Yesterday everything was driven by one fear – the United States.
Yesterday’s S&P outlook downgrade of the UK started chatter amongst investors about the US credit rating outlook since both countries are following similar economic policies (i.e. spend, spend and spend a little more). Bill Gross, the co-chief investment officer of the huge bond firm, Pacific Investment Management Co.(PIMCO), said fears that the United States is at risk of losing its AAA credit rating were hurting all U.S. assets. The United States is “going the way of the U.K. — losing AAA rating, which affects all financial assets and the dollar” as governments around the world spend billions to revive growth. On Thursday, Standard & Poor’s lowered its outlook on Britain to “negative” from “stable,” threatening the nation’s top AAA rating. Britain faces a 1 in 3 chance of a ratings cut as debt approaches 100% of gross domestic product (GDP). Yesterday’s trading day centred on selling everything US and we saw the dollar, US equities and US Treasuries all sell-off.
It is interesting to note that the old correlation between weak equities and a strong US dollar has also disappeared (overnight) and points to the fact that the safe-haven play for the Greenback is basically gone (here comes gold & oil).
Canada’s main stock market index fell after a major 2-day rally as a drop in oil prices, from 6 month highs, pressured energy shares downward. Oil fell to settle at $61.05 a barrel as signs of job market weakness compounded concerns about economic recovery. The TSX index’s energy sector fell 4.4% and financial shares lost 3.1%. The Toronto Stock Exchange’s S&P/TSX composite index closed down 282.85 points, or 2.76% below 10,000 to settle at 9,949.59, with all 10 of its main groups lower. In the previous 2 days the benchmark was up 4.76% and touched its highest level in 2009.
The U.S. Federal Reserve, in minutes released from its April policy meeting, cut its outlook for economic growth over the next 3 years and said a full recovery could take 5 or 6 years.
We have had a phenomenal gain in the last 10 weeks but the economy is falling behind. In short, investors are starting to take note of some of the headwinds the global economy may be facing down the road. Some investors are starting to suggest that we have come too far, too fast and the market really needs to consolidate these gains, however, the majority of investors do not believe we will touch the March 9th gains again since there are no guarantees. Investors are concerned about downgrade for the U.K.’s triple-A credit rating and that the United States, with its increasing budget deficit and weakened economy, could face a similar fate.
The Dow Jones industrial average declined 1.54%, the Standard & Poor’s 500 Index declined 1.68% and the Nasdaq Composite Index declined 1.89%.
Initial claims for state jobless benefits fell to 631,000 in the United States in the week ended May 16th, compared to a high of 674,000 in late March, the Labor Department said. Analysts had forecast new claims at 630,000 to a record 6.6 million in the week ended May 9th. Employment is often seen as a lagging indicator, and many companies are likely to wait for sustained evidence of an economic revival before posting help wanted signs. The U.S. Congressional Budget Office said that the U.S. economy will likely start growing again in the 2nd half of 2009, but the jobless rate could peak at more than 10% against the current 8.9%.
Stocks headed for a higher open this morning reassured by comments from Moody’s which tempered fears about the credit rating outlook for the United States, while higher oil prices lifted energy shares. Moody’s Investors Service said it is comfortable with the triple-A sovereign rating on the United States, but the rating is not guaranteed forever
Additionally, investors were encouraged by a flurry of upbeat quarterly results from major retailers, including a surprise 1st quarter profit on Thursday from Sears
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
