Synopsis covers the topics listed below, grouped into five sections. Click on the underlined text to go directly to a topic. The Economy: Key Indicators |
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Investment Performance: Selected Rates of Return
Investment Performance: Equity Data
Investment Performance: Fixed-Income Data
- Bank of Canada (BoC) Target Rate
- Bank of Canada Bond Yield Curve
- DEX Universe Bond Index
- DEX Universe Bond Index Credit Quality Mix
Other Quarterly Highlights: Noteworthy Developments in the U.S. Economy
To discuss any of the content in this Synopsis, contact your Segal Advisors investment consultant or the nearest office. Alternatively, send an e-mail message to info@segalco.ca.
The Economy: Key Indicators
This section focuses on Segal Advisors’ commentary on select economic indicators for the second quarter (Q2) 2010.
CPI: Percentage Change Year over Year
Consumer prices rose 1.0 percent in the 12 months to June 2010, following a 1.4 percent increase in May and a 1.8 percent increase in April.
Increase in the cost of energy was the main contributor to the rise in prices in the quarter. Excluding the cost of energy, the CPI rose 0.9 percent in the 12 months to June 2010.
Source: Statistics Canada
Labour Market and the Unemployment Rate
The unemployment rate fell 0.4 percent in Q2 2010, to 7.9 percent, as the economy added 227,000 new jobs. The 109,000 jobs created in April was the highest monthly total since August 2002.
Since July 2009, employment has increased by 2.4 percent with the addition of 403,000 new, mainly full-time, jobs. This increase has come close to offsetting the labour market losses in the fall of 2008. However, the unemployment rate remains well above the 6.2 percent mark established in October 2008 because more job seekers entered the workforce.
Service industries including retail and wholesale, building and construction, as well as health care and social assistance, saw employment increase throughout the quarter.
Source: Statistics Canada
U.S. vs. Canadian Dollar Exchange Rate
The Canadian dollar fell 4.5 percent against its U.S. counterpart, ending the period at 93.99 cents U.S. versus 98.48 cents at the beginning of the quarter. It was up 9.3 percent from 86.04 cents a year ago, as shown in the graph below.
The Canadian dollar derived strength from Canada’s relative fiscal strength compared to other governments, and the unexpected growth in the Canadian economy.
However, the Canadian dollar declined against the Japanese yen, British pound and Swiss franc.
Canadian-U.S. Exchange Rate, July 2009-June 2010
Source: Bank of Canada
Percentage Change in GDP
Canadian GDP rose 6.1 percent for the first quarter of 2010 (the most recent quarterly data available). This was the strongest quarterly increase in more than a decade. Contrary to the previous quarter, net trade subtracted from growth. Exports were up by 12.0 percent, but imports rose by 14.1 percent. Overall, domestic demand grew by 4.7 percent.
However, over the first two months of Q2 2010, GDP growth was more muted. GDP rose by 0.1 percent in May after remaining unchanged in April. Led by oil and gas extraction, goods-producing industries rose 0.6 percent, driving overall growth in May.
Source: Statistics Canada
Investment Performance: Selected Rates of Return
This section presents rates of return for selected equity, fixed-income and other indices. The graphs illustrate returns for Q2 2010. The tables of data show returns for the latest quarter and one-, three-, five- and 10-year annualized time frames. All data in the tables are percentages.
Equity Index Returns
DEX Universe Bond Index Returns
Investment Performance: Equity Data
The tables of data in this section present equity data broken down by the Global Industry Classification Standard (GICS) for selected indices. The GICS is a classification system developed by Morgan Stanley Capital International (MSCI) and Standard & Poor's consisting of 10 sectors, 24 industry groups, 68 industries and 154 sub-industries. The tables show returns by sector for both Q2 2010 and one-year periods. Each sector’s weight in the overall index return as of June 30, 2010 is also noted.
S&P/TSX Composite Index
Health Care continued to lead the Toronto Stock Exchange (TSX) with a positive return of 11.3 percent for the quarter. At the other end of the spectrum, Information Technology lagged all other sectors with a negative return of 25.0 percent. Both sectors are dominated by one or two names, which have a significant impact on their returns. The three largest sectors of the TSX (Materials, Energy and Financials) had slightly positive to almost double-digit negative returns. The Financials sector weighed heavily on the TSX return by providing a negative 9.8 percent for the quarter.
Source: Mellon Analytical Solutions, LLC
S&P 500 Index
The S&P 500 also experienced a negative return of 7.2 percent for the quarter. Almost all sectors provided negative returns with only Utilities and Telecom inching into positive territory with a 0.8 percent and 0.3 percent return, respectively.
Source: Standard & Poor’s
Investment Performance: Fixed-Income Data
This section focuses on selected fixed-income data.
Bank of Canada (BoC) Target Rate
The Bank of Canada (BoC) raised the target rate by one-quarter of one percent, to 0.5 percent on June 1, 2010. The BoC warned that this is not indicative of future raises.
Uneven global economic growth, anticipated future reduction in household spending and the need to facilitate future business growth were the reasons stated for the muted rise in rates.
Interest Rates: Central Bank – Overnight Target Rate, Canada
Source: Statistics Canada
Bank of Canada Bond Yield Curve
Overall, yields were down 29 basis points (bps)* April through June, with the average yield on the DEX index finishing at 3.1 percent.
Short-term (less than one year) rates climbed 20 basis points to 0.5 percent, while long-term rates dropped 42 basis points to 3.7 percent.
Long-term bonds were the best performing segment of the market, with a positive return of 5.0 percent, followed by mid-term bonds with a return of 3.3 percent, and short-term bonds with a return of 1.7 percent.
Real return bonds had a positive return of 3.0 percent.
* As a reminder, 10 bps equals 0.1 percent.
Treasury Yield Curve
Source: Statistics Canada
DEX Universe Bond Index
For Q2 2010, the government sectors led the positive performance for the DEX Universe Index. While the Corporate sector trailed for the quarter, it remains well ahead of all sectors over the one-year period. The overall duration of the Universe also increased from 5.9 in the first quarter, to 6.2 in Q2 2010.
DEX Universe Bond Index: Breakdown by Corporate, Municipal, Provincial and Federal Sectors
*Note: Modified Duration in parenthesis. “Modified Duration” is a formula that expresses the measurable change in the value of a security in response to a change in interest rates.
Source: PC-Bond
DEX Universe Bond Index Credit Quality Mix
The credit quality mix increased slightly during Q2 2010. AA issuers increased from 21.6 percent in the first quarter to 22.1 percent in Q2 2010. There was a 20 basis-point deterioration in the BBB sector during the quarter.
DEX Universe Bond Index Credit Quality Mix
Source: PC-Bond
Other Quarterly Highlights: Noteworthy Developments in the U.S. Economy
Because institutional investors in Canada keep a close eye on the U.S. economy as a driver of global growth, this section discusses noteworthy Q2 2010 developments.
CBOE Volatility Index
The volatility in equities markets, as measured by the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) increased sharply during Q2 2010. The VIX reached a 2010 end-of-day high of 45.8 on the close of May 20, 2010 after the 15.6 end-of-day low on the close of April 12, 2010.
Uncertainty once again crept into the equity markets as investors sought stability. Turmoil began in Q1 2010 as the Greek debt crisis was stirring; however, as the Q2 2010 started, investors believed the problem was contained, and the VIX dropped to its lowest level since 2007. As the Greece situation deteriorated, the stock and credit markets took a turn for the worse and investor confidence fell once again. In addition, the May 6 “flash crash” raised concerns about the dependability of the day-to-day operations of the U.S. stock market. The VIX closed the quarter at 34.5.
CBOE Volatility Index (VIX)
Source: Federal Reserve Board
Municipal Bond Market
During the first half of 2010, default concerns escalated within the $2.8 trillion (U.S.) municipal bond market. While yields rose slightly at the end of June for municipal bonds, the cost to insure against losses rose steadily throughout the first half of 2010, as represented in the graphs below.
Local governments rely on the municipal market to raise money for construction projects, school districts and other budget items. In the wake of decreased property values and high unemployment rates, there is financial pressure on states and municipalities. A recent report by the National Association of State Budget Officers (NASBO) concluded that state budgets are expected to be “under strain for several years” and states are projected to face $127 billion in budget gaps over the next two years.*
* This report is available on the following page of NASBO’s Web site: http://www.nasbo.org/LinkClick.aspx?fileticket=2oDrzrruzuQ%3D&tabid=38
10-Year General Obligation Municipal Bond Yields Credit Default Swaps* for 10-Year Municipal Bonds
* Credit Default Swaps (CDS) are designed to transfer the credit exposure of fixed income products between parties. A buyer of CDS receives credit protection, whereas a CDS seller guarantees the credit worthiness of the product; this transfers default risk from the buyer of the security to the seller of the swap. In the above graph, municipal bond CDS is measured using the Markit MCDX Index, a basket of 50 municipal CDS contracts.
Source: Segal Advisors using Bloomberg data
Declining Home Sales
Sales of existing homes in the U.S. declined 2.2 percent from April to May, while the months of inventory (which has been above 8.0 months since February 2010) was 8.3 months. The median existing-home price rose 9.1 percent ($179,600) compared with February 2010 ($164,600).
Sales of new homes fell to 300,000 in May, down 32.7 percent from the April total. The decline in sales brought a sharp increase of months’ supply to 8.5 in May from 5.8 in April, a gain of 46.6 percent. The median price for a new home ended in May at $203,000, which is 5.2 percent higher than the April price, but lower than the March 2010 price ($229,800).
The decline in sales outlined above is primarily due to the elimination of the first-time home-buyers tax credit. Moreover, the fact that pending home sales have been trending upward suggests that perhaps closings are taking longer than expected, as mortgage lenders are more carefully processing applications. Constrained lending continues to slow the approval process, which may be affecting the flow of home sales that are closing.
New and Existing Home Sales (Seasonally Adjusted Annual Rate)
Source: Segal Advisors using new home sales data from the Census Bureau and existing home sales data from the NATIONAL ASSOCIATION OF REALTORS® that is reprinted with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2010. All rights reserved.
Bank Failures
As of Q2 2010, the Federal Deposit Insurance Corporation (FDIC) reported 86 bank failures. This is a staggering number over a six-month period, especially compared to 140 failures in 2009, 25 failures in 2008 and three failures in 2007. The number of bank failures is expected to peak this year and outpace 2009’s total, which marked the highest annual total since the height of the savings and loan crisis in 1992.
During Q1 2010 (the most recent available data), the number of insured commercial banks and savings institutions on the FDIC’s “Problem List” increased from 702 to 775, and total assets of “problem” institutions increased from $403 billion to $431 billion.
While the nation’s large financial institutions are facing less danger, falling home and commercial property prices, rising defaults and high unemployment continue to impact a large number of regional banks. The FDIC anticipates bank failures to cost approximately $60 billion over the next four years.
Cumulative Annual Bank Failures as Reported by FDIC
Sources: Federal Deposit Insurance Corporation
Helpful Online Resources
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Organization Web Sites
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To discuss any of the content in this issue of Synopsis, contact your Segal Advisors investment consultant or the nearest office. Alternatively, send an e-mail message to contactus@sibson.com. |
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On August 30, members of the Segal Advisors research team will conduct a webinar to discuss the content of this Synopsis in more detail. To register to attend this webinar, visit the following Web page: http://www.segalco.ca/2Q10-synopsis-webinar |
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