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Msg  67697 of 69935  at  7/8/2020 9:13:09 AM  by


The Launch Pad

Daily market commentary
The Launch Pad
July 8, 2020
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U.S. stock index futures are trading cautiously but are positive after snapping a five-day winning streak yesterday. Some big gains in tech helped initially yesterday, but even most of those names went into the red yesterday afternoon. Staples helped minimize the broad-based sell-off. In total, there were 431 decliners in the S&P 500, and just 72 stocks that managed to stay positive led by Walmart on news of their new Walmart Plus membership program.

This morning the big development is seeing gold move through $1800 for the first time since the brief one-month period back in 2011 when the yellow metal moved above $1800 and quickly made its way to its all-time high of US$1,921/ounce. It’s funny how high-water marks embed their levels in our memory, but thanks to behavioural economics we at least know why. As with a tide on a beach, the high-water mark leaves a defined line in the sand, regardless of how long it stayed there.

Global Macro Monitor has a good post detailing the S&P 500 gravy train and some key technical levels to keep in mind. The U.S. stock market has gotten very expensive and narrow, range bound between 3233 and 2965. The question on many investors’ minds at the moment is whether to continue to ride the train as long as it keeps on running or get off.

The hedge fund space has been a mixed bag of performance thus far in 2020. One particular strategy, long-short equity is facing an existential crisis. Some are shutting down, as flows move out of strategies that attempt to bet on winning stocks and shorting losers. Markets have largely recovered, but according to data as of yesterday, 70% of long-short funds are still down in the first half of the year.

In Canada, Cenovus, Imperial, and Husky are among Canadian oil companies resuming production as prices rise above $40 a barrel, leading Morgan Stanley to take a less defensive stance on Canadian oil. Overall, at least 20% of shut-in Canadian oil production is being restored, which is quite the turnaround given that just months ago Alberta’s oil sands were forced to cut production by up to 1 million barrels per day of output.

Not really market related, but here is an interesting piece from Bloomberg on suburbia. The U.S. is the land of suburbs, but until now no one has really come close to define it. Is the root of the definition geographical, or is it demographic? (allegedly white, middle class and socially homogenous). Some cities in fact, are almost entirely composed of suburbs based on how residents perceive the neighborhoods. Not surprisingly, a neighborhood is usually defined by how people think and behave and less about how the houses look and who lives in them.

Diversion: Uber users will now see a ‘grocery’ button in the app in select Canadian cities. Click Here

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Company news

On the deal front, Brooks Brothers officially filed for bankruptcy protection in Delaware. The clothing retailer has around US$500mm of liabilities listed in its chapter 11 petition. Elsewhere, Slack Technologies acquired Rimeto, a corporate directory startup. According to the press release, it seems a “natural fit” for the enterprise communications company. Finally, Nissan Motors is making a return to the debt market – it’s seeking fills for 1.5-year tranche at a coupon of 80-100 bps, 3.0-year notes at about 120-140 bps, and 5.0-year debt at around 150-170 bps. The move comes after the automaker abandoned its yen denominated auction last month.

In Canada, Canopy Growth said an employee at its Smiths Falls, ON facility tested positive for COVID-19. The employee was last at work on June 25, and 8 people were in contact with the individual. The facility they worked at is still operational while the employees self-isolate and get tested. Montreal-based La Chateu is negotiating with its lenders and seeking to refinance some of its credit. The company included a statement in its annual report yesterday about “material uncertainties that cast significant doubt upon the company’s ability to continue as a going concern”. Perhaps they could take a few tips from Brooks Brothers.


Oil prices are stable this morning. NYM WTI Crude futures are down -12 bps at the time of writing to a price of US$40.57/bbl. ICE Brent Crude has remained the same and has not changed price from US$43.08/bbl. One reason the rally could be on hold is the American Petroleum Institute (API) reported an increase in inventories last week of 2.048 million barrels. Analysts had predicted almost the exact opposite. EIA crude stock information is due later today. A rise in inventory shows that demand is curbing due to the surging coronavirus in several countries but most specifically the USA. OPEC+ is planning on holding a meeting next week to discuss their record output cuts.

As of this morning, Gold has broken the ever-elusive US$1,800/oz. Gold is currently up +48 bps to US$1,802.80/oz. This is the first time this has happened since 2011. This rally continues to be fueled by growing concerns over a second wave of coronavirus. We have now passed the grim milestone of 3,000,000 Covid cases in the USA alone. Investors seem to be banking on the belief that If coronavirus continues to grow, the Fed will be forced to insert more stimulus into the markets. Gold benefits from government stimulus as it is considered a hedge against inflation.

Fixed income and economics

Much has been made over the past month of the growing divergence between financial markets and the real economy. The former has been on a record setting tear over the past quarter while the latter has appeared to plateau and in some cases, appear to be falling on the wrong side of the recovery. No space has seen more evidence of this divide than the municipal bond market where debt prices have returned back to pre-pandemic levels, U.S. mutual fund flows have been adding $1 billion in muni’s each week, and volatility in the broad sector specific index has declined to its lowest since 2001. You would hardly even know that municipalities in the U.S. were dealing with a severe tax revenue drought. All across America, cities and states are being devastated by the closure of sources of public sector funds. Airports, convention centres, discretionary social services, infrastructure projects, you name it, are being imperiled by the forced closures that have led to the highest level of distressed borrowers since 2012, according to Bloomberg. For instance, New York’s Metropolitan Transportation Authority (the operator of the city’s subway, bus and commuter rail system) faces a potential $10.3 billion deficit through 2021 and a credit rating downgrade. But that hasn’t stopped their 2055 agency bonds from posting a near 200 basis point rally over the past six weeks to a yield of just 3.36%. You can credit (or fault) the Fed for this of course, as their bond buying program has supported all debt markets regardless of how unrealistic the paper market is being divorced from reality.

In an effort to curb the ballooning pace of onshore debt defaults, China’s top bond market regulators last week issued new guidelines aimed at handling nonpayment by issuers more efficiently and transparently to better protect investors. The guidelines, jointly released by the PBoC, the National Development and Reform Commission and China Securities Regulatory Commission, seek to build a framework for addressing defaults that focuses on the role played by trustees who act as the arbiter between borrowers and lenders. Bond defaults inside China have eased somewhat in 2020 following
two years of record blowups that saw a staggering 80% of nonpayment from issues less than three years old. A mini credit boom in Q2 has helped to revive the virus-hit economy but growing incidents of bond issuers seeking compromises on repayments in recent months have elicited frustration and criticism from regulators. One area of particular discontentment they are looking to crackdown are on borrowers who “maliciously avoid” debt repayment with poorly written bond prospectuses. In a positive sign though, as of late last month Chinese companies had defaulted on 38 billion Yuan ($5.4 billion) worth of local bonds, down 35.5% from the same period a year ago. Note that none of these new guidelines pertain to the offshore market (yet) where debt failures there have jumped nearly 150% to $4 billion and already above the total for the whole of 2019.

Chart of the day


Quote of the day

Of all the things I've lost, I miss my mind the most.

- Mark Twain

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