BMO Harris Private Banking

BMO Harris Private Banking

July 11, 2013 08:01 ET

BMO Harris Private Banking July Market Commentary: Positive Global Market Trends Prevail

- Investors retreat from bonds into risk assets following U.S. Federal Reserve's signals on quantitative easing

- U.S. economy continues to improve

- Proposed E.U. banking union expected to restore stability in Eurozone

- Canadian commodities soften because of weak Chinese economy

TORONTO, ONTARIO--(Marketwired - July 11, 2013) - Markets were rattled last month when the United States Federal Reserve signalled its intention to scale back its bond-buying program sooner than expected in an effort to boost economic recovery. However, BMO Harris Private Banking's July Market Commentary reveals that, despite the short term volatility and slowed growth in China, there is an abundance of good news for the broader economy.

"The tapering signal from the Federal Reserve sent many investors hurrying to the sidelines and caused a sell-off in the capital markets," said Daniel Theriault, Chief Investment Strategist, BMO Harris Private Banking. "Additionally, borrowers scrambled to sell and cover their loans, and U.S. 10-year Treasuries surged to finish the quarter at 2.47 per cent. Despite the anxiety and increased volatility that ensued, this new environment actually offers investors ripe opportunities if they stay mindful of the perils."

Further highlights from the report include:

Good News Abounds in the U.S.

The U.S. economy is growing healthier, albeit slowly:

  • Job numbers are improving moderately; however, the Federal Reserve's unemployment target of 6.5 per cent remains distant.
  • Inflation is at 1.1 per cent - still well below the range of 2 to 2.5 per cent that the Fed prefers before it raises interest rates.
  • The housing market is steadily improving which, in turn, is helping consumers to pay down debt while boosting confidence levels and encouraging consumption.
  • U.S. equities seem poised to advance should global growth and external demand for U.S. goods continue.

"Business spending is also accelerating at a steady pace and corporate balance sheets are flush with cash," said Mr. Theriault. "This in turn enables companies to upgrade aging structures, equipment and software in order to improve productivity."

Europe's Economy Stabilizing

Despite the continued uphill recovery, the report highlights that Europe delivered good news in the second quarter of the year as well:

  • E.U. leaders have agreed to create a banking union to help restore stability and move beyond the Eurozone's three-year debt crisis.
  • The banking union will provide tighter oversight and a mechanism to resolve problems, and will limit the amount of public funds available to bail out financial institutions.
  • The European Commission is planning to create a central resolution body called the Single Resolution Mechanism.

"Austerity programs and high unemployment are still frustrating recovery in the Eurozone," noted Mr. Theriault. "However, it is promising that policymakers are moving ahead to stabilize the financial system for the long term."

Concerns About China's Debt Level

China's debt continues to mount, especially at provincial and local levels. The BMO Harris Private Banking report notes that local governments are not permitted to borrow and therefore they raise debt through corporate entities financed by 'shadow banks'.

"Capped deposit rates and capital controls make the purchase of these debts attractive to investors, however the central bank has no control over shadow financing," said Mr. Theriault. "Yet if it tightens monetary policy hard enough to slow economic growth then it will eventually cut off liquidity to the shadow banks."

According to the report, China's policymakers are not deliberately setting out to slow economic growth, but that may be the unintended outcome and downward revisions to GDP growth estimates are likely.

Canadian Dollar Drops With Commodity Prices

Global events continue to affect Canadian market activity:

  • Bond interest yields in Canada have increased similarly to those of U.S. bonds.
  • Commodity prices have weakened, pushing down the Canadian dollar 1.4 per cent in June to $0.9508 per U.S. dollar.
  • Gold also fell, ending the quarter at $1,223.70 (USD).

"Canada's commodities performance remains in step with China and will continue to remain soft as long as the Chinese economy shows weakness," said Mr. Theriault.

To view the full report, please visit:

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