Services d’Investissement Férique


Market review

June 2014


Markets responding well to tapering  

North American equities and fixed income investments continued to perform well during May and for the year so far, belying critics who feared the effects of US Federal Reserve tapering of its quantitative easing program. The central bank has been paring its monthly asset purchases, which at one time totalled USD $85 billion, by $10 billion or so each month.


However far from boosting interest rates, as many had feared, bond yields have actually fallen across the curve, both in the United States and Canada. This in turn has boosted the relative value of stocks, to the point where several indices, including the S&P/TSX, which gained 7.21% during the first five months of the year excluding dividends, have hit repeated record highs.


Positive economic numbers

The strong performance in Canadian equities, which came on the heels of a strong rise in sales and earnings during the first quarter, is also in part a reflection of positive job numbers in the United States, Canada’s largest export market. More than 200,000 jobs were created south of the border during both April and May. This is a positive omen for demand for Canadian goods, corporate profits and US second quarter GDP data, which should come in much stronger than Q1 numbers.


Canada also got a big two thumbs up from Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, during a visit to the International Forum for the Americas in Montreal early this month. Gurria lauded the country’s strong banks, regulatory regime and tough fiscal discipline, and projected real GDP growth of 2.5% and 2.7% during the two coming years.


That said markets will be watching Federal Reserve tapering closely to make sure it does not veer off track. Despite the good news on the economic front, the main driver of most global markets is no longer related to fundamentals, but rather to multiple expansion spurred by central bank financial actions that have kept down the cost of money.



One positive sign on that front was a trial balloon put out by Eric Rosengren president of the Federal Reserve Bank of Boston who suggested recently that the US central bank may in fact implement a second tapering of its bond buying, once the current plan ends and purchases are cut to zero.


The new program, Rosengren speculated, could involve the Federal Reserve reducing the pace at which it reinvests the trillions of dollars of assets currently on its balance sheet in order to reduce that total in a predictable fashion. This could occur as the US central bank approaches its 2% inflation target and full employment Rosengren said.


This trial balloon about Fed unwinding, which would imply interest rate hikes further down the line, will somewhat calm those who fear that inflation could get out of control, as a result of the US central bank’s massive money printing operations of recent years.





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