Thursday, July 19, 2018
Contributors:
J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S.Obata

TODAY

The dog days of summer are upon us and market action is showing it.  A quick look at the VIX index shows volatility back down to a 12 handle.  This is nowhere near the record low vol we witnessed last year, when the Q4 average level was 10.3 and often in the single digits.

Equities are a bit soft this morning, but certainly not enough to assign a random narrative as to why.  More interesting is the continuing rally in the US dollar, up another half penny this morning and pushing loonies lower.  Another half penny and we will be back to the 0.75 mark we tested last month.
 
This longer read from Quartz is appropriate for a summer session, as they ask when will ESG investing just become investing?  ESG (Environmental, Social, Governance) investing, and its cousin Impact investing are growing trends in the market.  Products have been developed to meet the investment policy statements of such.  The article digs into some of the trends and issues facing it, such as the short term bias of markets – when long term solutions are required.

The commerce department is set to hold a hearing on auto tariffs today. Back in May the White House asked the department to investigate the potential to use the ‘national security’ loop-hole to impose levies of up to 25% on imported vehicles and car parts. After the hearing, the department will decide whether to impose the tariffs. Expect auto-industry representatives to fiercely argue the imposition of such tariffs. It’s not exactly like the industry is dying, since 2009 U.S. auto makers and suppliers have added over 300,000 jobs.
 
 

Amazon Prime Day raked in over $4 billion in revenue, exceeding analysts estimates. It also represented a 33% increase from last year. Pretty impressive. Following the success of purely commercial ‘holiday’ Amazon is making another run at the title of the world’s largest publicly traded company. With a current market cap of $894 billion, they are only $42 billion shy away from Apple’s top spot. It’s also looking like it could be a photo finish to see who will be the first to top the trillion-dollar mark. With earnings just around the corner for both companies, this could be a big catalyst for either.
 
In our chart of the day we highlight the recent backwardation for WTI. The spread between 1st and 3rd month futures widened to levels not seen in nearly 30 years last week. (ignoring a brief blip in 2008). Most of the blame is on the outages in Venezuela and at the Syncrude facility. For futures traders, this has been a rare event, but yesterday the WTI front months spread has come in back to $1.70, it's lowest level since June indicating some relief from the extreme tightness. Spreads have been softening this week, in anticipation of the Syncrude upgrader returning to service by September and increased OPEC exports beginning to hit U.S. soil.
  
A recent poll of 100 economists sees it likely that the ECB will raise rates in the second half of next year, confident that will be before the next economic downturn. While Euro Zone growth outpaced its major peers for the first time since the financial crisis last year, most economists feel that momentum has already peaked, and that trade is the number one issue that could cause a surprise to the downside. Predicted probabilities of recession over the next year was 10% and over the next two was 25%.
 
Diversion: Yesterday a 25ft statue of Jeff Goldblum has appeared in London to celebrate the 25th anniversary of "Jurassic Park". The homage to Jeff Goldblum’s torso was placed in front of Tower Bridge.
 
 
Forget Muskoka or Whistler – set your sights on your new, modest, 9 bedroom holiday house on your own island in Exumas, Bahamas.

COMPANY NEWS

Rogers Communications beat expectations, reporting a Q2’18 profit of $538 million, up from $528 million in Q2’17. Rogers added 122,000 net new postpaid wireless subscribers during the quarter. Canadian cheese and dairy giant Saputo sold one of Australian production plants to Bega Cheese for $244 million. “The sale of the Koroit plant was a condition set by Australia’s competition regulators in April when it approved Saputo’s $1.3 billion takeover of the Murray Goulburn Co-operative”, according to BNN BBG. Blackstone, the largest manager of alternative assets, reported that second quarter earnings were +55% YoY. Economic net income came in at $0.90 vs. expectations for $0.75, according to RTS. SAP raised guidance for this year and next, citing accelerating cloud sales. New cloud bookings, which are believed to lead future revenue growth, increased 29%. Even so, shares are trading lower after management flagged a growing disconnect between bookings and revenue, which is probably attributable to flexible pricing models such as pay-as-you-go. Costco is launching an online grocery delivery in southern Ontario. Orders will arrive within two days and will not carry delivery charges if they amount to >$75.

COMMODITIES

Oil is down -0.63% to $68.33 . Prices are moving lower after the DOE reported a surprise build in inventories, confirming the earlier API release. Crude stocks rose by 5.8 million barrels last week vs. expectations for a draw of 3.6 million barrels. Saudi Arabia and others are boosting production; however, the market remains tight given limited spare capacity and impressive demand. World oil demand amounted to a record 100.9 million bpd in June, according to BBG.

Gold is down -1.12% to $1,214.10 . Precious metals are trending lower as the USD weighs on the commodity complex. We have been seeing outflows from gold-backed ETFs; however, it seems as though physical demand is holding up. BullionStar is reporting that Chinese wholesale gold demand for H1’18 amounted to 1038.4 tonnes, the 3rd highest number on record. Lower prices could also lead to higher demand from India, another key market for precious metals.

In other commodities news…

Big crude oil margins should boost U.S. refiner earnings” – RTS

Saudi Aramco in talks to buy stake in world's no. 4 chemical firm” – RTS

“​Cameco sees no immediate impact of U.S. uranium probe” – BNN BGG

FIXED INCOME AND ECONOMICS

Don’t look now but the employment situation is actually starting to deteriorate in the United States (insert cynicism here). Kidding aside, the Department of Labor announced this morning that continuing claims in the country rose to 1.751 million Americans seeking unemployment benefits from the government. That’s the fifth straight week of rising claims and highest print in the headline number since late April. The labor situation is of course not bad at all for our neighbors to the south as the aggregate number of people seeking claims is actually the fewest since the early 70’s and when you combine that with the jobless rate dipping to multi-decade lows, one would expect just a bit of normalization at some point. Note that weekly jobless claims ending July 14 (which are new first-time filings) came in at just 207K and below the consensus, which should bring the overall continuing claims number down this time next week.
 
Canadian high yield bond markets got a shot in the arm yesterday with the launch of a new entrant. Privately held Vesta Energy Corp. raised $200 million in five year senior unsecured bonds that priced with an 8.125% coupon. That marked a +605.30 bps yield spread for the company’s inaugural offering which was right on the screws of initial guidance. Note that the syndicate had originally sought a funding target of $150 million so clearly demand was strong for the issue. BMO and RBC led the deal which is rated B- by S&P and carries the standard high yield covenants (35% equity clawback, non-call for two years, limitations on liens, restricted payments and certain dispositions). Proceeds will be used to fund capital expenditures. This deal adds to the overall indebtedness of Vesta whom signed a CAD $350 million 1st lien secured revolving loan with BMO back in March. Secondary trading saw the bond tick up a 1.5 points on the break immediately.
 

CHART OF THE DAY

QUOTE OF THE DAY

If there's one thing the history of evolution has taught us, it's that life will not be contained. Life breaks free, it expands to new territories, and crashes through barriers painfully, maybe even dangerously, but, uh, well, there it is.

Ian Malcolm (Jurassic Park - 1993)


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Charts are sourced to Bloomberg unless otherwise noted.

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