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Sideshow Casualties
Toronto: October 21, 2013
By John Stephenson

With the spat in Washington now over, investors have begun to focus their attention toward earnings season. While a spate of companies reporting earnings this week, the market’s attention will be solidly focused on the fundamentals rather than the sideshow in Washington. But the highlight of this week will undoubtedly be September’s delayed payrolls report. The unemployment rate may well remain at 7.3% during September but job growth in the remainder of the year will likely not keep pace with that of the first half. Any dip in the unemployment rate this month could be reversed in the October figures as shutdown jitters may have hit corporate hiring.

The impact of Congress’s hissy fit seems to have affected investor expectations with most assuming a mid-2014 start to the Fed’s proposed tapering of asset purchases. Most investors seem to be figuring that the Fed will not be in a position to cut back economic support before gauging the impact of the government slowdown and the debt ceiling debate on companies and consumers.

After the temporary stay of execution was announced the dollar dropped one percent while shares of U.S. companies with safe, stable dividends that can resist a weak economy were bid higher in the last few sessions. Telecoms finished the past week up 1.7%, utilities rallied 1.6% and consumer staples rose 0.8%, while the S&P 500 rose only marginally.

Another casualty of the strife inside the beltway is gold’s reputation as a traditional safe haven in times of trouble. In 2011, investors flocked to the yellow metal when it looked as if the U.S. might default, if the debt ceiling wasn’t raised. But while net ETF sales have slowly inched higher as Washington’s problems mounted gold prices had trouble rallying. Tensions in the Middle East may keep gold from tumbling in the short term, but look for $950 per ounce gold by the end of 2014.

Attention globally may have been focused on the troubles in Washington, but going largely unnoticed has been a shift in sentiment toward China. Better-than-expected economic data including the release of third quarter data on Friday, which showed that the middle kingdom’s economy expanded at 7.8% annual pace. The economy accelerated in the third quarter, up nicely from its second quarter run rate of 7.5%, helped by looser monetary policy and a bout of mini stimulus of investment in infrastructure such as rail and subway systems.

Exporters from Germany to Brazil have greeted the turnaround in China’s fortunes with renewed optimism, following a quarter when many emerging market economies were hammered by fears over potential tightening of U.S. monetary policy. But it may be a little too early to crack open the champagne, as recently released data from China’s National Statistic Bureau showed growth in industrial activity, retail sales and fixed asset investment slowed in September when compared with prior months. As well, anticipation is running high for at least a framework for reform at the upcoming third plenary session of the 18th Party Congress in November. Should the Chinese leadership fail to unveil a framework that can sustain the country’s momentum, recent optimism in the sustainability of China’s recovery could fade, dealing a body blow to materials prices.

With the sideshow in Washington on hold until at least the start of 2014, I continue to position my portfolios for stronger markets ahead. Financials, Tech and increasingly Canadian energy names are where I’m placing my bets. Canadian energy companies have badly lagged their American peers as the market has become overly fixated on the Keystone XL decision and the ability of producers to ship oil to market. But with several new potential pipeline solutions on the table and rail stepping up to pick up the slack, the differential in valuation north of the border is just too hard to ignore.

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