by Zubin Driver
July 06, 2010
For weeks, North American markets have teetered at a critical technical juncture, choppily trading either side of their 200 day moving averages. In the world of technical analysis, which uses chart reading to determine the future direction of prices, the 200 day moving average is thought to represent markets' long term trend. As major global governments struggle to contain debt levels, and BP's deepwater oil spill spews a steady stream of environmental damage into the Gulf of Mexico, the short term trend has now shifted decidedly downwards. The longer term trend has fought to preserve itself, but last week saw markets break a support base that they have been struggling to build at the 200 day moving average for most of May and June.
For the past year, the economy has enjoyed the wind at its back as governments fed massive amounts of spending in to counter the recession. Of late, those tailwinds have become headwinds as the pace of expansion has slowed and government stimulus is tapering off, leaving significant government and consumer debt levels behind. Faced with these difficult realities, market sentiment has quickly turned negative since the beginning of May; underlying strength in the post-stimulus economy will need to prove steady for the 200 day moving average to hold as a support level for the markets.
One telltale sign of late has been the intraday trading action: markets have rarely been holding on to their gains. While the market was in bull mode, it seemed to frequently close up. Sometimes it would open down 100 or 200 points but then close down only 30 points, or even be up a little for the day. Since the end of April the opposite has been the case, seeming to support the notion that markets may have entered a new phase. Or, as some participants suggest, is this simply typical seasonal behaviour now that we've entered the 'summer doldrums?'
Strong and Free
Canadians celebrated our country's 143rd birthday July 1st with the proud sense that 2010 has been our year thus far. Vancouverites may have experienced the feeling most strongly as we hosted an unforgettable Olympic games. Canada's record number of gold medals, combined with a spirit that enlivened the city beyond all expectations, made the games an unqualified success.
On the economic front, the G20 meeting hosted in Toronto, highlighted some of Canada's strengths in recent years. These include the relative health of our banks coming out of the recession, along with better debt and deficit to GDP ratios than most developed nations. The highlight initiative that came out of the G20 meetings stated that countries would work to halve their deficits by 2013 and stabilise or reduce debt-to-GDP by 2016, an initiative that was said to be most strongly supported by Canada and the EU. Some are concerned that this belt tightening by government, coming when the recovery remains tenuous, could undermine it and lead to the feared and frequently mentioned 'double-dip' scenario. The market certainly seemed to agree with this thesis, selling off hard last week after the summit concluded.
In BC and Ontario, Canada Day also meant the onset of the controversial new Harmonised Sales Tax (HST). The arguments for and against get quite technical, but the basic thrust is that opponents don't want to pay more taxes, while proponents state that it makes our tax system more efficient and taxes consumption rather than production. Many economists believe that taxing people's spending rather than their income makes for a stronger economy; the BC government states that there will be an offsetting income tax reduction, so implementation of the HST is actually revenue neutral. As noted above, governments have been racking up debt in recent years while revenues have been declining; with expenditures set to soar in coming years and decades as pension and health care bills escalate, governments are struggling to find a way to pay for it all.
Best regards,
Zubin
Zubin Driver
Investment Advisor
(W) 604 643-7608 / (F) 604 643-7606
Email: zubin_driver@canaccord.com
Canaccord Wealth Management
Attention: Zubin Driver
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