Oil vs The US Trade Weighted Dollar
Oil vs The US Trade Weighted Dollar – Today
Markets are generally softer this morning after the mixed result from yesterday. In the overnight sessions Asian shares were a little soft, while Materials in Australia offset energy to pull the index slightly higher on the day. This morning in Europe, the opposite is true as energy rebounds slightly with oil prices stabilizing. Meanwhile bonds are reversing their gains from yesterday and yields are moving higher.
Loonies are slightly stronger this morning after reversing course midday yesterday and turning much stronger after the FOMC release. In fact, everything against the dollar rose after the dollar index declined on the Fed’s softer outlook. The odds of a US rate hike within one year from today stand at about 60% – so far from a done deal.
Given the stronger base metals relative to energy for the past few days, Aussie dollars have been on the rise relative to ours as well.
Tomorrow we get to see the Q2 U.S. GDP print. Well the advance print that is as it will be revised a few times in the coming months. Since the economy began this slower than normal expansion we have seen an average GDP growth of 2.1%. Sure there were some lows of -1.5% in Q1 2011 and some highs like 4.6% in Q4 2011. More recently the last two quarters were 1.4% and 1.1%, not very exciting. This one is lining up to be better. The economists consensus is for 2.6% growth, which includes a high estimate of 3.3% and a low of 1.0%. The optimistic are the Swiss (UBS) and it seems the Germans are most negative (Deutsche Bank). The Atlanta Fed’s GDP now has held in the quarter, sitting at 2.3%. This market would likely welcome anything above 2%.
Oil vs. USD
Yesterday oil traded down on a bigger than expected build in US inventories. The 3rd week of higher US oil production probably didn’t sit well either. But it might be more accurate to look at the US dollar as a strong driver of oil prices over the past couple years. The chart of the day is oil vs the US trade weighted dollar. Not a perfect fit but certainly a strong relationship.
Canadian Real Estate
The Canada Mortgage and Housing Corporation is out with its national housing market assessment. We have not dug through the details yet, but we have heard some industry insiders like Martin Reid of Home Capital Group, suggest that activity is already slowing in Toronto and Vancouver. Given the extent of the rises, that was inevitable. Throw on a foreigners’ tax out of BC, which we cover in the following paragraph, and a banking industry stress test focused on housing, and there could be lots of ripples and waves in pricing.
BC’s government has introduced a new tax on foreign buyers in an attempt to cool one of the hottest real estate markets in the world. The provincial government will charge foreign home buyers in the Greater Vancouver Area, “who are neither Canadian citizens nor permanent residents,” a one-time 15% fee beginning on August 2nd. The move is meant to curb speculation in a market where prices rose more than 30% this year. It is unclear whether or not the tax will help to tighten the market. Even so, it is a step in the right direction. If more buyers come into the market then the supply response may not be adequate. This would exacerbate the issue. More from The Globe and Mail here.
The market’s love affair with exchange-traded notes continues…and we have no idea why. “Since the start of July, the biggest ETN tracking the CBOE VIX has absorbed $746 million of inflows, on pace for the most since 2012,” according to Bloomberg. There are various problems with these instruments. The first is the negative roll. In order to take advantage of spikes in volatility, ETNs such as the VXX buy front end futures, which tend to rise faster than longer dated ones. The problem with this strategy is that the VIX futures curve is normally in contango. In other words, it rises with the term structure. As such, volatility ETNs have to pay up – sometimes daily! – whenever they buy into the next month’s contract. This drag cannot be overstated. It is the reason that VXX has to declare reverse splits every so often. In a way, the instrument is destined to go to zero.
Another issue is that volatility is not a perfect hedge. If equities go down then volatility goes up. That said, the negative correlation is not perfect. Investors who want to protect themselves against drawdowns are usually better off buying puts or selling futures. Moreover, volatility is typically overpriced. This reduces the effectiveness of buying volatility as a hedge. Can you make money buying VXX? Absolutely. Even so, it is important to realize that it is more of a trading tool than an investment. Most of the time, the roll will get you in the long run.
Bloomberg Endorses Clinton
The independent’s case for Hilary Clinton. Via Bloomberg View
Bodycam Shows Driver Playing Pokémon Go Crashing Into Police Cruiser. Via the Baltimore Police
Lots going on as it is earnings season. We have Facebook up this morning on strong ad spending. Credit Suisse actually managed to make money this quarter, which surprised most. Ford missed earnings this morning driving share nearly 8% in premarket trading. The street was expecting $2.16b and they came in with profits of $1.97bb. Increasing incentives and slowing sales weighed on profits. They didn’t cut guidance but did indicate it was at risk. On the deal front we have Oracle buying NetSuite for just under $10 billion. This will help Oracle increase cloud and gain a foothold in the CRM space. In Canada, Potash cut its dividend after an ok quarter but lower full year forecast. Suncor lost money due to the wildfires. Transcanada profits fell mainly due to maintenance at its power operations. Wells Fargo is facing an investigation as to whether they improperly repossessed cars owned by military members. Barrick is divesting assets by selling their stake in Kalgoorlile Super in as commodity prices have surged higher.
With the US dollar a little lower we have most commodities up a bit. Oil is roughly flat after yesterday’s plunge. Seems inventories keep rising, reaching the highest seasonal level in over 20 years, and we are getting close to the end of driving season. Gold was up nicely yesterday as the US buck fell after the Fed indicated it would be going pretty slow. A less talked about commodity (well suppose who you talk to) that has been on the rise is lumber. Up 50% since troughing last September. Good US housing data is helping, Canada/US trade issue probably helps the price too. Iron ore prices are bouncing back after a retreat from the April rally. Futures are poised to make their fourth weekly gain out of the past five weeks. Expanding credit in China is giving a boost to production and demand from the world’s largest purchaser.
Fixed Income And Economics
The FOMC left policy unchanged yesterday and revealed very little in the accompanying statement. We would highlight the comment that “Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months.”, and that “Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.” In other words, although the employment side of the equations has rebounded after the blip of a weak number in May, inflation expectations are low and stable. However, the other key part of the statement was “Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments.” This suggests there remains a chance of raising rates before year end, and FOMC member Esther George did dissent by voting to raise rates now. However, markets have disagreed, rallying yesterday and hence further reducing expectations of a move – the probability of a hike in December is just 48%.
Focus now turns to the Bank of Japan meeting. More stimulus is expected, but the action they take is uncertain, and could have a material impact on markets. The outlook is mixed over more government bond purchases (which would have a limited effect on yields, but would help weaken the yen and result in higher US yields), and buying other financial assets (which could put additional strains on a market already dealing with liquidity challenges. The latter could see a further rally in both Japanese and global bond markets.
Chart Of The Day
Quote Of The Day
Don’t find fault, find a remedy — Henry Ford