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Six months of turmoil After a rocky six months, global markets are shaping up to end the first half of 2011 on an upbeat note. But they remain on edge amid the troubles of the euro zone, the United States and other regions.
More than a year in, Europe has yet to get a grip on its sovereign debt crisis, and the United States is struggling to come back from a recession that wiped out millions of jobs. Fears over a Chinese slowdown persist. In Canada, consumers are weighed down by hefty debts and high gas prices. And with unemployment still well above 7 per cent, and not expected to fall below that mark for years, many are struggling to find work.
The Federal Reserve's quantitative easing program, an asset buying scheme dubbed QE2, also ends today.
And as for stocks, a whole lot of bupkis.
"The global economy is moving to slightly lower growth, and slightly higher inflation trajectories," Bank of Nova Scotia warns in a new forecast.
"However, the transition has become more turbulent because of the increasingly unsettled conditions around the world triggered by the convergence of a variety of cyclical and structural economic problems in many regions, recurring sovereign debt strains, and ongoing geopolitical problems," Scotiabank economists said.
"The 'rough air' stems from a number of growth-restraining factors. High gasoline prices have undercut discretionary spending around the world. The supply chain aftershocks from Japan's mid-March catastrophe have weakened manufacturing activity internationally. In both the United States and Canada, these factors and a slowdown in hiring have triggered a softening in consumer spending. Intensifying sovereign debt strains in Greece, and the potential for contagion in other peripheral euro zone nations, have added to the weaker economic tone, and roiled financial and currency markets."
So we head into the second half of the year with confidence undermined, though some of the reasons may be temporary, the economists noted, and there are several factors that will sustain the economic rebound.
"The average duration of business cycles in the post-WWII period is about five years," they said. "Virtually every one has a mid-cycle slowdown as the rebound in spending and rebuilding of inventories winds down. The current cycle is mirroring this trend, with the moderation in growth coming roughly two years after the recovery began in mid-2009."
According to a Reuters poll on asset allocation today, investors are slightly more upbeat but still jittery.
The surveys indicate that on average, 58 fund companies in the United States, Europe and Japan have boosted the share of equities in balanced portfolios to 51.5 per cent, compared to 50.7 per cent in May. Bond holdings inched down to 35.1 per cent from 35.5 per cent, and cash to 4.9 per cent from 5.2 per cent.
As of yesterday, when it closed above 1,300 for the first time in a few weeks, the S&P 500 was up by about 4 per cent since the beginning of the year, though not everyone believes that can continue.
"There are plenty of optimists who expect the stock market to go from strength to strength," said John Higgins, senior markets economist at Capital Economics. "However, we continue to expect the S&P 500 to drop back to 1,200 by the end of the year for three key reasons."
Among those reasons: QE2 ends today with no QE3 in sight, a lower than expected outlook for corporate earnings, and stretched valuations.
Separately today, The Conference Board of Canada's consumer confidence reading for June showed Canadians are bummed out. Its index fell for the second straight month, down 2.5 points to 83.1.
- Investors cautious heading into second half
- Inflation rise an ominous sign for interest rates
- U.S. malaise a drag on Canada, Krugman warns
Economy flat Canada's economy stalled in April, kicking off what is projected to be a weak showing for the second quarter.
Gross domestic product was flat in the month, Statistics Canada said today, after growth of 0.3 per cent in March. Both the goods-producing and services sectors stalled, and the auto sector was hit by supply disruptions.
"Significant increases were recorded in mining of metal ore and coal. Retail trade, the public sector, construction and utilities also advanced," the federal agency said.
"However, this growth was offset by declines in manufacturing and, to a lesser extent, in wholesale trade and the finance, insurance and real estate sector. Transportation services were unchanged."
The report was only slightly better than expected, and "we expect May to show similar softness," said Avery Shenfeld, chief economist at CIBC World Markets.
"A strong finish in June would put the economy on track for just over 1-per-cent growth, too sluggish for the Bank of Canada to hike rates in July," Mr. Shenfeld said.
Momentum has dwindled from a strong start to the year, The Globe and Mail's Tavia Grant reports today. Observers expect growth to pick up in the last two quarters of this year, even as risks to the global economy - such as Europe's sovereign debt crisis and concern over U.S. debt levels - remain elevated.
Indeed, there is hope that the economy can "regain its mojo" in the second half of the year, added Douglas Porter, deputy chief economist at BMO Nesbitt Burns.
"With gasoline prices simmering down, auto production poised for at least a partial rebound, and hopefully fewer weather 'events' in coming months, we look for growth to pick up to the 2.5 per cent to 3 per cent range in the next two quarters."
German banks said to strike deal Germany's banks have struck a deal with the government to help out Greece by rolling over a certain amount of the debt they hold. The French government has already taken similar steps.
This comes as Greece's Parliament voted today to pass the legislation to implement the government's austerity program. Politicians approved the overall plan yesterday. The two votes, and a follow-up meeting of euro finance ministers on Sunday, are key to Athens receiving a further €12-billion in bailout money from the EU, European Central Bank and International Monetary Fund.
The developments in Greece have buoyed markets, though, as The Globe and Mail's Eric Reguly reports today, the threat of a credit default is still very real.
"Even if Greek and French banks agree to roll over their debts, however, it is not clear that rating agencies will not put a default rating on Greek debt given the change for the worse in the original indenture terms," said Karen Cordes Woods and Derek Holt of Scotia Capital.
- Greece passes austerity law
- German banks agree to help Greece
- Default threat remains despite Greece's austerity vote
- How a Greek default would ripple around the world
- Eric Reguly's Global Exchange: Italy's bold austerity plan is all smoke and mirrors
U.S. jobless claims remain high The U.S. labour market seems unable to gain any meaningful traction.
Initial claims for jobless benefits slipped last week, by just 1,000, to 428,000, still well above the 400,000 mark. The four-week moving average inched up to 426,750, the U.S. Labor Department said.
"Another week, another disappointing U.S. initial claims report," said senior economist Jennifer Lee of BMO Nesbitt Burns. "... This report does nothing to reassure anyone that the job environment is improving."
In International Business today Nearly three-quarters of banks and insurers in Europe have introduced a system to withhold bonuses from staff if their performance does not match up to expectations, Patrick Jenkins of The Financial Times reports.
In Economy Lab today Give someone an inch and they'll take a mile. It's rare, however, to hear that if you give someone an inch, they'll take that mile, and go in the wrong direction. The Globe and Mail's Julien Russell Brunet reports.
In Personal Finance today Setting up a trust can offer ways to reduce the hit on income, says Tim Cestnick.
These "zombie survival tips" will help you survive a financial disaster.
The Internet abounds with horror stories of young people who take on far more debt than they can comfortably carry.
From today's Report on Business