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Monday, June 26th, 2017
Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S. Obata


It feels as though summer has truly started, and the markets are happy for it, showing solid gains to start the week overseas.  While Australia was flat, Hong Kong and China managed some decent gains, and Europe is broadly up around 1% at the halfway point in the day.
Credit spreads are also moving in, with the Markit investment grade index sub-60, where it spent a brief period in 2014 before doubling through 2015 and early 2016.  We are watching closely and thinking about the possible effects, as that move coincided with the disastrous year for preferred shares (which was largely blamed on interest rates rather than credit), and of course energy credits were pinned as the primary cause of the broad decline.

Credit can stay “tight” for long periods of time, though.  The fact that both investment grade and high yield spreads are as low as they have been since 2006 doesn’t in itself spell trouble.
News that China’s A-Shares are being added to the MSCI World index (as long speculated) certainly turned some heads – but of course there are skeptics given many of the tight controls that the Chinese continue to have over their mainland stock market and money flows.  SCMP reports.
Crude declined close to 4% last week, bringing the price down over 20% from recent highs. Sentiment is clearly pretty negative at the moment, and bear market oil headlines dominated a lot of the news flow. We analyzed the news flow of the past week over Bloomberg and counted 104 instances of “bear market” and “oil” in the same headline. This was certainly an extreme reading, which when plotted over the price of oil shows that, as a SHORT TERM sentiment indicator, it can be taken as a bullish sign. That being said, our most recent Market Ethos report on oil looks at the bigger picture. We remain underweight in our portfolios and advise patience.
Nestle targeted by Dan Loeb in activist investors biggest ever bet. Loeb’s Third Point has built a $3.5 billion position in the company. For now the company is publically saying that it will remain committed to its strategy, while keeping an open dialogue with its shareholders. Loeb would like to push the company into selling L’Oreal, increase leverage and increase share buybacks.
Hong Kong has lost its ranking as world's top IPO market. Based on deals over the first six months of this year, it has slipped to third behind New York and Shanghai. Snaps $3.9 billion IPO certainly helped give a boost to New York, but a first half total of $18.2 billion has given it a healthy lead over its Asian rivals.
Diversion:  The inaugural Azerbaijan Formula 1 race was a barn-burner, and Canadian Lance Stroll became the youngest Canuck (and second youngest ever) to ever podium.  Click through for highlights from Baku.


Berkshire Hathaway is buying nearly 10% of Store Capital Corp. sending shares of the REIT up over 15% in premarket trading. This is another real estate bet after the company took a stake in Home Capital Group last week. The LCBO fending off a strike of their nearly 8,000 workers this weekend with the help of a mediator. Stores were staying open longer than usual this weekend to allow customers a chance to stock up, just in case. Amazon is planning on revamping how Whole Foods operates their warehouses once the $14bb deal closes. They see this as one of the most immediate ways to realize cost synergies.


Oil is up 0.23% to $43.11. The wait is finally over. Read our latest Market Ethos report - “Oil In Purgatory” - here.

Gold is down -1.50% to $1,237.60. The yellow metal has been under pressure since the European open. Next support is at $1235, which corresponds to the 200 day moving average.

In other commodities news…

OPEC Gets Another Supply Headache From Surging Brazilian Exports” – BBG

Hedge funds turn from Opec friend to adversary in oil market” – $FT

Yancoal Said to Add New Incentives to Offer for Rio Coal Assets” – BBG

Gold Plunges as 1.8 Million Ounces Traded in a New York Minute” - BBG


Italian PM Paolo Gentiloni unveiled yesterday after an emergency cabinet meeting in Rome that the nation has agreed to a €17 billion bailout of two more banks in the biggest ever rescue plan of their financial system. The  rescue deal for both Banca Popolare di Vicenza and Veneto Banca comes six months after the Italian government decided to bail out Monti dei Paschi, who were unable to raise capital from private investors at the time. Under the terms of the current landmark arrangement, funds will come from the banking group Intesa Sanpaolo that will see them initially tap about €5.2 billion to take on some assets without hurting capital ratios. The Italian government will then provide an additional €4.8 billion (guaranteeing an additional €12 billion if needed) to help with the takeover. Note that this is in direct contradiction to the EU’s current banking rules on bailouts --- specifically, that they are not allowed and that taxpayers are not to be saddled with rescuing banks (hence the creation of “bail-ins” whereby bondholders are supposed to take the brunt of any pain). German officials have already condemned the use of state resources and are investigating Italy’s use of a “public interest” clause loophole that has circumvented the rule. Fears are now that other distressed European banks will follow the same route.
Orders for U.S. durables fell by -1.1% at the end of May and more than the -0.6% forecast. That’s back to back months of declines and the first time in a year that purchases for capital equipment fell in consecutive periods. While some solace can be taken in knowing that this data print is notorious for being a far-flung number due to the tendency of a single transportation order skewing the result, it is becoming worrisome that the purchases of airplanes are the only reason the number has stayed positive the last little while. Core durables were up just +0.1% (missing the +0.4% expectation) while shipments and new orders of non-defense equipment were down -0.2% each. Virtually no positives in the details either with slowing momentum in inventories throughout. Treasuries are catching a decent bid post-release with equity futures down a touch and gold bouncing off the morning low.



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––Steve Jobs

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Charts are sourced to Bloomberg unless otherwise noted.

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