JMRD Market Observer for June 2nd, 2017 – Asset Allocation Strategy

June 2, 2017

In This Week’s JMRD Market Observer

 

 

  • Asset Allocation Strategy – Can risks trump the essential?

  • Forex (June 2017): Bank of Canada ditches dovish language

  • NBFM Monthly Fixed Income Monitor – June 2017

  • JMRD Basket Corner

  • Retirement Corner

  • Reads of the Week

  • Economic Calendar

  • Earnings Reports

 

 

Asset Allocation Strategy – Can risks trump the essential?

 

Highlights

 

  • What really matters is the economic cycle. Based on the expansion phase (that is, years of economic growth following the recovery period), the current cycle seems still short in the tooth. As such, equities should continue to outperform bonds in the medium to long-term horizon.

 

  • In the shorter term however, things are not so clear. Surely, political risks have abated lately. Yet, we can’t help but feel a sense of unease. With North Korea launching missiles, and China being back on the radar, our level of conviction is low.

 

  • The minutes of the May FOMC meeting suggest the Fed is likely to increase interest rates at least twice more this year and will probably start reducing its balance sheet sometime in Q4 of 2017. As such, barring an external shock, the path of least resistance remains upward for bond yields until the end of the year. For the time being, however, in light of the risks to the outlook and the softness in inflation, we recommend maintaining a duration around benchmark with a preference for investment grade securities.

 

  • In the U.S., for as long as IT “darlings” continue to do well, large-cap growth stocks should outperform value and smaller-cap stocks.

 

  • Canadian equity market continues to lag its peers. Sagged by the recent fall in oil prices, the prospect of NAFTA renegotiations, the demise of Home Capital Group, and Moody’s credit warning on Canadian banks, the TSX is about 3% below its February 21 all-time high. Although we feel a lot of bad news is priced in at current levels, we advise against jumping back pre-emptively into Canadian stocks.

 

  • Our preference lies in Europe. Certainly, on a stand-alone basis, European markets are also expensive. But, they offer the best relative value versus U.S. markets as they stand at their lowest point since 1970 both on a local FX basis and on USD-adjusted terms.

 

See the full article

 

 

Forex (June 2017): Bank of Canada ditches dovish language

 

Highlights

 

  • While the Canadian dollar could remain under pressure over the near term as GDP growth softens after Q1’s blockbuster performance and the Fed tightens policy, we remain positive about the currency over the medium term. True, the loonie remains vulnerable in light of persistent current account deficits which are being financed by unstable short term flows. But interest rate spreads with the U.S. are about to become more favourable to the Canadian currency. Indeed, the Bank of Canada’s decision to ditch its dovish language signalled to markets an upcoming change in monetary policy stance. We expect USDCAD to hit 1.30 by early next year.

 

  • The USD could bounce back over the near term if, as we expect, the Fed raises interest rates two more times this year (recall that only one hike is currently priced by markets). But the outlook for the greenback afterwards isn’t rosy considering that the expected shrinkage of the Fed’s balance sheet could reduce the need for rate hikes over the next several years.

 

  • While we’ve raised our forecasts for EURUSD, we do not see a lot of upside from current levels over the forecast horizon given the European Central Bank’s apparent lack of urgency in tightening policy and large amounts of speculative long positions on the common currency. 

 

See the full article

 

 

NBFM Monthly Fixed Income Monitor – June 2017

 

Highlights

 

  • We continue to see 10-year Treasuries trading around 2.95% going into 2018 and the target range for the fed funds rate set at 1.25% to 1.50% at the December 12-13 FOMC meeting. In our view, rate hikes after Q1 2018 will depend on developments in international financial conditions as well as on incoming U.S. indicators.

 

  • Currently our base case scenario is for the Bank of Canada to raise the overnight rate in Q12018. This said, we see more than 40% chance the BoC will decide before year end that the time has come to return the overnight rate to where it was before the oil shock (1.0%). Like the Bank, we will be watching the incoming data for indications of the appropriate timing and size of adjustments to the overnight rate. If employment growth remains firm and business investment picks up, an October hike may well become our base case scenario. 

 

See the full article

 

 

JMRD Basket Corner

 

DIG Basket

 

Keyera (KEY) – Keyera has sanctioned Phase I of its Wapiti sour gas processing facility, representing a capital cost of $470 mln (150 mmcf/d capacity online mid-2019), while Phase II would cost an incremental $155 mln, doubling capacity to 300 mmcf/d – expected to be sanctioned over the next 6-12 months based on robust drilling prospects in the region. See the full article

 

Whitecap (WCP) – Whitecap provided an operations update in tandem with the closing of its $200 million, 3.54% debt issuance. Although not material to our 2017 estimates, the company softened its second quarter expectations, citing unplanned downtime at the non-operated Coleville gas plant. A safety related issue shutdown the plant on April 28, but is expected to be operating at full capacity by the end of June. The company reiterated 2017 production guidance of 57.0 mboe/d, implying annual production growth of 25%.

 

All-Cap Growth Basket

 

Boyd Group (BYD.un) – This 700% Stock Gainer Seeks to Double Car Repair Revenue 

See NBF highlights

 

CGI Group (GIB.a) – The long-term rising trend on GIBa paused for 10 months in a rectangle pattern that is now resolving to the upside. See the full article

 

Shopify (SHOP) – Harley Finkelstein, COO at Shopify joins BNN to discuss his views on the future of retail and his outlook for the company’s growth.

 

U.S. Growth Basket

 

Broadcom (AVGO) – Broadcom Shares Pop on Strong 2Q Results: What Wall Street’s Saying

 

Arista Networks (ANET)Arista Wins Another Wipe-Out of Cisco Patent, Says Wells Fargo

 

Pinnacle Foods (PF)Conagra, Pinnacle Foods deal talks have ended: Sources

 

 

Retirement Corner

 

 

 

Reads of the Week

 

  • Hot Charts – Canada: Lending standards are not U.S. circa 2006: Underwriting standards for mortgage debt in Canada has become an issue for many investors following the troubles of an alternative mortgage lender at a time when home price inflation in Ontario is ahead of fundamentals. Rapid home price increases should not come as a total surprise given that the Bank of Canada maintains a very accommodative monetary policy despite the fact that the unemployment rate in Canada’s most populous province is at a 17-year low. Fortunately, the Ontario government has recently stepped in with a number of measures to cool its housing market. In the meantime, we take solace from the fact that lending standards for first-time homeowners in Canada have remained strict in recent years. As today’s Hot Chart shows, the share of first-time homebuyers with a low credit score on this side of the border recently fell to a multi-year low of 4%. That is a far cry from the peak of 28% observed in the U.S. at the height of its housing bubble. See the full article

 

 

 

 

 

 

 

 

 

 

 

 

Economic Reports

 

Monday June 5th – US ISM Non-Manufacturing Index, US Factory Orders

Tuesday June 6th – None

Wednesday June 7th – Canada Building Permits; US Mortgage Applications and Consumer Credit

Thursday June 8th – Canada Housing Starts and New Home Price Index; US Initial Jobless Claims

Friday June 9th –Canada Employment Change and Unemployment Rate;

 

 

Earnings Reports

 

Monday June 5th – None

Tuesday June 6th – HD Supply

Wednesday June 7th – Dollarama

Thursday June 8th – Hudson’s Bay Company

Friday June 9th – None

 

 

Have a good weekend!

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