Author: Consultant

CNN
—
On March 13, the Biden administration approved the controversial Willow Project in Alaska.

ConocoPhillips’ massive Willow oil drilling project on Alaska’s North Slope moved through the administration’s approval process for months, galvanizing a sudden uprising of online activism against it, including more than one million letters written to the White House in protest of the project and a Change.org petition more than 3 million signatures.

Here’s what to know about the Willow Project.

What is the Willow Project?
ConocoPhillips’ Willow Project is a massive and decadeslong oil drilling venture on Alaska’s North Slope in the National Petroleum Reserve, which is owned by the federal government.

The area where the project is planned holds up to 600 million barrels of oil. That oil would take years to reach the market since the project has yet to be constructed.

Who started the Willow Project and when?
ConocoPhillips is a Houston-based energy company that has been exploring and drilling for oil in Alaska for years. The company is the only one that currently has oil drilling operations in Alaska’s National Petroleum Reserve, though its two operating projects are smaller than Willow would be.

https://edition.cnn.com/2023/03/14/politics/willow-project-oil-alaska-explained-climate/index.html

This a CNN posting – Beware of bias!

• Canada has one of the largest deposits of minerals that are essential to manufacture of electric cars.
• “We see today that, for example, China produces 98% of Europe’s supplies of rare earths,” European Commission President Ursula von der Leyen said earlier this month.
• The G-7 group of advanced economy announced in December a plan to ramp up the production of these minerals.

https://www.cnbc.com/2023/03/14/canada-is-aiming-to-beat-china-in-the-critical-race-for-rare-earth-metals-.html

• Meta CEO Mark Zuckerberg said Tuesday the company plans to cut 10,000 employees.
• The company laid off more than 11,000 employees in November.
• Zuckerberg has pitched 2023 as Meta’s “year of efficiency.”
• The CEO previously told analysts Meta plans “on cutting projects that aren’t performing or may no longer be crucial” while simultaneously “removing layers of middle management to make decisions faster.”

https://www.cnbc.com/2023/03/14/meta-layoffs-10000-more-workers-to-be-cut-in-restructuring.html

Gold and silver prices surged on Monday, as their safe-haven appeal drew in investors spooked by the collapse of Silicon Valley Bank, with the crisis also sparking hopes the U.S. Federal Reserve would have to slam the brakes on its aggressive monetary policy.

The U.S. dollar and Treasury yields extended their declines despite efforts by regulators to control the Silicon Valley Bank and Signature Bank turmoil.

https://www.cnbc.com/2023/03/13/safe-haven-gold-accelerates-as-traders-assess-svb-fallout.html

Oil prices fell over 2% in volatile trading on Monday as the collapse of Silicon Valley Bank roiled equities markets and raised fears of a fresh financial crisis, but a recovery in Chinese demand provided support.

Brent crude futures settled down $2.01, or 2.4%, to $80.77. The global benchmark earlier fell to a session low of $78.34, its lowest price since early January.

U.S. West Texas Intermediate crude futures (WTI) dropped $1.88, or 2.5%, to $74.80 a barrel. WTI earlier declined to $72.30 a barrel, its lowest price since December.

https://www.cnbc.com/2023/03/13/oil-prices-slip-as-concerns-over-rate-hikes-rattle-investors.html

• On Friday, Signature Bank customers spooked by the sudden collapse of Silicon Valley Bank withdrew more than $10 billion in deposits, a board member told CNBC.
• That run on deposits quickly led to the third-largest bank failure in U.S. history. Regulators announced late Sunday that Signature was being taken over to protect its depositors and the stability of the U.S. financial system.
• “I think part of what happened was that regulators wanted to send a very strong anti-crypto message,” said board member and former congressman Barney Frank.

https://www.cnbc.com/2023/03/13/signature-bank-third-biggest-bank-failure-in-us-history.html

The world’s leading French fry maker is making the largest investment in its history, with McCain Foods announcing plans on Monday for a $600-million expansion of its potato processing facility in southern Alberta, creating 260 new jobs.

McCain, maker of one in four fries eaten each day around the world, is doubling the size of its plant in the town of Coaldale, near Lethbridge.

“This investment is a sign of our confidence in the future of food production in our home country,” said Max Koeune, chief executive officer of New Brunswick-based McCain.

McCain operates in 160 countries and Mr. Koeune said: “The stability of Canada, in contrast to the geopolitical uncertainty in many parts of the world, is important to us when we think about the growth of our business.”

Expanding in Alberta encourages farmers to devote additional land to growing potatoes, building a stronger agriculture industry in the province, Mr. Koeune said. Demand for French fries traditionally grows at 2 per cent to 3 per cent annually. McCain’s sales to institutional customers, such as restaurants, and shoppers buying frozen food in grocery stores are rising at a slightly faster pace, Mr. Koeune said, as the company wins market share by successfully competing on product innovation.

Family-controlled McCain has 51 production facilities around the world, almost all of which are located in rural communities, and more than 20,000 employees. Over the past five years, McCain spent $157-millon expanding its two facilities in New Brunswick, $100-million building its first plant in Brazil, $200-million to expand in Idaho and $300-million building out a facility in Washington State.

“While we have grown globally, we are thrilled to be able to make our largest investment at home, in support of our employees and farmers,” Scott McCain, chair of McCain Foods, said in an e-mail. “Our family is proud of our Canadian roots and excited about the future of agriculture in Canada.”

The majority of French fries produced in Coaldale will be sold in North America, with a minority of future production exported to Asian and Latin American markets.

Alberta farmers dedicate 68,000 acres to growing potatoes, making the province the third-largest producer of the crop, behind Prince Edward Island at 85,000 acres and Manitoba at 79,000 acres. McCain has two facilities in both New Brunswick and Manitoba. The company closed a PEI processing centre in 2014, shifting the work to its New Brunswick operations.

Over the past five years, Alberta farmers increased the amount of land dedicated to potatoes meant for French fries by 29 per cent to 43,000 acres, or 63 per cent of the total crop, according to data from the Potato Growers of Alberta.

In a sign of consumer preference for frozen food, just 8 per cent of Alberta’s potato farmland is dedicated to growing fresh produce for grocery stores. Approximately 10 per cent of potato farming is devoted to making the raw material for chips.

McCain spent $94-million to build its Coaldale plant, which opened in 2000, and increased the facility’s capacity by 14 per cent in 2017. It employs 225 people. The renovations are scheduled to begin this year.

Expanding in Alberta gives McCain an opportunity to green its operations. The new plant will run on wind and solar power, and generate biogas to run boilers, cutting natural gas consumption. Mr. Koeune said the environmental initiatives will allow McCain to double the size of the facility without increasing its carbon emissions. “The work we are doing in Coaldale on sustainability will help us to hit our goal of cutting greenhouse gas emissions in half, globally, while continuing to expand our business,” he said.

Founded 66 years ago by four brothers, McCain has grown from a regional producer of frozen French fries to one of the world’s largest food producers, with annual sales of $11-billion. In addition to fries, the company makes pizza, snacks and desserts under various brand names.

Mr. Koeune joined McCain 10 years ago as chief financial officer and was named CEO in 2017. He was previously head of business development at Paris-based dairy company Danone SA.

Alberta farms and ranches sold a total of $15.4-billion of agricultural products in 2020, the most recent year provincial government statistics are available. Cattle, wheat and canola were the largest sectors, each accounting for roughly a third of sales. In 2020, farmers in the province sold $272-million of potatoes.

Large bank stocks declined further as the impact from the failure of California-based Silicon Valley Bank on Friday continued to ripple through financial markets, raising the question of whether Canada’s Big Six banks are too cheap to pass up.

Observers argue that the specific issues that sank SVB – including exposure to the struggling tech startup ecosystem, a large amount of uninsured deposits and assets tied up in long-dated debt securities – mean that a full-blown financial crisis is unlikely.

That supports the case for investing in Canada’s biggest banks, which dominate the Canadian banking landscape through an oligopoly and are diversified across lending lines and geographies. These banks withstood even the financial crisis of 2008 without having to cut their dividends.

OSFI takes control of Silicon Valley Bank’s Canadian unit

SVB impact: Credit markets suddenly price in Bank of Canada rate cuts this year, bond yields plunge

“The big lesson of SVB’s collapse is that the U.S. banking sector needs to become more Canadian,” Meny Grauman, an analyst at Bank of Nova Scotia, said in a note.

In the near-term, though, the direction of bank stocks is anyone’s guess, amid an increasingly gloomy outlook. The Big Six banks fell as much as 3.5 per cent early Monday, on average, before recovering some ground. The sector ended the day down 1.8 per cent.

Bank of MontrealBMO-T -2.02%decreaseand Toronto-Dominion Bank, two banks associated with substantial exposure to the United States, were hit harder. BMO fell 2 per cent and TD fell 2.9 per cent.

The banking group, the backbone of most dividend mutual funds and exchange-traded funds, is now down about 9 per cent from a recent 2023 high in mid-February.

The initial selloff of bank stocks last month was connected to central banks mulling larger-than-expected interest rate hikes in the face of stubbornly high inflation, raising concerns about credit health, the housing market and economic activity.

Now, the selloff has entered new territory: Bank stocks are reflecting a surge in investor anxiety after the collapse of SVB and what comes next as many other U.S. banks flounder.

Opinion: Silicon Valley Bank collapse shows our financial system is just a collective delusion

Opinion: Silicon Valley Bank’s fall marks an identity crisis: the bonfire of the venture capitalists

Regulators closed New York-based Signature Bank on Sunday, after a run on the crypto-lender’s deposits. On Monday, the crisis spread further, hitting U.S. regional banks that have a large share of potentially flighty deposits that are not insured by Federal Deposit Insurance Corp.

First Republic Bank fell 62 per cent, Western Alliance Bancorp dropped 47 per cent and Zions Bancorp fell 26 per cent, illustrating how fast investors can lose faith.

The rout developed despite assurances over the weekend from the U.S. Treasury Department, the Federal Reserve and the FDIC that they will fully protect all depositors with Signature Bank and SVB to strengthen public confidence in the banking system.

“The authorities were clearly concerned that systemic risks were real heading into this week,” David Rosenberg, of Rosenberg Research & Associates, said in a note.

Canadian bank stocks are capable of falling 30 to 50 per cent in the case of a bad recession or crisis. Today, they are about 20 per cent below their record highs in early 2022, suggesting they are not yet reflecting a truly dismal future.

But there’s some good news here for investors who can tune out the bad news and focus on the sector’s impressive track record for stability.

For one, if nervous depositors – and finicky investors – are shifting from smaller financial players to larger ones out of fear, then the biggest banks could benefit from an influx of new clients.

For another, while SVB’s ratio of uninsured deposits was nearly 90 per cent prior to the crisis, uninsured deposits at the U.S. arms of TD and BMO are well below that level, suggesting that the risks of a crisis are significantly lower.

They range between 50 per cent and 60 per cent, according to Gabriel Dechaine, an analyst at National Bank Financial. That is consistent with most U.S. regional banks he tracks.

And lastly, although Canadian bank stocks are not absurdly cheap, valuations are low.

According to Darko Mihelic, an analyst at RBC Dominion Securities, the Canadian banking index’s price-to-book ratio – which compares share prices to book values (or assets minus liabilities) – fell to 1.47 on Friday. That’s below the average of 1.79 since 2010.

Still, the current valuation is merely in line with a shallow recession, while price-to-book ratios can fall to 1.2 when banks are under significant stress or even 1 – that is, the stocks trade at book value – during exceptional uncertainty.

The quick translation: There’s downside risk here if a financial crisis is brewing, but the long-term opportunity is looking attractive.

Bond markets have made a dramatic reassessment of future rate moves by central banks in the wake of the Silicon Valley Bank failure and bailout- including that of the Bank of Canada.

Swaps-based implied probabilities of future moves by the Bank of Canada suggest decent odds of a quarter-point cut at its next meeting on April 12. And markets are pricing in at least 50 basis points of interest rates cuts by this summer.

As of Friday, when U.S. jobs data hinted at disinflationary trends and news emerged of the collapse of Silicon Valley Bank, money markets were priced for a strong likelihood that the Bank of Canada would be on hold for the rest of this year. Prior to that news emerging on Friday, they were even pricing in a quarter point hike by mid year.

This morning, the market’s assessment of future Bank of Canada moves has shifted with a speed seldom seen. It was accompanied by a big dive in bond yields, especially in shorter-term issues. The Canadian 2-year bond yield, for instance, is down nearly 40 basis points, to 3.58%, largely tracking the move in 2-year U.S. Treasuries. The U.S. 2-year treasury yield is set for its biggest one day fall since 2008.

Changes in central bank policy rates are particularly felt on the shorter end of the bond yield curve. They also directly impact variable mortgage rates and many other forms of credit.

At last check, the Canada 5-year bond yield, highly influential on fixed mortgage rates, was down more than 30 basis points and retesting its lows for this year.

Here’s what Refinitiv Eikon data is showing as of 10:25 a.m. ET for what credit markets are pricing in for the Bank of Canada’s overnight rate.

MEETING DATE	IMPLIED RATE	BASIS POINTS
12-Apr-23	4.423	-5.89
7-Jun-23	4.246	-23.59
12-Jul-23	3.9678	-51.41
6-Sep-23	3.9444	-53.75
25-Oct-23	3.9151	-56.69
6-Dec-23	3.8187	-66.32

Source: Refinitiv

The current Bank of Canada overnight rate is 4.5%. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. And they are particularly volatile at the moment, with significant shifts from minute to minute.

As of this writing, the bond market suggests about a 40% chance of a Bank of Canada cut next month. By August, it’s pricing in a near certainly that there will be a cut.

A similar reassessment is underway over future moves by the Federal Reserve.

On Sunday, the U.S. administration took emergency steps to shore up banking confidence, guaranteeing deposits after withdrawals overwhelmed Silicon Valley Bank and closing under-pressure lender Signature Bank in New York.

But while stock futures rose in relief, bond markets opened in Asia with a furious race to re-price rate expectations on the thinking that the Federal Reserve can only be reluctant to hike next week while the mood is febrile and delicate.

“The market thinks that this is not just SVB (Silicon Valley Bank), but several banks. The sharp rise in policy rates and sovereign yields over the last year and a half has put a lot of banks under stress,” said Stan Shipley, fixed income strategist at Evercore ISI in New York.

“The consequence is that the outlook for rates is not going to be as high as previously thought. Last Wednesday, you had people thinking 6% (peak Federal Reserve funds rate) is a sure thing. I don’t think anybody thinks that now,” Shipley added.

Bank stress and the resultant shakeout of loan books mean higher borrowing costs, said Akira Takei, fixed income portfolio manager at Asset Management One in Tokyo, with the resulting pressure in the real economy making further hikes difficult.

“If (U.S. Fed Chair Jerome) Powell lifts interest rates next week, he will jeopardize this situation,” he added. “If they don’t prioritise financial stability, it’s going to (breed) financial instability and recession.”

A late-Sunday note from Goldman Sachs, in which the banks’ analysts said the banking stress meant they no longer forecast the Fed to hike rates next week gave the rates rally an extra leg in the Asia session.

At 4.05%, U.S. two-year yields are below the bottom end of the Fed funds rate window at 4.5% – a sign markets see rates’ peak is near.

The latest futures pricing implies a near 40% chance the Fed stands pat next week and an 60% chance of a 25 bp hike – a huge shift from last week when markets braced for a 50 bp hike.

“I think people are linking Silicon Valley Bank’s problems with the rate hikes we’ve already had,” said ING economist Rob Carnell.

“If rates going up caused this, the Fed is going to mindful of that in futures,” he said. “It’s not going to want to go clattering in with another 50 (bp hike) and see some other financial institution getting hosed.”

Monday’s early moves also sharply pulled forward and pushed down market expectations for where rates peak. From about 5.7% on Wednesday, implied pricing for the peak in U.S. rates was testing 5% on Monday and year-end expectations – above 5.5% last week – tumbled to about 4.7%, a drop of some 80 basis points in days.

With files from Reuters