Big Picture
Greek debt talks hit snag; U.S. may ease
Greek debt-restructuring talks hit an impasse on Tuesday as private sector creditors pushed for a higher interest rate on the new bonds, arguing they are already taking a 50% write-down on existing bonds worth US$265-billion. A debt restructuring agreement is a precondition for Greece to receive its next installment of aid to stave off bankruptcy. The IMF cut its forecast for global economic growth to 3.3%, from 4%, in 2012 and warned the European crisis could tip the world into recession if decisive action is not taken soon.
The U.S. Federal Reserve announced interest rates should remain low well into 2014 and Chairman Bernanke appeared open to another round of stimulus, noting that bond buying is “an option that is certainly on the table.” A report on the quality of jobs in Canada revealed more people turned to lower paying positions or became self-employed in 2011. According to Stats Canada, the number of self-employed Canadians increased twice as fast as those in paid employment. Full-time employment increased by 1.5% in 2011; however, low-paying jobs grew four times faster than high-paying jobs. Asia will lead the world economy in 2012 with 7% growth, led by China, India and Indonesia, according to the head of the Asian Development Bank.
Markets
Fed sparks optimism; gold, oil, treasuries rise
Commodities and government bonds rallied for a second day Thursday, while the U.S. dollar weakened, after the Federal Reserve pledged to keep interest rates low and said it is considering more bond purchases. Research In Motion shares fell 9% Monday as founders and co-CEOs Jim Balsillie and Mike Lazaridis resigned after 20 years at the helm, handing over the reins to the company’s COO, Thorsten Heins. Chesapeake Energy, the second-biggest natural-gas producer in the U.S., will cut production in an industry-wide effort to reduce a massive surplus that has depressed prices to 10-year lows. Natural gas prices jumped 10% on the news.
The price of oil rose above $100 as the Fed outlook fueled optimism for increased oil consumption. The International Energy Agency (IEA) expects crude prices to reach US$247 a barrel by 2035, almost twice the US$133 assumed by OPEC, citing rising marginal costs to meet increased demand. Apple had another blowout quarter, marking its largest quarterly earnings ever, with record sales of 37 million iPhones, 15.4 million iPads and 5.2 million Mac computers. The fourth quarter of 2011 saw a breathtaking 118% jump in profit, leaving the tech giant with nearly US$100-billion in cash.
Our Recommendation
Outlook improving but equities appear short term overbought
- Equities: Although investor risk appetite appears to be growing, in the short term equities are overbought and vulnerable to a modest pullback.
- Fixed income: Term Call – given the recent decline in yields, we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings.
- Portfolio strategy: On an absolute basis, the S&P 500 rally is looking overbought. Relative to bonds, however, we could witness further equity outperformance through Q1.