• Do you believe there will be a deal before the default deadline arrives in the U.S.? Vote in our poll.

    As we get closer and closer to the August 2nd deadline for the U.S. Government to raise that country’s debt ceiling, politics enters the fray as expected. Finger pointing and whining from both Republicans and Democrats has become the norm unfortunately. Meanwhile, the markets do not like this uncertainty one bit.

    Even Moody’s Investor Services got involved in the process this week and put the U.S. AAA credit rating under review for a downgrade. Such a move comes as no surprise as the credit rating agencies have already stated their intentions (i.e. downgrade) if a debt ceiling increase is not achieved. Naturally Moody’s news was not well received by the U.S. dollar which depreciated, but gold and silver prices strengthened considerably pushing the bullion to a new all time high.

    • As usual Europe continued to be problematic, but this week’s focus was no longer on Greece; Italy became the country of discussion as it tried to pass a budget. Investors have also been debating the health of Italian bank balance sheets for weeks, adding more fuel to the credit debate on that continent.

    Turning to corporate news, we saw the beginning of the Q2 earnings season as Alcoa reported results which were good but guidance left some investors unimpressed. JPMorgan Chase and Google offered hope for a good quarter
    though since both companies reported positive results as we venture into next week when earnings releases start to accelerate.

    One positive data point from the week was the quarterly GDP growth rate out of China up 9.5% year over year when economists were looking for growth of 9.3%. This print offered hope to those investors looking for a soft landing in China as that country’s economy matures. Strength in the commodity markets earlier in the week saw the Canadian dollar regain some lost ground and appreciate against the U.S. dollar. The Chinese GDP print also helped the loonie advance as we’ll have an interest rate decision out of the Bank of Canada next week.

    The Trading Week Ahead

    Two things that are quite certain are that European credit problems will persist and the U.S. Government will continue to debate a deficit reduction package in order to find consensus to raise that country’s debt ceiling. Daily meetings and news conferences will likely be in the cards, but with only two weeks left to reach an agreement, focus on this issue will only intensify even though a last minute deal scenario is a likely outcome.

    Even if Europe and the United States are responsible for many market moving headlines, we could see others come from the corporate world as U.S. reporting season will get into full gear. We will hear from many Dow and NASDAQ heavyweights such as IBM, Apple, Microsoft, McDonald’s, and General Electric to name a few.

    Guidance will likely be the focus for most investors as they will want to know how the recent slowdown, seen in many parts of the world, will impact corporate profitability going forward. A couple of companies will be reporting in Canada, but our earnings season won’t start to pick up until later in July.

    Turning to monetary policy, investors will be awaiting an interest rate decision by the Bank of Canada on Tuesday, although no change is expected. However, we will see inflation data on Friday, which could give us a better perspective on the possibility of an interest rate hike later in the fall. With no change in rates anticipated this month, we don’t expect to see the Canadian dollar react materially; however, the loonie could be affected by the Bank of Canada’s Monetary Policy report which is due for release on Wednesday.

    Ongoing fiscal debates in the U.S. have kept a lid on U.S. dollar appreciation, thus supporting some commodity prices, namely precious metals. In the absence of any deal next week, we could continue to see commodity price support purely due to currency translation. However, if U.S. budget fears turn into economic growth fears, we could see some of the more cyclical commodities pull back.

    Finally, the depressed U.S. housing market will be in focus as we will see another disappointing National Association of Homebuilders Index print along with Housing Starts and Existing Home Sales for the month of June.

    Question of the week

    Housing has been problematic in the United States since prices started to fall in 2007. Which states in particular have suffered from high foreclosure rates?

    Many U.S. states are having trouble balancing their books and in many cases unemployment and housing are main components of that struggle. Below we list the 10 U.S. states with the highest foreclosure rates. It should come as no surprise that southern states like Nevada, Arizona and California, where the weather is better in the winter and where development speculation was high are suffering most. However, we also see northern states struggle, such as Michigan, where economic growth has been relatively horrible for years.

    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