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Wednesday, October 18th, 2017
Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S.Obata, J.Groff


Markets Overview

Having muddle through yesterday, the TSX is poised to move higher alongside US equities this morning, with oil holding on to its recent gains. The rest of the commodities complex is having a tough morning, however. Perhaps this is in response to Chinese president’s Xi address from last night. In it, he promised that China will be at the centre of the global stage by 2050 and emphasized the importance of the environment and quality of life.

People are betting on the loonie. Net futures positioning on the loonie is the most bullish it has been since 2012, when it hit a long term high and started its 2013-2016 decline. This, incidentally, is true whether you are measuring the C$ against just the US$, which started its big rally in 2012, or against a basket of our trading partners' currencies. Aussie dollars didn’t like the markets overnight and are sliding slightly after a recent tick higher.

Fed Hikes

It's looking more and more like the Fed will hike again by year end. That being said, the pace of this hiking cycle has been much slower than in precious tightening cycles. Curiously, stocks are also behaving differently compared to cycles past. Stocks have gotten more expensive since the first rate hike in 2015. In our chat of the day, you could see that the forward P/E for the S&P 500 is 11% higher than it was before the Fed first hiked. In previous tightening cycles, valuations were typically lower two years after lift off.


Blockchain for securities settlements in Canada? You don’t say!  Payments Canada has announced their exploration and research into such a project in conjunction with the TMX Group and the Bank of Canada. Could this be the beginning of the long talked about T+0 settlement cycle? We just went to T+2!

Death of Vol
It feels as though volatility has been outlawed.”  Ben Carlson posts a piece that has our contrarian radar pinging like mad! The conclusion, however, is that perception of risk is constantly changing. Manage your behaviour as an investor and your reaction to it, and you are most of the way there in this game.

Ummm. Volvo?  Really?


Canadian Pacific Railway reported higher than expected quarterly profits as a result of its higher shipments. CP has raised its full-year profit forecast and expects that 2017 adjusted earnings will post double digit growth numbers. IBM beat quarterly revenue estimates, gaining traction from its cloud and security services, which climbed by 11%. Although total revenue fell from $19.23 to $19.15 billion, IBM seems to be benefiting from their new business areas, as this was the smallest quarterly decline since the third quarter of 2016. CSX Corp reported a slight rise in quarterly profit, after increasing its shipments of coal and consumer goods and posting higher freight rates. The company’s coal and consumer goods shipments both rose 5%, offsetting declines in almost every other commodity the railroad hauls. Corus Entertainment beat profit expectations, benefiting from its 2% reduction in costs. The Canadian media company has stated that it will sell its French-language specialty channels to its rival BCE Inc. for $200 million as it continues to look for ways to further increase profits.


Oil is up 0.42% to $52.10. The great rebalance is still on track after API data showed that crude inventories fell by 7.1 million barrels last week. Look out for official data from the DOE at 10:30 AM this morning. Geopolitical risk has been supporting prices; however, it seems as though the conflict in Kurdistan is cooling down. If tensions start to rise again then we could see a sustained disruption in prices.

Gold is down -0.42% to $1,280.80. The yellow metal has not been forgotten. In a new report, Goldman Sachs says that gold is (still) better than bitcoin. In the short to medium run, prices are driven by fear. In the long run, they are driven by wealth. Bitcoin has outperformed gold – and virtually everything else – by a wide margin this year. Even so, the latter still has some enduring qualities that will support prices going forward.

In other commodities news…

Canada's oil sands survive, but can't thrive in a $50 oil world” – RTS

The World's Largest Oil Hedge Is Complete” – BBG

In charts: has the US shale drilling revolution peaked?” – $FT


Curve flattening continues to be the dominant theme in the bond world, with yield differentials across any benchmark pair nearing or setting new cycle lows. The 2-30 Treasury spread touched a fresh decade low of +125.6 bps yesterday and marked an impressive 14 bps move in just the past two weeks. Both sides of the spectrum are contributing to the narrowing trade --- 2’s busted through the 1.50% psychological resistance earlier this month (up to 1.56% right now) on the heels of an 83% likelihood of Fed rate hike in December while the long end has lopped off -7.5 bps over the same period due to mixed inflationary data prints (CPI soft, PPI and import prices not). The momentum is carrying over to other Treasury spreads as well with the 5-10 (+34.05 bps) and 10-30 (+49.98 bps) differentials all hitting post-GFC lows on momentum in the belly of the curve. The flattening being seen in bond benchmarks north of the 49th parallel is even more acute with the 2-30 Canada spread down to a scant +83.8 bps. That’s +1.5 bps away from the nine year low touched in September and nearing a 50% haircut from the level of curve steepness seen just six months ago. Fixed income compensation for extending tenor is becoming less and less with each passing day, potentially nearing a negative basis. Yields between 10 and 30 year Canada’s are down to just +34.29 bps at time of writing. Another BoC hike on December 6 (at a 45.5% likelihood currently) and modest shocks to anything fundamentally related to consumer prices (oil, housing, wages) could wipe out this spread entirely by the time the calendar turns on 2017.



If you cannot do great things, do small things in a great way

- Napolean Hill

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Charts are sourced to Bloomberg unless otherwise noted.

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