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March Market Review

 

Title: Equities inch towards new highs

 

Stocks flirted with record levels in United States following a settling of the fiscal cliff deal earlier this year, the lead-up to sequestration-related budget cuts and money printing throughout the advanced economies.

 

The primary driver of the strong gains in US equities, which were echoed in Canada Europe and Japan, continues to be aggressive central bank monetary policy. The Federal Reserve continued its $85 billion in monthly asset purchases throughout February, and plans to maintain them indefinitely until specific targets are hit. The result has been continued low interest rates which are now below zero in real terms throughout much of the yield curve. This has been practically forcing yield-seeking investors to buy stocks.

 

However “QE Infinity,” as the Fed program has been dubbed, has created considerable side-effects, which have forced other major central banks to adopt similar policies. For one, the money printing has put downwards pressure on the US currency, which is making American goods more competitive in export markets. These economies have responded with similar actions. The European Central Bank, which is struggling to keep euro zone problems in check, continues to keep its purse strings loose, as are the Bank of Japan and the Bank of Canada. This has led some to speculate that a “currency war,” may be in the offing.

 

Support from fundamentals

That said, there have also been some powerful fundamentals driving markets. US job creation has been strong, capped by 236,000 new posts added during February. This brought the country’s unemployment rates down to an impressive 7.7%. Better still, a series of crises created by US politicians have fizzled out, leaving investors feeling increasingly invulnerable to such events.

 

Soon after the much talked about “fiscal cliff” debacle was settled with a series of tax increases on the rich, sequestration, a series of so-called “drastic,” across the board US federal spending cuts began to be implemented.

 

The prospect of spending reductions raised barely a shrug from the markets, which likely reasoned that although targeted cuts would have been more effective, any improvement in the steadily deteriorating US fiscal situation, provides cause for optimism.

 

European woes

That said, not all was rosy during the month. That is particularly true on the other side of the Atlantic where the large European players are showing continued signs of weakness. Great Britain, one of the few countries to launch a significant austerity program, was rewarded with a downgrade in its debt by the Moody’s credit rating agency, from the coveted AAA level. France too, led by its new president Francois Hollande, is drifting aimlessly between a need to implement reforms, and pressures from the ruling Social Party’s pressure groups.

 

As if that was not enough, Italy also recently grabbed world attention when the Economist magazine published a cover likening Sylvio Berlusconi, to a local comic, who’s party raked in nearly a quarter of votes in recent elections. While there were clear publicity-seeking motives behind the portrayal, it nevertheless refocused world attention on that heavily indebted and severely divided nation.

 

peter@peterdiekmeyer.com

 

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