QE pullback could end equity run

Read: Ending Fed stimulus too risky, says Bernanke

Americans are “easing,” the Europeans are “easing,” the British are “easing” and now the Japanese are heavily “easing” (by easing we’re referring to quantitative easing where central banks have either indicated or are actually buying bonds to keep interest rates low).

But all these jurisdictions are at different stages of their easing cycle. The Americans have been easing for a long time, the Europeans only formally said they would do “whatever it takes” to help the Eurozone and the recent wave of Japanese easing was only announced this year.

Considering the U.S. economy is now in better shape, investors are expecting the Fed to be the first major central bank to either eliminate or scale back their quantitative easing policies. While this conclusion is not debated to a large extent, the timing of the monetary policy withdrawal is far more topical and will likely be a source of volatility as we move into the second half of the year.

Why did the markets pull back last week? Because the minutes from the last Federal Reserve Open Markets Committee (FOMC) meeting suggested some members of the Committee might be open to the idea of scaling back bond purchases as early as next month, if conditions permit. However, there was no unanimity about what those “economic conditions” might be. Is the Fed really going to scale back next month?

No, we don’t believe so, and that’s why losses last week among the major U.S. exchanges were limited. The one thing Fed Chairman Ben Bernanke doesn’t want to do is jump the gun: the FOMC will want to see signs of sustainable growth over a longer period of time before declaring once and for all that the U.S. economy is growing at a rate that can justify the reduction or elimination of central bank assistance.

Read: Will U.S. Fed stimulus taper off?

We can’t rule out the possibility this decision could be made before the end of the year if the recovery is better than expected, but we highly doubt it will happen in the very near future and especially at the next FOMC meeting on June 18-19.

TRADING WEEK AHEAD

Expect this week to start off quietly since our neighbours to the south will be BBQing and setting off a few fireworks to celebrate the Memorial Day holiday. While Canadian markets will be open, the lack of U.S. trading will keep Toronto volumes low. Even when the Americans return to work on Tuesday, there will be very little earnings news to report as almost all major large cap companies have reported their most recent results.

The same can’t be said for Canada, as we’re in the midst of seeing fiscal Q2 (February to April) earnings from our big six banks. We’ll see results out of Bank of Nova Scotia on Tuesday, Bank of Montreal on Wednesday, followed by CIBC and Royal Bank on Thursday. We haven’t seen particularly eventful results thus far, and we expect to say the same for the remaining four banks next week.

With earnings relatively quiet, market attention could remain fixed on macroeconomic data on either side of the border. U.S. statistics include updates on the housing front, a number of manufacturing indices, and a look at consumer confidence.

In Canada, we’ll see GDP figures on Friday, but there will be a lot of attention directed at Wednesday’s Bank of Canada meeting, as it will be Governor Mark Carney’s last before stepping down on June 1 and passing the reins over to incoming Governor Stephen Poloz.

No change in policy is expected from the meeting, but some investors are curious to know what Stephen Poloz’s priorities will be and whether or not he will take a different approach.

Look for U.S. and Chinese manufacturing data to set the tone for commodities such as base metals and oil, while gold prices will still remain focused on the ongoing Federal Reserve policy debate.

The loonie will likely be flat, but we may see some volatility depending on what the Bank of Canada has to say.

Read: FOMC questioning worth of QE