For the most part, from a macroeconomic perspective, this week was “more of the same” as investors continued to deal with the ongoing economic uncertainty caused by the ongoing debt problems in Europe. However, there were some economic statistics that were better than expected, but investors remained conservative looking for more positive results in the future before changing their perception of the global economy.
We did see some swings in the market driven by media speculation that German and French officials had come to an agreement to expand their efforts in solving the European debt crisis. However, many of those reports were denied which only added to the uncertainty. What was clear though, was that investors reacted positively to rumours that the European Financial Stability Facility (EFSF) might be expanded to 2 trillion euros, thus demonstrating that any revised plan needs to be big in order to get markets moving again. The band aid approach used initially back in 2008 will not be effective in this situation.
We saw a number of companies report Q3 earnings this week with mixed results. Some financial institutions, such as Goldman Sachs, had a tough quarter due to market performance. However, other sectors of the economy still showed some impressive numbers considering the state of the U.S. and global economies. The technology sector did see Apple miss expectations for the first time in a long time, but analysts chalked up that miss to consumers putting off an iPhone
purchase until the company’s latest release recently became available. Other technology companies, such as IBM, reported solid numbers thus offsetting Apple’s mixed results.
It was a decent week for some commodity prices, especially oil which continues to push its way back to US$90.00 per barrel even as talk of recession persists. Thanks to this resource strength, the Canadian dollar make its way back above the US$0.99 level.
The trading week ahead
We wish we could tell you that Europe was not the main focus of the markets next week due to the uncertainty that continent brings to the capital markets; however, we cannot. Speculation and rumours will persist, but it sounds like European leaders hope to have some sort of “plan” to address debt concerns by the middle of next week. However, we put plan in parentheses because many times we have seen plans without specifics, and it is specifics that the market so desperately wants to see.
Meetings between European officials will continue through the weekend and into next week and markets will certainly hope that some sort of framework can be in place or discussed by the time the G20 meetings in France arrive at the beginning of November.
Reporting season is alive and well for third quarter earnings in the United States as we will see a significant number of companies announce their results next week, including a number of the largest Dow Components such as Caterpillar, E.I. Dupont de Nemours, 3M Co, Boeing, Exxon Mobil and Procter & Gamble. Earnings season thus far south of the border has produced some mixed results versus expectations. However, it would appear that Corporate America is still performing well in a difficult economic environment.
We will also see reporting season kick off in Canada as the rail companies announce their earnings on Tuesday and we will see a number of other large cap heavyweights report on their Q3 throughout the week. The Canadian reporting season will pick up pace as we go into November. While defensive industries in Canada will be more likely to meet analyst earnings expectations, concern will likely hang over resource companies due to the decline in most commodity prices during the summer months.
On the economic front most eyes will look to Thursday and the release of U.S. Q3 GDP figures. However, Canadians will likely be interested to see what the Bank of Canada (BoC) has to say on Tuesday when they make an interest rate announcement. While no change in interest rates is expected, investors will want to see the accompanying comment from the central bank to see if there has been any change in sentiment on the BoC’s economic outlook.
Commodity prices and currencies will continue to be driven by the economic uncertainty resulting from the European debt crisis. If there happens to be some sort of breakthrough on the debt situation over the next week then investors might feel anxious to put the “risk on” trade back into play which would bode well for commodity prices and the Canadian dollar. However, the odds of a ignificant breakthrough remain slim at this stage.
Question of the week
Considering what’s going on in Europe, is the adoption of the Euro currency necessary to join the European Union?
No, it is not. There are 27 countries that make up the European Union. However, only 17 of those countries have chosen to replace their old currencies with the Euro and they include Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain. Five other countries that use the Euro, but are not part of the European Union, include Andorra, Monaco, Montenegro, San Marino, and Vatican City.
Notable countries that are part of the European Union but do not use the Euro include the United Kingdom (British Pound) and Sweden (Swedish Krona), while the other eight countries are Bulgaria, the Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland and Romania. The European Union is currently at 27 countries. However, there are five countries which are currently candidates for joining the Union and they include Croatia, the Former Yugoslav Republic of Macedonia, Iceland, Montenegro, and Turkey. Even after these extensive lists there are still another 17 countries that are considered part of the European continent but have no involvement with the European Union whatsoever.
Some of these countries, such as Switzerland and Norway, have historically been neutral politically and economically.