January 2016

January blues

Highlights

The year started with a bang, but it wasn’t in the direction anyone wished as China fears, added to the downturn in crude prices (-9.4%) created a general malaise that set up a major bout of risk-asset sales across the globe. A last minute rally wasn’t enough to offset the worst January performance since 2009 for the S&P 500 (-5.0%). Its Canadian counterpart didn’t fare any better, recording its third negative month in a row which is a consequence of crude oil troubles and mounting economic challenges in the country.On the bond and currency side, the diminishing probabilities the Fed will hike rates in March and beyond impacted U.S. 10-year treasury yields as they lost 35 bps to close the month out at 1.93%. As for the US dollar, the risk-off mindset triggered a flight to quality asset movement that helped the currency appreciate 1.0%. The loonie dropped to 0.68 US$ before rebounding at the end of the month.

Asset allocation strategy

• We think markets are currently over-emphasizing bearish indicators and short-term news while ignoring the rest of the global environment. As such, there now seems to be a growing disconnect between dramatic financial market moves and the underlying economic situation.

• The current energy levels are the result of an overall oil glut, not decreasing consumption.

• While we believe defaults in the oil sector will ramp up in the coming months, this has been largely discounted in the markets via increasing spreads.

• Unless the situation improves materially in the near future, March is now out of the question for a hike and markets are now pricing fewer than two hikes in 2016.

-Martin Lefebvre/Simon-Carl Dunberry-