This article is a guest contribution from Phil Kwon, Vice-President, Investment Management and Research, Richardson GMP Ltd.
The week started with a bang when the European Union announced details of a $1-trillion loan plan to support the economies of Portugal, Italy, Greece and Spain (PIGS). News of the support plan sent equity, commodity, and currency markets significantly higher in the early going on Monday morning. The magnitude of the bailout plan, which includes third party debt purchases by the European Central Bank, shows just how serious this problem could have become. The announcement of the bailout plan was introduced to help buy time for the PIGS to help get their finances in order and also to deter the depreciation on the Euro. However, this euphoria did not last long and doubts over Europeās ability to weather their debt problems became forefront by the end of the week.
Deutsche Bank Chief Executive Josef Ackermann told German television Thursday evening that there are some doubts about Greece's ability to repay debt and German Chancellor, Angela Merkel, said Friday that Europe is in a āvery, very serious situationā and that successfully negotiating the sovereign debt problem isnāt a sure thing. This sounds much gloomier than earlier in the week when she said the loan package to which European leaders agreed on Sunday āserves to guarantee and secure the future of the Euro.ā With such dramatic headlines, markets saw the Euro plunge on Friday and close at a four year low. The currency is down almost 20% from its 12 month high reached at the end of the 2009. North American markets which had taken the bailout package in stride, and were climbing higher for the majority of the week fell dramatically on Friday. However, even with a sour ending, the S&P/TSX held on to a weekly gain of 2.8% and the S&P500 was also up 2.2%. As mentioned in last weekās commentary, volatility which had dramatically spiked has subsided and was down 24% for the week. The jumped witness two weeks ago was the largest weekly jump on record.
Commodities took it on the chin as the U.S. Dollar continued its upward trend and concerns in Europe weakened global growth prospects. Crude oil continued its descent and was -4.7% for the week and closed at US$71.61. Since its 12-month high reached just over a month ago, oil is down 17.5%, a decrease that drivers donāt seem to experience at the gas pumps. Contrary to the rout in resources was gold. Gold usually trades in tandem with the Euro and is negatively correlated with the U.S dollar as it is seen as an alternative asset to the U.S. currency. However, gold has been trading outside its normal behavioural pattern as the metal is currently being bought as a safe haven asset and hedge against currency volatility. Bullion hit its all time high on Wednesday flirting with the US$1250/oz level to close at US$1 243/oz.
Earnings Season
Earnings season in North America has pretty much come to an end. In Canada, 181 out of the 222 companies in the S&P/TSX Composite have reported with 93 of them exceeding estimates. In the U.S. it was a much rosier story with 460 out of the 500 companies in the S&P 500 posting their numbers with 77.1% of them having better than expected results, and only 15.1% surprising on the negative side.
The Week Ahead
The economic calendar is quiet in Canada with only CPI and retail sales numbers coming out at the end of the week. The U.S. is much busier with PPI and CPI out on Tuesday and Wednesday respectively, and Thursday rounding out the week with the Philadelphia Fed, Leading Indicators, and the Initial Jobless claims numbers. On the earnings front, nothing substantial in Canada until the last week of the month when the major banks will report, and in the U.S. the home building retailers are on tap along with heavy weight retailers Wal-Mart and Target.
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