Stock markets in Canada advanced yesterday as higher than expected earnings from Bank of Montreal (BMO) fuelled a sharp rally in the financial sector.

The S&P TSX Composite index jumped 130.56 points, or 1.2%, to end the day at 10,920.53. The financial sector was ahead 3.2% with all of the major Canadian banks reporting quarterly earnings this week.

Canadian equities were initially even higher but the energy sector deteriorated alongside falling oil prices declining by 1%. Oil retreated in price by 3% or $2.32, to close at $72.05 a barrel after a recent rally. Oil prices have advanced more than 65% this year and some investors took this as an opportunity to book some profits. The U.S. Energy Information Administration (EIA) will release its report on nationwide petroleum stockpiles today after a report last week showing a building in stockpiles.

In the United States stocks advanced extending a recent rally, after reports showed that consumer confidence and home prices are starting to recover. News that President Obama is nominating Federal Reserve chief Ben Bernanke for a 2nd term in office added to the positive sentiment.

Since bottoming at a 12 ½ year low on March 9th the S&P 500 is up 52%. The pace and breadth of the run up has left many Wall Street investors calling for a big sell-off in September and October — since at this pace we will be at all time highs by mid-winter. However, more economic news is providing further justification for a sustained recovery balanced against increase budget deficit projections and ballooning government debts.

Home prices rose 2.9% in the 2nd quarter versus the 1st quarter, according to an S&P/Case-Shiller report. That’s the 1st quarterly rise in prices in 3 years and could signal that the housing market has bottomed in the United States. The 20 city index declined 15.4% in June versus a year ago, but that was shy of forecasts for a drop of 16.4% versus a year ago. The Case-Shiller 20 city indexes have dropped by 45.3% from its 2006 peak.

The Conference Board, an industry group, said consumer confidence climbed to a reading of 54.1 in August from 47.4 in July, easily beating forecasts, on an improved outlook for the job market and the overall economy. The missing ingredient has been the recovery in consumer spending. The stock market is now hopeful that the strong consumer confidence data could lead to better consumer spending numbers. The index has been as high as 95 and was at 65 prior to the credit crisis thus, there are still risks on the horizon. The weak job market remains a worry point to a quick economic recovery and especially in higher consumer spending. The Fed has acknowledged that there is a likelihood of a “jobless recovery,” with the unemployment rate staying high long after growth resumes as companies are reluctant to hire.

The Dow Jones industrial average .DJI advanced 0.32%, the Standard & Poor’s 500 Index advanced 0.24% and the Nasdaq Composite Index advanced 0.31%.

Bernanke has put his policies in place and now (assuming reappointment), the capital market is reassured that he will unwind the policies in a timely manner and potentially avoid high levels of inflation. It is good that someone else will not come in and change everything. The positive news overshadowed government forecasts that the U.S. national debt will nearly double over the next 10 years due to a slow recovery from the worst recession since the 1930s, and higher spending on retirement and medical benefits.

This morning stocks are looking a little weaker as China said it is studying restrictions on over capacity in certain industries including steel and cement, adding to concern that policy makers in that country may seek to constrain growth fueled by record credit availability.

The government will increase “guidance” to these industries, the State Council said. The government will strengthen controls on approval of stock and bond sales by companies in these industries. Investors are concerned that economic growth will be constrained as banks reduce lending. China’s economy expanded 7.9% in the 2nd quarter, rebounding from the weakest growth in almost 10 years, after banks extended a record $1.1 trillion of new loans in the first 6 months. This is tightening and they are contemplating tactics that have a lesser impact on the broader global economy.

In Canada, the Canadian Imperial Bank of Commerce (CIBC) also reported earnings but unlike its counterpart Bank of Montreal (BMO), which lifted Canadian stock prices by beating expectations, CIBC did not thus, we could see a little profit taking in the financials today. Commodity prices are little changed this morning but there could be some headwinds.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner

www.roicapital.ca