The Canadian dollar is super-charged lately with lots of volatility. The Canadian dollar closed higher versus the greenback (U.S. dollar) yesterday and touched the highest level in more than 7 months! A rise in oil prices and upbeat U.S. economic data translated into investor appetite for risk taking (in short, everybody sell U.S. dollars and bonds and buy stocks).
The consumer confidence data was the latest of several reports in the past few weeks to signal an improving U.S. economy and to weigh on the “safe haven” status of the U.S. dollar or currency allowing the Canadian dollar to rally from the 4 year low it hit in early March. The Canadian dollar ended the session at C$1.1178 to the U.S. dollar, or 89.46 U.S. cents (it did hit a low of 88.01 U.S. cents at one point in the day).
It’s amazing how quickly the stock market just turns a cheek to bad news (North Korea and a projected $50 billion Canadian Federal deficit) and looks away when we get another bit of good news out of the United States (Consumer Confidence and Bank of Montreal posting a better than expect profit although, significantly lower than before).
The Canadian stock market was up 2.15% on the day led by the financial sector and higher than anticipated profit from BMO. CIBC, TD, Bank of Nova stock are scheduled to report earnings on Thursday and Royal Bank on Friday. Stocks move on news and there was ample news to digest today and investors liked the majority of the news that came to fruition.
Stocks in the United States also climbed more than 2% as data showing the biggest monthly jump in consumer confidence in 6 years lifted hopes of an economic rebound. An index of U.S. consumer confidence surged in May, strongly topping expectations as it registered the biggest monthly jump since April 2003, according to the Conference Board. The index of consumer attitudes jumped to 54.9 in May from a revised 40.8 in April, well above forecasts centered around 42.0. April 2003 was when America believed the war in Iraq was coming to a quick conclusion (remember “shock & awe”). In short, the stock market is celebrating the return of some sign of consumer confidence.
Other data showed prices of single family homes fell in March from a year earlier. The pace of decline, however, slowed for a 2nd consecutive month. Prices of U.S. single-family homes fell 18.7% in March from a year before, according to the Standard & Poor’s/Case Shiller index. In the 1st quarter, prices fell 19.1%, the most in the 21-year history of the survey, reflecting the worst housing recession in generations. Analysts say a rebound in housing is central to any economic recovery, especially since the financial position of U.S. consumers has become so closely tied to the value of their homes in recent years. The moderation in the rate of decline in economic activity has raised hopes that an actual improvement will take hold in coming months.
The Dow Jones industrial average jumped to 2.37%, the Standard & Poor’s 500 Index jumped 2.63% and the Nasdaq Composite Index was helped by a jump in Apple shares of 7% as it received an upgrade based on the strength of the iphone to end up 3.45%.
Consumer spending accounts for roughly 2/3rds of the U.S. economy. The data also seemed to outweigh geopolitical concerns over North Korea’s latest nuclear and missile tests. The stock market’s gains came after 4 straight days of losses which marked the longest losing streak since the 5 days ended March 3rd for the Dow Jones Industrial Average. Worries about a possible cut to the United States’ credit rating on Friday had pushed stock markets lower.
Things are looking a lot better but we are not out of the woods yet.
The U.S. economy appears destined for several years of weak growth and high unemployment that leave it vulnerable to a recession relapse if the massive government stimulus starts to decline, or oil prices spike, or interest rates go up to quickly or we have rapid inflation. In short, consumers and businesses will be unable or unwilling to borrow and spend as freely as they did before the crisis. The U.S. government has stepped in as lender and spender of last resort, but its deep pockets are not bottomless (Gross Domestic Product or GDP is driven by consumer, business, government spending and exports less imports).
Typically, deep recessions are followed by powerful recoveries because when demand finally returns, companies quickly ramp up production. That helps explain why Bay and Wall Street has been feeling optimistic about recovery prospects. Treasury Secretary Timothy Geithner said on Thursday that the current crisis was “caused in large part by too much borrowing and too much lending. And the adjustment process of that will be difficult.”
In turn, the economy is starting to gain traction and oil prices have started to climb which could make it harder to get out of this recession.
Shares of General Motors closed at $1.44 after news the automaker had failed to persuade bondholders to accept a debt for equity offer, setting the stage for the largest-ever U.S. industrial bankruptcy within days. The event marks a critical disappointment for GM, the largest U.S. automaker and once considered the bellwether of U.S. manufacturing. Bondholders have “balked” at proposals that they forgive debt in exchange for a 10% stake in a restructured company. GM could file for bankruptcy any time but before June 1st.
The U.S. government has provided a combined $36.6 billion to GM, Chrysler and their financing units since December. In an interview broadcast over the weekend, Obama said he hoped GM and Chrysler would emerge from restructuring “leaner, meaner, more competitive.” Chrysler is seeking approval this week to sell itself to a “New Chrysler” owned by the U.S. and Canadian governments, Chrysler’s union and Italian carmaker Fiat. A hearing on the sale will take place today.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
