The Launch Pad: The TSX is over 14,000 and crude is over $50, the bull is back! Or is it? Optimism is nowhere to be found by ConnectedWealth
Thursday, May 26th, 2016
Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S. Obata
TODAY
It has been a heck of a week for stocks and it looks like more to start the day here with futures pointing higher yet and again most overseas markets doing better. Oil prices touched $50 causing the loonie to take notice and continue on its reversal of recent course for its 3rdstrong day in a row.
The spread between US and Canadian 2 year bonds has led to loonie weakness as well, although for yesterday and today, that trend is not the case. US yields are dropping while Canada’s are not. At 0.90%, the US 2 year is pricing in at least one FOMC hike by the end of year, so we can assume the US dollar is as well. Meanwhile, rate expectations in Canada following the Bank of Canada meeting remain for no changes through the balance of the year.
Over the years, massive inflows to high yield ETFs have changed the landscape. But there have been some huge outflows recently, seemingly uncorrelated to the direction of the market. We found this Bloomberg article very interesting about the way bond dealers, formerly those that carried big inventories of bonds but now thanks to new regulations do not, are using ETFs to buy baskets of bonds and break them into their individual components – then sell those components to clients. Why do the work of buying all those individual issues?
Oil has touched $50/bbl this morning yet the connection to the C$ appears rather suspect of late. The C$ peaked on May 2 at 80 cents and has fallen back down to 77 ¼ this morning. So the C$ peaked when oil was $44 and has gone in the opposite direction as oil continued its climb. No doubt there is still a strong connection between oil and the C$ but perhaps not as much as before. It does appear the ebb and flow of economic data relative to expectations appears to be the bigger driver. We often chart the Citigroup Economic surprise indices, which measure how economic data is being reported relative to consensus expectations. If data is coming in better than consensus, the number if positive and if below, negative. It is a 3-month moving average to smooth the trend somewhat. Anyhow, we charted the Canada surprise index minus the US. So when Canada is doing better relative to the US the blue line is rising and falling if American data is better. Adding the orange line for the C/US exchange, it would appear these move in tandem of late. We circled where extremes in the relative economic data has coincided with peaks/troughs in the exchange rate. So I guess it really comes down to which country will see their economic data improve or soften relative to expectations…..
The TSX crossed over the 14,000 mark for the first time since August of last year, crude is over $50, ask yourself are you bullish yet? Or are you still feeling skeptical about this rally? You’re not alone, the AAII Bullish sentiment reading ticked lower yet again to 17.75. This is lower than the middle of January when markets were over 10% lower. While the TSX has been riding the commodity rally, the S&P 500 is still stuck in a very long term consolidation pattern between 1850 and 2150. After crossing 1850 over two years ago it’s been oscillating back and forth, now near the higher end of that range.
DoubleLine manager Jeffrey Gundlach is more bearish than most, and doesn’t have a lot of faith the the recent rally. Market Watch noted that Gundlach would have to see a breakout over 2,200 for the market to “prove itself”. After that he’d be willing to buy in to the optimism and go with the flow.
More on the latest sentiment survey. “I don’t know” sentiment hitting new highs? Is confidence in forecasting going down, or is the world just more comfortable admitting that they actually don’t know? We aren’t sure, but hope it’s the latter. Josh Brown discusses how people saying I don’t know is hitting 26 year highs. P.S. It’s ok not to know!
So with one new King of Credit not buying into the optimism just yet, let’s check in with the former ruler. Bill Gross has noted recently that he wants to sell credit risk and insurance on market volatility rather than just buy long-term debt. Believing that the day or reckoning is near, he wants nothing to do with the markets in a traditional long only sense. It’s not easy for him however, as he notes, “It’s really hard to change your psychological makeup and to be a hedge manager that is comfortable with being short”. The full interview with Bloomberg is here. Again, what’s said in public doesn’t mean it matches exactly with what the fund is doing. Don’t just buy the hype.
Say adiós al niño, it’s official the strongest El Niño in 20 years has ended, so says the Australian Bureau of Meteorology. Also named the ‘Godzilla’ El Niño, we simply say RIP. Thanks for the warmer winter here, but we could have done without all the other climate anomalies around the globe. Also California is still waiting for the extra rain you were supposed to bring. The potential for a La Nina follow up still remains, and with her in the region we should expect a cooler winter for most of North America. This would be good for natural gas, but don’t’ forget about the enormous amount in inventories.
Sam Zell on CNBC
Equity Group Investment’s Sam Zell talks real estate, politics and regulations. See ValueWalk’s recap here.
Diversions: Have you gotten used to your car’s fancy backup camera, but really want to drive Eleanor or Christine (or insert your classic car here) ? FenSens is for you.
What happens when a scientist, sprinter and sumo wrestler are asked to run across a giant cockroach trap? Thankfully a chemical company in Japan had the means to test and answer this age old question. After watching it, I have one thing to say. Only in Japan.
COMPANY NEWS
There is a rumor this morning that Apple was taking a look at buying Time Warner Cable in a move to build a presence in media. TWX is up in pre-market trading on the rumor. However, the report also stated they could buy a streaming network like Netflix that would attract content providers. RBC has beaten street expectations with their Q1 earnings report on the back of strong P&C results and the integration of City National Bank. CIBC also reported an earnings beat and boost their dividend. They raised the dividend to $1.21 a share, the seventh consecutive hike. Wealth management was down 12% in the quarter after the bank sold the stake in American Century. TD Bank saw their earnings grow 10% this quarter as strong results from retail banking in both Canada and the U.S. boosted profits. U.S. retail was up 21%.
COMMODITIES
Oil prices have broken through the physiological barrier of $50 a barrel this morning as the dollar weakens against major pairs. A reduction in stockpiles and outages in Nigeria and here in Canada have given a boost to prices. There was also a drawdown in U.S. inventories this week, adding to the rally. Gold prices were up earlier and now flat on the day, the yellow metal has posted six straight days of losses on the back of dollar strength. The U.S. jobs report is out later today and should be the next catalyst for a price move because of its implication on the FED rate hike expectations.
FIXED INCOME AND ECONOMICS
The Bank of Canada came and went yesterday with a rather ho-hum policy update that left a slightly less dovish tone than previously expected. While keeping the overnight rate at 0.50%, the BoC acknowledged the Canadian economy will shrink in the second quarter because of Alberta’s devastating wildfires, lopping about 1.25% off of Q2 real GDP. Given that the April MPR had forecasted a 1.0% gain to output, one would suppose that translates into a -0.25% pace now, and mark a contractionary quarter. However, that will all be made up in Q3 with Poloz & Co. expecting a rebound of 2.50% between July and September. An official mention to the loonie finally occurred as well with officials unofficially noting that the CAD is “close to the level assumed in April” which we can translate as that they are ok/content/indifferent with the 1.3000 level where we currently trade against the United States. The loonie is a touch stronger again this morning on the back of WTI pushing through $50.00 so a continued strengthening could see the BoC talk down the currency at a later date. Lastly,a somewhat left field comment was noted about the white-hot domestic housing marketwith the statement acknowledging that the market “continues to display strong regional divergences, reinforced by the complex adjustment underway in the economy” and that “household vulnerabilities have moved higher”. Not sure if that means the government will take action to throw some water on the action but it is a subplot worth keeping tabs on in the near future.
Since the market hasn’t had enough FOMC-speak in their diet yet (we’ve heard from half of the voting/non-voting troupe in the past two weeks so why not keep the parade going?), St. Louis Fed President James Bullard spoke in Singapore this morning noting that “U.S. labor markets are at or beyond full employment”, are “relatively tight” and hence “may put upward pressure on inflation going forward”. Bullard is a voting member this year and a previously strong dove, so his comments certainly lead us to think that he may have turned. Does that mean a June hike is coming? Bond guru Bill Gross certainly thinks so in an interview with Bloomberg and the market has responded with a June 15 probability coming in at 35% at time of writing (highest we’ve seen yet).
A pair of notable high yield new issues were in the headlines overnight beginning with Vancouver-based mining giant Teck Resources set to raise $1 billion in a two tranche USD issue today. The senior notes are expected to be rated B+ by S&P which is three notches lower than the last time TCK came to market with a debt financing. The 2021 and 2024 maturities are indicated to price with a coupon guidance of 8.25% and 8.75% respectively with proceeds of the deal being used to fund a tender. Current TCK bonds have been trading at distressed levels for the past 6 months with existing 2021 paper closing at $85.75 yesterday after being as low as $45.80 in December. Yesterday, Waterloo-based software and services company Open Text Corporation came to market for the second time ever with a debt deal (yes, “OTC” seeking “OTC” funding) with a $600MM ten year USD raise. The senior unsecured notes priced with a 5.375% coupon (+401.0 bps over Treasury benchmarks) and were given a BB rating by S&P with a stable outlook and a recovery rating of “5”. The notes sold well and traded a couple points higher in secondary action.
