The Launch Pad by @
Wednesday, May 25th, 2016
Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S. Obata
Has including ESG become a necessity for investors?
Things are looking up again with markets around the world ripping higher, except in China. Yesterday’s big correction in materials is likely to slow, judging by the pause in the US dollar index this morning. The DXY is flat so far, but has had an impressive bounce this month. You may have noticed that the quote on the loonie has been weak for about the same period and gold is off 5.5% this month… all related to the big dollar, of course.
What happens when low volatility is no longer? Bloomberg reports that the volatility of the great performing low-vol ETF’s has actually been higher than that of the market as a whole. Where to now, then? If we had a sarcasm font. We would use it here to say – hard to see that one coming, no? We wrote about this a few weeks ago, and strongly feel that adding atactical component to your portfolio is an ideal way to reduce volatility without over-weighting expensive Staples and Utilities.
“We are the smart money because we have principles to which we adhere while prudently deploying capital.” New Mexico’s chief pension fund manager calls out Private Equity fund firms for offering onerous terms to investors, and expects the utmost levels of transparency. Hear hear.
140 no more? Twitter is starting to allow users more than the 140 characters limit currently in place. Well, really they just won’t count media and @ names to use up the character count, but can more characters outright be very far off? After relying on a couple of sentences for so long, we aren’t sure we have the attention span to go to 280.
Can you name that 80 billion euro sucking sound in the European bond markets? No, not a Hoover or even a Miele, it’s the ECB draining the continents bond liquidity. After expanding the size of the debt buying program to 80 BILLION A MONTH, demand is starting to outstrip supply from some countries. At today’s pace Germany would exhaust the supply of bonds in less than a year, unless the ECB broadens its criteria. Bloomberg has more on Draghi’s quandary.
A deal has been reached for Greece with its creditors. In a meeting that ran into the early hours of the morning, European finance ministers have agreed to $11.5 billion aid payment/bailout. Notably, the IMF had to drop its demand for outright debt reduction. Greek bond yield are down over 10bps, not trading below 7%, the first time since last November.
Germany’s Electricity Generation
In Germany, electricity generated from renewable sources has tripled over the past 10 years. It represented 31% of gross electricity generation in 2015. Germany’s energy transition policy goals are to increase this share to 40 to 45% by 2025 and to phase-out nuclear energy by 2022. Surprisingly, 44% of Germany’s electricity production was generated from coal in 2015. This share will decline as the country continues to invest in solar photovoltaics and wind, in particular. Germany’s energy policy is encouraging from an environment standpoint. That said, it has not come without costs. According to the EIA, “the German government has supported renewable electricity growth by promising a fixed, above-market price for every kilowatthour of energy generated by solar PV or wind and delivered to the grid.” These costs have been passed onto consumers in the form of higher taxes and fees. In Germany, the average sales-weighted retail price for residential consumption was ~35 cents/kWh in 2014. This compares to the US, where the average price was ~13 cents/kWh. More from EIA here.
Food for thought: What do you say, is retirement an outdated concept? Here is the argument for never retiring.
Diversion: Think you know how to skip stones? Kurt Steiner KNOWS how to skip stones, currently holding the record with 88 skips.
Surfing legend Kelly Slater has built and now sold to the World Surfing League the perfect man made wave. Check out the video’s on this Bloomberg article to see for yourself. Learning surfing, with zero sharks, I’m in.
Microsoft Corp. is cutting 1,850 jobs and incurring a massive restructuring charge as the admit defeat in the smart phone business. The majority of the cuts are coming from the legacyNokia business they acquired in 2014. Google is pushing phone makers and carriers to update to the latest version of Android software. They have had real trouble doing so, currently only 7.5% of the 1.4bb active users currently use the latest Marshmallow software. That pales in comparison to Apple who has 84% of their user’s base using the late version of iOS. BMOmissed profit estimates but has raised their dividend. The loss was caused by a rise in growing delinquencies from the oil and gas industry.
Oil prices are rising this morning approaching $50 a barrel, after a large rally yesterday afternoon. The American Petroleum Institute reported the U.S. inventories fell by 5.14mm barrels last week, the biggest weekly decline so far in 2016. The consensus view is that the OPEC meeting on June 2nd will bring little resolve in terms of capping production but with the majority of major players, beside Iran, already pumping near their capacity limits, this could be somewhat of a non-event. Gold prices have fallen to the lowest level since the end of March. This comes as expectations for a June FED rate hike continue to rise. This has boosted the dollar to a two month, which is adding further pressure to prices.
FIXED INCOME AND ECONOMICS
Loonies are flat to begin the session with barely a 50 pip trading range since last Thursday. That is likely to change of course at 10AM EST with a Bank of Canada policy update that your’s truly believes will add a pinch of dovishness to the future outlook. Alberta wildfires notwithstanding, data from the retail, labor and manufacturing sectors have been mostly weak over the past month and that should give officials ample room to remain cautious. The Canadian economy is still forecasted to post a decent first quarter of GDP even after the slowdown in March but the outlook for Q2 is more uncertain as it depends heavily on U.S. growth and oil price stability — two factors outside of the control of Canadian policy makers. WTI is north of $49.25 at time of writing and with the DOE out with their weekly report 30 minutes after the Bank, volatility will be even more paramount for the CAD this morning.
Dampening the risk appetite this morning is a new report from S&P that expresses concerns that high yield bond defaults are rising at the fastest pace since 2009. The credit rating agency noted that 72 global corporate defaults have occurred as of this year (10 last week alone) with more than half in the energy and natural resources sectors. At this time last year there were 39 defaults year to date. S&P believes the number could increase too — “We expect credit pressure to continue affecting these sectors with even more defaults stemming from oil and gas companies having fewer options to boost cash flow, barring an unlikely substantive rise in oil prices”. The agency further warned of continued stress in the asset class as little spillover effect from energy has been seen in other part of the market thus far.
It what could be a first for the nation (as well as representative just how significant a Fed tightening move is being viewed globally), Bloomberg is reporting this morning that China is planning to ask the U.S. when they expect to hike interest rates. Chinese officials are meeting with their American counterparts next month and are prepping for the potential impact said move would have on their currency. Recall that China loosened their long-time RMB-USD peg last summer that signaled they were ready to allow a proper free market on the Yuan (as well as depreciate the too-expensive currency). Unfortunately, this also sparked the massive sell-off in Chinese equities that cascaded over here to North America. Bloomberg notes that it’s not unusual for senior officials to press each other on their policies but neither side is confirming the talks. Read the full article here.
Adding to the aforementioned rumors that China is looking to time the pace of Fed rate hikes, we came across a very good piece in the WSJ yesterday about what impact a tightening move would have not only in the U.S. but also for the rest of the world. To sum the article — the world’s biggest economy can handle it but everyone else would be unable to stretch further. At the crux of the argument is low global growth as postulated by the pancake-flatness of the yield curve. See the full report here (chart-geeks beware, the author likes to use them).
CHART OF THE DAY
QUOTE OF THE DAY
I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.