July 10, 2015
Investors cautious amidst Greek uncertainty
Caution was the main investor watchword during the past quarter, as gains made earlier this year levelled off, amidst, global economic uncertainty and Greek debt negotiations.
The Federal Reserve’s June decision not to raise its policy rate provided some good news for investors. While US job creation has been strong, Janet Yellen, the central bank’s chair, did not want to take chances, as other data, notably GDP stats, have not kept pace. That said, North American fixed income yields were mixed during the quarter, remaining stable at the short end of the curve, but rising substantially for longer-dated issues. US and Canadian ten and thirty-year government bonds were hit particularly hard.
Markets are now looking for central bank tightening to begin in either September or December. Yellen has suggested that, once the tightening process gets underway, future increases would occur slowly and be “data dependent,” a term that gives her wiggle room to change her mind, if the economy does not unfold as planned. The FTSE TMX Canada Universe Bond Index fell slightly during the quarter, but remains up by 2.37% year-to-date, a decent return in a low-inflation environment.
After a strong start to the year the commodity heavy S&P/TSX underperformed major global indexes during the second quarter, due to weak oil and natural resources prices, coupled with slumping overall demand. However a strong May jobs report (59,000 new posts created during the month) suggests that other sectors are picking up some of the slack
An expected fall election is also creating uncertainty, particularly the strong recent showing of the New Democratic Party in the polls, which raises the possibility that a center-left wing government may take power.
US stocks also traded sideways during the quarter, with any investor gains largely sourced in dividend payouts. Current sluggishness is in part related to the strong run-up in US stocks during the past five years, as the S&P 500 continued to bounce along near its all-time high for much of the period. Although the loony gained ground against the greenback during the quarter, on a year-to-date basis, Canadian holders of US stocks have also been rewarded by a 7.51% rise in the American dollar since the start of the year.
US economic data, particularly corporate earnings forecasts, remains mixed. While technically growth shrank during the first quarter, consistent strong job creation suggests there are some quirks in the GDP calculations. As a result, US statisticians have said they will review their methodology. The big question remains how well US exporters will do in a rising dollar environment, and whether that trend will affect Fed interest rate policies.
Global developed economy markets were mixed during the second quarter, but generally remain strong year-to-date. That’s particularly true regarding the Japanese, Paris and Frankfurt benchmark exchanges, all of which continue to benefit from strong central bank actions. The European Central Bank launched a huge round of quantitative easing asset purchases earlier this year, which has kept down interest rates and boosted the relative value of equities. The Bank of Japan has gone even further and has been actively buying stock funds to boost prices.
Chinese stocks for their part pulled back as the quarter came to a close, giving back some of considerable gains made during the previous year.
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Peter Diekmeyer Communications Inc.