Originally from our sister publication, Advisor.ca.
The growing weight of positive data continues to whet the global risk appetite. As eurozone credit crisis fears eased in February, capital markets across the world rallied, according to a market commentary released today by BMO Harris Private Banking.
The report, Equities Advance as Fears Ease, noted that improving U.S. economic data and continued strength in emerging markets boosted investor sentiment and contributed to positive equity market returns.
“Coming into 2012, we identified the possibility of imminent default by Greece on its sovereign debt, and unsustainably high bond yields on other eurozone countries’ sovereign debt as the two major threats to equity markets,” said Paul Taylor, chief investment officer, BMO Harris Private Banking.
“But, at this time, Italian and other eurozone bond yields are down significantly, and Greece has secured additional funding. When considered with improving U.S. economic data and continued strength in emerging markets, the result is more optimistic investor sentiment and positive equity market returns.”
Emerging and international markets led the global equity rally in February, with gains of 4% and 3.8%, respectively. However, Canada’s equity market lagged global peers, returning just 1.7%.
In the U.S., the S&P 500 Index reached levels not seen since 2008, as investors were encouraged by economic indicators that signalled better U.S. and global growth ahead, decent corporate earnings and low interest rates.
With U.S. Q4 real GDP revised up to 3% and the full year 2011 growth rate being 1.7%, the U.S. economic recovery has proven to be stronger than expected. By comparison, Canada’s Q4 real GDP was 1.8% with 2.5% growth for 2011.
The optimism reflected in February’s equity market advance was due also in large part to positive developments in the eurozone, which included a new rescue plan for Greece, allowing its government to make a €14.5 billion ($18.9 billion) debt payment due in March.
The European Central Bank conducted a second long-term refinancing operation (LTRO) on February 29 to inject liquidity into European banks and keep their local credit markets functioning.
“Greece’s bailout and the LTROs are clear indications that the eurozone’s policy leaders are committed to resolving their credit crisis, and equity markets agreed,” said Taylor.
However, headwinds from the Middle East remain a cause for concern, making oil prices vulnerable to potential shocks.
“The possibility for conflict in the Middle East has the potential for broad, negative implications on the global economy, particularly for the price of oil,” added Taylor.
Taking Iranian supply out of the market would tighten global supply at a time when spare capacity is scarce. From a current crude oil price of around $106 per barrel for West Texas Intermediate, such an upheaval has the potential to trigger oil price hikes to the $130-$200 level, based on previous historical price shocks, he added.
There is cautious optimism among industry experts about the eurozone situation. The growth in the U.S. economy is expected to continue, albeit at a moderate pace, while equity market returns are expected to continue to outperform fixed income, with mid-to-high single digit returns.