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Msg  66046 of 66262  at  10/21/2019 11:11:00 AM  by

carswell


The Launch Pad


Daily market commentary
The Launch Pad
October 21, 2019
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Today

Futures are up this morning, as there are some earnings on deck as well as some positive developments both on the trade front. Both sides continue to say that talks are progressing towards a partial trade deal, as China’s top negotiator offered some positive signals over the weekend. With the latest Chinese growth numbers coming out rather dismal, it’s no wonder they also want to try to work things out.

We’re seeing a continuation of recent trends in the currency market. The U.S. dollar continues to weaken against most pairs (more on the US dollar below). The British Pound has reached its highest level since May on Brexit optimism. Bloomberg notes that he may have enough votes to secure backing. The loonie also continues to fly higher.

It’s election day in Canada, please go out and vote. For polling station times and everything else you need to know, CBC is there to help you. Should be interesting to see how it plays out they also provide this round up of federal party platforms for those who are still undecided.

Should be an interesting week for Canadian markets, with the election and the ramp up of earnings season. This Bloomberg piece notes that growth may be running out of steam for many Canadian companies, with growth expectations running below previous quarters. Hindering growth has been lower oil prices as well as weaker real estate markets. The good news, at least, is it seems real estate has been strengthening recently, as noted in this somewhat positive economic article from CBC. 7 reasons Canada could escape economic doom: Don Pittis.
After a slow patch Canadian houses are selling again. And while they may have reconsidered for a while, there are signs that the condo builders who have filled skylines with cranes are making too much money to stop. Some have pointed to the recent slump in New York condo prices as a warning, but there are reasons why Canadian cities are different.

Say it ain’t so! China’s pig crisis is pushing up bacon prices around the world. By the end of next China’s swine heard will fallen by around 40% compared to levels last year thanks to African swine fever. Given that they are the worlds largest pork market by a significant margin, this is driving up prices for everyone. Here’s a great graphic from the article. Looks like Eastern Europe is the place to be.



We’re always on the lookout for potential bubbles and mispriced assets. While equity markets might have some excessive froth, they are far from a bubble. The weed bubble looks to have popped from a year ago, but there just might be a bubble in streaming rights. The race for content by streaming services has pushed the price up to ridiculous levels for any series that has a plenty of content and a loyal fanbase. South Park is reportedly nearing a $500 million deal for streaming rights.

With earnings season back in action, currency traders have been noticing a lack of currency hedging at the corporate level. Although weakening over the weekend, the USD has strengthened 6% against the Euro relative to Q3 last year, providing USD multinational companies with depressed foreign earnings in USD terms. For companies that quantify the effect on their results from currency, the costs in Q2 totaled just over $21 billion. The lack of hedging could be a result of two things: complacency at a corporate level, or a belief that the USD is overvalued. We recently put a partial hedge on the USD within our North American dividend mandate (meaning we see risks of the USD weakening).

As the global economy continues to develop, further integrating technology into our daily lives the demand for energy is rapidly increasing. Growth in renewables is projected to spike in the next 5 years, and its electricity generation’s capacity is expected to equal up to that of the entire United States. With costs rapidly decreasing for solar panels, solar technology has the looks to become the leader in renewables technology, likely to account for 60% of the growth pushing renewables to 30% of global power generation by 2024.


Diversion: Turns out invisibility cloaks might become a thing of the future. Check out this material a Canadian company developed to hide whatever is behind it (to clarify - it is not opaque).

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Company news

The bidding war for Hudson’s Bay Co. continues today, as a group led by the company’s executive chairman raised its buyout offer by $100-million, which would come at a 62% premium to the current share price. The man behind the bid, Richard Baker, has the backing from members of the company’s board of directors and will now need to convince the majority of HBC’s remaining shareholders to take their cash in exchange for the 43% of the company equity they do not own, rather than continuing to own their stake. Elsewhere, Boeing is facing a crisis yet again after messages from one of the company’s test pilots surfaced to the public; the texts exhibited concerns over the 737 Max’s erratic software behaviour and were dated two years prior to this year’s deadly crashes. In other Canadian news, Thompson Reuters stated it is engaged in succession planning for CEO Jim Smith as “a matter of good governance”, quelling leaked reports published by the Financial Times stating the company was beginning its search. In a memo to his employees, Smith further iterated that he too was actively involved in the succession process and that he was not planning on going anywhere soon.

In the U.S., Facebook is facing – believe it or not – growing skepticism about its digital currency project Libra. In retaliation, the company said at a banking seminar on Sunday that its initiative could use cryptocurrencies based on national currencies such as the dollar, opposed to the synthetic one it proposed at the start. The company faced troubles with the project earlier this month, as Mastercard and Visa backed out of the project. In China, smartphone maker Xiaomi intends to launch more than 10 5G phones next year, according to its CEO. These promises come amidst intense competition from Huawei Technologies. Last month, Xiaomi’s launch of the Xiaomi Mi 9 Pro, the company’s first 5G-enabled phone for the domestic market, was met with larger-than-expected demand, leading to issues in the company’s supply chain. The company’s future 5G models will cater to the high, middle, and low-end price tiers. Your move, Huawei.

Commodities

Oil prices fell overnight as global demand concerns continued to weigh on market sentiment; at the time of writing, WTI Crude futures were down -71 bps to US$53.40 and Brent Crude futures were down -91 bps to US$58.88. Despite bullish signals from the U.K. and Europe – where the possibility for a no-deal Brexit has waned – and the progress made on a Phase 1 trade deal for the U.S. and China, market participants for the most part are still bearish on future economic growth. This may be due in part to the fact that tensions still remain fairly high between the latter pair; China is seeking $2.4 billion in retaliatory sanctions against the U.S. for non-compliance with a WTO ruling in a tariffs case dating back to the Obama era. Hence, foreseeable bullish catalysts are slim. Either a meaningful U.S.-China trade agreement is drafted, or OPEC deepens their supply cuts. The caveat of the day is that China’s refinery throughput for September increased +9.4% y/y, suggesting that petroleum demand is robust, despite the country’s economy slowing to +6% y/y growth.

On supply side, things aren’t looking too well either. Russia said on Sunday that it did not meet its supply reduction commitment in September. While the country’s energy minister attributed this to an increase in natural gas condensate output in preparation for the winter ahead, more oil in the market certainly does not help prices. Moreover, Kuwait and Saudi Arabia will likely resume oil production from joint fields in the Neutral Zone between two countries, with capacity of 500k bpd.

In other commodities news, gold prices were flat overnight as investors continued to monitor trade-war talks and Brexit developments; at the time of writing, the spot price for gold was up +1 bp to US$1,494.30.


Fixed income and economics

“Winning or losing of an election is less important than strengthening the country.” --- Indira Gandhi

Today is the big day for us Canadians as results for the 43rd Federal Election will start rolling in for the east coast polls shortly after 7:30PM EST. Advance surveys point to a coalition government being formed (by whom will be the big question) and the absence of a majority government will most certainly weigh on our loonie. The CAD/USD cross sits at 0.7635 at time of writing and the weakest level for our currency since the last day of July. While the Canadian dollar advanced another +0.6% last week and remains the top performing major currency year-to-date amongst G10 nations, the lack of an outright majority could drive the CAD up toward 2019’s downside low and technical support level of 0.7685. One could argue that the outcome of tonight’s voting on the loonie should really be taking a back seat to a focus on the USMCA and domestic monetary policy though. Next Wednesday the BoC is expected to keep its benchmark rate on hold at 1.75% and when combined with a potential Fed rate cut (released on the same afternoon and 88.4% priced in), could give Canada the highest overnight yield in the G10. Government bond benchmarks start the day in the red (outperforming our American neighbors for once) with the 2/30 yield spread back into positive territory at +1.90 basis points. There’s no meaningful economic data nor central bank speakers on the calendar, so expect debt markets to take their queue from continued corporate earnings releases.

Chart of the day

Markets

Quote of the day

When all else is lost, the future still remains.

- Christian Nestell Bovee



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