Markets in the Red on Black Friday

It was a slow week for equity markets, but that really comes as no surprise as U.S. markets were closed on Thursday for the Thanksgiving holiday. While they did reopen for part of Friday, volumes remained low and there was a small burst of enthusiasm in the morning as it appeared Black Friday retail sales could be strong this year. However, the overhang of the European debt crisis continued to weigh heavily on equity markets worldwide.

Europe yet again stole the headlines this week even after the U.S. Congressional Supercommittee was unable to strike a new deal for deficit reduction. Automatic reduction policies, such as not renewing past tax breaks, are in place to save the U.S. Government just over $1 trillion, but further measures required to make investors and rating agencies more comfortable were not forthcoming. Instead, we focused back on Europe where borrowing costs continued to increase for a number of countries and where Germany was unable to sell as many bunds as it would have liked in a mid-week auction. Such an event raised questions about the safety of German debt and saw German yields climb further.

The ongoing drama in Europe pushed investors back into the U.S. dollar, resulting in a corresponding fall for the Euro and for commodity prices which also sold off after China’s Flash PMI index fell from 51.0 to 48.0 in November and U.S. Q3 GDP was revised down to 2.0% from 2.5%. However, there were some good economic indicators over the past 5 days as Canadian retail sales were better than expected and U.S. personal spending for October exceeded expectations. Even precious metal prices fell as the U.S. dollar seemed to be one of the few assets investors wanted to own as the Europeans try to get their fiscal house in order.

The U.S. dollar’s gain was the Canadian dollar’s loss as the loonie fell to just north of US$0.95. The weakness caused by the strengthening U.S. dollar was only compounded by increased global economic fears thanks to the loonie’s sensitivity to commodity prices.

Canadian Dollar Continues to Slide

While it was a rather quiet week in terms of trading volumes on equity exchanges, continued worry about European debt and the global economy took its toll on commodity prices and strengthened the U.S. dollar. Those two factors combined led to a very bad week for the loonie which now finds itself just north of US$0.95 after regaining strength at par back on October 31. We have seen this trade before as investors either remain concerned or capitulate. When they’re concerned they worry about the present but see potential for improvement in the future. In this environment commodity prices and even precious metal prices perform well. However, once investors start to capitulate, the environment changes to one where capital preservation is paramount. Therefore, many investors turn to the U.S. dollar for safety even though that country continues to struggle economically and will continue to have problems getting its fiscal house in order.

The Trading Week Ahead

U.S. investors will finish up their holiday weekend on Sunday and return to the markets on Monday morning. They will return to little change in terms of progress on the European front, so we may be in store for a challenging open. However, the European fears could be offset, albeit momentarily, if Black Friday sales continue to be strong throughout the weekend and if consumers have success finding online deals on Cyber Monday.

While we can hope for a strong start to the week, market focus will eventually return to Europe where many investors would like Germany to embrace the idea of a “Eurobond”. However, Chancellor Angela Merkel has remained firmly against such action. Any negative news out of Europe could be countered by a possible positive employment report in the United States on Friday. For seasonal reasons (i.e. holiday shopping), employment figures are expected to exceed last month’s job gains. However, they will still remain below the level of jobs required to get the U.S. economy back on its feet in short order.

With respect to corporate earnings, much of the Q3 earnings season is over in the United States; however, Canadian earnings will be influential towards the end of next week as the big Canadian banks begin reporting their fiscal 2011 year end results starting with CIBC and TD Bank on Thursday, followed by Royal Bank and Bank of Nova Scotia on Friday. While retail banking earnings have likely remained consistent from last quarter, capital market earnings will likely show signs of weakness when compared to the same quarter last year due to a decline in overall market activity. It is possible that we could see a dividend increase from Bank of Montreal, which remains the only bank that hasn’t yet increased its dividend since the recession of 2008.

Commodity prices and the Canadian dollar will continue to be influenced by events in Europe and the broader impact of the debt crisis on the global economy.

QUESTION OF THE WEEK: How big is Black Friday in dollar terms?

For the past few years Black Friday has represented approximately $10 billion dollars in sales for the retail industry for the first day of what is considered to be the “holiday shopping season” which carries on through Christmas. Historically, Americans have shown up to the shops on Black Friday to pick up deals; however, the difficulty over the past couple of years has been to keep them coming back through Christmas. According to a September estimate from ShopperTrak, U.S. national retail sales, when compared to the same period last year, could rise 3.0 percent during November and December, while foot traffic will decrease 2.2 percent. So naturally this is a good sign for retailers, but we also see a continuing trend that Americans increasingly prefer to make purchases online which bodes well for “Cyber Monday” next week when online sales come into focus and worker productivity declines as Americans surf for bargains.

Gareth Watson is the Vice President, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @Gareth_RGMP