This article is a guest contribution by David Andrews, CFA, Director, Investment Management & Research, RichardsonGMP Ltd.
Many of the heavily favoured clubs battling it out for soccer’s top prize in South Africa hail from Europe. So far in the tournament, none of the European clubs have lived up to their advanced billings, thus giving Europeans one additional worry besides high government debt levels and fiscal budget imbalances. Although Spain entered the tournament as European league champions (and heavy favourite to win the 19th edition of the World Cup), it seems its players were somewhat preoccupied by last week’s rumour the EU and the IMF were arranging emergency liquidity facilities for Spain which faces € 25 billion of debt maturities in July. You may recall that Greece sought EU/IMF bailout when it faced € 8.5 billion of its own debt maturities. The Spanish government vehemently denied the rumour but markets did remain on edge until later in the week when a Spanish government bond auction was well received by the market. This took some of the edge off investor fears regarding Europe and allowed stock markets to rally.
Last week, the S&P/TSX rose four out of five days ending up 2.2% for the week. The Gold sector led the way as gold bullion reached its highest ever recorded price. The June 28th futures contract was priced at US$1257.20 late in the week as investors remained concerned about the European financial situation and some softer U.S. economic data was viewed negatively. The U.S. data showed a weekly increase in jobless claims and a poor Philly Fed number which indicated manufacturing in the greater Philadelphia area had weakened. Gold investors feel Europe is not out of the woods, and the US recovery may not be sufficiently strong enough to offset the European weakness. Gold gained 2.3% last week and has risen four weeks in a row. Gold is the only global currency investors seem willing to place their confidence in at the moment.
Last week, President Obama defended his administration’s handling of the Gulf of Mexico oil disaster. The president called on America to adopt a “national mission” to reduce its dependence on oil and to develop alternative sources of energy. The U.S. Congress spent the better part of last week grilling oil industry executives over past safety records, deep water drilling procedures, and the industry’s disregard for environmental considerations in search of profit. Congress saved its pomp and circumstance for the public flogging of British Petroleum’s CEO Tony Hayward. BP also gave in to pressure from the U.S. government last week and suspended its quarterly dividend and agreed to establish a US$20 billion escrow account to pay damages to residents and businesses affected by the oil disaster. The company may need to sell up to $10 billion of new debt as early as this week in order to raise cash for the fund. The funds will be administered by Ken Feinberg of 9/11 Victims Compensation fame. As an unfortunate aside, oil continues to gush into the Gulf amidst reports the beleaguered company intentionally misled the public about the daily volume of oil leaking from its Macondo well. BP may have buried a report the well was leaking as much as 100,000 barrels per day.
This week, all eyes will focus on the U.S. Federal Reserve meeting on Tuesday. We do expect to see the Federal Reserve continue with its language regarding low rates for an extended period of time. We would not expect to see U.S. interest rates increased at any point before 2011. Even Bank of Canada Governor Carney recently indicated that a follow up rate hike for Canada in July is anything but a certainty. North American central bankers remain concerned over the impact of a slower, more austere Europe unseating the North American domestic economic recovery.
