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Energy Market Volatility


Thoughts on Energy Market Volatility  Since hitting a high in mid-June, global oil prices have officially entered a bear market, with U.S. benchmark West Texas Intermediate (WTI) prices down 23% and global Brent prices off 25% (in USD).  In terms of Canadian dollar equivalent, WTI is down 19% from the June peak and Brent is down 22%.   A relatively bullish crude oil environment has transformed very quickly due to the confluence of increased global supply at a time when global economic growth forecase has been reduced.  We share our thoughts on recent volatility and cover six main topics influencing the energy market.

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Market Watch: Global Update


Growth worries persist

Worries about weakening global growth and its potential impact on the US economic recovery roiled markets around the globe this week. Europe continues to be the primary source of concern as most economic indicators have turned down since mid-summer. The most recent piece of bad news came Tuesday when Germany – the eurozone’s largest economy – cut its growth outlook for 2014 from 1.8% to 1.2% and reduced its 2015 projection from 2.0% to 1.3%. In addition to paring back German growth estimates, there has been no pick-up in the country’s level of inflation which remained unchanged from August to September at 0.8%. The combination of falling growth and a lack of inflation has plagued much of the eurozone and news that its strongest country may succumb to the same ills rattled traders on both sides of the Atlantic. They’re worried about the impact a decelerating Europe would have on a still scuffling US economy especially in light of halting Chinese growth. A string of poor economic reports out of the US Wednesday added to the down beat mood as retail sales fell, the producer price index disappointed and a business conditions survey dropped. Two positives came Thursday in the form of US jobless benefits claims which came in at a 14-year low and industrial output which sharply rose. The dose of good news seemed to remind traders that the US economy is moving in the right direction and a sense of calm returned to the markets late Thursday. Traders also seemed to notice US Q3 corporate earnings ahead of the weekend which have been pretty decent with 65% of the companies beating estimates thus far.


Stocks stabilize
North American stocks stabilized late in the week following another wild couple of days filled with sharp ups and downs. For the four-day period covered in this report, the Dow fell 418 pts. to close at 16,117, the S&P 500 gave back 43 pts. to close at 1,862 and the Nasdaq shed 63 pts. to finish at 4,217. In Canada, the TSX lost 175 pts. to end Thursday’s session at 14,052.

Our Recommendations

Higher volatility returns

Equities: Warren Hastings, Associate Director, Portfolio Advisory Group wrote: “The week was characterized by a notable return in volatility. This week, through Thursday’s close, the S&P 500 declined 2.3% in USD terms while the S&P/TSX fell 1.2% (CAD). The declines mirrored a 3.6% decline in crude oil prices following reports Saudi Arabia was considering a volume over price strategy in respect of its oil exports. Equity volatility, as measured by the CBOE Volatility Index, spiked, closing at 26.25 on Oct. 15, the highest since 2012, and the same day the US 10-year Treasury yield declined to 2.14% — a level not seen mid-2013. The sell-off created several attractive buying opportunities in the Canadian equity market, in our view, including select financial, energy producer, and energy infrastructure names.”

Global Markets YTD 2014 October 17 CADGlobal Markets YTD 2014 October 17 USD

Market Watch: Global Update


Growth worries rise

Anxiety over the pace of global growth took centre stage this week with the US Fed adding its voice to those worried about a slowdown. The Fed’s concern was articulated in minutes coming from the central bank’s September 16/17 meeting. The minutes identify global growth and the strength of the US dollar as threats to the halting US economic recovery. In light of these new concerns, the Fed says it is more inclined to stick to low interest rates for a ‘considerable’ time. That helped assuage concerns the Fed may raise rates earlier than expected but it also deepened worries about growth. Earlier in the week, the IMF reduced its forecast for global growth citing eurozone weakness and a slowdown in emerging markets. According to the Washington-based IMF, 2014 growth will come in at 3.3% versus an earlier prediction of 3.4% and next year will bring a growth rate of 3.8% compared to a previous estimate of 4%. Adding to the downbeat mood, the head of the ECB said Thursday that monetary policy alone may not be enough to stop the eurozone slide. Meantime, estimates for Chinese growth were revised down by the World Bank for the next three years. What little there was in the way of market-moving economic data came in the form of initial jobless claims south of the border, which came in below forecast. Looking ahead, Q3 US corporate earnings season gets underway in earnest next week while Canadian markets will be closed Monday for Thanksgiving.


Turbulence hits stocks
North American stock markets were volatile much of the week with major benchmarks registering three-digit point swings on several occasions. For the four-day period covered in this report, the Dow fell 351 pts. to close at 16,659, the S&P 500 shed 42 pts. to end at 1,928 and the Nasdaq gave back 114 pts. to settle at 4,378. The TSX also ended the week in negative territory losing 369 pts. to finish at 14,460.

Our Recommendations

Higher volatility could persist for next several weeks; Rather than panic, we’re looking for opportunities to deploy cash.

Fixed income: Andrew Mystic, Director, Portfolio Advisory Group wrote: “We continue to think that investors should be migrating towards more liquid, higher quality credit – as recent credit pressures are demonstrating. Recent equity weakness, the impact of and threat of M&A activity and geopolitical risks have all conspired to move spreads wider. Although more defensive credit (utilities, pensions) has seen only modest widening, lower grade credit has been impacted more forcefully (retailers, REITs and telcos‎). Although we generally remain constructive on credit, event risk should continue to persist suggesting individual name selection will continue to be key. We expect that as we approach the Fed’s December meeting the recent bout of volatility could become more acute – which may spur some opportunity. We do however continue to see the impact of geopolitical events weighing on rates and continue to expect a US 10-year around 2.70% by year end.”

Global Markets YTD 2014 October 10 CADGlobal Markets YTD 2014 October 10 USD

Market Watch: Global Update



Rocky start to the fourth quarter

It was a rocky start to the fourth quarter this week as it opened amid renewed concern over global growth. Although the US economy is expected to deliver further – albeit halting – growth doubts remain about Japan and to a greater extent Europe. Overall, much of the world is trying to gauge the impact and timing of an interest rate rise south of the border. The US Federal Reserve is preparing to end its bond-buying this month and eventually raise rates above zero – where they’ve been since 2008. Low rates and the easy money policies of the Fed have been credited with helping US markets reach new highs. One measure the Fed uses to guide its actions is employment data which includes non-farm payroll numbers and the jobless rate (both figures are released today, October 3). Meantime, the ECB made no new stimulus announcements at its policy meeting Thursday. Some had hoped to see the ECB take further action in the eurozone particularly after Germany showed a surprise decline in manufacturing activity for the first time in 15 months. But the central bank said it prefers to wait and see what kind of impact previously announced measures have as they work through the economy. Finally, pro-democracy protests continued in Hong Kong with a fragile peace held together with the promise of talks scheduled between the two sides.


Year-to-date gains remain solid

Through the third quarter, most major North American equity markets are flashing green led by the TSX which has delivered a 9.83% return as at September 30. The Nasdaq has posted a 7.59% gain, the S&P 500 has moved ahead 6.7% and the Dow is up 2.81%. For the four days covered in this report, the Dow fell 312 pts. to close at 16,801, the S&P 500 gave back 36 pts. to end at 1,946, the Nasdaq shed 82 pts. to finish at 4,430 and the TSX settled at 14,776 after losing 260 pts.

Our Recommendation

Higher volatility could persist for next several weeks; Rather than panic, we’re looking for opportunities to deploy cash.

 Equities: With the Fed about to end its bond buying spree and getting ready to embark on a rate hike cycle, and growth sputtering in Europe and decelerating in China, we’re not surprised that investors are asking whether the current bull market is over. Over the past three years, the S&P/TSX Composite and S&P500 have appreciated 30% and 75%, respectively. These gains have come primarily from P/E expansion which tends to precede earnings growth. With P/E multiples unlikely to move materially higher (TSX and S&P500 both at approximately 15x on a forward 12 months basis), further gains will be more dependent on earnings growth. Lower commodity prices and decelerating growth for Canadian banks will likely crimp near-term earnings growth for the TSX, while current consensus U.S. earnings growth forecast of 8% in 2014 and 11% in 2015 could see modest downward revisions as a strong USD eats into non-U.S. earnings of American multi- national companies. As we commence the final quarter of 2014 (October has a bad reputation, which is unwarranted based on historical data), we expect volatility to remain elevated. Ultimately, however, we don’t think the current equity cycle has peaked and expect further upside over the next 12 months, albeit more modest than what investors have become accustomed to in recent years. An expectation of a prolonged low bond yield environment has us revisiting traditional dividend-paying sectors for opportunities to add exposure amidst market volatility.

Global Markets YTD 2014 October 3 USDGlobal Markets YTD 2014 October 3 USD

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