Launch Pad
Daily market commentary

 

Wednesday April 24, 2019
  
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Today

The Canadian dollar is losing some ground this morning against the background of a quietly strengthening US dollar.  Recall that at the end of the year it cost $1.365 to buy one US dollar, but loonies strengthened as the equity markets recovered in January.  Since then, it has been a slow leak leading to today’s rate of $1.345 which, outside of December, is the weakest point for the C$ since Q2 2017.

We can’t find any analysts who are bullish on the loonie and would normally shy away from such a “crowded trade”, but outside of that contrary indicator, it is very hard to find reasons to get excited about our dollar.

While the U.S. Dollar Index has hit its highest level since 2017, it's putting pressure on commodities, namely gold, and reinforces just how impressive the most recent rally in oil markets is. A stronger U.S. dollar typically coincides with increased emerging market volatility; however, we’re not seeing much response as of yet. You see, it’s more to do with the weighting of the Euro (57.6%) and Pound (11.9%) within the dollar index and their recent weakness.

As in investing, the sports betting world loves to celebrate the one guy who bet $85,000 on Tiger winning the Masters at 14-1 odds.  Clearly an inappropriate bet for this individual, who was pretty deep in debt, still the media celebrates his victory, with little mention of the many other, much safer bets that lost.  Sound familiar as we read through articles about investors who made the right bet on the last market move and what they are doing now?
 
As we’ve noted in many publications, rising rates due to tighter monetary policy was a contributing factor in the stock market volatility last year. In particular, longer-term bond yields in both Canada and the U.S. edged into restrictive territory. With central banks hitting the pause button, longer term rates have fallen back to neutral or below which has supported markets and elevated valuations. Bloomberg Economics has done an impressive study comparing borrowing costs against estimated neutral rates for the world’s most important central banks. The key finding? Globally rates are still accommodative, but they are closer to neutral than at any point since 2008. Also, worth noting that the combined asset purchases by the Fed, ECB and BoJ is now positive again promoting lower yields. For now, patience is the key word used by Central Banks, but time will tell if this pause is just that, a pause before rates begin to rise again. 
 
It’s all about the narrative. Here’s a good post on why stories are so important to investors. One reason, nothing sells like a sexy story. It plays on our emotions and triggers decisions that often override logic. They’re important because narratives help simplify complex situations and help us believe that we understand something. They are also used to explain correlations and attribute causation, even though markets often just enjoy a random walk.
Most of us won’t make an investment decision without it being supported by some form of story, and that’s understandable; stories are effective and can be very valuable.  However, we must also take the time to consider the credibility of the narrative, the data that underpins it and our own role in shaping it.
 

Huge volumes of gold are being smuggled out of Africa through the Middle East, as a gateway into European and American markets. Although Africa has seen a huge opportunity in prospecting for gold, much of the gold could not be accounted for through exports. The missing gold mysteriously finds its way moving east, with Dubai as the ultimate city of gold. A destination for African gold without any paper record. 

 
Diversion:  Watch as thousands of students perform a Kung Fu demonstration, filmed from space!

 
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Company news

AT&T lost 204,000 wireless subscribers in the first quarter of 2019, dragging total revenue below estimates. The company did pay down $2.3bb in debt last quarter by divesting a stake in Hulu and physical real estate. Caterpillar beat estimates on the top and bottom lines aided by their mining business, putting aside concerns of slowing global growth. Snap shares are higher in pre-market trading following strong results and analyst upgrades. The stock is up 118% so far this year, but still 29% below the 2017 IPO price. Lululemon hosted an analyst day yesterday where they announced that they expect to double men’s revenues by 2023 and quadruple international revenues. China and the rest of Asia Pacific remain a focus.
 
Occidental Petroleum Corp. provided a US$38b counteroffer for Anadarko Petroleum Corp, in an attempt to break up the proposed takeover by Chevron, who offered $33b in mid-April. Boeing reported a21% fall in Q1 profit and suspended its 2019 outlook, as they are trying to gain more clarity on the issues surrounding the 737 Max.
 

Commodities

“Apparently, the global oil market is sufficiently supplied,” say Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt. An industry report signaled a gain in US crude inventories provided some comfort to investors, offsetting concerns of the US’ sanctions on Iran. Moreover, Saudi Arabia mentions no need for immediate action in the crude market and plans to continue its production level as planned for May. Saudi Energy Minister Khalid Al-Falih is looking to see what the customers want and intends be responsive to customers – those with and without waivers.

Fixed income and economics

In what could be the least interesting update in recent memory, the Bank of Canada is set to provide us with a monetary policy announcement at 10AM EST today. No change will be made to the overnight rate target of 1.75% (16 “qualified economists” were polled for those wondering) while the accompanying statement is poised to be in the neutral-to-dovish camp. Uncertainty remains elevated, retail consumption has been soft, domestic demand contracted in the latter half of 2018, inflation pressures are non-existent, household debt per capita continues to advance --- all of these reasons and others will keep officials on the sidelines for now. That being said, some believe that Q1 2019 will be the low point of the year and we may see a glimmer of positivity sprinkled in the otherwise softer language. Keep an eye out for any ink spilled on talk of the neutral rate --- Governor Poloz stated that the “policy interest rate will need to rise to a neutral stance to achieve the inflation target” last October when they tightened policy. We are still waiting to see this today. Two year Canada yields are down three basis points already in the session to 1.54% and the lowest nominal level this month.
 

Chart of the day

 

Markets

Quote of the day
 

“Narratives are human constructs that are mixtures of fact and emotion and human interest and other extraneous detail that form an impression on the human mind.” - Robert Shiller.

Contributors: J. Price, C. Basinger, D. Benedet, C. Kerlow, D. Mak, A. Tjiang, E. LaPlante, S. Sethi

Charts are sourced to Bloomberg unless otherwise noted.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Insurance services are offered through Richardson GMP Insurance Services Limited in BC, AB, SK, MB, NWT, ON, QC, NS and PEI. Additional administrative support and policy management are provided by PPI Partners. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.