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Tuesday, March 28th, 2017
Contributors: C.Basinger, D.Benedet, C.Kerlow, D.Mak, S. Obata


Markets are trying to get over the volatility resulting from the failed attempt to repeal the US Affordable Care Act.  So far, it is looking pretty good.  Futures are pointing to a mildly lower open, overseas markets were relatively quiet. The US dollar is regaining a little ground and yields are up a little.  As the Trump team moves to tax reform, a failed attempt at that one is not likely going to be as easy for the market to stomach.  We knew it would be interesting.
We often use the Citigroup economic surprise indices that track eco data relative to consensus.  It gives an idea of how the economy is doing relative to expectations.  Bloomberg has a similar index but they also provide components, breaking down the economy.  This is the chart of the day.  It is clearly a positive story, looking at the black line on top that is the aggregate.  Digging into the pieces, labor is on the rise and business cycle is way up there (this includes many of the survey based data such as PMI).  The laggards are personal and industrial.  Personal could improve if wages start rising and enough positive PMI data should translate into better industrial.  Overall, its pretty good and the top line number is near the highest level in years. 
Ok, everyone agrees that OPEC has a spotty record at compliance when it comes to quotas on production.  How does OPEC cut production by 500k barrels per day?  They announce a million barrel cut.  Perhaps this is unfair this go around, after all production has dropped in the last couple months.  Mainly due to Saudi Arabia (-750k b/d), Kuwait (-200k), Iraq (-180k), with Venezuela and UAE also reducing by about 100k since the production peak in November.    Now the peak in November was extreme, but still this is a decent decline led by Saudi Arabia.  And there is talk of extending the production cuts.  Well if OPEC has a history of cheating what about Russia?  They claim to be cutting production yet February production was down only by 100k and tanker loadings in March were up 180k barrels per day from February.  In fact tanker loadings have been rising pretty steadily since December.  Tanker oil usually hits the market with a one month lag.  But there are other reasons that influence tanker oil loadings including pipeline shut downs, variance in domestic consumption to name a few.  Still, on the surface when it comes to oil production and quotas, there is a difference between what people say and what they do, which appears to go beyond just OPEC. 

Factor based ETF’s were all the rage the past couple of years with new issues brought out by more a couple firms developed to isolate and exploit market based factors. You might also recognized the term ‘smart beta’. From value to momentum the entire spectrum has been sliced and diced. The Capital Spectator has a good review on how they have performed. As in investment it’s tough to pick one single factor that will always outperform, but looking at how they have been doing is a good way to see what’s been driving the market. Leading the charge ATM are high quality names, and the min. vol. space is also making a comeback after lagging for the past seven months.
Saudi Arabia adds a little more sweetener to its upcoming Aramco IPO. The kingdom has just lowered the tax rate for the state run oil behemoth, by royal decree retroactive to Jan. 1st. Along with an organized OPEC production cut to boost the value of crude along with its reserves, the tax cut will make Aramco even more profitable and therefore appealing new investors. That being said, the previous tax rate of 85% (now 50%) did seem a tad high but this move isn’t going to help the Saudi government close its budget deficit.
Diversion: The world’s first front flip by a monster truck, jump to about 2 minutes to see the whiplashy action.


According to the @realDonaldTrump Ford will be announcing the investment in three Michigan auto plants. This comes after the President eased environmental regulations in return for more hiring. Emissions standards have plagued the industry to appease shifting client tastes for larger vehicles. Analysts are estimating that the Saudi Aramco IPO could be valued at over $1 trillion. This comes after the government reduced the tax burden overhanging the company. Amazon has made an offer to purchase online retailer This comes after they walked away from the deal earlier this year. Enbridge is raising $500mm in a secondary offering of Enbridge Income Fund to pay down debt amassed from the purchase of Spectra Energy.


Oil is up 1.17% to $48.29. Prices are moving higher after yesterday’s rebound. Even so, it is important to note that oil is now trading at pre-OPEC cut levels.

Gold up 0.12% to $1257. Precious metals continue to rise as the USD tries to find its footing.
In other commodities news…

US producers build up sales hedges as oil falls” – FT

Iranian oil minister says global oil cuts deal likely to be extended” – RTS

COLUMN-Market share or higher prices? The Saudi, Russia oil dilemma: Russell” – RTS

Threat of Cyclone Disrupts Mining in No. 1 Met Coal Exporter” – BBG

Brazil's Tainted-Meat Probe Leaves World Hungry for Chicken” - BBG

h/t @JKempEnergy


Treasuries and Canada’s are higher again to start the session with 10’s up an eighth south of the border and higher by a quarter north of it (yes, we are outperforming for once!). Not much on the docket to swing markets save for more leftover healthcare aftermath and some home pricing data at 9AM, so bonds will be moving with technical and equities as the main drivers. It’s been a quiet last couple days in domestic new issuance with nary a corporate bond deal seen in the market. Save for TD’s $1.5 billion depo deal last Monday (a standard bank issue) and the 407 ETR’s 2033 deal (part of their regular funding program to continue extending the highway), nothing has noteworthy has come from any issuer. Earnings season is over so you can partially attribute the light calendar to general risk aversion in the market. Morgan Stanley did sell $750 million in new three year FRN’s yesterday that was upsized from the original $500 million target. It’s the U.S. bank’s second CAD deal already this year, and saw the deal price at quarterly CDOR +70.0 bps. That brings out a coupon of about 1.63% for investors. Aside from the elimination of interest rate risk, it’s not a heck of a lot of return for a BBB+ rated issuer.



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- A Filipino proverb

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