This week, due to travel schedules, the following condensed commentary comes from Canaccord Genuity market strategist Martin Roberge.
After a strong start earlier this week, global equities lost some of their gains today such that most indexes are posting flat weekly returns. Coincidence or not, after flirting with new all-time highs yesterday, the S&P 500 hit a wall when the index reached the 200%-return mark (1,991) from its March 2009 low (666). As for the S&P/TSX, it is a non-stop march to new highs. Obviously, the index is benefitting from its rich resource content. As such, it is very sensitive to global economic growth prospects, and the strong Flash manufacturing PMIs released this week bode well for further outperformance. Our Chart of the Week shows the average PMI when combining the US, Europe, Japan and China. As we can see, so far this year, the January-to-July average (52.7) strongly surpassed that seen in 2012 (49.9) and 2013 (50.5). This backdrop is another reminder for investors that the outperformance of Canadian and emerging-market equities in 2014 is no head fake.
Elsewhere, US bonds continue to their cue from the strong US$. We are keeping an eye on the 200-week average at 2.39% for 10-year Treasuries. If violated, it could lead to a swift rally to 2%. This move may seem at odds with strengthening economic indicators, but US bonds offer juicy yield spreads relative to European bonds. Finally, it looks like the C$ rally could be running out of fuel now that speculators have closed their short positions. In fact, speculators have gone long for the first time since 2012. Watch for a shift in sentiment, which could send the C$ below its 200-day moving average at 92.40 cents.
Regarding economic statistics this week, in Canada, retail sales in May (+0.7% MoM) missed consensus estimates (+1%) despite strong car sales (+2.5%). In the US, total and core inflation in June came in at 2.1% and 1.9% YoY, respectively. Meanwhile, durable goods orders (+0.7% in June) beat expectations. That said, nondefense capital goods shipments (excl. aircrafts) declined 1% over the same period, Also, the housing sector seems to be softening anew with new home sales declining 8.1% in June despite very low mortgage rates. Again, these data points suggest that the expected economic rebound in Q2/14 might not be as strong as expected. In line with this view, the IMF now predicts the US economy to growth only 1.7% this year. That compares to previous forecasts at 2.8%. Global growth for 2014 has also been cut, to 3.4% from 3.7%. Elsewhere, in Europe, while the flash mfg. PMI improved slightly at 51.9, the recovery remains uneven with the PMI (purchasing manager’s index) in France worsening to 47.6 (from 48.2). In Japan, inflation stood at 2.8% YoY in July. However, exports disappointed (-2% YoY) while imports surged (+8.4% YoY) and the PMI deteriorated, settling at 50.8. But good news came from China with the PMI improving to 52.
Next week, aside from final PMI readings, US Q2 GDP growth, nonfarm payrolls as well as the Fed interest rate decision are likely to move markets. In Europe, our focus will be on inflation as the ECB remains concerned by disinflationary pressures.
Next week, aside from final PMI readings, US Q2 GDP growth, nonfarm payrolls as well as the Fed interest rate decision are likely to move markets. In Europe, our focus will be on inflation as the European Central Bank remains concerned by disinflationary pressures.
Have a great weekend.
Thank you for your trust.
As always, we welcome any feedback.
The Dekker Hewett Group
Source: Martin Roberge, M. SC, CFA – Canaccord Genuity Corp. (Canada) North American Portfolio Strategy & Quantitative Research