The Launch Pad: EU referendum campaigning on hold for a second day, seeing some positive market movements via @connectedwealth
Michael Mauboussin: Here’s what active managers can do
Hmmm, we are seeing some positive price movements this morning. Brexit campaigning appears to be on hold for a 2nd day after the murder of a lawmaker earlier this week. Truly a dark day for democracy. Based on Oddschecker, the probability of an exit from the EU rose to peak at 43% on June 14 but has dropped to 36% over the past couple days. For the record, this Oddschecker is an implied probability based on bookmaker odds (aka gamblers), so take it for what it’s worth. However, it does move step by step with how the pound moves, so with the odds falling the pound is on the rise.
European stocks are up about 1% this morning with Asia right behind. Financials and energy appear to be leading the way. Bond yields are slightly higher and commodities are rebounding after yesterday’s drop. Best new yet though, it’s Friday.
The S&P 500 volatility index has dipped below 20, still elevated, but taking a wait and see approach. After reaching new highs yesterday, it took an about turn and closed at the low of the day. After spiking up after the beginning of the week, it’s been comfortable around the 20 mark, with the average true range receding from its highs. Nice to see the VIX below 20, especially after reading this blog over at stockcharts.com, VIX Over 20 Can Be A Huge Problem. While we don’t agree that a VIX over 20 signals a bear market, we will say that it warrants caution. Now if we were to see a massive spike, this is usually the capitulation bottom, and a signal to take a contrarian stance into falling market.
Despite the recent pullback in the markets, valuations still remain quite high, though there are emerging pockets of value. The TSX has a P/E of 21.32x and the SPX has a P/E of 19.22x.
Sweden Tests Blockchain
Sweden is trying to determine if its land registry system would benefit from the use of blockchain, which is the infrastructure that supports bitcoin. It works by “creating a permanent, public ledger of all transactions that could potentially replace complicated systems such as clearing and settlement with one simple database.” In the real estate space, blockchain would help to improve efficiency. At present, it takes months to close a real estate deal in Sweden. With the use of blockchain, all of the parties involved would be able to track the transactions, thereby improving visibility and security. More from Reuters here.
Diversion: Father’s Day Fails. Via FailArmy
Siemens has agreed to purchase nearly 60% of Gamesa a wind power generator. The deal is ¾ stock and the rest cash. They expect synergies of roughly $300mm from the deal. It is rumored the Thompson Reuters is purchasing Redi Global Tech. The company was formerly owned by Goldman Sachs who sold it to a consortium in 2013. Bloomberg software has a product called EMSX that competes with Redi. Dow Chemical is in a chemical deal with Saudi Aribia’s Aramco which will be valued at $19.3bb once the Sadara project is fully operational. The project with provide Europe, Asia and the Far East with a plethora of chemicals and plastics.
Oil is up for the first time this week, pairing six straight days of loses. Oil prices have fallen to the lowest level in two months. The dollar index fell this morning and stocks overseas rallied overnight giving a boost to prices. The production outlook for Canada, Nigeria and Libya are all improving, increasing the prospect of more supply flooding the market. Gold is on pace for a third straight week of gains as the U.K. referendum vote has brought a high degree of uncertainty into the market. Gold made a new two year high yesterday before UK lawmakers announced a suspension of Brexit campaigns which gave some reprieve to the market.
FIXED INCOME AND ECONOMICS
Not to be outdone by our neighbours to the south who are seeing prices rise faster than expected, Ottawa unveiled their own CPI data this morning that showed the cost of living slowed last month in Canada. Headline annualized inflation clocked in at +1.5% during May to miss the consensus forecast for a +1.6% pace and dropped from the +1.7% clip in April. Food costs, which make up a significant weight of the index, were the main drag by falling -0.3% and offsetting the higher prices for gasoline (+4.1%), transportation (+1.3%), alcohol/tobacco (+0.2%), and household items (+0.4%). Stripping out food and energy, core CPI is still above the BoC target at +2.1% annually though slightly slower from the prior month (+2.2%). Regionally, the overall cost of goods and services rose in every province led by B.C. (+0.7%), Manitoba (+0.6%), Newfoundland (+0.5%) and Ontario (+0.4%). We remind readers that the headline pace of CPI in Canada has not exceeded the BoC’s +2.0% target since the autumn of 2014, so don’t expect any hawkish rhetoric (that that there has been) from officials any time soon. Little reaction is being seen in Canada benchmark bonds or the loonie post-release.
We’ve got some calm in the markets (ahead of the storm?) with North American futures pointing to a flat open and benchmark Treasury and Canada debt modestly lower. We note that markets seem to have gotten more level-headed in the wake of yesterday’s tragic incident in northern England with early volatility being wiped out by the afternoon session. Brexit campaigning has been suspended for a second day so we hope to see some calm ahead of the weekend. The data docket is mostly quiet save for U.S. housing starts falling by -0.3% during the month of May. That was better than the -1.9% expectation but partially detracted from the +4.9% gain prior. Permit issuance for new construction was also soft, rising by just +0.7% over the same time (+1.3% expected, +4.9% prior) as the cost of building materials rises. Note that demand remains fervent for U.S. real estate and with mortgage rates still at veritable lows, permits and starts should pick up over the summer.
With bond yields grinding lower, why not seek more debt funding? The Province of Ontario launched a new long unsecured note yesterday, raising $600MM in bullet bonds that will mature on June 2, 2048. The RBC-led deal price at a fairly tight +108.0 bps spread over benchmarks for a clean 2.80% coupon. Demand for the issue was strong with the deal selling out in seconds.
CHART OF THE DAY
“You can tell what was the best year of your father’s life, because they seem to freeze that clothing style and ride it out.”
– Jerry Seinfeld
“When you’re young, you think your dad is Superman. Then you grow up, and you realize he’s just a regular guy who wears a cape.”
– Dave Attell
“I gave my father $100 and said, “Buy yourself something that will make your life easier.” So he went out and bought a present for my mother.”
– Rita Rudner
“Fatherhood is great because you can ruin someone from scratch.”
– Jon Stewart