The first full week back for investors in 2012, and markets kept the rally going on speculation China may soon act to spur growth and results from Alcoa Inc. giving an optimistic start to the U.S. Earnings Season. China’s economy saw imports fall to a 2-year low and inflation fell to a 15-month low suggesting the need for imminent Chinese monetary and fiscal stimulus which is good news for commodities and in turn, good news for the TSX. Alcoa, the first of the Dow Jones Industrials to report, further boosted sentiment with better revenue than expected and a fourth quarter loss that was no worse than consensus expectations. Investors’ luck seemed to turn bad on Friday as the European debt problems of 2011 resurfaced again. At the end of the day, Standard & Poor’s downgraded several Euro zone members, including both France and Italy.
Last week’s Spanish bond auction was viewed as a success with bonds sold at higher than expected prices to start off 2012. The Italians also held an auction but demand was viewed as less robust. A credit rating downgrade is in the cards for Italy, which may make Italy’s future re-financings more challenging over the coming months.
The economic data out of the United States had been steadily improving but may have hit a bump in the road this week. December’s retail sales were soft and weekly jobless claims rose back to levels last seen in November. The good news is seasonal layoffs usually occur at this time and November retail sales were strong, suggesting not everyone is a last minute shopper…It is also worth noting both the Fed’s Beige Book and the University of Michigan Confidence Index gave firm indications that the economy and the outlook are improving.
The energy sector saw crude oil drop to three week lows as EU officials said an embargo on Iranian crude imports may be postponed for six months until replacement sources of oil could be secured. Rising tensions between Iran and the West over Iran’s nuclear development has spurred prices well ahead of the fundamentals. Natural gas has fallen another 10% so far this year with some analysts now calling for natural gas to trade as low as US $2.00/million British thermal units in 2012.
Copper Break Trend… To the Upside!
Copper futures have moved rather indecisively for the past three months but this week investors saw the commodity break above its recent trend line. Copper, often referred to as “Dr. Copper” for its ability to predict the future of the global economy, is suggesting the economic picture is about to get much brighter. Goldman Sachs expects copper, oil, and gold to all rally this year as the economic outlook in the U.S. and Asia has improved and will likely offset the impact of a European recession. The key will be the timing and magnitude of any monetary and/or fiscal stimulus in China. Chinese inflation fell to a 15 month low in December which enables the government to begin adding fiscal support, likely in metals intensive industries.
The Trading Week Ahead
With the holiday season firmly behind us, now seems like a great time for a three day weekend which the U.S. markets will as they celebrate Martin Luther King Day. Despite the shortened trading week, fourth quarter earnings season kicks into high gear with 54 companies due to report their year-end results. Following the disappointing 23% slump in JP Morgan Chase’s earnings, investors will scrutinize the results of the other large U.S. banks. Financials has been one of the best performing sectors in 2012 after being one of the worst in 2011.
Viterra Inc. is the only TSX listed company reporting results this week. Most Canadian companies with a calendar year-end won’t release earnings until the end of the month.
Economic data this week will focus on inflation as December producer and consumer prices will be in focus. Following the inflation declines seen elsewhere, North American data should be tame as well. For the month, energy prices were up but food inputs were lower as an offset. Watch for a U.S. existing home sales to surge to the highest level since May of 2010. Pending home sales tend to lead existing home sales by a month or two and pending home sales have been running even stronger than existing home sales in recent months.
The Bank of Canada rate will likely be held unchanged again at Tuesday’s policy meeting. The policy statement should reiterate that the European debt crisis/recession remains the biggest concern for the Bank’s outlook. We also look for no near-term guidance for rates to move as they are already very low and the Bank of Canada will continue to monitor things carefully. It is likely to raise its 2011 GDP projection after Q3 growth (3.5%) came in well above its forecast (2.0%). A slower Q4 GDP profile should be maintained, but probably not as soft as its prior published expectation (0.8%).
As usual, developments in Europe will likely remain volatile as markets react to news headlines out of the area.
QUESTION OF THE WEEK
Natural Gas prices are declining and the outlook is for more weakness. Are there companies I can invest in to take advantage of that?
Whether natural gas has further to fall or is finally finding a bottom is up for debate, but a quick price recovery is most unlikely unless governments slow the pace of exploration using hydraulic fracturing. Should natural gas prices remain low, several industries stand to benefit either through lower expenses or increased revenue. Companies focused on natural gas as a transportation fuel should see demand growth from consumers, businesses and potentially growth through government policy. Companies involved in the ownership, construction and servicing of natural gas pipelines also should be able to expand revenue through increased usage and demand. In addition to both transportation and pipeline companies, businesses that use natural gas in the production of end products such as agricultural nutrient and feed producers should be able to increase their bottom lines. These companies use natural gas both as a feedstock in the manufacturing process and to power the plants that produce their end products. Low natural gas prices should allow these companies to lower the overall production cost and increase their margins.
@David_RGMP