Wednesday, January 11th, 2017
Lots of articles on Obama and how he gave his last speech as president last night. One accomplishment worth noting is 75 months of straight job growth soon after taking office in the middle of an economic disaster. This time we’ll be able to use one of our favourite meme’s with complete sincerity: THANKS, OBAMA.
At 11am this morning, Donald Trump will be holding his first press conference since the election. These were typically a gong show during the campaign so we’d expect the market to hold its breath during its course. Hopefully we’ll see more clarity surrounding topics like trade, currencies, tax plans and fiscal stimulus. It will be a big waste of time if it’s entirely focused on Russian hackers.
Looking towards the open, futures are rather flat as are markets overseas. Yields are a little lower this morning, U.S. 10’s are at 2.37%. While yields have taken a little breather the past week, the equity markets really didn’t care the whole way up to 2.5%. At some point they will. Bill Gross thinks its 2.6%, while Jeff Gundlach has also just weighed in and thinks that magic number is 3%. (Reuters) For these bond kings (we’ll let you decide who is current and former) this number is more important that the U.S. dollar or the price of oil.
With Gundlach talking about the end of the bond bull market that started in the early 1980s, folks of course are listening. He has had a good number of calls and certainly knows the bond market. Maybe he is right or maybe we are in a brief reprieve before too much debt and demographics resume their dominance of yields. We believe bond yields are moving higher and don’t disagree at all that the 10-year could breach 3% this year. This is of greater importance as even with the recent decline in bond prices (higher yields) the duration of the bond market remains at its highest level since the available data started in the early 1990s. A duration of 5.95 for the Barclays aggregate bond index means a 1% move in bond yields equals a 5.95% decline in the price of bonds. So it isn’t just the direction of yields that is important, it is the sensitivity (chart of the day).
The World Bank predicts the global economy to expand by 2.7% in 2017. This is actually not too bad, compared to the 2.3% seen last year. (BBC) They are expecting emerging and developing economies to pick up steam, buoyed by rising commodity prices. While we’ll add that this scenario could be put at risk if the U.S. dollar continues as it did the 2H of last year. We rarely heed much attention to forecasts, they are rarely correct. Uncertainty is a constant, however with Trump coming in office this variability of this variable has been turned up a few notches.
Vadas Viskanta investigates Gordon Gekko’s famous claim that the high paid MBA types are just sheep (vid) which is why they just can’t beat the market. Turns out there is some truth to this one. (link)
By now we should all recognize that active management is a tough game. These findings seem to indicate a way to identify managers who have a high level of motivation. Another data point worth considering is identifying fund managers with proverbial “skin in the game,” that is substantial parts of their net worth in the fund. Gordon Gekko may have been an odious (fictional) character, but it sure seems like he had insight into fund managers.
Diversion: While we wait for the hot air to blow at 11am this morning, here is a decent gust and a big tree getting ripped out of the ground. Love seeing the power of nature.
Volkswagen AG is set to pay $4.3 billion in penalties “for rigging diesel-powered cars to cheat on emissions tests…” The accord raises the total cost of the emissions scandal to >$23 billion. Wal-Mart is planning to cut “hundreds of jobs” this month. This round of layoffs “follows the company’s plans to invest $2.7 billion in programs that involve training its workforce and a series of wage hikes that took the minimum hourly pay for store workers to $10…” Wal-Mart has also been investing in e-commerce, according to Reuters. Alibaba will pay $2.6 billion to acquire Intime, a department store chain. “The deal shows that there is still value to brick-and-mortar stores…”, according to Bloomberg Intelligence. Ford is betting that its “distinctly American” Mustang will help to boost sales and profits in China. The vehicle, which starts at $57,670 is a top seller in China’s sports car segment. “Last year, (the Mustang) outsold the Chevrolet Camaro from General Motors by nearly 15 to one”, according to Reuters.
Oil is up 0.67% to $51.16. Oil was down ~6% over the past two sessions due to worries about non-compliance to production quotas and to the prospect of rising US production. Moreover, yesterday’s API data showed a build of 1.5 million barrels vs. a draw of 7.4 million barrels in the prior week.
In other energy news…
“Oil Prices Fall…Yet Again” – Barron’s
“Oil companies prepare to ramp up investment again’” - FT
“The irreversible momentum of clean energy” – Barack Obama
Gold is up 0.27% to $1188.75. Prices are near 6-week highs ahead of President-elect Donald Trump’s first conference since the US elections. The markets have been in risk-on mode for some time. That said, investors are aware of the potential for rising economic and political uncertainty. This had boosted gold’s safe-haven appeal, according to Reuters.
FIXED INCOME AND ECONOMICS
Treasury markets are slightly weaker this morning, but 10-year yields are holding below the FOMC-day range (2.422%) and the 40 day moving-average (2.418%) --- both of which offer meaningful support as we approach this afternoon’s dealer auction. Investor demand for government safe havens will be skewed to Trump’s press conference this morning as the event-risk associated with his public appearance has become apparent in light of rumors that Russia is in possession of a report that may compromise his reputation and political conduct. Skewing it as a bullish or bearish event for the Treasury market is challenging to be sure, if for no other reason than many of his economic plans are expected to be inflationary and that has been largely priced in. Political fireworks won’t be limited to the Trump however as Tillerson goes before the Senate this morning in his confirmation hearing as the Secretary of State nominee. As market attempts to gauge what the next 100-days will mean for Trump’s policy ambitions, a read on the level of cooperation from Congress will be a meaningful consideration.
Break out the champagne as we saw the first real corporate bond deal for Canada in 2017 yesterday. Honda Canada Finance came to market with a two tranche offering by way of a $200MM FRN and $400MM in 2022 senior unsecured bullets. The former priced at quarterly CDOR +52.0 bps while the latter at +104.0 bps over Canada’s for a 2.268% coupon. Both issues are rated A1 by Moody’s and A(high) by DBRS. BMO and CIBC led the financing for the automaker’s first domestic deal since last August. Demand was strong for the issues as investors scooped up the bonds in droves, while pushing secondary trading of both higher by a nickel as per Bloomberg. Expect to see similar market appetite for other issues in the near future as the lack of bond supply helps to drive buyer interest. At time of writing, we’re still waiting for the first bank deal of 2017 and at the moment there doesn’t seem to be anything imminent from out big 6 on the horizon.
CHART OF THE DAY
QUOTE OF THE DAY
If you're tired of arguing with strangers on the internet, try talking to one in real life.
- President Barack Obama
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