Keep calm and carry on (with austerity)

Feb. 18-22/2012


Market comments: On Tuesday the S&P hit a new five-year high. On Wednesday, it began to fall. After a two-day sell off, stocks rebounded. Despite these gains, the S&P was unable to maintain its seven-week winning streak.

Why? Fed minutes were released Wednesday afternoon, and suggested that the central bank may slow or stop payments despite employment remaining low.

“A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the (policy-setting) committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labour market had occurred”.

Fortunately, investors bought into the two day sell off and markets rebounded on Friday. Good earnings reports from some consumer companies on Thursday also aided purchasing.

Along with equities, gold fell - reaching its lowest level since summer of 2012, and causing it to flirt with the death cross. The death cross is a strong bear market signal, where the asset’s price falls below its 200 day moving average. In this case, however, analysts are cautioning investors not to over react. Apparently, there have been six death crosses in gold in the past ten years, and just one has followed the expected death cross trajectory. 

The Canadian dollar is also doing poorly. Previously linked to oil and gas, its current weakness has been related to poor domestic performance. It now sits at 98 cents to the USD. This is revealing itself in market performance: “The S&P 500 is outperforming the S&P/TSX composite index in 2013 by nearly 4 percentage points, when you ignore currencies. But if you look at the S&P 500 in Canadian-dollar terms, the difference widens to more than 7 percentage points.”

Company News:  Both Bombardier and Tim Hortons fell in price after missing analyst expectations. Bombardier reported a 93% fall in Q4 earnings and shares fell 6.5%. Tim Hortons shares fell 3.4%. On the other hand, Wal-Mart released strong earnings; the company announced an 18% increase in dividends and the stock gained 1.5%.  Interestingly, both Wal-Mart and Tim Hortons increased dividends.

International news: European markets did not fair much better than North American ones last week, also reacting to the Fed’s statements.  Bad news from the European Commission, which “projected that the continent’s economy will shrink by 0.3% in 2013, its second straight year of contraction. In Spain and Greece unemployment will remain around 27% in 2013, with unemployment in the Eurozone as a whole rising to 12.2% from 11.4%” also caused concern. Read the EMEA round up here

Otherwise: The WSJ has responded to the Big Mac index with an index of their own... the Grande Latte index.  The index looks at purchasing power parity. The most expensive is in Oslo, while the least expensive is in New Delhi.


New Statesman offers a critique of the index, citing supply chain issues. Check that out here


Central Banks moved markets last week. On Wednesday, Fed minutes caused concern that the Fed may cut payments sooner rather than later, and impacted global equity markets. Beyond this, BoE governor Sir Mervyn King voted for more QE, which caused people to consider more purchases are likely, and pushed sterling lower (but UK equities up).

Indeed, it was a volatile week for British investors. “The FTSE 100 managed to both hit a new five year peak and record its biggest one day fall since July, all in the space of two days.”

On Friday Moody’s downgraded UK debt (after US markets closed), causing the currency to fall to a two year low. Many are concerned that currency weakness puts even more pressure on monetary policy, in what is becoming a never-ending cycle.

Lets remember, however, that the UK is behind on the credit downgrade trend. The US lost its AAA rating a while ago. This move is primarily political in nature. The Labour government responded by saying the cut is “humiliating”; the coalition says progress has been made. Osborne intends to keep calm and carry on (with austerity).

More on currency:  The Bank of England is setting up a renminbi-sterling currency swap agreement with the People’s Bank of China to spur trade and investment between the two countries. It should serve to encourage trade and FDI in the UK. Osborne said:

"This agreement between the Bank of England and the People's Bank of China is an important step that cements London as the Western hub for the fast-growing renminbi market. It is another sign that in the global race, Britain is seen as open for business by emerging and established markets alike. We have already seen evidence in 2013 of a significant increase in renminbi trade in London."

In company news: RSA cut dividends, causing a fall of 14% and taking £650m off its market value. The insurer blamed low bond yields for the decision.

On the continent: France asked for a “budget pass”…

France’s finance minister has asked Brussels to give his government an extra year to meet EU-mandated budget deficit targets, saying it “would not be appropriate” to take additional austerity measures this year in the midst of a deepening recession.

… and Italian campaigning ended; elections set for Sunday. The candidates are Bersani (Center Left) Monti (Civic Choice Party), Berlusconi (Freedom Party) and Grillo (Five Star Movement) and economy and market implications are different for each winner.  Investors were nervouse last week as Italian equities fell and yields rose.  Remember, Italy is the third most indebted country in the world after the United States and Japan.

More next week, but I leave you with this quote:

Two of the four front-runners in the Italian election are convicted criminals. Such is the state of politics in this highly-indebted country as Italians go to the polls”.