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Progress in 2012 to have positive impact on global markets in 2013, says BMO Harris Private Banking

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The world’s market and economic situation is in better shape now than it was 12 months ago, according to BMO Harris Private Banking’s latest Market Outlook Commentary Report.



The report notes that several factors have led to this positive outlook, including the economic accomplishments of policymakers in Europe, the US, China and Canada, ongoing recovery in China and a stronger US economy.

The combination of these developments is expected to improve US equity markets and a rise in energy and commodity prices, in turn, positively impacting Canadian equity markets.

Europe’s sovereign-debt challenges came to the fore in early 2012, but the year closed with a clear path forward. Austerity programs, though necessary, were not enough and led to violent protests; through hard work, however, policymakers made tremendous progress by year’s end:

• Europeans now have a communal agreement on banking supervision throughout the region.
• Communication among all constituents vastly improved and has gone a long way to restoring confidence.
• There was considerable movement towards stability.

"European leaders have made more improvements in 2012 than anyone could have imagined a year ago, yet Europe has not fully recovered," said Richard Mason, head of investment management at BMO Harris Private Banking. "More work is required before markets in Germany, France and several Eurozone countries regain confidence and the region begins to grow again. Still, it is very encouraging that there is a sustainable framework in place."

The US Federal Reserve effectively set the tone for policy clarity in 2012, with politicians making substantial inroads in the important area of tax reform through the fiscal cliff negotiations:

• Monetary policy will be tied to the unemployment rate.
• A 6.5 per cent unemployment target means rates will remain low for at least another year.
• The dreaded Fiscal Cliff was averted through last-minute legislation, resulting in tax hikes for higher income earners, some relief for middle-class wage earners and no immediate spending cuts. In turn, the markets rallied.

"Rather than create a ‘grand bargain’ that linked spending cuts to tax reform, legislators made a wise move by postponing the deadline for the cuts that would kick in automatically," says Mason. "It will be interesting to see what transpires over the next few weeks and months, as it could have a ripple effect throughout the world."

In 2012, analysts voiced concerns that China’s economy was doing far worse than the reported numbers indicated. However, as a result of the efforts of hard-line policymakers, money and credit growth have stabilised and many measures of economic activity have moved higher. Still, the country has room for growth in 2013.

"It is expected that 300 million people in China will migrate from rural to urban communities by 2025," says Mason. "This will continue to have a significant impact on demand for, and the prices of, commodities, but does not expose China to the potential for social unrest."

Two events shaped Canada’s economy in 2012. The Bank of Canada maintained its steady course of low interest rates, providing further incentive for business development. In addition, the federal government introduced tighter rules for longer-term mortgages that have cooled the housing market. Analysts will watch closely to see how this plays out in 2013. Further, the report notes that good news is expected for the Canadian and US equity markets.

"With stronger economies in China and the US, we anticipate an increase in energy and commodity prices that, in turn, will positively impact Canadian equity markets," says Mason. "US equities are also expected to have a good year; US monetary policy remains supportive, and the growing strength of the housing market and consumer and corporate sentiment improves day-by-day."

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