It’s very difficult to find one word that sums up the past week, so we shall just use the word “volatile”. We realize that the word alone understates the wild swings we’ve witnessed for exchanges globally, but we’re not sure if there is a word out there that captures what we’ve seen over the past five days. Monday was supposedly all about the markets’ reaction to the U.S. downgrade by Standard and Poor’s, but broader economic concerns fed the selling frenzy. As the week progressed, attention turned to Europe and France in particular as rumours swirled about French financial institutions being in trouble. The Federal Reserve also added to the volatility by announcing that interest rates were unlikely to move over the next two years. There were also rumours that France was about to lose its AAA credit rating, a rumour that was dispelled by all three major rating agencies. Other news items contributed to the volatility including the decision by various European countries to ban short selling on certain stocks, a mixed bag of economic data out of the United States, some reasonable economic data out of China and a lot of speculation around U.S. financials thanks to some legal action by AIG. You may have noticed that I’ve used the words rumour and speculation above which means the market was reacting a lot to the unknown or the unconfirmed. Naturally, such reactions only added to the volatility.

Commodity prices could not escape the volatility that gripped the markets as economic concerns hit cyclical commodities while debt concerns added a tremendous amount of strength to gold prices. Oil especially was all over the map falling to the US$75.00 per barrel range at one point, but managed to regain lost ground by settling out the week in the mid 80 range. Considering the direction of stocks and the unattractiveness of various currencies, gold surged to a new record high. While it did not close out the week at a record, it became evident that investors were looking to park their money in hard assets and gold was clearly the winner on that trade. The currency markets also had a hard time trying to figure out where to go these days thanks to central bank interventions, and debt concerns. Unfortunately for Canadians, the retreat by commodity prices and the growing concern about the U.S. economy took the wind out of the loonie’s sails as it flirted with par at one point. Remarkable considering it touched US$1.06 only a couple of weeks ago.

Canada Still Leads the Way
There is no debate that recent stock market performance has been poor no matter which country you look at. However, during these difficult times it is always worth the time to put returns into perspective. Even though the TSX Index may be down for 2011 and down since the beginning of 2008, Canada’s declines in both cases are some of the smallest, if not the smallest, amongst the world’s major exchanges. A year ago, the cumulative returns likely would have been poorest for the emerging markets; however, we are now seeing the overall returns for European exchanges fall down the list. While the Shanghai’s return has been the worst since the beginning of 2008, the French CAC-40 Index is close behind. So, while the markets are going through a difficult time at present, it is important to remember that global investors have looked to Canada for outperformance.

The Trading Week Ahead
We will not even try to predict what the day to day movements of the market will be next week as this past week proved that in a market of high volatility, short term forecasting can be rather futile. However, we do have a few events or data points which could set the tone and hopefully reduce the volatility we’ve witnessed over the past few trading days.

The two largest concerns these days have been U.S. economic growth and European debt. On the U.S. front, we’re going to see a lot more economic data than we saw over the past five days. Retail sales data and jobless claims were better than expected last week while consumer confidence was dreadful. Focus will turn back to the housing market where we likely won’t see any improvement and to inflation which may not be as influential as it once was before the Fed’s interest rate announcement last Tuesday. We will get a better gauge on economic performance though when stats such as Industrial production, the Empire Manufacturing Index and the Philadelphia Fed Index are released. With respect to Europe, meetings will be ongoing throughout the week as politicians and bankers scramble to maintain calm in the market place. In particular, markets will be watching a meeting between German and French leaders on Tuesday to gain any insight if further fiscal action may be taken.

In Canada, we’ll see inflation data at the end of the week, which should still be within reason, but the Bank of Canada’s willingness to raise interest rates this year has likely been limited by the Federal Reserve’s decision to keep rates unchanged until mid 2013.

With broader macroeconomic issues continuing to dominate the headlines, we expect to see continued volatility in the commodity and currency markets. Oil prices have bounced off their lows, but could be constrained if economic growth continues to slow in the U.S. while gold prices could see continued support above US$1,700 per ounce if we see little news flow coming out of European discussions. Naturally the Canadian dollar will remain volatile until these broader macro issues are sorted out.

Question of the week
Last week, we showed you the breakdown of U.S. Federal Spending and Tax Receipts for Fiscal 2010. We had a positive response from our readers to this table and a number of our clients have asked how the Canadian Federal Budget for Fiscal 2010-2011 compares. Below, we provide you with the projected breakdown of government expenses and receipts from the last fiscal year.

Personal taxes are our main source of revenue in Canada and you may be surprised to see that GST and other duty collections are greater than what we collect in corporate taxes. Then again, Canada has been cutting corporate taxes since the 1990s. Perhaps this is one of the reasons our employment situation is better in Canada and why our personal taxes top our list of receipts. Some investors wonder if the United States might introduce a Value-Added Tax (VAT) like the GST; however, in today’s political environment, such an idea is a non-starter. In addition, it’s probably not best to tax consumption when you want it to increase and consumers are struggling.

Canadian Projected Federal Spending and Tax Receipts for Fiscal 2010-2011 (US$ Billions)
Spending
Amount
 Tax Receipts
Amount
Federal Programs
120
42.9%
 Personal Tax Collected
117
50.6%
Transfers to Persons (E.I., Elderly, Children)
72
25.7%
 GST and Other Duties
41
17.7%
Social Transfers (Health, Services)
57
20.2%
 Corporate Tax Collected
26
11.0%
Public Debt Charges
31
11.2%
 Other Revenue
25
10.7%
E.I. Premiums
18
7.6%
Other Income Tax
5.5
2.4%
Total
280.5
 Total
231.4
Source: Globe and Mail
Gareth Watson is the Vice President, 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.
@Gareth_RGMP