After rallying sharply in October on strong third quarter corporate earnings reports, stock markets dropped in November as the end of the reporting period focused investor attention back on Europe again, where the sovereign debt problems have raised concerns about economic growth and the financial system.  Stocks however, did rally sharply on the last day of November as a series of economic initiatives boosted confidence that governments and central banks are beginning to seriously address the problems in the region.  Markets were also buoyed by the news that China’s central bank would reduce the reserve requirement for banks by 0.5%, indicating a ‘loosening’ of monetary policy.  Following months of declining economic activity, the People’s Bank of China said it will lower the reserve requirement ratio for the country’s largest banks for the first time in three years to ease constraints on lending and replenish liquidity in the country’s banking system.  The move to ease the flow of money in China represents a dramatic and important shift away from the central bank’s post credit-crisis tightening campaign.

Finally, recent U.S. economic reports were much stronger than expected with the ADP payroll data, home sales, Chicago ISM and the Conference Board’s consumer confidence index all surging well beyond expectations.  With that ‘trifecta’ of good market-related news, stocks surged higher with the largest single-day move since early August.  Similar sharp recoveries in August and October failed to follow through so it has yet to be seen whether this most recent run to the upside (the strongest 3-day gains for the U.S. market since 2009) will turn into the often-occurring “Santa Claus” rally or not.

Despite the 4% gain for Canadian stocks on the last day of the month, the market still fell by 0.4% in November as weakness in the Financial sector (-4.6%) and Base Metals (-2.1%) offset strength in the Energy sector (up 0.6%) and Golds (up 5.7%).  U.S. markets suffered similar losses with technology stocks showing the most weakness; the S&P500 Index fell by 0.5% while the Nasdaq Index dropped 2.4%.  Results from overseas stock markets were even weaker on growth fears in Europe and China;  Hong Kong dropped the most with a monthly fall of 9.4% while the Emerging Markets composite index fell by 8.1%.  The MSCI World Index fell by 2.5% in November and remains down 7.5% for the year thus far.  Bond prices staged a sharp recovery in November as long-term government yields fell from over 2.9% to under 2.7%.  The Dex Bond Universe index in Canada gained 0.84% in November and has returned 11.46% in 2011.  Commodity prices followed stock prices lower last month as the correlation between the stocks and commodities continues to get stronger; nickel prices dropped 10.6% last month while lumber fell by 9.2%, natural gas dropped 9.8% and copper dropped 1.6%.  Oil prices bucked the negative trend as supplies tightened further and drove the WTI crude oil price over US$100 per barrel, a monthly gain of 7.7%.

In terms of the moves by central banks on November 30th, it was very reminiscent of the actions taken back in 2008 after the collapse of Lehman Brothers; central banks acted quickly on a co-ordinated basis and, more importantly, the move had been unexpected by most investors in terms of its timing.  On the details, the central banks of the U.S., the E.U., Canada, Japan, England and Switzerland jointly announced that they will drop the rate on U.S. dollar swaps by 0.5% starting next week.  What this does is allow the European banks to act more quickly and to have more liquidity available in emergency situations at lower rates than previously.  It should help to alleviate the short-term funding issues that have been at the centre of the sovereign debt crisis in Europe.  Combined with the timing of the move by China on loosening monetary policy, there was a huge reversal to the upside in global stock markets.  We continue to see moves in Europe that should help to alleviate the economic and financing problems in that region.  The new head of the European Central Bank (ECB), Mario Draghi, reduced interest rates on November 3rd   in his first week on the job.  New governments in Italy and Greece are committed to reform and have come into office with substantial (85-90%) majorities in Parliament.  Finally, the ECB has substantial excess liquidity on its balance sheet, meaning that it still has significant funds available to fund its members liquidity needs if required.

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