Bank Of Canada Rate Decision, Markets Continue To Make New Highs, Higher Open
Bank Of Canada Rate Decision – Today
Futures are mixed this morning following modest gains in markets overseas and bonds that have halted the selling for the morning.
Warren Buffett’s Annual Letter: Mistakes, Buybacks and Apple
Warren Buffett published his annual letter to shareholders over the weekend. The annual update, which has become one of the largest events in the calendar for value investors, provided Buffett's views on one of the most turbulent and extraordinary years for the financial markets in recent memory. Q4 2020 hedge fund letters, conferences and more Read More
With it being a Bank of Canada rate decision day, we will be watching the loonie closely. While it had a strong day yesterday, this morning trading is quiet. We are still a ways off the lows from January, we would highlight that the yield spread between US and Canadian 2 year bonds is back on the rise – one of our key indicators for the exchange rate.
As the market hits new highs, Bespoke points out that the breadth is good across multiple sectors. Meaning investors have bought everything on this recent dip. Looking at the credit indicators, we would point out that High Yield and Investment Grade bonds have had a fantastic week as well, with the HY index improving by almost 100 basis point since the Brexit vote.
Markets making new highs (U.S. markets that is), earnings season ticking along, have the markets ever seemed to happy? Today, we look at the Citigroup economic surprise index for the US and it is at its highest level since January 2015, that is a year and a half ago. And there is more good news, the GDP Now forecast from the Atlanta Fed has not imploded as it typically does in the weeks heading up to an official GDP print. GDP NOW is an econometric model that uses more timely data in an attempt to capture what is happening in the economy, NOW. Get it? The chart of the day is the GDP Now forecast over the past year, noting how it has fallen dramatically ahead of GDP prints (red triangles). At the moment it is holding steady at 2.3% growth for Q2, which get reported July 29. 2.3% growth isn’t huge, but it isn’t bad.
So, not really that surprising when a company that profits from real estate sales forecasts surging real estate sales, but Bloomberg highlight’s Royal LePage’s view that Brexit will cause a surge in Canada housing prices as Brits leave the UK and immigrate to Canada. They see a 27% (no typo) rise in Vancouver pricing next year!!
Japanese shares continue to climb as stimulus expectations rise. The three day streak is the largest since last August. Given how poorly they had been performing, short covering is also part of the reason for the stock appreciation. One relationship however continues to hold true, as equities rise, the Yen continued to weaken. Or is it vice/versa? A big problem for Japanese funds is there is really nowhere to run for safety as yields on even hedged U.S. bonds fall below zero.
As mentioned yesterday, Abe met with Ben Bernanke yesterday. The discussions were private, however the term “helicopter money” is what being talked about most. Japan is proving to be a most excellent testing ground.
German has become the first Eurozone country to auction 10-year debt at a negative rate. The fact that there is still demand for this debt at yields below zero reflects the lack of supply in safe haven fixed income. Lackluster global growth & inflation and QE programs have pushed down yields across the globe. Rising political risk is also weighing on yields. With the Brexit now done and the US elections around the corner, investors are buying fixed income in an attempt to protect their capital. More from the WSJ here.
Interesting read on why golf has gone the way of the three-martini lunch.
Diversion: The BBC has a pretty cool jungle animal Olympics trailer.
After leaving the bridge and the helipad, have a visit to the garden. Hareide Design’s 108M Mega Yacht.
Teva Pharmaceutical gained yesterday are expectations are that the deal with Allergan is close to closing. It is also expected that their revenue could be as high as $5bb over the next year. Lightstream Resources is proposing to bond holders a debt for equity swap which would give the largest bondholders majority ownership of the company. Canadian Tire has fired their current CEO Medline to replace him with former CEO Wetmore, who previously led the company for five years. AGT Food and Ingredients is expecting record exports this year as planted crops reach a record level. They expect the rising demand to come from India, Africa and Turkey.
Oil prices are giving back a bit of yesterday’s gains after data showed that stockpiles increased last week by 2.2mm barrels according to API. Output reductions from the U.S. were offset by increases in the Middle East, which reached record highs. Gold prices are up this morning after a two day pullback as talks of helicopter money in Japan have surfaced after Abe was re-elected. Copper prices in London have bounced back to the highest level since April on increased expectations for global growth increasing demand for metals.
Fixed Income And Economics
The Bank of Canada is out at 10AM EST this morning with a policy update where all 26 economists polled are expecting no change whatsoever to the overnight rate of 0.50%. While there is no chance of a hike being priced by OIS spreads, there is a 9% chance that Governor Poloz decides to cut by 25 bps (though we consider even this to be on the high side). We’re expecting a dovish slant in the accompanying statement with global uncertainties (Brexit) and sky high domestic indebtedness (debt-to-disposable income at 165.3% in Q1) offsetting eachother. A stable loonie that averaged 1.2972 against the greenback since March is also likely to contribute to the “no move” camp from the BoC. Note that headline inflation is currently running at +1.50% annually as well to further keep a lid on hawkish undertones. We’ll get an MPR update as well which will be the first since before the Alberta wildfires.
Another day and another FOMC voting member has come out with hawkish language pertaining to the July 27 Fed meeting. Loretta Mester, president of the Federal Reserve Bank of Cleveland, said yesterday that she remains upbeat over the US jobs market and adding that a gradual “upward tilt” in interest rates remains appropriate. “I’m positive about the U.S. labour market” Mester said, speaking at a conference on financial sector stability in Sydney. “Significant progress” had been made on achieving the Fed’s employment mandate and that it was important that the Fed not “overstay its welcome” at zero rates. She further added that the timing of interest rate increases would be determined by the evolution of the economy and the risks surrounding the medium term outlook. This language followed on the heels of Kansas City’s Esther George on Monday whom would be inclined to tighten rates at the current time.
Fortified Trust, a special purposed entity formed by BMO for the purpose of issuing debt securities and repaying credit facilities, came to market for the first time ever yesterday with a $750MM 5 year bullet note. The AAA rated bonds priced with a 1.67% coupon for a +107.10 bps spread over benchmarks. For BMO the issuer represents an alternative source of low-cost financing. BMO was the sole lead on the deal.
Chart Of The Day
Quote Of The Day
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