This article is a guest contribution by David Andrews, CFA, Director, Investment Management & Research, Richardson GMP Ltd.
Earnings Season that is, and this week is the kick off to what should be another strong one. Alcoa Inc. will get things rolling after the market close on Monday. We expect to hear from bellwether names like Intel Corp., JP Morgan Chase & Co., Bank of America, and General Electric Co. On the back of a recovering economy, analysts expect first quarter earnings to be 36% higher than last year. Pre-announcements seem to indicate that like last quarter, many of those reporting will be beating top line revenue expectations by approximately 10 percent or more. It is worth pointing out that in the build up to the season, investors expectations have increased and it may not be surprising if stocks don't get a big lift. Stock markets tend to do better when we are not in earnings season as evidenced by the 6.8% rise in the S&P500 since the conclusion of last one.
Last week's big news was the flight of the Canadian dollar touching parity with the U.S. dollar but later closing below par as Friday's Canadian employment data was positive (17,900 jobs added in March) but lower than anticipated. March was the third consecutive month where the Canadian economy added jobs and despite the weaker than expected result for March, we anticipate the Bank of Canada is likely to raise short term rates sooner rather than later. The market has priced even odds on the Central Bank making a move prior to its meetings in June. The Canadian dollar finished up 0.4% for the week, at the 99.60 cent level versus the U.S. dollar.
Big news at the end of last week (which did not involve Tiger Woods at the Masters) was the confirmation of support for Greece by the European Union. Greece is an itch that doesn't seem to go away on its own. As Fitch Ratings Agency downgraded Greek debt, the cost of borrowing for the Greek government soared. Ten year Greek bonds were quoted with yields as high as 7.2% and the Euro currency took the brunt of the pain on global currency markets. It touched a low of 1.3286 before recovering on the news that the European Union (and the IMF) had agreed to backstop loans of 45 billion Euros to the struggling nation. The loans are at roughly 5% for 3 years and give the government a reprieve from the soaring cost of raising funds in the public markets. Speculators are pushing the envelope on the Greece and Eurozone situation and are testing the resolve of all the bailout participants. We expect the situation will remain fluid and we anticipate more challenges ahead for the common currency.
Commodities markets were mixed due to conflicting economic data last week. Crude Oil concluded with three consecutive down sessions on higher than expected oil inventory data in the U.S. and concern that the ongoing situation in Europe may dampen demand. The oil futures market is pointing to the fact that there is more than enough supply to meet current demand. We should keep in mind that oil has increased 45% in the past year and our technical target remains higher from here. We believe pull backs should be used as accumulation points as we move into both the summer driving season and continue to get signs of global economic improvement. May crude oil futures closed at just under $85 per barrel.
Gold has been benefitting from the uncertainty surrounding the Greek debt situation and touched a four month high last week. The U.S. dollar was slightly weaker and investors sought gold as an alternative currency. Investors are concerned about the borrowing power of governments around the world and are pointing towards gold as an alternative to government debt. Recently, the demand has begun to outstrip physical demand in the gold market for the first time since 1980. Physical demand for gold is also expected to rise in 2010 as the World Gold Council suggested that India, the world's biggest user of the metal, would likely match or exceed the amount imported in 2009. Imports were about 500 tonnes for the nation last year. Spot gold closed in New York at $1,162 per oz.
