Asymmetrical trading sees markets reacting positively even to bad news
TORONTO, Feb. 28, 2012 /CNW/ - Global markets are looking for signs that
conditions are improving and any sliver of good news, no matter how
small, is driving gains in the market, finds a new report from CIBC
World Markets Inc.
"These are not normal times," says Benjamin Tal, Deputy Chief Economist
at CIBC. "In normal times investors overreact to bad news more than
they react to good news. In today's environment, good news has the
upper hand. Investors are highly responsive to positive data surprises,
while negative news is often ignored or creatively interpreted as good
"Greece-fatigue makes European developments secondary in affecting the
mood in the market with investors growing increasingly indifferent to
news from the zone - probably with the realization that any turn to the
worse will be dealt with effectively by the European Central Bank."
Despite the negative surprises that dominated the news during the past
three months, the Canadian market has managed to grow by nine per cent,
notes Mr. Tal. He says investors seemingly ignored Canadian data and
paid more attention to positive factors in the U.S. and international
In the U.S., the 12 per cent rally in the S&P 500 since mid-December is
largely attributed to the better-than-expected economic data during
that period. But, on average, the market has also reacted positively to
negative data surprises. "This asymmetrical trading is due largely to
the current asymmetrical Fed policy," adds Mr. Tal.
"No less than one-third of all major economic data released over the
past three months outpaced expectations. And those positive surprises
were immediately translated into gains in the equity market. After all,
with the Fed committed to remain in neutral until 2014, the market can
enjoy the full benefit of stronger-than-expected macro data without
worrying about the usual spoiler of increased policy-tightening
"More interesting, however, is the average 0.13 per cent daily market
gain in the S&P 500 in reaction to the 20 per cent of releases that
have fallen short of expectations. The logic here is that any sign of
economic weakness increases the likelihood of a third round of
quantitative easing, with clear positive implications for the market."
Mr. Tal expects Canadian investors will continue to focus on U.S.
economic data and largely ignore further negative news from Canada's
manufacturing sector where the drag of the strong dollar is still
In a section of the report authored by Avery Shenfeld, Chief Economist
at CIBC, and Warren Lovely, Senior Economist at the bank, the struggles
of a sector seriously impaired by a strong Canadian dollar are
highlighted. Manufacturing's share of Canada's GDP has plummeted since
the Canadian dollar turned the corner, but it has also lost ground on a
relative basis versus the U.S., where the factory sector's footprint
has held steady.
Manufacturing now contributes just over 12 per cent of Canada's Real GDP
compared to nearly 19 per cent at the turn of the millennium. While,
factory output in Canada has seen a revival from the depths of the 2008
recession, much of that has been delivered from a one-time recovery
from cyclically depressed demand.
Mr. Tal expects that as economic, fiscal and political power
consolidates in western Canada, regional income inequity will soar.
While Canada's monetary authorities can avoid accelerating that process
by keeping rates on hold for longer, it won't prevent a further
hollowing out of Canada's manufacturing heartland.
"The likelihood is that investors will have plenty to ignore in the
coming months," he adds. "How long this win-win trading environment
will last is anybody's guess, but the likelihood is that this process
has not been exhausted yet."
"The euphoric trading could continue until the market wakes up to the
realization that whatever it gets now will be taken away by the big
fiscal drag of 2013."
The complete CIBC World Markets report is available at:
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For further information:
Benjamin Tal, Deputy Chief Economist, CIBC World Markets Inc. at (416) 956-3698, email@example.com; or Kevin Dove, Communications and Public Affairs at 416-980-8835, firstname.lastname@example.org.