Currency
Bank of Canada governor Stephen Poloz is gave a speech titled “Let Me Be Clear: From Transparency to Trust and Understanding” that will be scrutinized closely for any hints as to what the Bank of Canada will do with rates at its next meeting on July 11th. It will be so closely watched because the market it currently pricing in a 60% chance of rate hike, but that number has been as high as 80% and as low as 50% in the last two weeks. Clearly showing the market is unsure whether the bank will raise rates or leave them unchanged. If Poloz sounds hawkish, I would expect those odds to increase and that CAD would rally. If he sounds dovish/overly cautious, I think CAD could see a sharp selloff.
We have two other key economic reports before the meeting, April GDP this Friday and June employment next Friday. His speech will add insight to his leanings, but a miss on either or both of these reports would make it more troublesome to raise rates. While inflation has firmed, last Friday’s core CPI miss gives the bank no urgent need to rush into raising rates. With softness in housing numbers and the high debt levels of Canadians, Poloz has many reasons to remain “cautious” going forward. I think Poloz will only sound hawkish if he wants to keep rates moving higher to try and get back to a more “neutral rate” before it’s too late. If that is the mindset of the bank, it would take a huge miss in remaining data points to derail them. Once again, why the speech could be so important.
WTI oil prices have risen dramatically over the past several days which usually helps the CAD. The pressure to end Iranian crude shipments is a real worry for global supplies. However much of the talk last week was about OPEC agreeing to higher production levels, but big news for WTI prices was an outage at a Syncrude upgrader that took 360K bpd off the market until the end of July. This caused the front month price of crude to rally significantly. But Alberta has been stockpiling crude, unable to get enough to the US due to a lack of pipelines/rail, so the supply in Alberta to keep the pipeline full for a month shouldn’t be out of the question. Second, any crude price increase that comes from a lack of supply from Canada, does not help Canada. We saw an example of this when the wildfires wreaked havoc on northern Alberta in 2016 and cut oil supply. As the fire burned through the month of May CAD dropped 4 cents.
The recent economic data has been softening in CAD and the 2yr interest rates spreads with the US have moved out to new 11yr lows. This has brought the CAD lower, however it has held in around the 75 cent level even despite the recent miss on CPI and retail sales last Friday. The chart below shows that interest rate pressure should be taking CAD lower as the red lines show the interest rate differential (orange line) recently took out the low of the past 2cycles at around 60bps(now over 70bps). At the same time CAD has been putting in higher lows, the yellow lines, in each of these cycles. Oil prices(blue line) do explain the stronger CAD at each interest rate low, however the recent oil price action may be misleading and keeping CAD firmer than it should be.
We have also seen a little softness in the USD that may have helped CAD stay steady over the week, but any further USD strength will be additional pressure on CAD.
Battery metals such as lithium and cobalt, as well as platinum group metals, are on the US government’s list of critical minerals.
The list, announced in the Federal Register, finalizes a draft list of 35 minerals that was released in February in response to an executive order issued last December regarding “A Federal Strategy to Ensure Secure and Reliable Supplies of Critical Minerals.”
“The United States is heavily reliant on imports of certain mineral commodities that are vital to the Nation’s security and economic prosperity,” the Federal Register notice said.
“This dependency of the United States on foreign sources creates a strategic vulnerability for both its economy and military to adverse foreign government action, natural disaster, and other events that can disrupt supply of these key minerals,”…. CLICK for the complete article
Getting ready for the shotgun starts at the Goldcorp Invitational in support of Special Olympics. Thanks for all your support! ~MC
Yes, accurate data does matter – especially when it comes to making government policy designed to “cool” or “rein in” private markets. We’ve warned for some time that federal, provincial and municipal efforts to impede the housing market could have significant negative un-intended consequences. And this chart from Stats Can suggests the policies are be made to fix a problem that may not exist outside 3 or 4 high-end (never affordable at any time) neighbourhoods.
Crucial information for the U.S. trading day
Blue chips on Friday managed to avoid their longest losing streak since 1978, putting an end to eight-straight down days with a triple-digit pop.
Everything’s fine, right?
Well, it’s true that the dreaded “trade war” has been more bite than bark so far, and investors have mostly treated it as such, with the recent stretch of selling hitting the Dow DJIA, -1.07% with a 3% drop from peak to trough.
But the trade tensions won’t be going away anytime soon. One look at the big-font headlines splashed across financial websites and blogs tells you all you need to know about what the prevailing theme is heading into the week.
Oh, and yes, the presidential feed isn’t about to let up either:
To find out, Barron’s asked Wolfe Research’s Yin Luo, former star quant at Deutsche Bank DB, -1.14% and longtime artificial-intelligence evangelist. He doesn’t see robots replacing money managers anytime soon, but he’s a big believer in the edge that machine learning can give investors. And those machines are firing off “trade war risk” signals.
“We have an algorithm that goes through every major media and social-media site, looking for key words related to trade conflict, like ‘trade tensions,’ ‘tariffs’ and ‘quotas,’” Luo explains. “It’s gauging the wisdom of crowds. Once people are talking about it, it is more relevant to stock performance. Today, [that chatter] is at its highest point since we started tracking these things in 2003.”
Couple political risks with rising interest rates and you probably don’t need a robot to tell you there are clouds hanging over this market.
“We are still bullish but warn investors that the downside risk is significant, which is different from last year,” Luo says. “We are at the peak point in the economic cycle, growth is showing some signs of weakening, and inflation continues to rise.”
So what’s an investor to do? In our call of the day, Luo says his models favor U.S. large-cap stocks, global real-estate investments trusts and gold.
“With U.S. stocks, we are bullish consumer discretionary, technology, and industrials over the medium horizon, and are negative on consumer staples and telecom services, where fundamentals remain relatively weak and momentum has been negative,” he says.
The market
The Dow Jones Industrial Average YMU8, -1.26% is poised to start another streak into the red, with futures down premarket. The S&P 500 ESU8, -1.25% and Nasdaq-100 NQU8, -1.74% are also looking toward a negative open.
Gold GCU8, +0.00% and WTI crude CLU8, -0.52% are little changed. Asian markets ADOW, -0.88% closed mostly lower, while Europe SXXP, -1.72% is taking a hit. In crypto, bitcoin BTCUSD, +1.64% is bouncing back after its latest drop.
Check out Market Snapshotfor more.
The buzz
President Recep Tayyip Erdogan, one of Washington’s key allies, won a victory in Turkish electionson Sunday, as voters extended his 15-year hold on power and endorsed his increasingly authoritarian model of government. “I would like to congratulate our nation once again,” he said.
Struggling conglomerate General Electric GE, -1.23% is about to ink a deal to sell a unit that makes large industrial engines to private-equity firm Advent International for at least $3 billion, sources told the Wall Street Journal. Word of an official deal is expected to hit as early as Monday.
Student housing developer Education Realty Trust EDR, +1.52% is being bought in a $4.6 billion all-cash dealby a Greystar-led fund.
Also see: Investors who paid attention to GE’s accounting saw trouble coming
The chart
This was always bound to be an issue for Trump and his administration, who have consistently trumpeted the surging stock market as a measure of policy success. So what happens when the selling starts, like it did last week?
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