Weekly Market Wrap-Up: Extended But...
The S&P 500 traded sideways this week while the S&P/TSX added nearly 2% and broke decisively above its 200-week moving average. This line usually delineates bull and bear markets according to market technicians. Long life to the Canadian bull (more below)! Again this week, there has been an active rotation out of defensive yielders into cyclical stocks. The weaker US$ dynamic continues to boost commodity prices, bolster inflation expectations, revive economic growth and maintain the belief that corporate earnings will improve markedly in H2. Bond yields, for a change, accounted for prospects of a better global growth outlook, with US 10-year Treasuries jumping 12bps this week (to 1.88%), breaking above their 50-day MA. On the central bank front, it was a quiet week. The PBoC in China hinted that it could become less accommodating in proving stimulus now that the economy is showing signs of improvement. Conversely, ECB President Mario Draghi reiterated his dovish stance and asked investors to be patient. The policy supports provided by the ECB over the past year should eventually filter through the Eurozone. Markets seemed to agree by lifting European stocks ~2% this week.
In our yearly strategy outlook published in January, we suggested that 2016 could be a turnaround year for the S&P/TSX. We said, “In the past, the TSX has been up 8 times out of 9 in years following >10% declines and on average has been up >10% in years following non-recessionary price routs.” Then, this week, we reiterated our positive view on Canada. With resource cyclicals taking market leadership, we cautioned investors not give up on the S&P/TSX considering that historical resource rallies last on average 23 months and outperform the market by 43%. We are still far from these thresholds. Also, should history repeat itself, short-covering activities should continue to jolt the S&P/TSX higher. Indeed, our Chart of the Week shows that short positions (albeit down) are still very high at 63M shares in the XIU (12% of shares). When we look at financials and energy stocks in the S&P/TSX 60, short positions are at 308M shares (3.1%) and 183M shares (1.9%) respectively. With such pent-up buying power, it seems just a question of time before the TSX pushes above its 14K resistance.
Regarding economic statistics this week, in Canada, headline inflation retreated to 1.3% on a YoY basis. Core inflation, however, accelerated somewhat, to 2.1% YoY (from 1.9% in February). We also learned this morning that retail sales improved 5.6% YoY (4.3% in volume terms). In all, inflation remains under control despite the CDN$ depreciation. Also, the service side of the economy stands on strong footings despite low oil prices. The upcoming fiscal boost should cement the foundations. In the US, both building permits and housing starts declined markedly in March (-7.7% and -8.8% MoM respectively) but the NAHB index remained unchanged at 58 in April (vs. 59 exp.) and existing home sales improved markedly, up 5.1% MoM (vs. 3.5% exp.). Elsewhere, in Europe, both the manufacturing (51.5 from 51.6) and services (53.2 from 53.1) flash PMIs came in below consensus. However, the ZEW economic sentiment settled at 21.5 (from 10.6 and 8.8 exp.) while consumer confidence improved a notch to -9.3 (from -9.7 and -9.5 exp.). Finally, in Japan, the trade balance improved sequentially but exports and imports worsened YoY (-6.8% and -14.9% respectively). Also, the Nikkei flash manufacturing PMI declined to 48 (from 49.1). In all, the Japanese economy is losing momentum fast, which could possibly prompt a response from the BoJ, maybe as soon as next week.
For next week, we await Q1/16 GDP growth, durable goods orders and new home sales in the US. In Europe, we will focus on GDP growth, inflation, loan growth and several sentiment measures. In Japan, inflation, retail sales and industrial production are on deck. But the BoJ should draw the spotlights.
The Canaccord Genuity research included in the Legacy Wealth Weekly is solely for Canadian residents. To subscribe to our weekly newsletter, click here.
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