**March 6th Issue of The JMRD Market Observer**
In This Week’s Market Observer
- NBF Economics & Strategy Special Report: The Oil-Price Shock and The Canadian Housing Market
- NBF Asset Allocation Strategy: Spring is finally coming
- NBF – Bank of Canada Policy Monitor: Target rate left at 0.75% as BoC sees more balanced risks
- NBF Forex (March 2015) – USD-related gyrations
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
NBF Economics & Strategy Special Report: The Oil-Price Shock and The Canadian Housing Market
This week, there was a host of news in Canada with the Bank of Canada announcement (no change in the Overnight rate) and the Canadian Banks winding up Q1 reports with the Bank of Nova Scotia reporting on Tuesday. We start off the Market Observer with a topic of much discussion recently, a look at the impact of lower oil prices on the Canadian Housing market.
- The oil price slide has crimped the Alberta home-resale market. There is nothing to indicate that the weakness is about to spread to major markets elsewhere in Canada, such as Toronto and Vancouver
- Uninsured residential mortgage loans in Alberta are generally non-recourse. There is fear in some quarters that a wave of strategic defaults could impair the profitability of Canadian banks to the point of triggering a severe contraction of credit in Canada as a whole.
- Since a borrower must make a down payment of at least 20% to obtain an uninsured mortgage loan, a strategic default is unlikely unless the home depreciates at least 20% from the purchase price.
- The mortgage loan delinquency rate rose sharply in Alberta in 1983 and 1984 when home prices fell more than 30%. It is likely that a wave of strategic defaults was a factor. Though there have been two recessions since then, the Alberta delinquency rate has never returned to a level near that of the early 1980s. Since in those two recessions the decline of home prices was much less pronounced than in the early 1980s, the opportunities for strategic default would have been rarer.
- Even if Alberta home values were to end up falling more than 20%, uninsured loans in that province account for only a modest portion of the mortgage loan portfolios of Canadian banks. Thus in the absence of some truly catastrophic turn of events, it is hard to see how a wave of strategic defaults in Alberta could shake the foundations of the Canadian banks to the point of triggering a severe contraction of credit.
(see attached for the full report)
NBF Asset Allocation Strategy: Spring is finally coming!
After a shaky month of January, stocks rebounded well last month. The S&P500 led the way with a performance of 5.7% bolstered by strong economic numbers while the S&P/TSX enjoyed strong contributions from the financials (6.7%). In addition to the anticipation of the ECB implementing its QE program, a general decrease in risks stemming from Greece and the Russia‐Ukraine conflict helped lift European markets. On the bond side, 10‐year notes were weak all month long with yields increasing from 1.68% to 2.00%. The bulls got a small reprieve with Fed Chair Janet Yellen’s congressional hearing, but it wasn’t enough to offset to overall bearish tone for this asset class last month.
Asset allocation strategy
- In WTI: even though the worst of the price action seems behind us, we are not out of the woods yet as the market anticipates sizeable inventory buildups over the next weeks and some participants are forecasting that Cushing’s storage facilities will to be full by mid‐April.
- There won’t be any movement in the fed fund rates until mid‐June at the earliest, but the next step is clearly an increase, not more easing.
- With strong ECB easing measures now in place and with geopolitical uncertainty moderating thanks to the deals in Greece and Russia/Ukraine, risk assets remain well positioned to offer the best expected returns over short and longer‐term horizons.
- We do not anticipate a significant pick‐up in yields over the short‐term, since lower energy prices will continue to put downward pressure on inflation, at least until this summer.
- Canadian dollar: the recent movement in the currency seems a bit overdone we continue to feel that the downtrend still has some legs to it.
(For more details, the full report is attached)
NBF – BOC Policy Monitor – Target rate left at 0.75% as the BoC sees more balanced risks
The Bank of Canada left the overnight rate unchanged at 0.75%. The central bank gave itself a pat on the back for January’s surprise cut by saying “Financial conditions…have eased materially since January, in response to the Bank’s recent monetary policy action and to global financial developments. This easing is reflected across the yield curve and in a wide range of asset prices, including the Canadian dollar. These conditions will mitigate the negative effects of the oil price shock.”
Also explaining the pause is the central bank’s view that “the risks around the inflation profile are now more balanced and financial stability risks are evolving as expected”.
The BoC still believes the negative impact from lower oil prices will appear in the first half this year, but it now thinks it may be even more front-loaded than projected back in January
The Bank of Canada is clearly prepared for more negative news from Alberta given that it says the impact of the oil price shock will be more front-loaded than it thought earlier. Governor Poloz will have to be surprised on the downside to take further action on rates. So, an April rate cut is unlikely in light of this morning’s press release. But as we’ve seen in recent months, the BoC’s message could change depending on economic data, e.g. Central Canada’s ability to offset anticipated job losses related to the oil shock, as well as the potential fiscal drag from upcoming provincial budgets that are not yet factored in the BoC’s current forecasts. Our view is that the odds remain tilted towards another rate cut.
(Full report attached)
NBFM Forex (March 2015) – USD-related gyrations
NBF’s Economics & Strategy department published its March Forex report this week which discusses a possible further short-term rebound in the Canadian dollar. (full report attached)
- While we expect the trade-weighted greenback to continue trending up this year in synch with diverging monetary policy in the U.S. and the rest of the world, there could be some volatility in the short term. Any hint of a delay to Fed rate hikes beyond Q3 could temporarily weaken the USD versus most majors. For instance, because of a dysfunctional Congress, uncertainties related to the debt ceiling could force the Fed to remain on the sidelines for longer. Another factor which may delay Fed hikes and hence cause gyrations in the currency market is U.S. inflation, the latter likely to remain below the Fed’s 2% target for a while, more so considering the negative impacts of the USD’s earlier surge on import prices.
- Money printing has historically weighed on the issuing central bank’s currency and there is no reason for the euro to be the exception.Considering our lack of enthusiasm with regards to the eurozone’s outlook, we expect the ECB’s QE program to be extended well beyond 2016. As such, we remain comfortable with our view that EURUSD will depreciate towards 1.05 by the end of next year.
- While the Bank of Canada stood pat in March, that’s not to say the easing cycle is over. There is a chance economic data will disappoint the central bank as the impact of the oil price slump becomes more apparent. Making things worse is the fiscal drag from upcoming provincial budgets, which are not yet factored in the central bank’s current forecasts. And if employment significantly weakens as a result of softer growth, the BoC may seek further “insurance”. That could get the loonie to resume its depreciating trend. But considering the above-mentioned USD-related gyrations, the loonie could swing towards 1.20 versus the greenback before weakening again.
JMRD Basket Corner
All Cap Growth Basket
CCL Industries (CCL.b) – BNN commentator Andrew McCreath speaks with Geoff Martin, CEO, CCL Industrieshttp://www.bnn.ca/Video/player.aspx?vid=554808
Parkland Fuel (PKI) – Parkland reported Q4 results this week, in-line with Street expectations. The company reported Q4 revenue of $1.74B (vs. $1.79B est. & $1.6B Q4/13), adj. EBITDA of $51.1M (vs. $50.2M est. & $50.6MQ4/13) and DCPS (adjusted for 1x acquisitions costs) of $0.37 reflecting a 71% payout (vs. $0.36/73% est. & $0.36/71%Q4/13). Results were similarly consistent with $51.4M consensus EBITDA
Apple (AAPL) – “Apple Will Join the Dow Jones Industrial Average”
CVS Healthcare (CVS) – “Walgreens and CVC Declare War on Property Taxes”
NXP Semiconductor (NXPI) – NXP announced on Monday that the company would acquire smaller rival, Freescale Seminconductor for about $11.8B in cash and stock. The deal will result in the combined entity being the eighth-largest semiconductor company in the world.Both companies are major suppliers of chips for use in cars and are seeking to benefit as vehicles become more advanced, requiring more processors and electronics. Shares of NXP moved higher by 15% on the week. NXPI
- Retirement shouldn’t bring new complexity to managing your portfolio (Globe and Mail)
- “How Nordstrom built the world’s best customer-service machine” From no-questions-asked returns to hand deliveries, Nordstrom is throwing down the gauntlet in Canadian retail
- “This Pirate Sells Treasures From Trader Joe’s to Canadians” (Wall Street Journal) Vancouver-based retailer Pirate Joe’s trades on the name and quirky reputation of the giant U.S. grocer
- “Don’t Be Like Buffet. Be Like You” (Bloomberg)
- “Will Tesla Ever Make Money?” (Bloomberg) Sure, Elon Musk makes great cars, but investors are wondering when his company will turn a profit
- What CEOs are saying about the state of the economy (skrisiloff.tumblr.com)
Week at a Glance
(See attached Week at a Glance report)
Monday March 9th – Canada Housing Starts
Tuesday March 10th – None
Wednesday March 11th – None
Thursday March 12th – Canada Teranet/National Bank Home Price Index; US Retail Sales, US Initial Jobless Claims
Friday March 13th – Canada Unemployment Rate; U. Of Michigan Consumer Confidence
Monday March 9th – None
Tuesday March 10th – Kelt Exploration, Detour Gold
Wednesday March 11th – Crescent Point Energy, Northern Properties REIT
Thursday March 12th – Bellatrix, Canadian Energy Services, Veresen
Friday March 13th – None
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