Chris Kuflik - ScotiaMcLeod Montreal

November 2011 has not been kind to investors. Many RRSP and cash accounts have suffered this month. Fortunately we have continued to hold higher cash positions which has mitigated the decline.  Despite improving economic fundamentals and increased corporate earnings in North America, the equity markets have witnessed sharp declines due to European concerns. This has left investors wondering if they will see a Santa Claus rally this year.

The Santa Claus rally phenomenon, as defined by Investopedia is: “A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day.” This surge can be attributed to investors buying equities with the anticipation of rising prices in January. Pension funds and investors often receive additional funds via year-end contributions and Christmas bonuses. These additional monies increase demand and prices for equities. While the Santa Claus rally used to occur between Christmas and New Year’s, it has been occurring as early as the middle of December in the last decade as investors have begun to anticipate this event.

Last night, when I wrote my initial commentary, it focused on the inability and / or the unwillingness of European finance ministers to properly address their liquidity and funding problems – read punitive bond yields in Italy and Spain and lack of interbank lending to European banks. This morning when I arrived at the office, while preparing for an interview with the Canadian Press, (click here for the link to the article) I was forced to address overnight surprises for the markets. The markets were positively surprised on two fronts:

•        First, China surprised with its first cut in banks' reserve requirements in nearly three years. Futures had been lower before the Chinese move, impacted by a downgrade by S&P for 15 big banking companies. JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs Group, Morgan Stanley, Barclays, HSBC Holdings and UBS, were among the banks that had their ratings reduced by one notch each. A notch is one third of a letter rating. The downgrade was part of a wider overhaul of the agency’s ratings, but comes at a time when the markets for bank debts are already fragile. China's central bank cut was done to ease credit strains and shore up their economy which was running at its weakest pace since 2009. China's central bank said it lowered the reserve ratio by 50 basis points. This frees up funds that could be used for lending to cash-strapped small firms.

•        At 8am The U.S. Federal Reserve, the European Central Bank, and the central banks of Canada, England, Japan, and Switzerland surprised markets when they announced plans to coordinate their actions to boost liquidity in the global financial system. The move is designed to ease strains in financial markets and free up credit to households and businesses, the banks said in a joint statement. These central banks will lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by half a percentage point so that the new rate will be the U.S. dollar overnight index swap, plus a half a percentage point. The new pricing will begin Dec. 5, 2011, and the swap arrangements will last until Feb. 1, 2013, the banks said. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As previously stated these actions have jolted markets higher so far this morning. When you combine this with better, albeit slowly improving economic numbers in North America, and good recent quarterly corporate earnings, we may be starting the Santa Claus rally. The overnight announcements have shown that despite European inaction, the global central bankers will act to slow and hopefully prevent a global crisis. What investors now need is some positive news that Europe will finally propose and enact policies that will diminish and address their debt and solvency problems. Should this happen, investors may begin to turn their attention to the positives and push equity markets higher.  

Please feel free to share this commentary with someone that you feel could benefit from its contents.

Chris Kuflik

Associate Director, Wealth Management

Wealth Advisor

514-287-2931

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