Services d’Investissement Férique
Third quarter 2014
The big story in fixed-income markets lately has been the US Federal Reserve’s tapering of its Quantitative Easing asset purchases, which is nearing completion. The actions have been spurred by consistent and steady job creation during the past four years, capped by more than 200,000 new posts during September.
While in theory, the prospect of higher interest rates should have driven up bond yields, reaction so far has been mixed. Yields on US two- and five-year Treasuries rose slightly during the quarter. However longer dated 10 and 30-year bond yields actually fell. In many ways the mixed reaction may be exactly what the Fed, which did not want to put into jeopardy the US economic expansion, - was looking for. US two, five, 10 and 30 year Treasuries closed the third quarter yielding 0.52%, 1.68%, 2.4% and 3.11%.
The US moderation of its loose monetary policy, which comes amidst continued massive Japanese money printing and the launch of a new European Central Bank quantitative easing initiative, is creating considerable upwards pressure on the US dollar as global investors seek refuge from global uncertainties.
The big story in US equities during the third quarter was a general sideways motion, following strong gains earlier in the year. As of September 30, 2014, the S&P 500 was up by 5.29% year to date (in local currency terms, excluding dividends). This continued strength in US equities reflects solid job creation numbers and continued low interest rates, which are boosting profits and stimulating a wave of share buybacks, which in turn are increasing earnings on a per share basis.
Canadian stocks also declined slightly during the third quarter, following strong gains earlier in the year. The S&P/TSX was up by 8.69% on a year to date basis (in local currency terms, excluding dividends) as of September 30th, 2014. The increases were sparked by many of the same factors that boosted US stocks, notably continued monetary loosening, which is leaving yield-seeking investors nowhere else to go. However energy also played a major role, particularly earlier in the year. The outlook going forward also looks some what promising. According to Statistics Canada the Canadian economy created an impressive 74,000 jobs during September. This should provide a good boost to domestic demand. The country’s unemployment rate fell to 6.9%, a six-year low.
Markets in other major developed economies have been having a rougher go. European stocks, notably the Paris, Frankfurt and London CAC, DAX and FTSE indexes have all traded sideways so far this year in large part due to weakness in the European economy.
Japanese stocks for their part rose strongly during the quarter, though they remain down slightly for the year as a whole. That is likely due in part to the mixed effects of the Abe administration’s massive money printing program and recent sales tax hikes, which are creating a grim mix of economic sluggishness and high inflation.
On a global basis, probably the most important story was the announcement that the size of the Chinese economy in purchasing power parity terms has surpassed that of the United States for the first time according to the International Monetary Fund’s measurement. However it will be some years before China surpasses the US in US dollar terms.
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Peter Diekmeyer Communications Inc.