Futures gained this morning as major companies continue to report strong third-quarter earnings, easing concerns that persistent Covid cases and rising costs would derail profit recovery for corporate America. 80% of S&P 500 companies that have reported so far have beat earnings expectations, but while reports have been strong, investors are focused on commentary about supply chain issues and inflation. Financials got earnings season off to a strong start, where Covid and supply chain issues aren’t as impactful as other industries which have yet to report. It will now get interesting to see what other industries will have to say about the health of the economic recovery. While earnings are looking good, economic data from China has been weighing on investor sentiment after it reported low GDP and industrial production for September, falling short of expectations. Industrial production in the U.S. also fell for September as supply constraints continued to hinder manufacturing.
Canada saw its fourth monthly decline in housing starts reported yesterday. They remain at elevated levels vs. Historical, and prices have not shown any sign of abatement, given lean supplies. In related news, Zillow shares are lower after announcing a pause in their program to acquire homes directly. The advertising and reference pricing services of Zillow have been under scrutiny lately as they are both speculating and suggesting prices in the same neighbourhoods.
Meme stocks are back in the news as the SEC released its report yesterday adding momentum to toughen the rules. The report details the SEC’s assessment from when retail traders “took on Wall Street” and sent shares of GameStop and other meme stocks “to the moon”. The report urged a close look at factors that prompt brokers to restrict customer trading, short-selling, and payment for order flow. All are areas where the SEC has proposed an aggressive agenda that's likely to ensnare hedge funds, Robinhood, Citadel and other firms.
Proshares will launch the first bitcoin futures ETF today, giving investors exposure to the cryptocurrency via the futures market, thereby bypassing the use of a digital currency exchange such as Coinbase. The ETF will invest in bitcoin futures contracts traded on the Chicago Mercantile Exchange. Notwithstanding the potential for tracking error, there is also the potential cost associated with rolling a futures contract from one month to the next (contango). However, as the futures market is regulated, bitcoin enthusiasts believe it will spur a regulatory framework for cryptocurrencies in general and subsequently encourage wider adoption by investors. Bitcoin rallied leading up to the launch of the ETF and traded above $62,000 last Friday.
Green bonds, or bonds that are issued to focus on environmentally friendly projects have sold a record $411 billion so far this year, compared with $234 billion raised in all of 2020. Based on a Barclays report, demand for green bonds has been so high that investors are accepting lower yields despite lower liquidity compared to investment grade bonds. This confirms the investor base for green bonds (such as pension funds), follow a buy and hold strategy and is therefore not as concerned about liquidity issues.
Diversion: With hockey, football, and basketball all back now you might not have any time to watch other sports so here are the highlight from the newest sport on the scene.
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Some Dow components reporting today. Proctor & Gamble beat analysts’ expectations and maintained its full-year fiscal 2022 sales growth outlook in the range of 2% to 4%. More importantly to the consumer, P&G will start charging more for certain beauty, oral care and grooming products. These price increases and increased demand from WFH will help offset some of the higher costs.
Johnson & Johnson is looking to trade higher after topping earnings estimates. Looking ahead, J&J is bumping up its FY profit guidance with the FDA looking to allow mix-and-match Covid-19 vaccine boosters. Preliminary results from a National Institutes of Health study indicate mixing vaccines as a booster can produce the same or even more antibodies compared with using the same vaccine for all shots.
Highlight of the day will be Netflix’s report after the close which could set the tone for technology earnings this season. We will see if the surprise success of “Squid Game” has helped boost new subscribers. Analysts are projecting the addition of 3.72 million customers in the third quarter which would top the company’s outlook for 3.5 million new customers, but the more interesting number comes from the forecast for the current quarter, which puts subscriber additions at 8.32 million.
Oil prices rose this morning as a supply crunch in natural gas, electricity and coal continued across the globe. With temperatures falling as the northern hemisphere winter approaches and heating demand increasing, prices of oil, coal, and natural gas are likely to remain elevated. At the time of writing, NYM WTI Crude futures are up +1.03% to US$83.29/bbl and ICE Brent Crude futures are up +0.74% to US$84.95/bbl.
Gold snapped a two-session slide to advance 1% this morning as a weaker dollar and lower U.S. Treasury yields supported prices and lifted bullion’s appeal. Gold Spot is down +0.73% to US$1,777.40/oz this morning.
Fixed income and economics
The Bank of Canada’s Business Outlook Survey was released yesterday and showed further improvement in overall merchandising sentiment during the third quarter of 2021. The BOS indicator, a statistical summary of survey results, increased from 3.96 to 4.73 during the period as businesses expect domestic and foreign demand to continue strengthening that will translated into higher investment in labor and capital over the next year. Firms are seeing a broad-based improvement in demand relative to a year ago, though supply chain disruptions and worker shortages will limit domestic and export sales. Keeping pressure on monetary policy, a record share of firms now think that inflation will be on average greater than 3% until 2023. That sentiment is broadly shared by consumers whom are mirroring the concerns of the former as expectations in the group forecast consumer prices to be above the one-year rate of 3.7%. All this ties in nicely with the release of the September CPI update out tomorrow. Immediate reaction post-release saw the loonie rally to a fresh 90 day high with the CAD trading through 81.20 pennies versus the greenback.
Call it the itch that just can’t be scratched away. Lehman Brothers International Europe (LBIE), a London-based subsidiary of the defunct bank, is taking bond-insurance firm Assured Guaranty Ltd. to court over decade-old claims that a swath of credit-default swaps it had bought were incorrectly settled in 2009. At the heart of the issue is the LBIE’s belief that the insurer didn’t correctly mark-to-market twenty eight credit default swaps that were sold as protection against a subprime mortgage defaults (we all know how that story ended). The exotic products were undervalued by nearly $600 million as Assured made up the market prices of the swaps, which in their defense was done because there was no market for them at the time. Assured purportedly stated they held an auction for Lehman’s positions and no bidders emerged so the company estimated the future performance of securities underpinning the trades. In the context of the financial crisis, CDS were better known as a tool for speculation rather than insurance, and during the depths of the meltdown saw few players actually able to unwind their bets when they wanted (serving as a fresh reminder that short sellers never cover at the bottom).
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I can't change the direction of the wind, but I can adjust my sails to always reach my destination. Jimmy Dean
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