Global Insight - 2013 Outlook

  • Prospects for the U.S. economy should shape the outlook for financial markets in 2013. The path for global equities could be determined by whether Washington delivers much-needed fiscal certainty.
  • China’s gradual re-acceleration should gather momentum, which is good news for other emerging economies and commodity-sensitive markets like Canada. 
  • Europe’s painful adjustment period, complicated by politics, could extend through most of the year. 
  • In fixed income, risk premiums have declined precipitously, leaving defensive positioning as our preferred strategy for the new year.

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The Weekly Bottom Line - December 14, 2012

Canada

  • TD Economics released updated economic and financial forecasts this week.
  • The debt-to-income ratio rose to 164% in Q3, but on an annual basis, debt growth is at its slowest pace seen since 2002, and half the pace seen during the 2004-08 period.
  • Housing starts dropped to a 1-year low in September, consistent with the cooling seen in other areas of the housing market. Residential construction will be a weak spot in the Canadian economy going forward.
  • Canada’s trade deficit narrowed in October. Exports will likely post a modest gain in Q4.

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Canadian Economic Forecast

Highlights

  • The U.S. fiscal cliff, a European recession and the resulting dampening impact on commodity prices are the biggest challenges facing the Canadian economy over the next six months. Domestic demand is also likely to be further tempered by a slowing housing market.
  • We assume that a compromise on the U.S. fiscal cliff will be reached – perhaps at the eleventh hour. Nonetheless, fiscal consolidation in the U.S. alone could shave up to 0.7 percentage points off Canadian economic growth through lower exports and the knock-on-effects to other areas of the economy in 2013.
  • As the fiscal drag in the U.S. abates and uncertainty eases, Canada is likely to gain from a recovering U.S. economy and improving financial conditions. By the second half of next year, exports and business investment are expected to ramp up. Still, a high Canadian dollar, elevated household debt and government restraint will keep the country’s overall pace of economic expansion in check.
  • Canadian real GDP is expected to grow at a lacklustre pace of 1.7% in 2013, before picking up to a more solid 2.5% in 2014. Inflationary pressures will likely remain subdued. Despite having a tightening bias, modest economic growth and inflation is expected to keep the Bank of Canada on the sidelines until October 2013.

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Policy measures and reduced short-term risks buoyed markets

The prices of most risky assets increased between early September and early December. In the advanced economies, yields on both investment grade and subinvestment grade corporate bonds fell to their lowest levels since before the 2008 financial crisis. The same was true of yields on emerging market bonds, whether issued by sovereigns or corporates, or denominated in local or international currencies. And yields on bonds backed by mortgages and other collateral fell to their lowest levels ever. Meanwhile, equity prices mostly rose during the early part of the period, although they fell back somewhat later on.

Unusually, equity and fixed income gains coincided with a weakening of the global economic outlook. Forecasters cut their projections for 2012 and 2013 global economic growth.

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The Weekly Bottom Line

Canada

  • To no one’s surprise the Bank of Canada left interest rates unchanged this past week, as Canadian economic growth continues to be soft, hurt by weak foreign demand. But, the Bank retained its hawkish bias.
  • November’s very healthy job growth would seem to support that hawkish stance by the Bank. However, some of the details in the report reveal the soft underbelly of the Canadian economy, namely a slowing goods sector.
  • In addition to weaker external demand, Canada faces competitiveness challenges seen clearly in Canada’s poor productivity performance in Q3. These reasons underscore why November’s healthy job gain is unlikely to be sustained in the months ahead.

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Global Insight Weekly

  • While the U.S. dawdled with fiscal cliff negotiations, Asian and European stocks rallied.
  • China’s Shanghai Index posted its strongest weekly gain in more than one year. We continue to recommend an “Overweight” allocation to Asia-ex Japan equities, including Chinese stocks.
  • Surprise! Equities usually don’t fall after a key economic index peaks. (page 3)
  • Global Roundup: Updates from the U.S., Canada, Europe, and Asia Pacific. (pages 3-4)

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Market Indices, Asset & Risk Management Numbers: November 30, 2012

This is a great summary of the markets' recent performance - Stock and Bond Markets, Benchmark Portfolios - Month-To-Date, Quarter-To-Date, Year-To-Date and 1-Year returns.

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The Weekly Bottom Line - November 30, 2012

• This week, we learned that the Bank of England has poached the current Governor of the Bank of Canada. While his absence will surely be felt, the imminent departure is not expected to change the course of monetary policy in Canada.

• In deciding when to change interest rates, domestic and international developments will be closely monitored. Earlier this morning, we learned that the Canadian economy grew by just 0.6% (annualized) in the third quarter. This pace represents a sharp deceleration relative to the prior quarter and the third consecutive quarter of sub-2.0% growth.

• Amid the tepid economic backdrop and the litany of downside global economic risks, the lower for longer interest rate mantra will continue in Canada until the third quarter of 2013. Once rates are lifted, the increases will occur in a gradual, step-wise manner.

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