The Launch Pad: Another step higher for oil And LULU, another one lower for global yields by @ConnectedWealth
Wednesday, June 8th, 2016
Futures are pointing to a stronger open this morning following softer results in Asia and Europe. The S&P 500 is a stone’s throw away from its May 2015 all-time high of 2134 so participants are watching closely. Given that Apple, the index’s biggest weighting, is off more than 25% from that time, the recovery in the index is even more interesting. Not to say that the broad market doing better, equal weighted S&P 500 is still about 2% its highs.
The conundrum, of course, is a 1.70% 10 year US Treasury. A remarkably low yield given the strength in equities. Global yields are likely to blame given that 1.70%, among “risk-free” sovereigns, is one of the high yielders. This is probably the main reason why in the latest auction Treasure demand was the highest it’s been in 50 years.
With the ECB still buying up bonds like nobody’s business. Despite corporate bonds by the likes of Anheuser-Bush InBev and Siemens AG, government bonds are still in such short supply that German 10 years came within a razors edge of negative territory, falling to a record low of 0.033% this morning. The Treasury/Bund spread is currently at 165bps, roughly in line with the average for the year.
Chart of the Day: Third times a charm? The S&P 500 traded above 2,100 for the first time early in 2015, it then traded in a tight range for months before dropping last summer on concerns over China. In last 2015 the market recovered again to the 2,100-2,150 range before dropping precipitously in January of this year. Most blame the Fed, soft economic data, China and oil for that drop. So now the S&P is back having shaken off the bad news and recovered to the 2,100-2,150 range. So is the third time a charm? Very likely. One of the encouraging signs this time is the small caps. The chart of the day shows the S&P 500 (blue line) and the Russell 2000 or R2K (beige line). As you can see the S&P 500 is running into the red line for a 3rd time over the past couple years. The difference this time is the orange line, which measures the relative performance of the S&P 500 (large cap) vs the Russell 2000 (small cap). A rising orange line is large cap leading with small cap lagging in performance. That would be a market with less breadth or support from the small cap if you prefer. Now look at today and small cap is rising faster than large cap, that is an encouraging sign. Of course China, the Fed or a Brexit could derail this but for now we will say this is very positive.
New video from the Connected Wealth Team: Monthly Market Insights – A Hot June (HERE)
Another indicator always on our radar is credit levels. Investment Grade credit has rallied back to yielding just 73 basis points above 5 year yields according to the MarkIt IG index. Back in May 2015 at equity highs, this spread was 63 basis points. For High Yield, those excess yield spreads have not recovered to the same extent. They are currently 415 basis points above the 1.24% 5 year Treasury, while last May it was much lower at 3.38%
To put this in context, yesterday, Toyota Finance Corp yesterday sold ¥20bn worth of 3 year bonds with a coupon rate of 0.001%
After decoupling in May, oil and base metals are now both on the same page. Marching high
After our link to the event ticketing disappointment on Monday, Tyler Cowen at Marginal Revolution provides an economic view on the tickets to the hottest Broadway show at the moment – Hamilton.
What Went Wrong? – Rosenberg’s presentation at the Mauldin Economics conference.
In a world in which even Mark Zuckerberg’s social media accounts are at risk, it is best to keep your internet security tight. Despite that reality, the 10 most popular passwords on LinkedIn are nothing short of pathetic…
Diversion: The best drone footage of the year so far. Via Gizmodo
LULU – COMPANY NEWS
Lululemon Athletica (LULU) reported profits that came in below analyst expectations as the athleisure segment seems to be losing momentum. The company continues to focus on efficiency and innovation as the catalysts for future growth. Suncor is issuing a bought deal at $35 a share, a 4% discount from yesterday’s closing price. The proceeds will be used to fund the Syncrude joint venture and reduce the debt load. They could also use the funds to make strategic acquisitions. It is said that Telus was looking at Manitoba Telecom before BCE made a bid for the company. That transaction has heightened expectations that Sask Tel will be the next target of the big three wireless providers in Canada.
Gold prices are up again this morning rising $13 in premarket trading. The dollar continues to pull back as expectations for a June rate hike have fallen to zero; this has given the boost to gold prices. Oil prices are on the brink of breaking through $51 a barrel for WTI pricing this morning, the highest level since last summer. U.S. supplies continue to be reined in and supply continues to come offline, reducing the massive supply glut. Repair work in Nigeria has begun to fix a major Royal Dutch Shell pipeline that was blown up by rebels.
FIXED INCOME AND ECONOMICS
As U.S. equities reach spitting distance of new record highs, it’s worth noting that corresponding high yield markets are nowhere near to reaching a similar summit just yet. The iShares iBoxx High Yield Bond ETF (HYG) is still 6% away from their 52 week high, closing yesterday at $84.25 and trading lower in the pre-market. If you want to talk about records, the same index is more than 13% shy of their all-time high set in mid-2014. At the same token, the 5 year Markit CDX HY Spread Index is trading at +416.1 basis points over similar term Treasury benchmarks at time of writing. That’s three bps tighter from yesterday’s close and almost 190 bps narrower from the calamitous intraday high reached in February. Not bad at all. However, it is worth pointing out that the same index is barely improved from the riskiness touched during last August’s flash crash and is well wider of the +350.0 bps range that it averaged inn 2015 prior to the sell-off. You want to talk records? Like HYG, that also occurred in mid-2014 when it touched a spread of just +291.0 bps over Treasuries. Still lots of room for improvement here for the asset class and validating those who believe the recent equity strength is not being confirm by the junk bond market.
Canadian housing starts numbers for May showed that builders slowed slightly in the construction of new homes, currently at an annualized pace of 188.6K starts from 191.4K prior. This is the average from the past three years despite falling under the consensus for 189.0K builds. It’s not an earth shattering miss whatsoever (especially when you consider the frenzied pace of the real estate market these days) but perhaps underscores the issue of insufficient supply to meet buyer’s demand. Combing through the details, single-detached starts were up +4.2% while multi-family dwelling units were down -5.7%. Rural area construction rose +8.8% from April and urbanized builds declined by -2.5%. The Alberta wildfires had an impact on the regional numbers, with starts in the Prairies slower by -6.7K. British Columbia was down 22% month-over-month, but was offset by increases in Quebec (+22%) and Ontario (+4%). There is reaction (as expected) to Canadian bond benchmarks or the loonie post-release.
Speaking of the loonie, as fast as the sell-off from 52 week highs came about at the beginning of May, the rally seen in the past few sessions has been breathtaking to say the least. The USD/CAD cross touched 1.2655 earlier this morning for a five penny gain in just five trading sessions (weekends not included). The 4% appreciation for the CAD is being driven by a combination of surging WTI (+6.25% over the same period) and USD weakness as the DXY is down -2.60% during this time (we remind readers that the Canadian dollar only accounts for 9.1% of the index’s weight). Technicians are throwing the textbooks out the window as all support, moving average and Fibonacci retracements are being surpasses in such a short period of time. The next resistance for the loonie comes at the 1.2500 (80 cent CAD/USD) level and surpassing this, the 1.2461 intraday low on May 3. Watch for the DOE release later this morning as if the result is similar to last night’s IEA, we could see further strengthening of the loonie into the session.
CHART OF THE DAY
QUOTE OF THE DAY
We tend to forget that happiness doesn’t come as a result of getting something we don’t have, but rather of recognizing and appreciating what we do have.
– Frederick Koenig