Services d’Investissement Férique
October 12th, 2013
First quarter 2013
Bonds has a rough third quarter in both Canada and the United States. The weakness was mostly due to indications earlier in the year by Chairman Ben Bernanke that the US Federal Reserve would begin to taper its Quantitative Easing bond buying program, which had been putting downwards pressure on mid-to-long-term interest rates.
Bernanke, who announced in mid-October that he was stepping down from his post had been a big proponent of giving market forward “guidance,” regarding the central bank’s upcoming moves. However something clearly got lost in the shuffle, as Canadian and US markets, which pushed up yields across the curve, interpreted his comments to mean that the tapering would start as early as September. That did not happen.
That news, coupled with US President Barack Obama’s announcement that Federal Reserve vice-chairman Janet Yellen, a known dove, would be taking Bernanke’s place, signals that US monetary policy will likely continue to remain loose for the foreseeable future. Canadian five, 10 and 30 year treasury yields closed the quarter at 1.88%, 2.53% and 3.07% respectively, up by 46.9, 70.6 and 71 basis points since the start of the year.
Canadian stocks registered exceptionally strong gains during the quarter, reversing what had been a losing year. The S&P/TSX was up by 2.84% for the first nine months of 2013, excluding dividends. (As at June 30th, the index had been down by 2.45%).
The strength was due in part to economic fundamentals, notably steady job creation (including 12,000 posts in September), coupled with better performance from resource stocks which are no longer as much of a drag on the index as they had been. Economic output also turned around in July, rising 0.6%, reversing a set-back the previous month. Spill-over effects from continued loose central bank monetary policy south of the border also contributed.
US equities have been going gangbusters since the start of the year, driven higher by the Federal Reserve’s continued low interest rate policies which are forcing investors into stocks in a quest for yields. As of September 30th, the Dow Jones Industrial Average was up by 17.91% for the year in local currency terms, not including dividends. Markets remained strong despite an impending US Congressional standoff over the debt ceiling issue, which came to the head as the fourth quarter approached.
The global economy’s interconnectedness showed up in spades this month again, as other major western equities markets moved higher in tandem with North American issues. Japan in particular has seen a stellar performance, with Tokyo’s Nikkei 225 up by 39.1%, in local currency terms since the start of the year, ex-dividends. The Abe administration, which is printing money even faster than the US Federal Reserve, despite the fact that Japan’s economy is a fraction of the size, gets the credit for much of the increase. Europe’s the main indexes, the CAC, DAX and FTSE, all registered major gains during the quarter, rising by 13.8%, 12.9% and 9.7% respectively for the year as a whole, in local currency terms, ex-dividends. The strength stemmed in part from the many European economies that have been pulling out of recession, coupled with the absence of bad news, which had been keeping equities down.
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Peter Diekmeyer Communications Inc.