Young and Frederick - ScotiaMcLeod Whitby

ScotiaMcLeod Portfolio Advisory Group

Greek worries are resolved. Following a negative start in January (MSCI AC World -4.4%), global equities have rebounded roughly 10% in the last seven weeks. 

The S&P 500 (+4.6% in Q1/10) is en route to outperforming long term Treasuries (TLT ETF down 1% in Q1/10) as government bonds end the quarter on a tougher note. Two disappointing Treasury auctions last week, coupled with improving U.S. data, sent bond yields shooting higher. U.S. 10-year yields could retest the 4% level soon. Our model pegs U.S. 10-year “fair value” at 4.8% by December 2010. We prefer equities (ETFSPY) and corporate bonds (JNK-high yield) to Government bonds (TLT). 

Hawkish words from Bank of Canada governor Carney also added to the pressure in Canada. Yields were up between 6 bp and 16 bp last week, with two-year CA/U.S. spreads moving to +65 bp and 10-year CA/U.S. spreads narrowing to -30 bp.

U.S. profit margins hit 10.2% in Q4/09 and operating leverage could push S&P 500 earnings to US$78 this year. The lack of warnings and steady stream of earnings surprises (Best Buy last week) hint of another strong “beat” ratio in Q1. 

At the macro level, Japanese exports were up 45% YOY in February and the Euro-zone PMI advanced to 56.3 in February. U.S. durable goods orders strength extended in February (+0.5% MOM; +12.5% YOY) and jobless claims continued to drift lower (four-week average now at 454,000). Our blended ISM index has averaged 52.5 in Q1 (40.6 a year ago). U.S. payrolls should decisively turn positive in Q2, lifting consumer/investor confidence.

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