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Friday, April 28th, 2017
Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S. Obata

TODAY

 
Markets are mixed heading into the close this week.  It’s been a good one everywhere except Canada.  The shadow surrounding Home Capital leaked into the rest of the financials yesterday, causing that sector to drag the index down.  Energy hasn’t helped, though oil is higher this morning.

Loonies are holding their own for the day after a pretty terrible 2 weeks.  Headlines point to NAFTA, but as we pointed out yesterday, we look at bonds, commodities and technicals right now.  This current pause in the action is a pregnant one indeed…
 
Can stocks and bonds both be right?  Typically we see government bonds rising while stocks fall.  For the last couple of months, it has been wins on both sides of the tape.  Tim Duy, writing for Bloomberg, looks at the rate hike cycle and concludes it is still early.  Typcially, it is the last couple of rate hikes that should cause us worry when stocks and bonds are diverging.

Speaking of rate hikes, Capital Spectator comments on the chances of a June rate hike.  Currently, Fed Funds futures are putting the odds at 70% for a June hike (and just 13% for next week).  There’s not much inflation forecasted by the market and income pressures continue to build – albeit VERY slowly.  We’d guess there are 2 hikes in store before the end of the year.
 
Quote to ponder:  “… by buying illiquidity I thought I was buying a huge yield.  But I learned through buying illiquid investments cheap, you still need to find a buyer (if you need to exit)” - Steve Sjuggerud on Meb Faber’s podcast.  Short lesson – liquidity has a price.  Don’t ignore one side of the market!
 
Where have we heard this before? Trump is threatening to renegotiate another trade deal, this time with South Korea. South Korean shares are lower this morning, but it’s worth mentioning that they are trading more or less in line with the rest Asia. Has the market tuned out Trump already? This might be a first for a president in his first 100 days. He also wants them to pay $1 billion for a missile defense system. Oh, and the sabre rattling continues, with him warning of a “major, major conflict” with Pyongyang. South Korea is the 7th largest trading partner with the U.S, with total trade about a fifth of that with Canada. They are hardly enemy number one in terms of trade deficits either. They are number 10 on the list, behind the likes of Italy, Venezuela and Ireland.
 
Trumps pen will get some more action today, signing an executive order to proceed with the America First Offshore Energy Strategy. It’s intention is to open up millions of coastal acres to offshore oil and gas drilling. Is this a game changer for the U.S. energy complex? Hardly. Offshore oil and gas drilling take years to get up and running, and are extremely costly. Sure make a good headline for his support base.
 
In an attempt to shift sentiment following the bloody and battered passenger dragged off an oversold United Airways flight in Chicago, the airline increased the amount they will offer passengers to $10,000, to change flights. However, this is more of a publicity stunt because it works as an auction, offering an increasing amount to all aboard until someone bites. Rarely does it ever go above $1,000.

In other United news, Dr. Dao has received a financial settlement from the airline. Details are light, but both parties I’m sure are just happy to move on and leave this incident in the past.
 
Diversion:  The prettiest cars ever made?  Yes.  The prettiest cars ever made.  $115 million worth of Aston Martins.
 

COMPANY NEWS

Qualcomm is lowering their full year guidance following their dispute with Apple, which is withholding payments until the licensing fee arrangement is altered. Home Capital Group  received a $2bb loan from a consortium led by Healthcare of Ontario Pension Plan to help offset the nearly $800mm in deposits that have been pulled out of their high interest savings accounts this week. Sony Corp. reported their highest profits since 1998 as they continued their dominance in video games with a new Mario Brothers mobile version. They have also had prolific growth in the phone camera chips division. GM reported a strong profit as they ramped up production of current model SUVs and Trucks before a retooling takes place.
 

COMMODITIES

Oil is up 1.45% to $49.68. Black gold is set for its second consecutive weekly loss. In terms of drivers, rumors about an OPEC production cut extension have been offset by rising US production.

Gold is up 0.07% to $1266.78. The precious metal has given up its earlier gains after decent US economic data led to a rise in rates.

In other commodities news…

Libya's Sharara, El Feel oilfields restart after pipeline protest” – RTS

Potash Market Rebound in ‘Full Force’ as Global Demand Improves” – BBG

Trump Administration Opens Trade Investigation on Aluminum” – BBG

Peanut Farmers Harvest U.S. Federal Checks as Glut Persists” – BBG

FIXED INCOME AND ECONOMICS

Home Capital Group debt continues to be one of the most traded and talked about names after officially becoming a junk rated issuer last night. S&P Global Ratings downgraded the debt of the holding company by four notches to B+ from BBB- while maintaining the negative trend. "The rating action follows a series of recent developments at HCG that are undermining the firm's franchise value, including funding challenges stemming from diminished depositor confidence, heightened governance-related risks from continued executive and board turnover, pressures arising from OSC actions, and the negative impact on earnings and originations from evolving funding arrangements" said S&P Global Ratings credit analyst Michael Leizerovich. The move comes a day after DBRS downgraded HCG’s rating two notches to BB from BBB(low). For those looking for a detailed update on the company’s developments this week, Bloomberg has it well covered here. The company’s three bond issues maturing in next month, in March 2018, and in December 2018, were traded heavily yesterday with all of them closing at session highs. Early indications see them bid contextually at $95.00, $89.00 and $89.00 respectively (note they are trading on a “recovery” and not a “yield” basis).
 
GDP figures are out for both Canada and the U.S. this morning with both disappointing somewhat. Output in Canada failed to rise at all during February to miss the +0.1% expectation but still managed to report a yearly increase of +2.5% --- the fastest pace of economic expansion in over two years. Goods-producers (-0.3% overall) slumped badly with contractions seen in the agriculture (-1.2%), mining (-0.2%), manufacturing (-0.6%) and utilities (-0.2%) sectors. Service-producers (+0.2%) helps balance the decline with decent gains seen in the finance( (=0.7%), real estate (+0.5%) and professional services (+0.5%) categories. South of the border, the BLS reported that the American economy grew at a +0.7% annualized clip during Q1 --- way below the +1.0% consensus and the +2.1% pace prior. Consumption was way down, rising by just +0.3% compared to +3.5% last quarter while prices accelerated more than expected (+2.3% vs. +2.1%). Not exactly a good recipe for economic growth for sure, but we’ll take solace in knowing that this is just the first reading of three for U.S. GDP. The loonie is unchanged on the release, hovering at 1.3650 against the greenback as the two missed releases offset each other.
 

CHART OF THE DAY

QUOTE OF THE DAY

The most useful piece of learning for the uses of life is to unlearn what is untrue. 

- Antisthenes


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Charts are sourced to Bloomberg unless otherwise noted.

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