After a difficult week last week, equity investors were still in a selling mood on Monday as global economic concerns and a confidence vote in Greece weighed on investor sentiment. Eventually the Greek Prime Minister survived the confidence vote, providing some relief to the markets until Federal Reserve Chairman Ben Bernanke hosted his quarterly Q&A session after the Fed lowered its U.S. GDP growth forecasts for 2011 and 2012.
Mr. Bernanke noted that the U.S. economy had slowed recently and attributed that performance to higher commodity prices and the global supply chain disruption caused by Japan’s earthquake and tsunami.
However, he also recognized that housing and labour woes in the U.S. had become a larger drag on economic growth than previously thought. These comments only added to the cautious tone that we’ve witnessed since markets began their recent retreat in April.
The other material news story this week was the decision by the International Energy Association to release 60 million barrels of oil from various strategic reserves around the world to make up for lost Libyan oil production over the next 30 days. The United States will contribute half of that release which essentially will equate to 2 million barrels per day on average over the 30 day time period.
Oil markets did not like the news of this future added supply and oil prices fell accordingly bringing energy related equities down with them. While 60 million barrels is actually relatively small to what will actually be consumed globally over the next 30 days, the market did not like what it considered “political interference”
to help lower oil prices and perhaps help economic growth.
While the Euro has certainly recovered from its plunge last year, the events of this week saw the currency weaken. Even though it would appear as though Greece has cleared yet another hurdle in its attempt to get back to some sort of fiscal normalcy, investors are caring less about individual nations and are becoming more concerned about the exposure global banks and countries have to deeply indebted nations. With respect to the loonie, seeing that oil prices struggled and that gold prices were weaker, it was not surprising to see the Canadian dollar finish the week lower.
The trading week ahead
Now that summer has officially started, investors in Canada have one 4-day trading week to look forward to in each of the next 4 months. Our first holiday will arrive next Friday as we celebrate Canada Day, but trading activity would have likely been slow anyways as Americans prepare for their extended 4th of July
weekend.
As we are only a few weeks away from the beginning of second quarter reporting season, there are few corporate earnings releases expected next week; however, we will hear from some industry heavyweights in the U.S. as NIKE Inc, Monsanto Co and KB Home are all expected to announce the earnings. In Canada we only expect to hear from Shaw Communications and Empire Co from the large cap space.
Markets will likely continue to be influenced by economic data as we have a decent slate of releases expected in the days ahead. We’ll gain some insight on consumption on Monday when we see both personal income and spending data while we’ll get a sense of how the U.S. Housing market is doing on Tuesday with the Case- Shiller Index expected. However, the most influential release probably won’t come until Friday when we expect to see the ISM Manufacturing Index.
Some economists believe the ISM could fall below 50 which is traditionally the breaking point between
economic expansion and contraction. The economic data will likely continue to influence the commodity spectrum and the fallout from the IEA announcement could linger next week if positive catalysts are nowhere to be found. But since we’re looking at a shortened week in Canada and a lead up to shortened week in the United States, we would not be surprised if commodity prices remain relatively neutral which would also result in little movement for the Canadian dollar.
Question of the Week
Do higher oil prices really have an impact on consumer behaviour?
To answer this question we put together the following chart which outlines month-over-month changes in U.S. retail sales and the U.S. month end average automotive gasoline price per gallon. It becomes quite clear that as gasoline prices go up and our wages stay the same that the amount of money we have for discretionary spending declines which results in a decline in retail sales.
The dramatic rise in oil and gasoline prices earlier this year, thanks to unrest in the Middle East and Northern Africa, obviously put a strain on the average consumers’ purse strings. Not only did we witness such behaviour in the United States but also in Canada. The recession of 2008 and events so far this year have shown us that the global economy can not adapt quickly to a rapid increase in energy costs.
@Gareth_RGMP