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 news.”
“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,” Tal says.
Despite the negative surprises that dominated the news during the past three months, the Canadian market has managed to grow by 9%, notes Tal. He says investors seemingly ignored Canadian data and paid more attention to positive factors in the U.S. and international economies.
In the United States, the 12% 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 Tal.
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 clearly evident.
“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.”