Markets continue to oscillate erratically between euphoria and panic and then back again; amidst an incessant barrage of “what if analysis” reported on by the media – the prospect of sluggish economic growth ahead, notwithstanding a heightened concern that perhaps Europe’s sovereign debt woes (Greece) could morph into a full-blown credit and illiquidity crisis (a replay of 2008?) is weighing on market sentiment.

• News flow out of Europe and the U.S. has made for an increasingly challenging investment environment, and suggests a cautious stance toward the near term outlook.

• North American equity markets tumbled this week following a negative response to the comments and actions by the Federal Reserve. The so-called "Operation Twist" was not well-received by investors as the Fed's plan to push down long term interest rates and flatten the yield curve is perceived to be an indicator of weak growth and/or recession ahead...
  
  
• The Fed’s reference to "significant downside risks to the economic outlook” is also weighing heavily on market sentiment.
  
  
• European debt woes have added uncertainty as French banks in particular (due to their exposure to Greed debt) have been under significant selling pressure. Investors are hoping for a more coordinated policy effort by the EU, ECB, and IMF to moderate the financial crisis; perhaps requiring a recapitalizing of banks in the region and/or an "orderly default" of Greek debt?
  
  
• Market sentiment has softened further on weak PMI data out of China; indicating a manufacturing slowdown and slowing economic growth in that region.
  
  
• The weakness in stocks has been exacerbated by program trades which have kicked in and accelerated the downside moves.
  
  
• In spite of their perceived quality, relative safety and favorable dividend yields, the outlook ahead points to a prolonged period of low interest rates, perhaps explaining why banks and life insurance companies both, representative of ~ 30% of the Canadian equity market have sold off, along with other cyclical equities; especially resource companies.
  
  
• Gold's lustre has also faded in recent days – heavy selling by hedge funds and ETFs has served to unwind much of its recent parabolic (levered) move.
  
  
• History reminds us that investment fundamentals can be irrelevant in a market driven by sentiment and investor emotions; the current market direction is largely being dictated by events in Europe. The market clearly wants some kind of resolution to the debt crisis in Europe – extreme volatility and capital market erosion may serve to push the EU and ECB into action sooner rather than later.
  
  
• Further policy miss-steps in Europe or the U.S., could from a technical perspective, mean further market consolidation (perhaps 5-10%) before the next series of support levels are reached.
  
  
• Despite (historically) low fixed income returns, bonds (and cash) remain important elements within balanced portfolios. Moreover, some cash at the ready may be beneficial should markets consolidate more – "layering in" and taking advantage of bargain-hunting opportunities.
  
  
• Equity valuations in many instances already appear to be attractive, even with our expectation that earnings forecasts will ultimately be revised lower in the months ahead. The prospect of wide swings in market sentiment; from euphoria to panic and back again will mean favorable buying opportunities for select equities, however in the nearer term, the overhang of macro-economic issues will remain the primary driver of equity markets.

While uncertainty and market volatility are likely to persist for some time, opportunities abound – please contact us to arrange an in-depth review of your current asset mix and portfolio holdings; to ensure that your strategy remains aligned with your goals, risk tolerances and time horizon ahead and is well-positioned to take advantage of opportunities as they present themselves...

This report has been prepared by Scotia Capital Inc. as a resource for its clients and may not be redistributed. While the information provided is believed to be accurate and reliable, neither Scotia Capital Inc. nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of such information. Nothing contained in this report is or should be relied upon as a promise or representation as to the future. This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation or particular needs of any specific person. Investors should seek advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. The pro forma and estimated financial information contained in this report, if any, is based on certain assumptions and management’s analysis of information available at the time that this information was prepared, which assumptions and analysis may or may not be correct. There is no representation, warranty or other assurance that any projections contained in this report will be realized. Opinions, estimates and projections contained in this report are our own as of the date hereof and are subject to change without notice. The information and opinions contained in this report have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotia Capital Inc. nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents.

Dale A. Swan, CFP, FMA, FCSI

Chartered Strategic Wealth Professional (CSWP)
ScotiaMcLeod Wealth Advisor

Life Underwriter

ScotiaMcLeod Financial Services

604-661-7455 Direct
800-263-8637 Toll free
604-661-7494 Fax

dale@swanprinciple.ca

dale_swan@scotiamcleod.com

James Stansfield

Administrative Associate

604-661-7460 Direct

james@swanprinciple.ca

james_stansfield@scotiamcleod.com

ScotiaMcLeod

650 West Georgia Street

Suite 1100, PO Box 11615
Vancouver, BC Canada V6B 4N9