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Msg  65361 of 70134  at  7/12/2019 9:56:57 AM  by


The Launch Pad

Daily market commentary
The Launch Pad
July 12, 2019
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The rally that can’t be stopped appears set for another nice up day for equities, albeit just by a few points this morning. Softer trade data out of China isn’t helping (see below). European and Asian indices were generally higher. US bond yields are down a hair after yesterday’s big jump on CPI data.

Chart of the day is on the C$. We have seen a strong rally in the CAD over the past few days, largely due to dovish Fed talk. But beneath the headlines, the Canadian economic data has actually been very good over the past few months while the US data has continued to soften. The loonie made a new high for the year. The latest advance is supported by both commodities (gold and oil) as well as rate spreads thanks the better data. 2-year spreads are now only 26bps the narrowest they have been since the beginning of 2018. Worth noting in the chart below that last time spreads were at this level the loonie was trading at around 80 cents on the U.S. dollar. In the chart of the day we have the Citigroup economic surprise index for Canada minus the US. So, a rising blue line means our data is better. It has been impressive, go Canada.

It seems the tariffs are having a bigger impact than anticipated on the Chinese economy. While exports fell expectedly (1.3% vs 2.5% expected), imports fell more than anticipated (7.3% vs 4.5% expected), pointing to weakness in the Chinese economy. China is expected to report on Monday that growth in the second quarter was the slowest its been in 27 years. In the past, they have ramped up stimulus during periods of slow growth, and the world is hoping for similar news. Chinese manufacturers are struggling with weak demand both at home and abroad, shedding jobs at the fastest pace since the global crisis.

=IF(UK=“No-Deal Brexit”, “Zero-Rates”, “Near-Zero-Rates”)
Much like an ex-girlfriend that texts you at an odd hour of the night – usually something along the line of “you up?” – after the two of you have spent what seems like an eternity apart from each other, so too does Brexit come back into relevance in the Americas. The Bank of England expects it will need to cut interest rates to almost zero after a no-deal Brexit, while repeated delays in the exit could also make a rate cut necessary. Policy Committee Member, Gertjan Vlieghe, argued in a speech in London overnight that the BoE should be making major changes to its forecasting process and follow other smaller central banks by setting out its best collective guess about how borrowing costs might change. Currently the BoE bases its forecasts on interest rate futures in financial markets, making it “unnecessarily complex” for the central bank to get its message across to companies, investors, and consumers.

Diversion: Who knew there was a professional Cornhole league. Announcers, sponsored jerseys, and one of the most difficult shots in cornhole. Wow, only on ESPN The Ocho. As the saying goes, “if it’s almost a sport, we’ve got it here.”
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Company news

Boeing’s 737 program chief, Eric Lindblad, is retiring after about a year in the post, right before their other high-profile project – the proposed midrange jetliner. Lindblad the second head of the 737 program to leave the job in less than two years. Around 40 passengers and crew were injured Thursday evening when an Air Canada flight travelling from Toronto to Sydney hit severe turbulence and was forced to divert to Honolulu. Colgate-Palmoliveis said to buy the skin care unit of France’s Laboratoires Filorga Cosmétiques for $1.69 bb, as the they increase their personal care business. Lululemon will open a Chicago store where shoppers can work out in a fitness studio and borrow a Lululemon outfit (if they forget their own outfit). The firm hopes customers will end up buying (an unworn version) of the item when the workout is over. If the experiment is successful, Lululemon may dedicate 10 per cent of its store fleet to the new concept by 2023.

Oil prices climbed higher, hovering near six-week highs on Friday as American producers in the Gulf of Mexico cut more than half their output because of a tropical storm and tensions continued to simmer in the Middle East. At the time of writing, WTI Crude is trading up +15 bps off its last close at around US$60.29. Tropical Storm Barry is capping production in the Gulf region, with American crude inventories declining for four weeks straight. To recap, companies have cut already upwards of 1mm bpd of output – or 53% of the region’s production – as the storm headed for possible landfall on the Louisiana coast on Saturday. Storm Barry will likely become a category one hurricane. The International Energy Agency, however, said in a report released overnight that seemed to have put a ceiling on today’s advance; the IEA report forecasts – in line with OPEC’s expectations – a global oil surplus, surmising that surging U.S. oil output will outpace sluggish global demand and lead to a large stock build around the world in the next nine months. Talk about being bearish. In Asia, oil refining margins are now sitting at their highest levels since September 2017, as refiners cut output and tighten supplies. Profits for gasoline, naphtha, diesel, jet fuel and high-sulfur fuel oil rose this month after several refiners across Asia either reduced output or shut down plants for maintenance from late in the 2Q19 after refining margins slumped to their lowest for the season since 2003.

Gold prices also edged higher, up +18 bps to around US$1,409.30 at the time of writing. Trade data from China released this morning disappointed the market, primarily on the import side, leading many to believe that the economy is struggling. Not surprisingly, this only further fueled growth worries – as if there weren’t enough of that in the market already. In other commodities news, two leading American uranium mining companies say they are prepared to quickly ramp up production if President Trump approves their request for curbs on imports this week. The actors in question, Energy Fuels Inc. and Ur-Energy Inc. – are seeking quotas requiring 25% of the U.S. uranium market to be sourced domestically.

Fixed income and economics

Bond yields are mostly higher across the globe with markets selling off in the wake of higher equities. The lone exception would be in Treasuries where benchmarks are ticking ever-so-slightly higher after a PPI update that saw core wholesale prices stay flat in June. That was below the +0.2% expectation and also decelerated from the +0.4% gain prior. Headline PPI eked out a +0.1% gain while the annualized cost of producing goods and services came in at +1.7% and slower than the +1.8% pace in May. The 10 year traded as high as 2.14% post-numbers and the highest nominal rate we’ve seen since early June. Technical overhead resistance lies at the 2.19% level so we could see continued weakness in the near term. No other data points, auctions or Fed speakers are scheduled today.

Domestic primary corporate activity is trying its best to grind ahead but may now be truly seeing the doldrums of summer set in. Just two deals priced this week that combined with a big doughnut in the first week of July, brings us the fewest new financings over a 10 day stretch since 2017. We had mentioned National Bank coming to market with a $1 billion deposit note deal on Tuesday and this was followed by yesterday’s $200 million offering of 7.5 year senior unsecured notes. Pricing struck with +191.2 basis point spread (+195.0 guidance) over Canada benchmarks for a 3.456% coupon and a two basis point concession. RBC/TD/BMO led the deal which will see proceeds used to repay existing debt. The bonds rank pari-passu to existing notes and are rated BBB (stable) by DBRS. This is the Toronto-based REIT’s first deal in two whole years and the second longest obligation on their books.

China’s deleveraging campaign continued in earnest this morning with their National Development and Reform Commission announcing new measures to curb credit risks in the nation’s property sector. The rules now state that foreign debt issuance by domestic real estate companies can only be used to refinance bonds maturing no longer than one year. Additional information such as the purpose, size and tenor of the debt must also now be expressly disclosed. The tighter guidelines come amidst a blowout year for Chinese developers who have already raised a record USD $55.4 billion thus far in 2019 --- 80% more than all of 2018 and nearly equal to the past four years combined. The PBoC has been determined to cut China’s shadow banking activity in order to promote higher quality lending amongst the financial community. The central bank has cut the required reserve ratio (the amount of money banks are required to hold in reserve) six times since the beginning of last year in hopes of boosting lending, particularly to the smaller, private companies that have been hit hardest by the trade war.

Chart of the day


Quote of the day

Do not take life too seriously. You will never get out of it alive.

- Elbert Hubbard

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