Launch Pad
Daily market commentary


Thursday November 14, 2019
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The Dow and S&P 500 made new highs following Powell’s speech yesterday, in which he indicated his comfort with current interest rate levels. He made it clear that barring a “material reassessment of the outlook” the FOMC did not see the need for further monetary accommodation. Markets appear to be opening on their back foot today, on news of yet another snag in the Sino U.S. trade talks. Existing tariffs and agriculture remain key sticking points and both sides have made contradictory statements recently.
As markets move higher, it’s worth noting that the odds of a recession have also been coming down. Peaking at 50%, the Bloomberg Economics Probability of a U.S. Recession index has come down to 25.9%. Still elevated, but a safe distance from the brink. Historically measures of 30% or greater have typically led to a recession, but as you can see form the chart below, there are economic slowdowns scares that don’t result in an imminent recession.
As the odds of a recession recede, we’re also beginning to see some small green shoots of inflation. The U.S. Five-year breakeven has risen from a low of 1.24% in October to 1.56% today. In our Chart of the Day we’ve plotted the breakeven with the U.S. 10-year bond yield. As expected, the correlation is quite high since yields are a function of inflation expectation. What’s more curious are the levels. Historically, even with expectations around these levels’ yields would be higher, but the current levels are similar to 2016. A time following a previous economic slowdown, but one when the Fed’s target rate was still well below 1%. Rising yields over the past couple of months may be one of the clearest signals that recession fears have waned. The total amount of negative yielding debt around the world has fallen back to June levels at roughly $11.8 trillion.
The past couple of weeks have not been good for the loonie. Differentials have widened since the middle of October, and the Canadian dollar has retraced almost all that it had gained. Gold has come back some, but oil has been trading steady and is approaching the upper bounds of the tight range it has been trading in over the past five months.
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Company news

Apple is considering bundling services such as News+, Apple Music and Apple TV+ as early as next year. They have started to move in this direction by offering students who pay for Apple Music a free subscription to Apple TV+. Ford is spending $11bb to roll out 40 electric and hybrid vehicles by 2022. In the mix will be a Mustang electric crossover and a hybrid F-150 pickup. Shares of Qiagen jumped the most in premarket trading after rumors came out that Thermo Fisher Scientific said they are considering a takeover of the company. Shares of Canopy Growth are lower after missing second quarter revenue expectations. The shares are down 5.2% in premarket trading. Supply chain issues and a lack of store openings were to blame for the miss.


Oil is in a good mood this morning after a surprise drop in US crude inventories, and comments from OPEC about lower than expected US shale production in 2020. Both Brent and WTI are up a little under 1%. China is sending mixed signals around oil demand, as their industrial output showed muted growth in October, yet oil refinery throughput hit the second-highest level on record. The early December OPEC meeting remains the next biggest catalyst to determine the direction for oil prices in 2020.
Trump’s new choice to run the Energy Department, Dan Brouillette, will face questions at his US Senate confirmation hearing later today. Questions are expected surrounding the future of coal and nuclear plants, as both have struggled to compete with the cheap influx of natural gas. Dan’s predecessor suggested subsidizing coal and nuclear unsuccessfully, so it will be interesting to see his approach.
Gold is trading around $1470 this morning.


Fixed income and economics

Credit agency Fitch Ratings published a report last week raising their institutional leveraged loan and high yield bond default forecast to 3.0% and 3.5% respectively for year-end 2020 (from 3% and 2%). That’s above the 1.8% non-recessionary historical average and the 1.7% trailing 12-month default rate and is being driven by the firm’s belief that “healthcare sector opioid litigation uncertainty along with a worsening situation for several large issuers” pose new risks to the debt asset classes. Both the energy and retail sectors have expected default rates surpassing the overall average for the third consecutive year, with energy the highest of any sector at 13% (or nearly $7 billion in total credit outstanding). A supply glut and lower demand is being attributed to the expected increase in the rate. Retail, bludgeoned by a secular shift from bricks and mortar to online consumer purchasing, is forecast to see an 8% (or $5 billion) default rate. Fitch is basing these revised levels on a sudden increase in defaults during October saw already $4.5 billion in non-paying credit volume --- the highest since March 2018. Foretelling bankruptcy in the “near future”, Murray Energy Corp.’s missed interest payment is more than 40% of the total and propels the metals/mining trailing 12-month default rate to 20%.

Chart of the day



Quote of the day

The only thing worse than being blind is having sight but no vision.
- Helen Keller

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

Charts are sourced to Bloomberg unless otherwise noted.

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