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Msg  65629 of 65830  at  8/21/2019 10:00:12 AM  by

carswell


The Launch Pad


Daily market commentary
The Launch Pad
August 21, 2019
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Today

Euroland is having a strong start this morning as yields fall a little in the sovereign space. FOMC minutes are out this afternoon, so we may get a more nuanced insight to the future path of rates that didn’t come across in the previous release.

Yes, they did it. Germany raised €824 million in 30 year zero-coupon notes this morning that priced with a price of 103.61 an average yield of -0.11% --- the first-ever negative yielding auction result in their history. The result marked a 41 bps discount to July’s sale and ended with a 1.05X bid-to-cover ratio. More importantly however was the total size which fell embarrassingly short of the originally planned €2 billion target raise (the Deutsche Bundesbank took down the remaining 59% unsold and announced they would gradually filter it out into the secondary market over time). Market reaction is actually little changed post-auction as the results were widely expected prior. But with the entire Bund yield curve fully in negative territory and the 30 year tenor actually being the LEAST negative among all points on the spectrum, one has to wonder if the nation’s central bank will eventually be forced to be the majority buyer at all future auctions. Based on today’s lackluster result, it could very well happen.

There is now a Barclays Index of global negative yielding debt. It has 4538 “member” positions in it, yields on average -0.4% and has returned 3.3% over the past 4 months.

Our take for sovereigns, where there is much central bank buying creating huge “non-economic” demand (ie. Demand that is not concerned with returns) is different to that for corporate negative yields, where a shareholder stands to benefit from the issuance at zero or negative borrowing. In that space, while great for shareholder in the short term, we believe it will ultimately be destructive to business competitiveness.

The U.S. trade-weighted dollar has been on a tear the past couple of months, it’s made fresh YTD highs but has breached the upper band of its trading ranges. A trading band or envelope are typically defined using a standard deviation over a simple moving average. The chart below plots two bands above and below the dollars 50 day moving average. The fact that it’s touched the upper band signifies that this is a period of high volatility and possibly unstable levels.



Search – Click. This Axios article is interesting, noting that for the first time ever the majority of Google searches have resulted in zero follow on clicks. Notice how when you search “Blue Jays schedule” it just shows up on a Google page instead of you clicking through to MLB.com? This is Google’s attempt to keep you in their environment… and it’s working.

With less than two weeks to go, Trump abruptly cancelled his planned state visit to Denmark after his offer to buy Greenland was flat out refused. The Onion couldn’t even make this stuff up, but it does provide a break from the top headline being trade-war related at least. We agree with the Danish PM that this is all an “absurd discussion”.

Despite the rather disappointing IPO of Lyft, analysts are hopeful that Lyft insiders aren’t dumping in stocks the first chance they get. Lyft had a total of 257.6 million shares, with 88% of the total shares outstanding, becoming eligible for purchase. In fact, Tom White told CNBC that he is surprised to see Lyft shares actually increase on the lockup expiration date.

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Company news

Royal Bank missed earnings this morning after expenses came in higher than expected. The mortgage business continues to do well, expanding by 5%. PlusAI Inc. an autonomous trucking company, backed by Sequoia Capital and started by a few Stanford grads is raising their next round of financing at a billion-dollar valuation. The company is working on a joint venture with FAW Jiefang a subsidiary of a state-owned Chinese company. The company uses Nvidia chips to power the technology. Target is set to open at a record high this morning after a strong earnings release and increasing their profit forecasts by 15 cents a share. Web sales showed strong 34% growth last quarter. Lowe’s also reported strong results and is up in early trading. Management seems to be alleviating cost pressure, which caused the stock to gap lower last quarter.

Commodities

The oil complex is looking a bit brighter today after US crude inventories fell by 3.5mm barrels, more than the 1.9mm expected. Brent has gained roughly 1.5% today trading just under $61 while crude is up 0.67% to $56.70. Further support on prices came from Saudia Arabia earlier this month when they announced a plan to keep crude exports below 7mm bpd in both August and September, despite strong demand from importers to bring the market back to balance.

Tensions in the middle east continue, as Pompeo said yesterday that the US would take every action it can to prevent an Iranian tanker in the Mediterranean from delivering oil in spite of US sanctions.

The palm oil industry is beginning to fight back after the EU passed an act earlier this year to phase out palm oil from renewable fuel by 2030 due to deforestation concerns. Palm oil is a $60 billion dollar industry, with Malaysia and Indonesia producing roughly 85% of the world’s palm. The palm industry has brought on DCI group to lead the pro-palm marketing strategy, the same group that has previously developed campaigns for tobacco and oil multinationals. Ad campaigns highlighting the difficulties it will cause to small farmers in these developing countries will soon be launched.



Fixed income and economics

Loonies are catching a modest bid following the release of July CPI figures that exceeded consensus expectations. StatsCan reported that headline inflation rose by +0.5% last month to best the +0.2% estimate and mark the fastest since March. The annualized cost of living remained unchanged at +2.0% and at the low end of the BoC target range. Core price acceleration (measured by the median, common and trim figures) averaged +2.03% and faster than prior. Within the details, energy prices posted the largest advance in July at +1.9% while the cost of clothing/footwear slipped by -0.9% to lead decliners. Regionally, every province reported an increase to the cost of living last month. The USD/CAD cross fell a half-penny to 1.3260 immediately following the report but more importantly, the results reiterate the BoC’s neutral stance last publicly communicated (officials at the central bank have suddenly gone radio silent since July 10 despite uber dovish rhetoric in the U.S. and Europe as well as many global central banks easing policy). OIS spreads are currently at even odds for a rate cut at the October 30 meeting.

Chart of the day

Markets

Quote of the day

I think and think for months and years. Ninety-nine times, the conclusion is false. The hundredth time I am right.

- Albert Einstein

 


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