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Msg  67936 of 68234  at  8/12/2020 9:09:26 AM  by


The Launch Pad

Daily market commentary
The Launch Pad
August 12, 2020
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Markets are taking a reverse course from yesterday’s last hour weakness this morning, with U.S. and Canadian equity futures rising on the back of rising European and Asian markets. Treasuries and the greenback edged lower, while gold and oil rose.

While markets took a tumble late in the day yesterday, currency volatility has been the place where most the action has been over the past few weeks. Especially if you view gold and bitcoin as currencies. One recurring trend has been the falling US dollar. Remember when everyone was talking about a dollar shortage a few months back? There are many factors at play here. One simple one may just be the fact that the USD was bid up as a safe haven and that is unwinding now. Of course there are more theories out there. We do find it interesting that the speculators, measured by non-commercial futures and options contracts, have become net short USD (see chart of the day). In the past this has lead to a rebound, but then again the bets have been mounting for sometime.

One of this morning’s larger headlines centers around the trade talks that are to take place in the coming days between the U.S. and China. Among expected topics, such as agricultural purchases and the dollar-yuan exchange rate, Beijing is expected to further widen its agenda to include Trump’s latest crackdown on tech businesses including TikTok and WeChat. Trump’s chief economic adviser downplayed threats that those actions may lead to a fall out of the phase one agreement.

Elsewhere, Biden’s running mate – Kamala Harris – was announced yesterday. The California-based senator brings a progressive approach to politics and public policy and possesses a track record of deep electoral experience and expertise in the U.S. criminal justice system. While Biden appeals to moderates, Harris will likely work on appealing to more progressive voters. The duo are due to appear in a virtual fundraiser today.

President Donald Trump is continuing to prop-up the economy heading into the election. Recently, he is contemplating a $100 billion capital gains tax cut for investors by changing Treasury Department guidelines. It is hard to say whether any real action will come before election time; Economists are estimating that any executive orders passed by Trump before elections would have at best, marginal economic benefits, and will ultimately fall short of pledges to provide relief to jobless workers and hence, create jobs through tax cuts.

Back at home, lawyers on Bay Street are hiring more restructuring experts as they brace for a wave of insolvencies to hit the Canadian economy when COVID-19 relief measures dry up. We’ve already observed a first wave of formal creditor protection filings, mostly from retailers and energy companies. According to Innovation, Science, and Economic Development Canada, 27 filings were made under a federal restructuring law for companies that owe more than C$5 million in 2Q20, up from 4 in the same period last year.

While overall sentiment regarding Europe’s economic recovery remains positive, the U.K. economy has been a standalone underperformer. GDP plunged 20.4% in Q2 while widespread damages included a 35% decline in construction, services down 20%, and industrial production plunging 17%. The Bank of England highlighted the labor market as a key concern. Officials fear a jump in unemployment when government job support is ultimately withdrawn later this year. Economists argue that it is more likely to see stimulus in early 2021 rather than the end of this year, pointing to a slowdown in recovery during the Fall.

Diversion: The last Blockbuster on earth has become an AirBnb for three nights in September. Check out the actual Airbnb listing. Oh, the nostalgia is running high.

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Company news

It is rumored that Brookfield Asset Management is in talks with Blackstone to buy a stake in the liquified natural gas operator Cheniere Energy Partners. Blackstone’s stake is worth about $7.8bb. Bristol Myers Squibb is spending $300mm to train hundreds of hundreds of racially and ethnically diverse clinical investigators and set up trials in under-served communities. Wells Fargo and Dimensional fund advisors have both filed to launch their first ETFs. Little late to the part but they will be following T. Rowe Price and BNY Mellon which both also came to market this year. Hudbay Minerals reported better than adjusted loss per share than was expected. The produce 16% more gold this year compared to last.


Oil continues to have a great week as it pushes higher this morning. At the time of writing, NYM WTI Crude futures are up +1.51% to US$ 42.24/bbl. ICE Brent Crude futures are following suit, up +1.37% to US$45.11/bbl. Resilient fuel demand is the main cause this morning for the jump. Analysts had expected a draw of 2.9 barrels but according to the American Petroleum Institute crude inventories fell by 4 million barrels last week. Official government data will be released later today from the E.I.A. The administration also reported a decreasing amendment to the forecast for U.S. oil production. They believe that U.S. crude production this year will fall by 900,000 bpd instead of the previous 600,000 bpd. A lower production forecast lent support to oil prices this morning. We still await the decision from the Trump administration on what kind of stimulus package the U.S. is going to implement.

Gold Spot is up this morning after taking a significant drop yesterday. After a volatile fluctuation, the yellow metal is currently up +1.62% to US$1,942.25/oz. The selloff on Tuesday was the sharpest in 7 years. The positive jump this morning is due to Britain’s economy dwindling by a record of 20.4% over the past months. Gold prices were also assisted by the dollar strength taking a pause due to the delays of the stimulus discussions.

Fixed income and economics

Another day and another record for the high yield bond market. Music content company WMG Acquisition Corp. raised USD $550 million in new junk debt this week with a yield/coupon of 3% (+248.0 bps over Treasury benchmarks). That is the lowest ever tabled for a 10-year U.S. denominated junk bond according to data compiled by Bloomberg. This comes despite the BB rated (S&P) issuer having not reported a profitable quarter in the past five years and is a harbinger of how risky borrowers are refinancing in today’s world at historically low rates. Boosted by a surge of inflows in retail high yield funds, this has resulted in a supply pipeline in 2020 that is about to surpass all of last year’s total already. And don’t expect the surge in refinancings to slow either --- speculative bonds with more than $91 billion outstanding are trading above upcoming call prices, making it attractive for issuers to redeem the securities in the next three months according to the data. One trend that has changed though is perhaps how these bonds perform after hitting the secondary market though, as the aforementioned WMG note has yet to trade above par since closing the initial sale.

Treasury markets are softer this morning after a release of CPI data that showed consumer inflation reared its head in July. Headline consumer prices rose by +0.6% last month to double the consensus and keep pace with June’s pace. Annualized price acceleration perked back up to +1.0% for the first time since March. The core number was even more impressive as CPI excluding food and energy saw a +1.6% surge in prices. Used cars and apparel garnered the largest increases and one hopes that the gain in consumer prices reflects a rebound in demand for goods and services as the U.S. economy tries to recover. While the Federal Reserve isn’t likely to do anything based on this report, it is worth mentioned that the uptick had zero effect on real rates while nominal Treasuries rise --- helping to bring a bid back to the gold trade.

Chart of the day


Quote of the day

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