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Market Watch May 1 2015 Big Picture
Fed comment spooks markets
A comment by US Fed Chairwoman Janet Yellen about stock valuations was the news-making event of the week as it
tapped into lingering fears the current bull market may be getting ahead of itself. Yellen said stock valuations were “quite
high” at International Monetary Fund headquarters Wednesday. That rattled US, European and Japanese equity markets
which sold off before paring losses by Thursday close. Canadian equities got a jolt of their own but for a different reason;
a surprise win by the NDP party in Alberta whose policies may crimp energy profits. On a more positive note, European
Union economists said cheaper oil and central bank stimulus could deliver faster growth in the region this year. GDP
predictions in the 19-nation euro zone now stand at 1.5% for the year, up from a previous estimate of 1.3%. The forecast
for the larger 28-nation EU is 1.8% up from 1.7% in February. Ireland and Spain are pegged to grow the fastest while
Greece the slowest. Greece, as Market Watchers know, is stuck in a long fight with its creditors to loosen conditions tied
to its bailout agreement. Once again, there’s talk of a default and exit from the single currency union but there’s been so
many make-or-break moments it’s looking more and more like brinkmanship. The country must make a 750 million euro
payment May 12 – a payment the Greek finance minister has pledged to make. In the UK, the Conservative Party rode to
victory in the British general election Thursday in what political commentators called a surprise win. Closer to home, US
equity trading volumes were light this week ahead of the employment report due today (May 8). The jobs report is always
a primary focus but April’s has taken on greater significance as it may help determine whether the disappointingly weak
first-quarter GDP data was a blip or a sign of bigger problems. Estimates for the number of US jobs created last month
stand at 228,000 while the unemployment rate is expected to tick down to 5.4% from 5.5%.
Markets
Stocks fall for second week
North American stock benchmarks ended the four-day period in the red for the second week in a row. The Dow fell 110
pts. to close at 17,924, the S&P 500 shed 30 pts. to finish at 2,088 and the Nasdaq gave back 60 pts. to close Thursday at
4,945. The TSX was down 249 pts. to end at 15,088.
Our Recommendations
Uncertainty in the Canadian energy patch
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Equites: Himalaya Jain, Director, Portfolio Advisory Group wrote: “With regards to the NDP win in Alberta, the
bottom line is that changes are coming and these changes will be incrementally negative for Canadian energy
producers operating in Alberta. That’s the simple part. What is quite unclear is the extent of increase in royalty
and tax rates and implementation timing. This week’s share price moves, while knee-jerk, were likely reasonable.
Meanwhile, as the market digested the NDP win in Alberta, weekly US crude inventories declined (versus
expectations of a build) and total US oil production was flat week-over-week and down from the mid-March
peak. This is exactly what we’ve been expecting as the 55% decline in US drilling activity since Nov 2014 is
finally starting to show up in the production numbers. Another anecdote that is supportive of oil prices, but
supports our view that further job cuts are coming in the oil patch, was the April Challenger US job cuts that
showed April layoffs were at a four-year high and that one-third of the cuts were in the energy sector. Spring
break-up in Canada’s oil patch combined with negative sentiment from the NDP win means that further job losses
in Alberta are coming and could pull down the national job picture in Canada.”
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