The Launch Pad – “Remain” Edges Ahead, Risk Rallies via @connectedwealth
Tuesday June 21st, 2016
Charlie Munger: Invert And Use “Disconfirming Evidence”
Although stocks here could not keep up with those in Europe, the gains from yesterday appear ready to resume this morning. Futures are pointing higher following more gains in Europe and overseas. It is said that if you miss the 5 best trading days of the year, it will be most of the year’s gains. For the UK yesterday, it turned in the 4th best performance in the trailing year at 3.04% for the FTSE 100, bringing that index to within a breath of breakeven for the year-to-date return. Its worst day, of course, came just 3 days ago. As we stand, Italy and Japan have the worst performing major indices year-to-date, at -18% and -15% respectively, while the TSX index continues to hold on to the title of best gainer in the developed world.
Have bonds broken? The benchmark Canada 10 year sold off yesterday, posting its 5th worst day of the year by adding 8 basis points to yield 1.21%. It did not quite reach February’s low yield of 1% before snapping back. More importantly for most Canadians, the 5 year also rose 8 basis points, bringing it back to 0.67%. The preferred share market, largely driven by the level of the 5 year, had a tough week last week on the strength of this note. Meanwhile, are 5 year fixed-rate mortgages dropping?
The loonie is holding on to recent strength. Recall we also look at the US and Canadian 2 year yields for some direction on the currency, and at the moment they are diverging with Canada yields higher while 2 year Treasury bonds rally.
All the talk continues to be on the UK and the Brexit referendum. Traders are watching the betting markets such as Betfair, where over £40 million has been wagered. That number pales in comparison to how those bets (and other opinion polls) have swayed the markets and prompted analysis. Barclays, for example, views the UK markets as mostly pricing in a “Leave” vote. Therefore, it sees them as good value, despite expecting an 8% decline in UK corporate earnings should they leave the union.
“Feature Saturation” is what BCA Research is calling the cause for slowdown in smartphone sales. While we still see a few holdouts finally releasing their Blackberries for new shiny devices (hi Gareth), the anecdotal evidence suggests that the slowdown cycle for smartphones has begun. BCA: “Gartner and IDC have both downgraded their expectations for 2016 smartphone sales growth. Our view is that the decline in sales is caused primarily by feature saturation, which leads to extended replacement cycles.”
Boeing and Iran’s state airline have signed a deal that could have a value of up to $25 billion. If the agreement goes through then Boeing will provide Iran Air with various commercial passenger planes. This would be one of the biggest deals since Iran’s sanctions were lifted. That said, some people are critical of the deal, which is contingent upon US government approval. Full story from the WSJ.
A consortium led by Chinese internet giant Tencent has agreed to acquire up to 84% of mobile game developer Supercell. The transaction values the Helsinki-based company at $10.2 billion USD. Supercell is best known for games such as “Clash of Clans.” This deal should benefit both parties. Firstly, it will greatly improve Tencent’s game catalogue. Secondly, it will give Supercell invaluable access to Chinese consumers via Tencent’s channels. More from ValueWalk.
Oil is under pressure after reports that the Nigerian government has agreed to a one-month ceasefire with the Niger Delta Avengers. The rest of the energy complex is also trading lower.
Gold is down to ~$1275 after trading above $1300 at the end of last year. Polls that show the “Remain” camp is gaining momentum in the UK referendum polls have boosted risk assets. This has coincided with a sell-off in precious metals.
Other commodities are mostly lower with weakness in softs, meats and grains.
FIXED INCOME AND ECONOMICS
A pretty ominous report out of Moody’s Investors Services yesterday warns of the “systemic vulnerabilities” in the Canadian mortgage market that could see as much as $17 billion wiped out from lender’s balance sheet. The agency cautioned that our domestic real estate sector could see home prices fall by as much as 35% should a similar meltdown experienced by the U.S. during the late 2000’s hit north of the border, with the potential for downward pressure on prices emanating from a sub-group of lightly regulated mortgage lenders that have slipped through the regulatory cracks (and do not face the tighter underwriting standards imposed on deposit-taking banks and some credit unions). While the seven largest lenders in Canada could lose nearly $12 billion in an all-encompassing downturn (with insurers including CMHC getting hit with as much as $6 billion), Moody’s concludes the big banks would be able to absorb a downturn without “catastrophic” losses that would shake their stability. The report further noted that CIBC (Canada’s 5th largest bank) would take the biggest relative hit to its capital cushion given the bank’s larger proportion of domestic mortgage operations compared to peers, while B.C. is the province most at risk where 9 out of 10 homes in Vancouver exceed $1MM. This story comes in the wake of recent headlines over the past few weeks from PM Trudeau, Finance Minister Morneau, BoC Governor Poloz, and independent analysis from several banks/research houses that affirmed the growing unsustainability of the current property market.
Bonds and equities are both moving higher in the early session with most the activity spurred on by FOMC Chair Janet Yellen’s 10AM testimony today before the House of Representatives. It’s part one of her two day annual talk in front of Congress and markets will be looking for hints as to why her Committee kept monetary policy unchanged last week and whether it might change at the next meeting in July. Might be a pretty lengthy monologue from Yellen given that we already know most of her rationale for staying “lower for longer” but that doesn’t mean reaction will be the same. Ten year yields are falling to 1.67% ahead of the five year auction this afternoon where it is hoped that demand will be better than yesterday’s two year sale. The $26 billion in short notes drew a bid-to cover of just 2.72 times (the third weakest since the global financial crisis) and direct buyers accounting for just 9.9% of the total sale (fewest in a year). There is no economic data to hang our hat on either so expect market direction to be mostly driven by position squaring ahead of Thursday’s Brexit vote.
CHART OF THE DAY
QUOTE OF THE DAY
The lack of money is the root of all evil
– Mark Twain