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BMO Harris Private Banking

April 18, 2013 12:41 ET

BMO Harris Private Banking Market Outlook: Global Markets Rattled by Cyprus Bailout but Canada and U.S. Economies Remain Strong

- The Eurozone continues to face challenges with the Cyprus bailout and unemployment numbers high

- U.S. market rallies in all sectors, housing market improves with existing and new home sales up and interest rates to remain low for foreseeable future

- The Canadian government's goal of balancing the budget by 2015 is still within reach

TORONTO, ONTARIO--(Marketwired - April 18, 2013) - BMO Harris Private Banking's April Market Outlook Commentary Report notes that the recent bank crisis in Cyprus shows the Eurozone has not yet resolved its rooted structural problems.

The report states that, while Cyprus originally thrived after being inducted into the European Union, much of that economic prosperity declined at the peak of the debt crisis in 2010 - largely as a result of non-performing loans and bank mismanagement. This forced the Bank of Cyprus to request rescue bailout packages from the European Central Bank, European Commission, International Monetary Fund and Russia - each with stipulations and conditions.

"Despite a Cypriot bailout being inevitable, the handling of the bailout illustrates that European policy makers are still struggling to keep Europe's challenges under control," said Daniel Theriault, Chief Investment Strategist, BMO Harris Private Banking. "In a number of countries, most notably Spain and Greece, unemployment numbers remain stubbornly high and many Eurozone economies are still in recession. Even at the end of the quarter, Italy was still struggling with political deadlock which has resulted in delays addressing key issues such as debt and how to stimulate economic growth."

Additional highlights from the report include:

The United States Brings More Good News

In the U.S., the market and the economy continue to move on an upwards trajectory. Key indicators include:

  • The stock markets continued their upward climb with the S&P 500 finishing the quarter up by 10.61 per cent.
  • All sectors in the market performed well with healthcare, consumer staples, utilities and consumer discretionary leading the way, and economic fundamentals showing consistent improvement.
  • While the 88,000 new jobs added in March were below analyst expectations, the overall results for the quarter were encouraging because they directly relate to consumer spending.
  • The U.S. housing market is improving with existing and new home sales up, prices up and inventory levels of distressed properties down.
  • Corporate earnings are steadily improving with attractive dividends and balance sheets being shored up substantially for many publicly listed companies.

"The U.S. Federal Reserve has also indicated that they will be keeping interest rates low until the national unemployment rate is below 6.5 per cent," said Mr. Theriault. "All of these factors signal that the U.S. economy and domestic markets will continue to improve over the course of 2013."

Canada's Federal Budget

The report notes that much of Canada's financial news was driven by the introduction of the 2013-2014 federal budget. This year's budget, while not as direct in addressing the areas of fiscal stimulus and tax revenue as last year's budget, tackled different areas of the economy and spending, including:

  • The construction industry, which will receive $47 billion in new infrastructure spending, while the manufacturing sector will collect a combination of tax-break extensions and new spending.
  • Over the next five years, $1 billion will be allocated to southern Ontario's auto sector, while a similar amount will be directed to Canada's aerospace industry.
  • $500 million per year will be set aside for skills training matched to employer needs for Canadians who are unemployed or underemployed.
  • Import tariffs on baby clothes and sports gear will be removed to help make certain goods more affordable.
  • More tax breaks will be available for generating clean energy.
  • New tax reforms will be introduced, including closing a number of tax loopholes and rewarding whisteblowers who report tax evaders.

"Canada's economy is in a good position right now, and the goal of balancing the budget by 2015 still seems within reach if the economy cooperates," said Mr. Theriault.

To view the full report, please visit: http://www.bmo.com/pdf/hpb/BHIMI-Market-Commentary-April-2013.pdf.

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