The Economy and Financial Markets - Third Quarter 2010

Global stock markets rebounded during the third quarter although they remain volatile. While investors continued to cling to perceived safety in assets such as gold and federal debt, strengthening economic numbers began to appear and provided markets with some optimism later in the quarter.

The Canadian stock market roared back in the third quarter with the S&P/TSX Composite adding 10.3%. Materials led the gains as gold reached a new record high and fertilizer firms were up strongly following BHP Billiton’s hostile bid for Potash Corp. Utilities and Consumer Staples also experienced strong returns. Small cap stocks strongly outperformed large caps.

Global equity markets enjoyed a rally during the third quarter. U.S. equities gained 8.1% in Canadian Dollars ($C) as measured by the S&P 500 Index. All ten sectors posted positive returns led by telecoms, materials and consumer discretionary. Giving a ‘boost’ to foreign returns, the Canadian Dollar lost ground against most major currencies with the exception of the U.S. Dollar. International equity markets ended the quarter up 12.5% ($C) as fears about sovereign debt weakened and strong economic numbers were reported in a number or regions. Regionally, Europe outperformed the Pacific. Emerging markets were up 14.1% ($C).

Fixed income returns remained strong as the DEX Universe Index was up 3.2%. Performance was driven by provincial and municipal bonds while federal government bonds underperformed the Index. Long-term bonds significantly outperformed shorter-terms as the yield curve flattened and spreads narrowed between 30-yr bonds and 2-yr bonds. The Bank of Canada increased the overnight rate twice to 1% during the quarter, while the U.S. maintained their near zero interest rate policies.