Interest-rate outlook unchanged by market gyrations

At BMO Nesbitt Burns, analysts say this week’s tech correction was just that, a correction of anomalies that have crept into the market. They note that at its peak, the market was sitting 50% ahead of its moving average. While this latest correction will have taken out some of the air, Nesbitt says there are still warning signs in Nasdaq valuations, technicals and fund flows. It notes that Nasdaq corrections have typically retraced 60% of recent gains, a trend that would take it back to 3,500 from its current level.

With all the turbulence, Nesbitt recommends that investors keep a close eye on the fund industry, where massive flows into tech funds could reverse themselves and trouble portfolio managers with large redemptions. Nevertheless, Nesbitt maintains an overweight position in stocks and an underweight in bonds.

Nesbitt says the recent performance of the stock and bond markets has taken a 50-basis-point hike off the table for most traders, although it still expects two more moves from the U.S. Federal Reserve Board.

Economists at CIBC World Markets agree that the hawkish case is still in effect for interest rates. Next week’s inflation data in the U.S. should confirm that expectation. CIBC expects the full impact of the oil shock to show up in the numbers next week, with a possible surprise to the upside. A light data week in Canada is not expected to change the outlook.