KNOWLEDGE CENTRE

Knowledge Centre Archive

Mar
16
2012

February 2012 Market Update

By SEI Investment Management Unit

Summary

  • Investor confidence received a boost from the Greek debt restructuring and bailout agreement.
  • Equity markets gained, with risky assets among the strongest performers.
  • Bond market performance was held back by waning demand for government debt.

Equities continued to rally into February, while global bonds lagged in comparison. Investors generally remained positive and market volatility remained calm. Consequently, assets that are perceived to be riskier were favoured once again during the month. In particular, measures by the European Central Bank (ECB) to support the banking system and progress toward resolving Greece’s sovereign debt troubles fuelled a hopeful outlook.

Economic Backdrop

Ratification of the second bailout package for Greece took place during the month. The deal, which was agreed to in 2011, provides €130 billion for Greece from the European Union and the International Monetary Fund. This should help ensure that Greece is able to avoid defaulting on its next debt payment of €14.5 billion on March 20. However, the terms of the bailout were severe. One of the key conditions of the deal was that private sector Greek government bondholders needed to agree to take a loss on what is owed to them. This was to be achieved through a bond swap, also known as debt restructuring. The replacement debt would be worth less than the original, and would also pay interest at a lesser rate, equating to a 53% loss on a holder’s initial investment. Despite these terms and uncertainty surrounding the number of private investors willing to accept the losses, news of the agreement buoyed the markets.

Other activity in Europe also served to improve optimism. The ECB introduced three-year loans—known as long-term refinancing operations—in January, with the intention of helping to ease short-term money-supply pressures on the region’s banks. This provision was welcomed by the markets at the start of the year, and continued to have a positive impact on sentiment in February as additional funding (so far totalling approximately €1 trillion) filtered through to banks.

Economic data was mixed, although largely positive news coming out of the U.S. helped to counterbalance generally disappointing data releases from the eurozone. Eurozone unemployment reached 10.7% in January, with Spanish unemployment continuing to track above 20%. U.K. jobless numbers reached their highest in 16 years in January at 8.4%, but U.S. unemployment declined to 8.3%, its lowest level in three years. Eurozone inflation decreased in January to 2.6%. Inflation in the U.K. fell to a 14-month low in January (3.6%) as the impact of the Value Added Tax hike at the start of 2011 wore off. Inflation in the U.S. rose marginally, with the gain attributed to rising fuel prices. Retail sales declined by 0.4% in the eurozone, gained 0.9% in the U.K. and were up 0.4% in the U.S. in January.

In Canada, a report issued by Statistics Canada during the month noted that the country’s gross domestic product gained a modest 0.4% in the fourth quarter of 2011 on consumer spending and exports. Purchasing activity in the Canadian economy exceeded economists’ forecasts, as the Ivey Purchasing Managers Index increased to a seasonally adjusted 66.5 from 64.1 in January. Analysts predicted a decrease to 62.0.  Canada’s unemployment rate slipped to 7.4% in February from 7.6% in January, despite the fact that the economy lost nearly 3,000 jobs. Statistics Canada reported that the decline was due to the fact that 37,900 people left the workforce during the month. Labour productivity in Canada was up 0.7% in the fourth quarter of 2011 as a result of continued growth in business output. Finally, Canada Mortgage and Housing Corp. stated that housing starts were up 1.5% in February. The increase was attributed to a jump in multiple-unit construction in Quebec.

Market Impact

Global bond markets as a whole declined in February, masking a large disparity between asset types. Government bonds generally fell out of favour as investors left “safe haven” debt to embrace risk. Fixed-income assets that are perceived to be riskier therefore performed strongly in February. High-yield debt did particularly well, followed by emerging markets debt. As demand for government bonds slowed in February, yields in the U.S., U.K. and Europe rose. Within Europe, the yield on Greek government bonds increased notably. Portugal’s government debt was an exception, as yields there finished the month lower due to purchases by the ECB in the final days of February.

Cyclical sectors performed well once again in the global equity markets. Financials, Consumer Discretionary and Energy recorded the highest returns, while more defensive sectors, such as Health Care and Utilities, lagged. The Energy sector also benefited from oil prices, which rose due to tensions resulting from Iran’s nuclear program and fears that oil supplies could be impacted.

Index Data

  • The S&P/TSX Composite Index increased by CDN 1.67%.
  • The DEX Universe Bond Index returned CDN -0.40%.
  • The Dow Jones Industrial Average index gained USD 2.89%.
  • The S&P 500 Index returned USD 4.32%.
  • The NASDAQ Composite Index increased USD 5.58%.
  • The MSCI AC World Index, used to gauge global equity performance, gained USD 5.03%.
  • The Barclays Capital Global Aggregate Index, which represents global bond markets, fell by USD 0.07%.
  • The Chicago Board Options Exchange Volatility Index (VIX), a measure of implied volatility in the S&P 500 Index that is also known as the “fear index,” fell from 19.44 to 18.43.
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, rose steadily throughout much of February, moving from USD $98.48 a barrel at the end of January to USD $107.07 by February 29.
  • The Japanese yen weakened against most currencies, while the euro strengthened and the U.S. dollar was mixed. The U.S. dollar fell against the euro and sterling, but gained against the Japanese yen. The U.S. dollar ended February at $1.59 against sterling, $1.34 versus the euro and at 80.94 yen.

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