by David Andrews, CFA, Director,
Investment Management & Research
Richardson GMP Limited
March 19, 2010
After a little bit of back and forth, the markets concluded the second week of March on a positive note. We had a reprieve from the heightened market volatility that has been with us for the past couple of months as investors calmly digested a mix of economic reports. Better than expected Canadian employment data and US retail sales data gave further evidence of an improving North American economy, but stock markets were kept in check with reports of Chinese inflation having spiked higher and conflicting economic reports this week out of Europe. We saw a couple of up days and a couple of down days, but overall, the markets finished higher, led by banks on both sides of the border.
Overall, North American markets were higher on the week led by Financials and Materials sectors. The S&P/TSX finished up 0.3% and the Dow Jones was up 0.6%. Financial stocks in the United States soared as bi-partisan Senate discussions on financial services reform broke down, indicating that we can expect a delayed and watered down version of the hawkish reforms outlined by the Administration in January. In addition to reform, many banks are guiding for a return to sustained profitability and the market is responding favourably. The Financials index in the US was up 2.1% on the week. Financials are demonstrating market leadership and setting a positive tone as we head into the spring.
In Canada, the banks have kicked off 2010 with a bang. With the exception of Royal Bank (which met analysts' expectations), all of the big banks soundly exceeded expectations for the first quarter. In all cases, the banks have seen improvements in domestic banking due to a strong recovery in the Canadian economy. Loan loss provisions are lower across the board, as the worst of the economic storm now appears to be behind us. Collectively, the Big Six Banks' shares appreciated approximately 5% during the two weeks they reported their results.
Investor concern this year has focussed on the bond crisis in Europe and potential implications for sovereign debt contagion. Those concerns seemed to lessen this past week, with a sense that the situation will be settled and there will be a financial rescue package for Greece. The European Union is working out details of a plan to grant up to 25 billion Euros of aid to Greece, should it be required. With Greek concerns abated, fixed income investors have shown a resurgence of interest in corporate bonds, which rallied the most we have seen since last August.
With the North American earnings season having concluded, investors will now look to economic data for market direction. Last week was rather light on data, but this week will give us further evidence of the pace of recovery in both Canada and the United States. In Canada, the focus will be towards the end of the week when the Bank of Canada reports February's Consumer Price data. Friday's retail sales data for January should also indicate the return of Canadian consumers, providing further evidence that the domestic economy is gaining momentum.
The United States has a number of releases this week, beginning with February's Industrial Production numbers. We expect the manufacturing data will continue to show signs of ongoing recovery and strength. As well, Capacity Utilization, which measures the proportion of manufacturing plants that are active, is expected to be 72.6%, unchanged from January. The FOMC meeting is expected to be a relative non-event this week, with no change to interest rate policy expected. The week rounds out with US Producer and Consumer price data to be released on Wednesday and Thursday.
On the lighter side, the water utility in Edmonton published the most incredible graph of water consumption during the men's Olympic hockey gold medal game. Do you remember where you were?
