JMRD Market Observer for February 6th, 2015: NBFM Forex (February 2015) – Competitive devaluation‏

February 6, 2015

 

**February 6th Issue of The JMRD Market Observer**

In This Week’s Market Observer

  • NBF Forex: Competitive Devaluation
  • Canadian Financial Services: The Sensitivity of Large-Cap, Canadian Financials to the U.S. Dollar
  • NBF Asset Allocation Strategy – February 2015
  • JMRD Basket Corner
  • 2015 Tax Reminders
  • Retirement Corner
  • Week at a Glance
  • Reads of the week
  • Economic Calendar
  • Earnings Reports

 

NBF Forex: Competitive Devaluation

·         The U.S. dollar continues to benefit from the divergence of monetary policy. The stronger U.S. economy has raised the probability of rate hikes by the Fed at a time when several other major central banks have seemingly adopted competitive devaluation strategies by not only increasing stimulus but also signalling their intent to continue on that path. So, the greenback has room to run over the near to medium term. That said, we expect a moderation in the rate of USD appreciation this year. Low inflation will cap the Fed’s abilities to significantly tighten monetary policy, while some unwinding of the massive speculative long positions could also take some steam out of the greenback.

 

·         The European Central Bank’s quantitative easing program, slated to start in March, is significant. While the ECB’s balance sheet may not surpass the Fed’s in absolute terms, it will do so in relative terms ― as a percentage of the size of the respective economies, the ECB’s balance sheet will be larger than the Fed’s. Such currency debasement policies should hurt the euro. Recall that the trade-weighted U.S. dollar sank 18% from peak to trough during the Fed’s own QE program.

 

·         The Canadian dollar has lost more than 20% of its value against the U.S. dollar in the last two years. That said, the loonie’s decline hasn’t been as drastic against other currencies considering competitive devaluations by other central banks. So, while the Bank of Canada said its surprise January rate cut was an “insurance policy” against downside risks to inflation and financial stability, the loonie’s relative competitiveness and preservation of market share may also have been at the back of Governor Poloz’s mind. We expect the BoC to deliver another rate cut at its March meeting, something that should keep the Canadian dollar under pressure over the near term. That’s not the say the loonie will remain on a downtrend. A recovery in oil prices should help offset headwinds generated by unfavourable yields and provide some support to the Canadian dollar.

 (see full report attached)

 Forex Feb 2015

The Sensitivity of Large-cap, Canadian Financials to the U.S. Dollar

In this research note, NBF Financial Services Analyst Peter Routledge looks at how to differentiate the large-cap, Canadian financial services companies from each other by analyzing their sensitivities to changes in the value of the U.S. dollar. He concludes that Manulife (MFC) and Toronto-Dominion Bank (TD) appear to be the Canadian financial services companies best geared to a rising U.S. dollar.

 

He notes that the sensitivities shown do not a “bang-the-table buy (or sell) opportunity for any of the companies in our coverage universe.” These institutions have kept their sensitivities well within pre-determined board limits which, by definition, removes much of the benefit of the upside and threat of the downside. He has simply written the note to provide some insight into how each company has positioned itself for the immediate future.

 (see full report attached)

Cdn Financial Services 020215 

NBF Asset Allocation Strategy – Let the year start in February

 Market review

January was as volatile as it could be, with the S&P 500 index gyrating widely up and down throughout the month, for a total loss of 3%. While things started on shaky grounds for last year’s top performing developed market, riskoff was not the general tone for equities in January. EAFE markets performed particularly well, buoyed by a weaker euro and the launch of a betterthanexpected quantitative easing program by the European Central Bank (ECB) in response to slowing growth and deflation worries. Canadian equities managed to finish the month with a positive return, thanks to a strong performance by gold miners that was partly offset by the energy sector. The latter continues also to hurt the Canadian dollar which fell nearly 10% in January, also due in part to a surprise rate cut by the Bank of Canada. Meanwhile, the rally in fixed income

securities continued, with U.S. 10year yields falling nearly 50 basis points to 1.68%, the lowest level since 2013. This drove up gold prices which reached US$1,300 during the month.

 

Asset allocation strategy

  •  In the shortterm, we are playing it safe by maintaining an overweight position in the U.S. largecap equity market, which should continue to benefit from a lower relative beta and ongoing improvement in the global economy, and which offers a better exposure to our favorite sector, information technology.
  • Over the longer run, we think the EAFE region, and particularly Continental Europe, shows the most upside potential. The lower euro, combined with massive liquidity injections from the ECB all but guarantee that risk assets will outperform. As European stocks look historically cheap on both a relative and absolute basis, there could be a timing opportunity to slowly increase EAFE exposure to overweight.
  • Ultraloose global monetary policy and falling energy prices could keep pushing longterm bond yields lower. However, if energy prices stabilize at current levels, the downtrend in inflation will likely reverse around July. Nevertheless, fixed income securities bought at a premium almost guarantee that your aftertax real return will be negative.

 (see full report attached)

 Asset Allocation Strategy Feb 2015

JMRD Basket Corner

All Cap Growth Basket

 Stantec (STN) – Accounced a small acquisition to increase its West Coats presence with the acquisition of a building design company through a merger with Seattle-based, 130 person Sparling, and their lighting division Candela

 

U.S. Basket

Celgene (CELG) – Celgene Corp. said its revenue rose 16% to $1.32B in the most recent quarter as market share increased along with the duration of therapy. U.S. sales of the Revlimid, a blockbuster blood-cancer drug, increased 20% while international sales rose 11%. Celgene warned earlier in January that a stronger dollar will weigh on sales gains related to the drug. Overall, the company posted earnings of $613.9 million, or 74 cents a share, up from $214.4 million, or 25 cents a share, a year ago. Excluding certain items, per-share earnings were $1.01.

 

NXP Semiconductor (NXPI) – NXP reported Q4 results that came in at the high-end of the company’s guidance, as they delivered Product revenue of $1.50 billion, approximately a 20% increase from the same period in the prior year and 2% sequential increase – significantly better than historic seasonality on a sequential basis. Total NXP revenue was $1.54 billion, a 1.5% sequential increase, and nearly a 19% increase from the same period in the prior year. NXP traded higher by 5% on Friday to a new year-high.

2015 Tax Reminders

  • 2015 TFSA contributions – contribution limit $5,500.00 can be made in cash or securities.
  • 2015 RESP contributions – contribution limit is $2,500.00
  • 2014 RSP contribution deadline – Monday March 2, 2015. The 2014 maximum RRSP contribution limit is 18% of “earned income” in 2013, to an annual maximum $24,270. The 2015 contribution limit is a maximum of $24,930.

 

 Retirement Corner

1)     “RRSP season: An excellent time to plan for your beneficiaries” (Globe and Mail) 

2)   “15 money hacked for new parents, from the masters” (Financial Post)

Week at a Glance

 (See attached Week at a Glance report)

Week At A Glance  

Reads of the Week

 

Economic Reports

 Monday February 9th  – Canadian Housing Starts

Tuesday February 10th – U.S. Wholesale Inventories, U.S. Wholesale Trade Sales

Wednesday February 11th – None

Thursday February 12th – Canadian New Housing Price Index, U.S. Retail Sales, U.S. Initial Jobless Claims

Friday February 13th – University of Michigan Sentiment Index.

 

Earnings Reports

 Monday February 9th  – Loews

Tuesday February 10th – Genworth MI Canada, Sealed Air

Wednesday February 11th – Agnico Eagle, Air Canada, Calloway REIT, Cisco Systems, FirstService, Home Capital Group, Keyera, Yamana Gold

Thursday February 12th – Cenovus, CI Financial, First Capital Realty, Great-West Lifeco, Just Energy Group, Manulife Financial, TELUS

Friday February 13th – RioCan REIT, Brookfield Asset Management, TransCanada

 

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