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Thursday, June 22, 2017
Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S. Obata


Volumes are light as the results turn in mixed around the world for the Thursday session.  Futures are pointed to a mixed open in the early trading while bond yields are mostly unchanged.  Loonies are a touch better after a tough week – surely the price of oil over the last couple of days has derailed the C$ bulls as it moved from 72.5 to 75.5 US cents while oil has lost about 20%.

Jean-Francois Tardif of Timelo Investment Management spoke at Richardson GMP’s Alternative Investments Conference yesterday in Toronto saying that now is the time to be buying oil.  We recall his prescient (although early) call on crude in 2013/14 when he expressed that it had no business trading over $100.  JF’s performance for 2014/15 (as measured by JFS.UN) posted a 30% gain while the TSX 60 did 4%.
News that the Oracle himself will be investing in Home Capital group will dominate the Canadian headlines this morning.  We are still assessing, and trying to weigh the positive of the Buffet halo with the terms of the deal, which don’t appear to be all that good for existing shareholders.  The $2bn line of credit Berkshire will provide to HCG does not come at substantially better terms than HOOP’s existing line.  The interest rate is 9.5% vs. the 10% HOOP charged.  However, Uncle Warren makes the magic happen – as he did with Goldman Sachs in September 2008 – a deal which looked highly favourable to Berkshire at the time, but wound up benefitting everyone.  Perhaps this entices depositors back to HCG.
There is no shortage of research on population and its effects on GDP growth.  Capital Spectator provides the latest, showing a 0.36 r-squared (correlation) between growth of working age population and GDP growth.  While this certainly is not the strongest fit, it does suggest robust growth will be elusive for the USA and Canada.  “The future is still uncertain, of course. But to the extent that demography dictates economic growth, the case appears weak for predicting a significant acceleration in the macro trend.
While an an inverted yield curve is still far off, it continues to flatten (Chart of the Day). Some see it as a surefire economic law that an inverted yield curve signals a looming recession. While the record book does give it good odds, it may not be true in today’s era of unconventional monetary policy. At 1.18 points, an inversion is still a way’s away and unlikely unless we see a dramatic turnaround in the U.S. economy. Sure, this time could be different but you should be cautious anytime you hear those perilous five words.
Chinese business leaders are doing their part in helping Trump with his agenda. A few days ago it was Jack Ma in Detroit trying to drum up interest for U.S. businesses to sell to mainland China on Alibaba, now we have Foxconn dangling a $10 billion tech investment to create U.S. jobs across a few U.S. states. The company is best known for making the iPhone. They are also pushing the envelope in manufacturing R&D, pursuing advanced robotics, AI and virtual reality. Funny how Chinese businesses see opportunity in the U.S., yet Ford is moving Focus production to China.
DiversionNew Blade Runner “making of” trailer?  Click.


Qatar Airways is making a major investment in American Airlines buying 10% of the company pending board approval. Long time ride share CEO Travis Kalanick no longer has a job at Uber after five major investors asked him to leave the company. Uber, still a private corporation is valued at $69bb. Hain Celestial shares are higher in pre-market trading today after an internal accounting probe found no material problems. The company is a Whole Food Market supplier and released financial results for the first time in over a year today. Novartis AG has shown potential blockbuster results from a drug that could reduce heart troubles in a group of high risk patients. In overseas trading the stock rose the most in over six months. Amaya Inc., the owner of PokerStars is poising itself for entry into the India market. With already 1.2 billion mobile users, the company has its eyes on the fastest growing mobile marketplace.


Oil is up 0.71% to $42.83. Prices are slightly higher after they fell to a 10-month low yesterday. The EIA reported a bigger-than-expected draw in inventories; however, they remain well above the five-year average. The OPEC agreement may or may not lead to rebalance in the market. Either way, “the market wants proof that cuts are shifting petroleum balances, and it’s not getting it.” (RTS)

Gold is up 0.59% to $1,253.20. The yellow metal is rising for the second day in a row. It has been supported by a weaker USD. Moreover, 10s are trading near the low end of the recent range. Investors are waiting to see if the next hike will come in September or December. If the Fed holds off until the latter date then gold prices could rally.

In other commodities news…

Oil bear market separates strong, weak U.S. shale producers” – RTS

A First-of-Its-Kind Clean Coal Plant May Not Burn Coal at All” – BBG

How Just 14 People Make 500,000 Tons of Steel a Year in Austria” – BBG Businessweek

Ivory Coast, Ghana Said to Seek $1.2 Billion Loan for Cocoa” – BBG


What a difference a few weeks makes. At the end of May, Canadian bond markets were pricing in no change in rates from the Bank of Canada for the balance of the year. This was despite strong economic growth, as comments from Bank of Canada officials continued to cite uncertainty over the outlook given the unknown outcome of trade negotiations with the US, as well as the continued excess capacity in the economy and lack of inflation pressures.

However, Bank of Canada Deputy Governor Wilkins spoke on June 12 and gave a significant shift in rhetoric; that was followed later last week by Bank of Canada Governor Poloz in a similar vein. Essentially, the Bank of Canada is acknowledging that the downturn in domestic growth related to the fall in oil prices had been overcome, and there was less need for the additional amount of stimulus that was added in 2015 in the form of two rate cuts.  Markets have quickly shifted their expectations in response – before the speeches the market was pricing in just a 20% chance of a 0.25% by the end of 2017; as of today we are pricing in about an 80% chance of a hike at the October meeting, and we are fully pricing in a hike by December. This is expected to be followed by another rate hike by the end of 2018.

However, the change in rhetoric comes just as oil prices take another turn lower, now sitting almost 20% below the previous high. Today’s Retail Sales and CPI data will add further information to the outlook, but for now it is hoped that the resurgence of economic activity in central Canada, combined with trade negotiations that should be balanced, are enough for the Bank of Canada to raise rates from historically low levels. 




Anyone who has never made a mistake has never tried anything new.

- Albert Einstein

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Charts are sourced to Bloomberg unless otherwise noted.

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