Good news can dampen markets

By David Andrews | July 9, 2012 | Last updated on July 9, 2012
4 min read

Market reactions can be unpredictable. There are times markets rally on the worst of news. At other times, what seems like good news is interpreted as problematic, causing markets to slump.

Last week, the big news was the easing by several global central banks and the June employment reports.

In both cases, equity investors decided to sell on the news and stocks ended the week lower.

Read: Long-term interest rates will remain stable

China cut its interest rate for the second time in the past month while the European Central Bank cut its rate by 25 basis points to the lowest level ever. The ECB left investors disappointed, because they didn’t do more than just drop interest rates.

At least the Bank of England decided to fire up its money printing presses with a commitment to further quantitative easing. Perhaps most interestingly and in an effort to get money moving in its economy, the National Bank of Denmark pushed its lending rate into negative territory. They will now impose a 0.2% fee on term deposits left in Danish banks.

The recent wave of poor global economic data had given investors strange comfort in hopes that central bank stimulus would soon follow. When help arrives, as it did last week, investors sold. Go figure.

The other big news was the twin North American employment reports for June.

Read: Weak jobs numbers released

The U.S. is making scant progress toward reducing its joblessness with only 80,000 new hires. June is the third consecutive month of sub-100,000 employment growth, so will this be enough to induce another round of Fed stimulus (QE) this summer?

In Canada, our employment report was better than the market expected as we added 7,300 new jobs and our unemployment rate dipped to 7.2%. Despite our job-creating capacity being more impressive, it is still unlikely the Bank of Canada will raise interest rates this year.

Canada’s dollar weakened against its U.S. counterpart following the disappointing jobs data south of the border. Oil also erased its weekly gains and gold declined with the U.S. dollar reaching a two-year high against the Euro.

TRADING WEEK AHEAD

Economic data and the kick off to Q2 Earnings Season will dominate trade in the week ahead. On Monday night, aluminum giant Alcoa reports its second quarter results to begin what could be a very interesting earnings season.

Companies have been slashing forecasts and analysts have been cutting estimates as they prepare for a rocky quarter. Ninety-four S&P500 companies have issued negative earnings preannouncements for the second quarter, compared to only 26 positive forecasts. That’s a 3.6 ratio, and the weakest showing since the third quarter of 2001.

Wednesday will be the focus day with both the U.S. Trade Balance and the minutes from the June 20th Federal Open Market Committee meeting due for release.

The U.S. Trade Balance (May) will likely show the trade balance narrowed due mostly to petroleum prices which have dropped since March. In addition, the slowing of global growth is likely to have hampered exports.

The FOMC minutes are also out on Wednesday. The FOMC’s decision to extend Operation Twist was described by Chairman Bernanke as a substantive move, but it seems little more than a maintenance effort, especially given their lower growth projections also given that day. The minutes of the meeting may give further clarity to where Fed officials’ philosophical differences stand and how close we may be to a third round of quantitative easing.

Friday’s Producer Price Index should fall for a third straight month in June, the longest losing streak in two years. Lower energy prices should once again lower input costs for manufacturers, as was the case the last two months.

Also on Friday is the University of Michigan Consumer Sentiment data for July. After an unprecedented nine-month winning streak, sentiment posted an outsized decline in June and the economic news has been mixed so far this month. ISM manufacturing and service data were softer, but car sales a bit higher than expected. Lower gasoline costs should help underpin consumers’ wallets with lower costs at the pump.

Will things get worse or better?

Fundamental analysts have now become the most bearish in the past 15 years on the stocks they cover. According to Merrill Lynch’s Sell Side Consensus Indicator (a historically decent contrarian indicator), strategists are now more bearish on equities than they were at any point during the collapse of the tech bubble or the recent financial crisis.

Given the contrarian nature of this indicator, it is encouraging to see Wall Street’s lack of optimism and the fact that strategists are recommending that investors significantly underweight equities.

Read: Canadian equities bounce back

David Andrews is the Director, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @David_RGMP

David Andrews