As Goes the U.S. so Goes Canada?

By Paul Baiocchi | September 18, 2007 | 3:01 PM | 1 Comment

It seems that many contradictory forces are at work in the Canadian Market as the final quarter of 2007 gets underway. While we see currency traders bidding the Canadian dollar closer to parity with the greenback, we are left to mull over the latest Canadian Mutual Fund data, which should serve to temper enthusiasm for the Canadian market's perceived independence from the U.S. As a result, for the first time since 1994, August saw net redemptions to the tune of $1.5 billion in net sales.

What makes this more powerful is that the majority of the $916 billion dollar redemptions were in the money market fund class. This was a direct result of the systemic credit crunch affecting the asset-backed market in the U.S. and in Canada. The IFIC even went as far as saying "continued market uncertainty" was one of the main drivers of mass redemptions in August. Long-term funds were well represented in net redemptions as well, a total of $633 million, which points to an overall aversion to long-term holdings in favor of cash. It appears the recession fears that seem so pervasive in the U.S. have made their way to Canada, in direct contradiction to the arguments made by so many on CNBC and the like.

Some would also like us to believe that foreign investors who accumulate dollars are supporting the bond market. This is also refuted by the empirical data supplied by the IFIC data. The investment in the U.S. equity group out-performed the aggregate of mutual funds is Canada, up 0.2% on the month, in an environment where the aggregate was down 1.1%. In addition, overall growth for the U.S. Equity group is (up or down?) 10% on the year. Once again, this is in an environment where the U.S. economy is said to be falling off a cliff.

Interestingly, the best performing class was the foreign-balanced fund class, which still generated net $670 million in positive sales, even though it was down 1.3% from the prior month. This tends to be the best barometer of indirect foreign investment in the Canadian mutual fund class. Foreign investment remained relatively stable, even with Canadians expressing unwillingness to hang on to general market exposure through Mutual Funds in August. This would seem to buttress the claim that foreign currency investors are speculating on rate cuts in the U.S. and looking for places to invest their non-dollar currencies.

One can therefore assume that the significant appreciation in the Loony we have seen in the past two weeks, taking it to the $0.97 level, has more to do with interest rates differentials than with prospects for economic growth. Although this writer is quite bullish on the resource-rich Canadian economy moving forward, I remain skeptical that the recent move in the currency has more to do with the gap between U.S. and Canadian economic growth as some would like you to believe.

While many perma-bears persistent on instilling fear continue to wait with baited breath for an economic slowdown, the U.S. and global economy continue to prove them wrong. Following better than expected earnings data, this time from Lehman Brothers, the Dow, still up nearly 8% on the year, finished last week strong ahead of today's decision by the Fed to lower both the fed funds and discount rates by 50 basis points. In short, before you go betting on the parade of economic balloons of the world taking off while the pride of America stays grounded; consider the recent correlation the Canadian market has shown.

While the U.S. Dollar has sold off considerably, testing the all-important level of 80 on the index, market pundits have correlated this incorrectly with weakness in the U.S. economy. Those same people, who called the last two years the continuation of the bear market, will once again be proven wrong as the U.S. market proves once again to be the catalyst for the fortunes of global economy. In other words, expect the Dow to make its way back to its highs before it makes new lows.

For more information, see the report by the Investment Funds Institute of Canada. https://statistics.ificmembers.ca/English/reports/2007/08/public/IFIC_Statistical_Commentary.pdf

Flaherty's a bum! How could he do that to the energy trusts! You're so right--go get 'em, Mr B! Submitted by jsjgold on Wed, 2007/09/19 - 12:10pm » reply |