Canada’s main stock market ended a 6 day losing streak on Friday, led higher by resources and bank shares, as some positive developments in Europe and recent price declines helped spur investor buying or bargain hunting. The resource-heavy index fought back from a 14-week low touched earlier on Friday, led by a 1.7% rise in the energy sector, while materials moved up by 0.7% and financials climbed 0.9%.
The Toronto Stock Exchange’s S&P/TSX composite index closed up 1.01%, at 11,521.35, earlier in the day, the index sank to 11,179.97, its lowest level since February 9th of this year. Despite Friday’s rally, the TSX was off 4% for the week as investor sentiment was beaten down by concerns that austerity measures in some Euro zone countries would hurt European and global growth.
But confidence in the market edged higher on Friday after the head of the European Central Bank said the Euro was not in danger, while German lawmakers backed a $1 trillion rescue plan for the Euro zone, alleviating some of the concerns over sovereign debt levels and prospects for economic recovery.
In Canada, data showed Canadian inflation was higher than expected in April, while retail sales in March soared from February.
The United States also snapped a 3 day losing streak on Friday as investors bought beaten-down shares including banks on bets the financial regulation bill won’t be as onerous as some had feared. Nonetheless, the benchmark S&P 500 index was down 10.6% from its April 23rd high in what is traditionally considered a correction as investors fled risky assets on fears the Euro zone’s debt crisis. Bank shares rose a day after the U.S. Senate approved a sweeping overhaul of regulation of Wall Street firms, capping months of wrangling over the biggest changes since the 1930s. The Senate bill must now be merged with a measure approved in December by the U.S. House of Representatives. Top Democratic lawmakers said they aim to get a bill approved by a House-Senate conference committee to President Barack Obama to sign by July 4th.
The Dow Jones industrial average gained 1.25%, the Standard & Poor’s 500 Index gained 1.50% and the Nasdaq Composite Index gained 1.14%. Trading was choppy throughout the day as May equity options and some options on stock indexes will stop trading at Friday’s close. For the week, the S&P ended down 4.2%, the Dow lost 4% and the Nasdaq was down 5%.
Investors were also tempted back into the market after a nearly 4% sell-off on Thursday, the biggest 1-day drop since April 2009, that left stocks at cheap valuations. Interest rates and inflation in the United States are close to zero and the S&P 500 multiples are low when the economic fundamentals in the U.S. are still pretty positive. It is geopolitical and sovereign debt issues that are holding investors back from buying.
Yesterday, the Canadian stock market was closed but in the United States they were open. In the United States stocks slid driving the Dow to its lowest level since February 10th as fresh signs of Europe’s banking problems emerged. Financial shares were among the day’s largest decliners, with the KBW Bank index falling 3.3%. Concerns about Europe’s banking system continued to weigh on markets, after the Bank of Spain took over a small savings bank, CajaSur, over the weekend, increasing anxiety among investors worried about debt problems spreading throughout financial markets.
What happens specifically to Greece does not matter a whole lot, but if you start spreading to larger countries like Spain, then it becomes an issue. The Dow Jones industrial average dropped 1.24%, the Standard & Poor’s 500 Index dropped 1.29% and the Nasdaq Composite Index dropped 0.69%.
Economic data showed sales of previously owned U.S. homes rose to a 5-month high in April as buyers rushed to close on contracts before a federal home buyer tax credit expired, although housing inventory also increased.
This morning stocks fell around the world. Commodity prices led the way on mounting tension on the Korean peninsula between North and South Korea and concern Spain’s ailing banks signal a widening European debt crisis. The MSCI World Index of 23 developed nations’ stocks fell as much as 1.9%. Futures on the Standard & Poor’s 500 Index retreated 2.3% and the MSCI Emerging Markets index declined 3.6%. Oil slid below $68 a barrel for the 1st time since February and the Canadian dollar fell to $0.92. The Euro also fell for a 2nd day against the U.S. dollar, losing 1.5%.
In addition, 4 Spanish banks said they will combine as regulators and push lenders to merge with stronger partners and after the International Monetary Fund (IMF) yesterday urged the nation to take more steps to overhaul its financial institutions. The North Korea Intellectuals Solidarity group said on its website that the country’s military was put on alert, and the U.S. announced plans yesterday to conduct anti-submarine exercises with South Korea following the March 26th torpedoing of a warship.
Increasing tensions on the Korean peninsula, coupled with deepening concern about sovereign debt risks in Europe, are affecting investors’ sentiment although, much of North Korea’s comments appear to be bluffing. I don’t think another disastrous event will happen but more uncertainty is not healthy (there just seems to be more cockroaches in the kitchen). We have got another round of taking off the risk trade going on around the world, and stock markets are doing it in pretty dramatic fashion. Said differently, stock markets are instantaneously assuming the worst, selling 1st and then asking questions and looking at valuations.
It will take courage to make money by investing in equities on a going forward basis but… at times of highest perceived risk the actual risk is actually lowest and at times of lowest perceived risk the actual risk is highest. It will take time to determine how things will actually unfold and how the sovereign debt and geopolitical uncertainty will be successfully resolved but over the long-term these issues will also be resolved (in order to maximize the greatest utility for all). Just be careful about the volatility because it will be volatile.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
