- U.S. economic recovery stronger than expected - Canadian equity market lagging global peers with 1.7 per cent return - Better news from Europe leading to more optimistic investor sentiment, positive equity returns - Looking ahead - Middle East issues may have negative implications, including a spike in oil prices
TORONTO, ONTARIO--(Marketwire - March 19, 2012) - BMO Harris Private Banking today released its latest market commentary report, Equities Advance as Fears Ease. The report notes an improvement in the outlook for the eurozone and a continued advance in global equity markets.
"Coming into 2012, we identified the possibility of imminent default by Greece on its sovereign debt, and unsustainably high bond yields on other eurozone countries' sovereign debt as the two major threats to equity markets," said Paul Taylor, Chief Investment officer, BMO Harris Private Banking. "But, at this time, Italian and other eurozone bond yields are down significantly, and Greece has secured additional funding. When considered with improving U.S. economic data and continued strength in emerging markets, the result is more optimistic investor sentiment and positive equity market returns."
Highlights from the report include:
Equity Markets Rally
In February, emerging and international markets led the global equity markets with 4 per cent and 3.8 per cent monthly total returns. The U.S. equity market also did well; the S&P 500 Index reached levels not seen since 2008 with investors encouraged by economic indicators signalling better U.S. and global growth ahead, decent corporate earnings and low interest rates. However, Canada's equity market lagged global peers this month, returning just 1.7 per cent.
U.S. Economy Strengthening
The U.S. economic recovery has proven to be stronger than expected. U.S. Q4 real Gross Domestic Product (GDP) was revised up to 3.0 per cent and the full year 2011 growth rate was 1.7 per cent. For comparison, Canada's Q4 real GDP was 1.8 per cent with 2.5 per cent growth for 2011.
Progress Resolving the Eurozone Credit Crisis
The optimism reflected in February's equity market advance was due in large part to positive developments in the eurozone. On February 21, a new rescue plan for Greece was announced, allowing its government to make a €14.5 billion debt payment due in March.
On February 29, the European Central Bank conducted a second long-term refinancing operation (LTRO) to provide European banks with liquidity and keep their local credit markets functioning.
"Greece's bailout and the LTROs are clear indications that the eurozone's policyleaders are committed to resolving their credit crisis, and equity markets agreed," said Mr. Taylor.
The Middle East - A New Risk?
"The possibility for conflict in the Middle East has the potential for broad, negative implications on the global economy, particularly for the price of oil," noted Mr. Taylor. The effects of oil supply shocks are difficult to predict, but taking Iranian supply out of the market would invariably tighten global supply at a time when spare capacity is scarce. From a current crude oil price of around U.S.$106 per barrel for West Texas Intermediate, such an upheaval has the potential to trigger oil price hikes to the U.S.$130-$200 level, based on previous historical price shocks.
BMO Harris Private Banking is cautiously optimistic that the eurozone situation will continue to improve and that the risks posed by the sovereign credit crisis will continue to diminish. Growth in the U.S. economy will continue, but at a moderate pace, given the headwinds posed by the country's large stock of debt. That headwind will likely constrain economic growth in developed countries for years to come.
Meanwhile, equity market returns are expected to continue to outperform fixed income, with mid-to-high single digit returns.
To view the full report, please visit: www.bmo.com/harrisprivatebanking.
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