Oil Advances Some Following Yesterday’s Sell-Off, One Yen To Rule Them All, Lower Open

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Oil Advances Some Following Yesterday’s Sell-Off – Today

With a 3.3% drop in the S&P energy subsector yesterday while we were vacation, the prospects for a positive open in Canada are thin.  Meanwhile, overseas equities are down for the second day in a row as the general tone is one of caution.

The action lately is in the bond markets.  Yields are spiking in Japan, where the last day of the month saw 10 year JGBs, which had drifted as low as -0.30% yield, spike 8bps higher and followed that with two more negative performances sending the yields even higher.  We are even threatening a positive yield for 10 year Japan govvies!

Elsewhere, sovereign yields are heading higher too, save Australia, where a rate cut overnight had the bond markets rallying sending yields lower.  While Aussies dollars initially sold off, the weakness in the big dollar is taking center stage and send the A$ higher after the cut.

Canada’s GDP report is being sliced and diced after Friday’s release.  Importantly, as Bloomberg notes, as of May, Real Estate has become the largest private sector component of GDP.  It grew while manufacturing and energy continued to sink.  StatsCan provides the data tables here.

Vehicle volume so far in 2016 has been pretty much in line with forecasts, so it will be interesting to see if this trend continues to hold up today as producers report monthly sales numbers. With annualized numbers expected to come in at 17.3 million for the U.S., Growth is tough to come by following a peak last year. Though OEMs, have benefited from six consecutive years of gains, the market has not been friendly this year. Fords stock is down 11% YTD, and GM is down 8%. Both are paying attractive dividends making the total return a little more palatable. U.S. automakers are actually performing better than their global peers, beating Honda, Toyota, Daimler, BMW, Nissan and Volkswagen on a constant currency basis most by quite a large margin.

Mortgage rates in the U.S. continue to fall, with the benchmark 30 year rate from Bankrate.com matching its lowest rate ever set at the end of 2012. The 3.36% rate set on July 29th is the lowest ever. Not surprising that refinancing activity hit a three year high in July and new home sales continue to make new post crisis ground.

Japan’s cabinet has approved a $275 billion stimulus package. The market has not. USDJPY is retreating towards the key 100.00 level as investors remain unconvinced about the government’s ability to boost the economy. Moreover, Japan’s yield curve is steepening for the first time in ages. Abe’s three arrows, monetary policy, fiscal policy and structural reforms, have not had their intended effects. Japan’s economy has been growing at <1% for the past 3 years; well below Abe’s 2% target. Part of the problem is that consumers are not spending. According to Bloomberg, nominal consumption spending has been flat since the mid-late 1990s.

Oil Prices Yen

Another explanation is that policymakers have been unable to lift potential GDP, which is based on the labor force and productivity growth. Demographics are a serious issue in Japan, especially because the elderly tend to save more and spend less. The new spending package will aim to address these concerns. For example, some of the money will be used for daycare help. That should help to get more women into the labor force. Even so, the public and the markets are not so sure. “Initial optimism about Abenomics has waned.” As such, we may need to see real results before people start to believe again. More from Bloomberg here.

“(Information) consumes the attention of its recipients.”  Farnam Street implores you not to let your software tools use you… it should be the other way around.

Diversion:  Let’s apply some finance-type quant logic to eating.  Meb Faber does just that to present the 25 best recipes in the world.  Please save me some leftovers.


Company News

Aetna, one of the largest health insurers in the U.S. reported better than expected earnings as they were able to cut operating costs. Volkswagen vehicles have been banned for sale in South Korea as they report that the company forged documents relating to both emissions and noise of the vehicles. The conclusion impacts 83,000 vehicles. Williams Co, the Canadian pipeline company is cutting their dividend as low oil prices wane on earnings. This is their first cut in ten years. Enbridge saw second quarter profits fall after the wildfires in April weighed on earnings. They saw production in May and June down on average 255,000 barrels or 10% on their expected production. CVS reported today beating expectations for profit and rose full year guidance. As the acquisition of Omnicare and Targets pharmacies have been accretive to earnings.

Commodities

Oil prices are up this morning after trading lower yesterday while you were on vacation. They have dipped down into another bear market falling more than 20% from the recent highs. Gasoline and crude inventories are expected to have declined last week but still remain at the highest in the past twenty years.  Iron Ore prices are meaningfully higher this morning after data out of China showed that stimulus is boosting manufacturing in the world’s largest users of steel. The front end contract jumped 5.5% in overnight trading.

Oil Prices Yen


Fixed Income And Economics

Global bond yields are falling today on the back of a weak government bond auction in Japan according to Bloomberg. Ten year JGB yields rose 12.0 basis points to -0.025% at time of writing as demand for the paper was the weakest since February. To say it was bad would be an understatement as the BoJ had difficulty covering its target as the auction tail widened to a six month high (as an aside, is it really a surprise that demand for a negative interest bonds would be tepid?). This marked the fourth straight day of selling in Japanese benchmarks which translated to similar trading in Europe. Ten year Bunds fell for a consecutive day to put yield at -0.028%, while French (+7.5 bps), Swedish (+9.0 bps) and U.K. (+8.8 bps) bond yields all rose as well. In North America, the 10 year Treasury is weaker by 1/3 of a point to 1.56% and similar tenor Canada’s underperform by a 75 cents to yield 1.10% to cap an eight basis point sell off in just 24 hours.

AAA rated debt issuer Microsoft Corporation raised $19.75 billion in a seven tranche offering yesterday that marked its largest simultaneous deal ever and the third largest by a U.S. investment grade issuer this year (behind Anheuser-Busch and Dell). Maturities for the fixed rate notes range from three years to 40 with the coupons as low as 1.10% in 2019 to as high as 3.95% in 2056. The order book for the deal was 2.5 times oversubscribed. Both S&P and Moody’s affirmed their AAA opinions of Microsoft on Monday despite the significant increase in the

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