Pundits tell us that the United States is in a mess of historic proportions, from its political leadership to its economic state. Investors, who risk capital and therefore have a knack for seeing events more clearly, believe that Europe is in greater financial disarray.
Investors moved to a more risk-averse stance last week, selling commodities and foreign currencies, while buying up the U.S. greenback and - it's true - more Treasuries (the U.S. Treasury plans to match its all-time record for notes and bonds sales this week).
The euro is trading at its lowest level against the U.S. dollar in eight months, on fears that soaring European fiscal deficits could push Greece, Portugal and Spain to default on their debt.
At the same time, somewhere in the perplexing jumble of U.S. job data, there was a ray of hope last week that the period of greatest job destruction since the Depression may finally be drawing to a close. In this dramatic environment, it's proving much harder for investors to place their bets confidently, and for the market experts to agree on whether the stocks are entering bear territory.
What is clear is that around the world, investors are no longer prepared to throw their money at just any rising asset class.
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"Truly, the market is starting to differentiate between risks. That's what's happening right now," says Paul Vaillancourt, director of portfolio strategy at Franklin Templeton Managed Investment Solutions. "This is becoming more of a tactical, bottom-up, stock-pickers' market. Investor are going to have to pick their sectors, companies and regions properly."
His favoured areas are mid- to late-stage cyclicals, including energy, materials and industrials. And he predicts that some stocks will show "surprising upside," even as parts of the global economy suffer through trying times.
With corporate earnings season more than halfway complete, it's very apparent just how selective investors have become. The vast majority of S&P 500 reporters, and a slim majority of Canadian reporters, have exceeded analysts' expectations. At a handful of companies, executives have spoken about clear signs that the recession is behind them. But investors have reacted coolly to the positive news, more focused perhaps on disturbing economic events. The S&P 500 is off 7 per cent since reporting season began on Jan. 11, and the S&P/TSX composite index is down 6 per cent.
Today, Teck Resources Ltd. releases results after the markets close. Coca-Cola Co. and Walt Disney Co. post tomorrow, Air Canada and Talisman Energy Inc. on Wednesday, and Manulife Financial Corp., Shoppers Drug Mart Corp. and Philip Morris International Inc. on Thursday.
This will be a light week for economic reports. On Wednesday, the U.S. puts out international trade figures and the latest deficit numbers, while Canada releases merchandise trade figures. Ottawa's data will get scrutinized for an early read on where fourth-quarter GDP will stand. On Thursday, we get U.S. retail sales for January, with economists expecting a fractional rise, and on Friday, the University of Michigan's Consumer Survey Center posts its monthly update on financial conditions and attitudes about the economy.
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TREASURIES
The yield on 10-year U.S. Treasuries continued its slide last week and, in the short-term at least, investors can expect the decrease to continue as long as investors remain concerned about the state of the economy and volatility of the stock markets.
But Nassim Taleb, senior scientific adviser at the investment management firm Universa Investments LP, warned investors they should expect a rise in 10-year U.S. Treasury yields, which move inversely to prices, as long as the U.S. deficit mounts and the Federal Reserve keeps its overnight rate at an historic low. Rising yields are usually considered poison for stocks, but with the 10-year note still yielding a miserly 3.61 per cent, there is some headroom for gains before equity markets panic. The U.S. Treasury plans to sell $81-billion (U.S.) of notes and bonds next week, an unusually large quota.
CANADIAN STOCKS
Stock market trading volumes, spreads between bidding and asking prices and volatility were showing a healthier pattern at the end of 2009 than a year earlier, according to a study of the most-watched market structure statistics by ITG Canada Corp.
Alison Crosthwait, the firm's director of research, says that average daily trading volume in TSX-listed securities increased by 2 per cent in the fourth quarter of 2009, compared with the third quarter. For the full year, volumes rose 24 per cent over those in 2008. The difference between bidding and asking prices, bid-ask spreads, have tightened up. They were 21 per cent lower in 2009 than their average level a year earlier. Intra-day volatility has fallen during the same period, dropping 17 per cent.
COMMODITIES
Prices were hammered last week by the rising U.S. dollar. Concern about the strength of the global economic recovery suggests there's no reason to expect a sudden increase in demand and prices. "The weakness of the base metals collectively is telling us in the very loudest of terms that there is at least doubt as to the efficacy of a global economic recovery," notes Dennis Gartman, author of The Gartman Letter.
OECD countries will be the key drivers of any significant price increases this year, says Alan Heap of Citigroup Global Markets Inc. In the U.S., demand is still falling, but the rate of decline is slowing. Demand for aluminum, for example, was off as much as 30 per cent year-over-year in early 2009, but is now down no more than 5 per cent. The metal is trading at its lowest price since November, however. Copper prices, which more than doubled last year on demand from China, are off substantially this year, trading at their lowest point since last October.
"We expect demand to turn positive in coming months and the restocking amplifier, after two years of inventory drawdown, will be powerful," Mr. Heap says.