The Canadian stock jumped with some solid gains on Friday as commodity prices led gains in the wake of strong retail and manufacturing data. The S&P /TSX composite index jumped 169.84 points or 1.41% to 12,081.73. Statistics Canada said manufacturing sales rose by 1.4% to $47.6 billion, which was the highest level since October 2008.
Stock markets had dipped in the wake of a disappointing read on American consumer confidence. The University of Michigan’s consumer sentiment index for October dropped almost two points to 57.5, less than the 60 reading that had been forecast. But analysts say the American retail and Canadian manufacturing reports indicate that the fragile economic recovery remains intact. In short, the reports further confirm recent experiences, consistent low economic growth but not recessionary conditions.
Investors were also worried about the meeting in Paris of finance ministers and central bank governors of the world’s 20 leading economies, including Canada. They are discussing how to save Greece from bankruptcy, deal with Europe’s wider debt crisis and restart global economic growth. Leaders have kept expectations low for Friday and Saturday’s Group of 20 meeting in Paris. They have promised a plan by the end of the month and the weekend is likely to be dominated by closed-door negotiations.
Markets ended the week higher on growing confidence that European leaders are finally serious about finding a comprehensive way to deal with the government debt crisis and the serious threat it poses to the financial sector. The Canadian market was up 4.25% but remains 15.7% below its highs of the year from early March.
That said, headwinds remain as Standard & Poor’s cut Spain’s long-term debt rating, citing the country’s weak growth prospects and risks facing its banks. And Fitch downgraded its outlook for three European banks and said it was reviewing ratings for a host of others, citing ongoing exposure to sovereign debt in Europe’s weaker economies and sluggish growth prospects.
In the United States stocks posted their 1st back-to-back weekly gains since early July, on strong Google earnings and as investors kept riding the optimism for a solution to the euro zone’s debt crisis. The gains put the Dow industrials and the Nasdaq back into positive territory for the year, marking a dramatic reversal from 2 weeks ago, when the threat of a Greek default and sour U.S. data had buyers running from the market.
Investors are reacting to some positive catalysts, corporate earnings are good, we have a more formalized policy action out of Europe and the economy is not heading for a cliff.
The benchmark S&P index has climbed 14% from the October 4th intraday low of 1,074.77, which had temporarily tipped it into bear market territory. Now investors are looking to see if stocks can sustain a move above the 1,215-1,220 area that has been upper end of the market’s range since early August. For the week, the Dow rose 4.9%, while the S&P 500 jumped 6% and the Nasdaq climbed 7.6%.
The sharp turnaround in stocks from a 2011 took many by surprise, and buying has spurred more buying.
This week 3rd quarter earnings kick into high gear, with reports coming from Goldman Sachs, Bank of America, Apple and other prominent companies. Ten of the 30 Dow components are scheduled to report quarterly results this week. Reported and estimated earnings growth for the current earnings season is seen at 12.4% for all S&P 500 companies, according to Thomson Reuters data. That is down from this year’s estimate peak of 17% in July. However, companies like Apple and IBM, which hit lifetime closing highs on Friday, are expected to exceed expectations by a meaningful amount. And positive surprises could play into the buying momentum further confirming that the economy is less bad than feared and corporations are still doing well.
On Friday the Dow Jones industrial average was up 166.36 points or 1.45%, at 11,644.49, the Standard & Poor’s 500 Index was up 20.92 points, or 1.74%, at 1,224.58 and the Nasdaq Composite Index was up 47.61 points, or 1.82%, at 2,667.85. The Chicago Board of Options Exchange (CBOE) Volatility Index or VIX fell 8% to end at 28.24, and closed lower for the 9th day in a row, a pattern suggesting more gains could be in store as investors find less need for protection against losses.
Stronger-than-expected retail sales data added to the upbeat mood Friday. U.S. retail sales rose 1.1% in September from a month earlier, a report showed, beating the median forecast in a Reuters poll of a 0.7% rise.
This morning, stock futures were initially up by a good margin but Europe then signaled that they need more time to formalize and approve their sovereign debt plan, which has still to be made public. This plan includes writing down Greek bonds by as much as 50%, establishing a backstop for banks and magnifying the strength of the 440 billion-euro ($620 billion) European Financial Stability Facility.
In short, recent positive sentiment has hit a wall after riding on a wave of hope that European leaders get it and a bold measure is coming. Germany’s finance minister said a forthcoming European summit would not yield a definitive solution to the region’s debt crisis as many investors had hoped.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
