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Msg  66655 of 67069  at  1/20/2020 11:31:35 AM  by

carswell


The Launch Pad

 

Daily market commentary
The Launch Pad
January 20, 2020
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Today

Global stocks are mixed to kick off the week. While shares in China and Japan are slightly higher, European shares are lower. Expect volumes to be lower today due to Martin Luther King, Jr. Day. It’s a good time to remind readers to take care trading any U.S. ETFs. In fact, we would recommend waiting a day to fill any orders simply because bid/ask spreads are likely to be wide enough to drive a truck through.

Bond and currency market activity are muted due to the U.S. holiday, but we’re seeing strength in the energy complex thanks to some supply disruptions in Libya and Iraq. The U.S. dollar continues to prove the doubters wrong. It’s generally stronger in trading this morning, despite speculators driving up the net-short positioning in the futures market.

In Canada, the biggest news of the day besides the absolute dumping of snow in Newfoundland is the beginning of the extradition trial for Huawei Technologies CFO Meng Wanzhou. She was arrested 13 months ago, and China is once again demanding her immediate release. It’s a tough position to be in; sandwiched between two superpowers. The hearing is expected to extend five days and examine issues of “double criminality”. This seems to be the key issue of her defense.

​Some good news and some bad news from the IMF today. They did trim their global economic forecast for 2020 a little, to 3.3%. The good news is 3.3% is better than the 2.9% of 2019, and they see growth of 3.4% in 2021. There are signs the slump in manufacturing is starting to improve and the risks to the global economy have eased. They also see global trade starting to re-accelerate after an anemic 1% growth in trade for 2019. A few noteworthy adjustments: despite most nations seeing their 2020 growth forecast getting a slight trim, Japan estimates increased as did China’s. On the downside, India’s growth forecast was moved lower by more than a percentage point as domestic demand and credit growth slowed. All-in-all, not a bad outlook for the world in 2020

Rise of the titans
The largest companies in the U.S. have never dominated the S&P 500 like they do now. Markets wouldn’t have been able to make new highs this year if it wasn’t’ for the titans of the index. The top five publically traded U.S. corporations now make up a record 18% share of the benchmark, as noted in a recent Morgan Stanley report. They are names everyone knows, Apple, Microsoft, Alphabet, Amazon and Facebook, and where they go the market will follow. The rise of passive index investing has been rewarding the largest companies, pushing their prices ever higher. In our Chart of the Day, we plot the growing market caps of these behemoths and would like to congratulate Google into entering the four comma club.

Get out the masks
There is a new virus that has broken out in China that is 70% similar to the genetic make up of SARS, but “appears clinically milder”. The WHO has labelled the new virus 2019-nCoV. The outbreak started in Wuhan, a city of 11 million people. Scores of people have been hospitalized since mid-December, with some fatalities. Other cases have been reported in Thailand, Japan and other parts of China. On the other hand, patients have recovered and been released, and health care workers have not been infected.

When green is not so green
For environmentalists, there has been great debate on the pros and cons for both lead-acid and lithium ion batteries. While traditional lead-acid batteries are 99% recyclable, there remain concerns on the dangerous health impacts of lead as exposure can still take place during mining and processing. That being said, lithium-ion batteries are new to the market and environmental impacts are still being worked out. Lithium-ion batteries have only been recycled at a rate of 5%, as these batteries last a long time, and most in the market have not reached the end of their life cycle just yet.

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Company news

BAE Systems has won more than $2 billion in government contracts from Raytheon and United Technologies that they were forced to relinquish in order to have their merger approved. Despite Aphria missing earnings last week the Cannabis sector had its best week since August 2018, ending 15% higher. JP Morgan has bought the former BNP Paribas offices in central Paris with enough space for 450 employees. The bank wants to expand their presence in Europe following Brexit.

Alphabet is urging the European Union and U.S. to coordinate regulatory approaches to AI. This comes weeks before the EU unveils plans to regulate high-risk sectors such as health care and transport. The CEO of Trans Mountain expects the pipe to be completed by mid to late 2022. There are currently 2,700 people working on the project.

Commodities

Oil prices spiked as tension escalated in the Middle East and North Africa; at the time of writing, WTI Crude was up +1.14% to US$59.21. In Libya, developments in its civil war has seen the nation’s largest oil field and a second major field shut down on Sunday after supporters of Khalifa Haftar blocked exports at ports under his control. Oil output in the region is expected to dip to 72k bpd, a far cry from the 1.2mm bpd output observed on Saturday. World leaders will meet in Berlin to negotiate for peace. In the meantime, instructions have been sent from the Libyan National Army to halt more than 50 more oil fields and stations around the Sirte basin. In Iraq, work was temporarily halted at an oil field as mass protests are disrupting output. A second field is too at risk of closure. It’ll be interesting to see who’s buying this week, as last week hedge funds turned heavy sellers as Middle Eastern political tension seemingly receded and headlines refocused their attention to the health of the global economy. Hedge funds and money managers alike sold ~99mm bbl across several petroleum futures and contracts in the week of January 14 after purchasing 349mm bbl over the previous 5 weeks.

Gold prices rose to their highest levels in a week after a weekend missile attack in Yemen raised more geopolitical concerns; at the time of writing, the spot price for gold was up +15 bps to US$1,559.50.

Fixed income and economics

It was a tough week for investors of Bombardier Inc. after both S&P and Fitch on Friday joined fellow credit rating agency Moody’s by cutting their rating outlook on the transportation carrier to negative from stable. The warnings come a day after the company lowered its 2019 profit and cash flow outlook citing problematic rail contracts and challenges in their business transportation segment. S&P specifically questioned Bombardier’s belief that they could generate positive free cash flow this year and next in their hopes to cut their USD $19.5 billion debt load, noting that a failure to do so could lead to a full-blown rating downgrade. The agency currently rates Bombardier’s debt at B- while Fitch ranks them lower at CCC+. All of the company’s bonds traded lower to end last week with the CAD BBDBCN 7.35% 12/22/2026 senior unsecured bullet notes losing nine points to fall below $90.00 bid for the first time since 2016.

Canadian home prices continue to grind higher with the Teranet/National Bank HP National Composite Index reported a 0.2% increase in December. That’s the seventh uptick in the past eight months to help erase some of the bad memories seen in late 2017 and through 2018 after the B.C. and Ontario governments implemented new housing rules (note that the despite the December increase, home prices are not accelerating anywhere near the +2.5% pace seen at the height of the market frenzy). On an annualized basis, Canadian residential property prices are up +1.95% versus this time in 2019. Regionally, Toronto saw a +4.5% year on year increase, Montreal posted a +6.4% gain, while Halifax and Quebec City led all major municipalities with a +7.4% spike over the past 12 months. Vancouver, which continues to see a choppy market from the meteoric rise from two years ago, saw overall home prices fall -4.0% in the city.

Chart of the day

Markets

Quote of the day

An individual has not started living until he can rise above the narrow confines of his individualistic concerns to the broader concerns of all humanity.

- Martin Luther King Jr.


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