**August 5th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer Market
- Asset Allocation Strategy – All that glitters in not gold
- NBFM Forex (August 2016) – The return of risk aversion
- Oil down but CAD steady: What gives?
- JMRD Basket Corner
- Retirement Corner
- Reads of the Week
- Economic Calendar
- Earnings Reports
Asset Allocation Strategy – All that glitters is not gold
- The most important reason for gold’s appreciation has certainly been the bond markets. We are in uncharted territory regarding sovereign debt as 70% of global government bonds are yielding less than 1%, and 30% are even in negative yield territory. Such an environment is usually considered very constructive for gold as investors incur very little opportunity costs in owning the metal while implementing an effective hedge against potential inflation.
- Central bank policies combined with generalized risk aversion have now pushed fixed income assets toward extreme levels as investors are now stuck between a rock and a hard place where they must either take on greater risk by moving their investments into lower-credit rating classes or contend with subpar potential returns.
- As we expect the Fed will tighten its policy sooner than anticipated, we suggest taking a defensive position duration-wise while being more aggressive on the credit side. Such positioning will offer higher yields and mitigate the impact of a potential hike.
- For the U.S. dollar, the next quarters could show two opposing forces. While we expect that the timing of the Fed hike may help the greenback appreciate, we think the underlying global environment permitting such action would counter the effect, as this would mean the central bank thinks global risks are contained, thus reducing the US dollar’s attractiveness as a safety asset.
- In crude oil, we still expect the supply- and-demand picture to be balanced by the end of the year. U.S. domestic production is close to 1 million bpd less than at the peak witnessed earlier this year. Yes, the rig counts are increasing, but they are still materially lower than 12 months ago. However, inventory levels are much higher, which means any surprise in oversupply has the potential to be met with a substantial price decrease. (Full report attached)
NBFM Forex (August 2016) – The return of risk aversion
- If, as we expect, risk-aversion makes a comeback, triggered perhaps by profit-taking after recent gains in equity markets and/or the realization by investors that hefty valuations are not compatible with the weak global growth outlook, the greenback could get a lift. Indeed, the world’s reserve currency tends to gain in periods of heightened uncertainties. Additional stimulus from central banks in Japan and Europe could also help propel the trade-weighted greenback further.
- While the European Central bank has been in pause mode for the last few months, it made clear it was ready to act if needed. In light of the persistence of weak growth, threats of deflation and stress in the banking sector, more monetary easing can be expected from the ECB ─ including targeted loans to banks and an increase in the size of the ongoing asset purchases ─, something that should keep bond yields low and the euro under pressure. We are leaving unchanged our end-of-Q3 target of 1.06 for EURUSD. With the Japanese economy in the doldrums, the Bank of Japan is under pressure to add to the timid measures it implemented in July. So, while the comeback of risk aversion could temporarily push USDJPY below 100 over the near term, we expect the yen to depreciate over the longer term. Our end-of-2017 target for USDJPY is now 105.
- The Canadian dollar is under pressure from a disappointing global economy (and hence soft commodity prices) and weak domestic economic growth (i.e. the persistence of unfavourable interest rate spreads with the U.S.). The large current account deficit remains the loonie’s Achilles heel given that it continues to be financed primarily by short term foreign capital flows which can reverse on a whim. We continue to expect USDCAD to be in the 1.30-1.40 trading range over much of the next 12 months. (Full report attached)
Oil down but CAD steady: What gives?
The correlation between daily changes in CAD/USD and WTI has been particularly strong since 2009, averaging about 0.4. Since the beginning of July, however, it has completely broken down with the 4-week moving correlation dropping to zero (chart). For those (like us) that had predicted a drop in oil prices to $40, the last month has proven to be frustrating for our CAD forecast. Over that period, WTI has lost over 20% while the CAD has barely budged (down just over 2% vs. the USD). That is a spectacular resilience for our loonie. What gives? (See ‘Morning Comment’ attachment for full note)
JMRD Basket Corner
WSP Global (WSP) WSP showed good performance, especially in Australia, Nordics and the United States. UK (14% of EBITDA) was a good contributor to the results but post Brexit there is increased uncertainty in relation to spending, especially on the private side; note that we already adjusted our forecasts accordingly. We are very pleased with organic backlog momentum actually accelerating to 4.9% in the quarter from Q1/16 level of 2.0%. The shares traded higher by 9.5% this week
All Cap Basket
Innergex Renewable (INE) – Innergex reported strong Q2 results with generation 113% above LTA. Full report attached
Parkland Fuel (PKI) – Parkland reported very strong Q2 results. Adjusted EBITDA was $56.4M v. NBF at $47M and consensus at $52.5M. Strong profitability in the quarter was driven by performance in both the Retail Fuels segment (full quarter from Pioneer Energy) and Supply & Wholesale (+70% Adj. EBITDA y/y), partially offset by weakness in Western Canada and the Bakken region in the U.S.
U.S. Growth Basket
Applied Materials (AMAT) – “Why has Applied Materials Stock Surged Strongly in 2016?” (Forbes)
Broadcom (AVGO) – “Broadcom Punches Merger Ticket To Outplay Slowing Apple iPhone Sales” (Investor’s Business Daily)
- “Why Ranking Our Relative Retirement is misleading” (Financial Post)
Reads of the Week
- “’Weird’ corporate moves and frequent insider selling: Five reasons to sell a stock, even if your emotions tell you otherwise” (Financial Post)
- “The Unraveling of Harvard’s Star Trading Desk” (Bloomberg)
- “More Canadian oil will make its way to the U.S. Gulf Coast after US$2.6-billion Enbridge deal” (Financial Post)
- “Real Estate GDP Now Represents Half of Canada’s Economic Growth” (Huffington Post)
- “Fort McMurray after the fire” (Canadian Business)
- “Canada in Rio: Who to watch, follow and get excited about” (Globe and Mail)
Monday August 8th – Canada Building Permits
Tuesday August 9th – Canada Housing Starts
Wednesday August 10th – None
Thursday August 11th – US Initial Jobless Claims
Friday August 12th – Canada Teranet/National Bank Home Price Index; US Retail Sales, US Consumer Sentiment
Monday August 8th – Atlantic Power, Emera, Enercare Inc., Franco Nevada Corp, Kelt Exploration, Ritchie Bros. Auctioneers, Vermillion Energy, Ziopharm Oncology
Tuesday August 9th – Airboss of America, Centric Health, Exchange Income Corp, Gamehost Inc., Intrexon Corp, Raging River, Torc Oil and Gas, Valeant
Wednesday August 10th – Bellatrix Corp, Birchcliff Energy, Linamar, Northland Power, Painted Pony, Pason Systems, Peyto, Russell Metals, Stella Jones, World Point Terminals,
Thursday August 11th – Algonquin Power, Bonterra Energy, Chorus Aviation, Cineplex, Crescent Point Energy, Entrec Corp, Equitable Group, Horizon North Logistics, IBI Group, Intertain Group, Medical Facilities, Tamarack Valley, Trican Well, Western One,
Friday August 12th – Amaya
Have a good weekend and Go Canada!