As December rolls on, equities are making an attempt to claw back the ground they lost at the end of November and finish the year on a strong note. Although the first few days of the month saw markets surge, the rally has died down in recent days thanks to ongoing fears over the sovereign debt crisis in Europe. Yesterday saw markets finish relatively flat, while precious metals surged yet again as investors fled to safe havens. Gold finished up above $1425/ounce and silver hit a 30 year high as the white metal is now trading at just over $30/ounce. While European tensions are one of the main drivers of this surge, comments from the Federal Reserve also helped to boost precious metals. Ben Bernanke announced that the Fed was considering an expansion of the second wave of quantitative easing, as the $600 billion injection into the economy has not spurred the results that the central bank had hoped for. With the focus of the week shifting to North America, a major central bank is set to release its interest rates decision today, keeping the focus on the Western Hemisphere and America’s neighbors to the north.
Later today, the Bank of Canada is scheduled to give its decision on rates, an event that could have a major impact on equity markets, as the nation decides if they need to control inflation, or encourage growth. The bank is expected to hold interest rates at 1%, and it seems unlikely that rates will change any time in the near future. “We certainly don’t expect them to move on rates [Tuesday]. We also think they’re unlikely to raise rates any time soon in early 2011″ said Douglas Porter, deputy chief economist at the Bank of Montreal. The general consensus is that rates will freeze until mid-2011, when the bank may decide to move them based on how the economy is performing and what the inflation rate is like at that time.
Canada has already raised rates three times this year, by 0.25% in June, July, and September, but the bank is likely holding rates steady due to tame inflation levels and continued weakness in the American market. However, the outlook has begun to brighten in Canada as the nation’s unemployment recently fell to 7.6%, the lowest in approximately two years. Should the commodity boom further help to stoke the fires of inflation it could lead to a rate increase sooner than most people think, potentially adding further levels of strength to the loonie. However, some economists believe that a strong loonie is what led to the Canadian third quarter GDP coming in lower than expected, so keeping the loonie at bay may be the best option for Canada to grow.
With this central bank decision on tap, the IQ Canada Small Cap ETF (CNDA) will be today’s ETF to watch. This fund measures the performance of the small capitalization sector of publicly traded companies domiciled and primarily listed on an exchange in Canada. This fund focuses its assets on the industrial materials (58%) and energy (21%) sectors of the Canadian market. CNDA has surged over 31% since its inception earlier this year. Assuming the central bank holds rates as they have hinted at, this fund may be poised for a strong day, as it appears the Canadian government will be promoting growth over inflation concerns for the local economy, at least for the time being.
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Disclosure: Photo courtesy of John Vetterli. No positions at time of writing.
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