BONDS:
Investors in U.S. Treasuries are betting that any economic recovery will be oh so slow.
The yield curve - the difference between 10-year and two-year U.S. Treasuries - is flattening or narrowing, which is a sign of uncertainty over the outlook for the global economy, said George Davis, chief technical analyst for RBC Dominion Securities Inc.
The narrowing spread or difference in yield reflects a rise in the price of 10-year bonds and the resulting drop in yield. "At this point given the lacklustre recovery we are seeing inflation is not much of a concern," Mr. Davis said. "Most of the flattening movement is likely to take place in the 10-year security." Investors in the 10-year bonds are willing to accept a lower yield.
Meanwhile, the yield on two-year U.S. Treasuries continues to be fixed in an ultra-low 50-to-60 basis point range. (A basis point is 1/100th of a percentage point.)
The bond markets show investors are still nervous about the transition phase between government stimulus helping to boost the economy and the need for the U.S. consumer to step up and sustain growth, Mr. Davis said.
Short-term yields are unlikely to rise so long as the U.S. Federal Reserve Board indicates that it intends to keep short-term interest rates low, he said. At the same time, investors in long-term bonds appear not to be at all nervous about the prospects of inflation.
"To a certain extent it [the narrowing of the curve]will have a limited degree of impact - it will be a slight drag on bank profitability, but the spread is still supportive for the U.S. banks," Mr. Davis said. The banks are repairing their balance sheets by borrowing at a low cost and reinvesting their cash in higher-yielding Treasuries.
STOCKS:
About one-fifth of the companies in the S&P 500 have reported their second-quarter results and the percentage of positive surprises is the highest on record, according to a report by Brockhouse Cooper.
Of the 82 per cent of companies beating expectations, the financials, oil and gas and basic materials reported the largest earnings surprises, said Pierre Lapointe, global macro strategist for Brockhouse Cooper.
Nevertheless, investors remain worried about a slowdown.
"It's a normal recovery pattern," Mr. Lapointe said. In the first year of a recovery there is a strong rebound and then growth moderates, he said.
U.S. companies have about 10 per cent of their assets in cash and the major stock indexes are trading at a price-to-earnings multiple of 11 to 12 times, Mr. Lapointe said. In a normal recovery stocks trade at 15 to 16 times earnings. "This is why we are still positive on the equity market," he said.
It is surprising that inflation has not picked up with the expansionary monetary policy, but consumers and some companies are still in a de-leveraging process or paying off debts, Mr. Lapointe said.
For companies that have reported so far, revenue surprises have also mostly been positive, according to Brockhouse Cooper.
And investor fears continue to be overblown about the European sovereign debt crisis and looming austerity measures, Mr. Lapointe said. Their economies are being assisted by the low value of the euro.
However, Brockhouse Cooper continues to recommend an "underweight" position in European equities, because it sees the Asian-Pacific and North and South American equities as being more attractive.
COMMODITIES:
Commodity prices should "rally above current levels and perform quite well by historical standards due to continued strong growth in China and ongoing recovery in the Western world over the next 18 months," said Bart Melek, a global commodity strategist with BMO Nesbitt Burns Inc.
BMO's top picks are copper, precious metals, metallurgical coal, oil and iron ore. "There is unlikely to be clarity on the strength of the global commodity demand recovery until after the summer," Mr. Melek said in a report to clients.
BMO expects China's economy will grow in 2010 and 2011 at average rates of 10.2 per cent and 9.5 per cent, respectively.
Copper demand is expected to outstrip supply next year, while iron ore and metallurgical coal markets are expected to be quite tight with supply and demand in balance, he said.
Higher prices are quite likely as the demand for commodities grows, inventories continue to be restocked and producers remain disciplined on production, according to the report, according to the report. The lower grade of ore being mined along with the need to dig deeper to extract minerals along with rising production costs are other factors that should keep long-term metal prices quite robust, BMO said.
"Expected decent copper demand growth and deficits in 2010 and 2011 should limit the scale and duration of any short-term correction," BMO said. Copper is often viewed as an economic bellwether because of its use in a wide range of industrial applications.