Services d’Investissement Férique
First quarter 2014
US long-term bond yields fell during the quarter due in large part to a flight by international investors to quality issues early in the year, coupled with market optimism over the fact that Janet Yellen, the new Fed chairman, is regarded as a policy dove. Prevailing sentiment is that Yellin, will continue asset inflation policies which her predecessors Ben Bernanke and Alan Greenspan, put in place to boost economic growth.
Bond yields did recover somewhat as the quarter progressed due in part to Federal Reserve tapering of its massive asset purchasing program, in the wake of positive economic data. The resulting decrease in bond demand pushed rates up, pretty much throughout the yield curve during March. The main wild card remains market speculation that the European Central Bank may begin asset purchases of its own, which would put downward pressure on yields in the old continent and around the world.
Canadian Treasury yields, which largely track US movements, did so once again this quarter, except for five-year rates, for which spreads narrowed by 30 basis points. Canadian two, five, ten and 30 year treasuries ended Q1 yielding 1.08%, 1.71%, 2.44% and 3.02% respectively.
The S&P TSX rose by a robust 5.57% in local currency terms during Q1, before dividends, outperforming US issues, due in large part to a rebound in commodity prices. Canadian benchmark exchanges are heavily natural resources weighted, particularly gold. The price increases boosted corporate revenues and earnings and also drove up the loonie by almost 4 cents, which substantially increased Canadians’ purchasing power.
The US benchmark S&P 500 rose by a moderate, but healthy 2.0% during the quarter, in local currency terms, before dividends. This moderate upwards pace is somewhat natural following the huge increases seen during 2013. Markets have been encouraged by a slow but steady pickup in the US economy which continues to add new jobs, including 192,000 posts in March. US stocks also continue to benefit from strong corporate profits (which are currently at continued high levels relative to the country’s gross domestic product) and ongoing low interest rates, which reduce the attractiveness of alternate investments.
International developed economy markets showed mixed results during the quarter, with Paris and Frankfurt gaining ground, and Japan and London pulling back in local currency terms ex-dividends. Europe continues to rebound following a long period of sluggishness, but remains hampered by an aging population, and resulting consumption challenges. A major bright spot on the horizon has been the European Central Bank, which many suspect will begin a major asset buying program to keep down interest rates. This would in turn force investors into stocks and thus maintain upwards pressure on prices.
Japan gave back during Q1 some of the huge gains that stock prices registered during 2013. The Japanese central bank continues to print money at a blistering pace (more three times as fast as the US Fed on a per capita basis). However the Abe government is raising sales taxes from 5% to 8% to finance the country’s massive spending and service its disproportionately large debts. This could slow consumption during the coming quarters.
© 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007, 2006, 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998
Peter Diekmeyer Communications Inc.