Author: Consultant

  • These Canadian banks are now among Citi’s top global stock picks

    These Canadian banks are now among Citi’s top global stock picks

    Morgan Stanley U.S. equity strategist Michael Wilson is looking for lower earnings forecasts to signal a durable market bottom,

    “Over the past few weeks, interest rates have fallen sharply as the economic data continue to disappoint. Meanwhile, the S&P equity risk premium has also risen to 340 basis points, closer to our fair value level of 370bps. This is a necessary condition for a more durable low in equity prices, but until earnings estimates are cut to more reasonable levels or valuations reflect that risk, the bear market is not complete, in our view… several leading signals point to forward earnings expectations decelerating in the coming months from these elevated levels. Importantly, earnings revisions breadth, which often leads forward dollar EPS, is in negative territory and has decelerated further in the last few days/weeks … Generally, we find that defensive industries (Telecom, Utilities, Insurance, Real Estate, parts of Staples and Healthcare) screen relatively well when assessed on this basis. Meanwhile, we find that cyclical tech groups (Tech Hardware and Semis) screen as having higher risk on this basis. We also find that several consumer oriented groups (Food & Staples Retailing, Consumer Services, and Consumer Durables and Apparel) as well as Transports screen as being more at risk based on this framework.”

    “MS: Sectors most at risk of downward earnings revisions” – (research excerpt) Twitter

    ***

    Citi strategist Chris Montagu manages a World Radar stock screen methodology combining valuation and momentum in terms of stock price, earnings and cash flow growth.

    Canadian bank stocks dominate the list of stocks that have moved into the top decile of MSCI World index members that have jumped into the first decile of attractiveness by Citi’s criteria.

    Royal Bank of Canada and Toronto-Dominion Bank benefited from attractive relative valuation, while Bank of Nova Scotia and National Bank of Canada climbed into the top decile thanks primarily to relative stock price momentum.

    “MSCI World stocks climbing to top decile in Citi’s World Radar screen” – (table) Twitter

    ***

    BofA Securities U.S. equity strategist Savita Subramanian detailed the market carnage from the first half of the year and made strategic recommendations,

    “The S&P 500 officially ended the post-COVID bull market in 1H, down more than 20% from its peak (see Hello, bear market report). The 20% decline in 1H (total returns) was the worst since 1962 (-22%) and the second worst start to the year in our data history since 1935. Historically, a negative 1H has led to a negative 2H 44% of the time, vs. just 19% when 1H was positive … Of the 45 factors we track, dividend yield was the only factor that gained in 1H, +0.7%. As we shift from a price return to a total return world – dividends have driven 36% of total returns since 1936 vs. just 15% since 2010 – and cash grows more valuable amid Fed hiking, we expect dividend yield and bird-in-the-hand strategies to continue to outperform in 2H. The Russell 1000 Value outperformed the Growth index by 15ppt in 1H, on track to be the biggest lead since the Tech Bubble. But despite the de-rating in Growth stocks, they still trade one standard deviation above the historical average vs. Value, with positioning also still tilted towards Growth (see report). High Quality stocks (‘B+ or better’ in S&P quality ratings) led Low Quality stocks (‘B or worse’) by 12ppt YTD in 1H, marking the biggest lead since 2002. We expect volatility to remain elevated in 2H, which should continue to drive High Quality’s lead.”

    “BofA: “we expect dividend yield and bird-in-the-hand strategies to continue to outperform in 2H.”” – (research excerpt) Twitter

    ***

  • Greater China stocks lead losses as Covid concerns resurge; Asia-Pacific markets fall

    Greater China stocks lead losses as Covid concerns resurge; Asia-Pacific markets fall

    • Greater China stock indexes led losses as Covid concerns resurge, while Asia-Pacific markets traded lower on Wednesday.
    • U.S. stock indexes initially fell sharply on Tuesday stateside before rallying in the afternoon.
    • In central bank news, Bank Negara Malaysia is expected to release its monetary policy statement today. Analysts polled by Reuters expect the bank to raise rates by 25 basis points.

    https://www.cnbc.com/2022/07/06/asia-markets.html

  • Oil prices slip as recession fears rumble on, tight supply stems losses

    Oil prices slip as recession fears rumble on, tight supply stems losses

    • Brent crude futures slipped 35 cents, or 0.3%, to $111.28 a barrel at 0016 GMT, having jumped 2.4% on Friday.
    • U.S. West Texas Intermediate (WTI) crude futures similarly dropped 32 cents, or 0.3%, to $108.11 a barrel, after climbing 2.5% on Friday.
    • While recession fears have weighed on the market over the past two weeks, supply concerns linger, preventing steeper price falls.

    https://www.cnbc.com/2022/07/04/oil-markets-recession-supply-opec-russia.html

  • Bank regulator beefs up rules for some types of home loans

    Bank regulator beefs up rules for some types of home loans

    Canada’s top banking regulator is changing the rules that cover certain types of home loans to make sure that lenders and borrowers are able to stay on top of their obligations at a time when the country’s housing market is looking vulnerable.

    The Office of the Superintendent of Financial Institutions (OFSI) is implementing new guidelines for certain types of real estate loans, including shared equity mortgages, reverse mortgages and conventional mortgages that are paired with revolving credit lines.

    The biggest change targets so-called combined loans, which are conventional mortgage loans paired with revolving lines of credit known as HELOCs that home owners can dip into as they see fit, without being obligated to pay that portion back on any sort of schedule.

    The new regulations will kick in once a readvanceable loan exceeds 65 per cent of the underlying home’s value. Currently, an owner can technically borrow up to 80 per cent on such a loan, but the new rules will functionally ratchet that ceiling down to 65 per cent by forcing the borrower to start paying back some of the principal if they go above that line.

    https://www.cbc.ca/news/business/osfi-rule-changes-1.6504148

  • Economic Calendar July 4

    Economic Calendar July 4

    Monday July 4

    U.S. markets closed for holiday.

    (930 am ET) S&P Global Manufacturing PMI for Canada for June.

    (1030 am ET) Bank of Canada second quarter Business Outlook Survey of Consumer Expectations

    North American auto sales (tentative date)

    Euro area producer price index

    Tuesday July 5

    China Caixin PMI for June. A contraction number of 49.0 is expected. Purchasing Managers Indexes also due from Euro area and the UK.

    Australia monetary policy meeting

    STORY CONTINUES BELOW ADVERTISEMENT

    (830 am ET) Canada building permits for May. They are expected to fall 1.5%.

    (10 am ET) U.S. factory orders for May. Consensus is for a 0.5% rise.

    Earnings include: Sprott Physical Uranium Trust

    Wednesday July 6

    China foreign reserves for June.

    Euro area retail sales for May; Germany factory orders for May. UK Construction PMI.

    (945 am ET) U.S. S&P Global Services/Composite final PMI for June.

    (10 am ET) US ISM Services PMI for June. Consensus is an expansionary reading of 54.9.

    (10 am ET) U.S. job openings and labor turnover survey for May.

    (2 pm ET) U.S. FOMC Minutes from June 14-15 meeting.

    Thursday July 7

    ECB Minutes from June 9 meeting

    Germany production for May.

    (830 am ET) Canada merchandise trade balance for May. A $2.5-billion surplus is forecast, up from $1.5-billion in April.

    (10 am ET) Canada Ivey PMI for June.

    (730 am ET) U.S. Challenger Layoff Report for June

    (815 am ET) U.S. ADP National Employment Report for June.

    (830 am ET) U.S. initial jobless claims for previous week

    (830 am ET) U.S. goods and services trade deficit.

    Earnings include: Aritzia Inc; Levi Strauss & Co; MTY Food Group Inc; Richelieu Hardware; Postmedia Network

    Friday July 8

    China money supply and new yuan loans data for May. Chinese CPI for June scheduled for Saturday.

    Japan household spending and current account.

    (830 am ET) Canada employment report for June. BMO forecasts net job gains of 25,000, with the unemployment rate improving one notch to 5%. Average hourly wages are forecast to rise 4.5% from a year ago.

    (830 am ET) U.S. nonfarm payrolls for June. Consensus is for a net gain of 250,000 jobs, down from May’s job growth of 390,000. The unemployment rate is expected to hold steady at 3.6%. Average hourly earnings expected to rise 5% from a year ago.

    (10 am ET) U.S. wholesale inventories.

    (3pm ET) U..S. consumer credit for May.

  • Banks block online sale of cash ETFs that compete with bank savings products

    Banks block online sale of cash ETFs that compete with bank savings products

    Some of Canada’s largest banks are blocking online investors from buying high-interest-savings exchange traded funds, which compete with the banks’ own lucrative deposit accounts.

    The discount brokerage arms at Royal Bank of Canada, Bank of Montreal and Toronto-Dominion Bank do not allow do-it-yourself investors to purchase high-interest-savings ETFs, also known as cash ETFs, or HISA ETFs.The funds, which are run by independent asset managers, mainly invest in pools of banks’ high-interest savings accounts and deposits.

    Investing in high-interest-savings ETFs offers investors liquidity,whereas the equivalent products at banks– savings accounts and guaranteed investment certificates – may have locked-in investment horizons, and can be slow to react to rising interest rates.

    Mark Noble, executive vice-president of ETF Strategy at Horizons ETFs Management (Canada) Inc., said the company has never been able to get clear answers about why its HISA ETFs have not been listed to trade on the discount brokerages at some banks.

    Canadian ETFs: The latest launches and terminations

    “Historically, we have never seen a discount brokerage in Canada choose to not have an ETF listed on their platform,” Mr. Noble said. “Investors can buy an inverse bitcoin fund, a cannabis fund or two-times leveraged funds without any barriers. But then are being told they are not able to purchase a cash ETF. It is as low risk as you can get.”

    Dan Hallett, vice-president and principal with HighView Financial Group, said he finds it surprising that do-it-yourself investors aren’t able to buy low-risk cash ETFs at certain discount brokerages, even as “risky, leveraged ETFs have proliferated for more than a decade.”

    “Discount brokerages that restrict access are allowing access only to their own proprietary savings accounts, which generally pay a lower interest rate than the net rate available from most cash ETFs,” he said. “In other words, they’re not allowing clients to invest in those cash ETFs so that they can raise more, cheaper deposit capital.”

    Currently, there are six cash ETFs in Canada. They are: the Horizons Cash Maximizer ETF (HSAV-T), the Horizons High Interest Savings ETF (CASH-T), the CI High Interest Savings ETF (CSAV-T), the Purpose High Interest Savings ETF (PSA-T), the Evolve High Interest Savings Account Fund (HISA-NEO) and the Ninepoint High Interest Savings Fund ETF Series (NSAV-NE).

    Management expense ratios for the category range between 0.05 per cent and 0.39 per cent, andthe funds provide gross yield, before fees, of about 1.95 per cent.

    RBC spokesperson Kathy Bevan said in an e-mail that decisions about product selection on the bank’s discount trading platform are “carefully considered and reviewed regularly.” Any client who is interested in short-term retail deposits, she said, can access an RBC investment savings account, which is not a bank account but rather a short-term cash account that is available to all RBC Direct Investing customers.

    TD spokesperson Derek Kirk confirmed that TD Direct Investing – Canada’s largest discount brokerage – does not allow clients to trade HISA ETFs. Instead, he said, TD directs clients to its TD investment savings accounts, which are CDIC-insured bank accounts.

    Bank of Montreal spokesperson Jeff Roman confirmed in an e-mail that the bank does not sell HISA ETFs. For investors interested in savings, he added, the bank “currently offersa CDIC insured high interest savings account” through its advisory and self-directed channels.

    With rising interest rates, HISA ETFs have begun to see a bump in assets. In Canada, they have recorded more than $1.6-billion in sales in the first half of the year, according to data provided by National Bank Financial. HISA ETFs had $7.8-billion in total assets under management as of June 30.

    In comparison, high-interest savings accounts in Canada had about $541-billion in assets as of December, 2021, according to research provided by Investor Economics, a unit of ISS Market Intelligence. The Big Six banks account for over 75 per cent of that business.

    Another $588-billion sits in guaranteed investment certificates, a type of savings product that typically provides locked-in rates for set periods of time. GICs are one of the fastest growing product categories in today’s interest rate environment, according to Carlos Cardone, senior managing director at Investor Economics. Almost half of the balance held in GICs is at the Big Six banks.

    Mr. Cardone said that while growth in high-interest savings accounts slowed to about 5 per cent in 2021, as investors chased higher returns in the stock markets, early evidence suggests that more recent market volatility may have resulted in much faster savings-account growth in recent months.

    “The product category had been in net redemptions since rates dropped early in the pandemic and is now staging a major comeback,” Mr. Cardone added.

    Mr. Hallett said most banks were slow to raise their rates this year on certain savings accounts as interest rates climbed, because of the large captive audience in those products.

    “They would have likely responded sooner had they actually been competing with each other and these ETFs,” he said.

  • Before the Bell: July 4

    Before the Bell: July 4

    Equities

    TSX futures gained early Monday while U.S. markets are closed for the July 4 holiday. Major European markets were positive in early trading.

    On Friday, Wall Street’s three key indexes advanced as the new quarter got underway with the Nasdaq finishing up 0.9 per cent while the S&P 500 rose 1.06 per cent. The Dow finished the session up 1.05 per cent. Canadian markets were closed on Friday.

    On Monday, Canadian investors will get the Bank of Canada’s Business Outlook Survey and Canadian Survey of Consumer Expectations.

    “Key will be the extent to which measures of inflation expectations rise,” Derek Holt, vice-president and head of capital markets economics with Bank of Nova Scotia, said.

    “The surveys will be somewhat stale on arrival as the consumer survey period was over the first half of May and the business survey period was over the back half of May. The BoC then goes into blackout ahead of the July 13th decision and communications.”

    Later in the week, U.S. markets will get the minutes from the latest Federal Reserve meeting on Wednesday, with traders looking for hints about how hawkish the central bank will be in coming rate decisions after hiking rates by 75 basis points last month.

    Both Canadian and U.S. investors will get June jobs reports on Friday.

    Mr. Holt said he expects to see a gain in Canadian hiring of about 20,000 positions for the month with the unemployment rate holding at 5.1 per cent.

    “Restrictions continued to rapidly ease into the June Labour Force Survey reference week that typically includes the 15th of each month,” he said. “They had tightened more than in the U.S. when Omicron first hit and are now looking easier than in the U.S. This continues to drive regional mobility readings higher.”

    The U.S. report, he said, is likely to show an increase of 300,000 jobs as the pace of job gains ebbs.

    Overseas, the pan-European STOXX 600 rose 0.63 per cent in morning trading. Britain’s FTSE 100 added 0.89 per cent. Germany’s DAX advanced 0.09 per cent while France’s CAC 40 was up 0.73 per cent.

    In Asia, Hong Kong’s Hang Seng closed down 0.13 per cent. Japan’s Nikkei advanced 0.84 per cent.

    Commodities

    Crude prices remained under pressure with worries about the potential for a global recession offsetting tight supply.

    The day range on Brent is US$110.40 to US$112.35. The range on West Texas Intermediate is US$107.25 to US$109.06. Both benchmarks were weaker in the early premarket period.

    “JP Morgan warns that crude prices could hit US$380 per barrel, if Russia cuts output as a response to Westerns sanctions and mounting tensions,” Swissquote senior analyst Ipek Ozkardeskaya said in an early note. “Yet, the global demand could hardly keep up, if the price of a barrel got multiplied by two or, by four from the actual levels.”

    “Looking at the price dynamics, it’s more likely we see the barrel of crude fall below US$100 than rise above US$200,” she said.

    In other commodities, gold prices were lower early Monday, hit a stronger U.S. dollar.

    Spot gold was down 0.2 per cent at US$1,807.48 per ounce in uneven trading. U.S. gold futures rose 0.4 per cent to US$1,808.80.

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    Currencies

    The Canadian dollar was steady while its U.S. counterpart edged higher as investors sought safer holdings amid continued fears of a global recession.

    The day range on the loonie is 77.49 US cents to 77.75 US cents.

    Canadian markets get the Bank of Canada’s business outlook survey and consumer expectations survey just after Monday’s open.

    On world markets, the U.S. dollar index rose 0.1 per cent to 105.140, not far below last month’s two-decade high of 105.790, according to Reuters.

    The euro was little changed at US$1.042, not far from May’s five-year low of US$1.0349.

    The British pound hit a two-week low of US$1.1976 on Friday and last bought $1.21170, Reuters reported.

    CANADIAN DOLLAR/U.S. DOLLAR

    US$0.7785+0.0024 (0.3093%)

    PAST DAY

    PREV. CLOSE

    0:00 A.M., JULY 4

    US$0.7755

    6:32 A.M., JULY 4

    US$0.7785

    SOURCE: BARCHART

    Economic news

    U.S. markets closed for holiday.

    (930 am ET) S&P Global Manufacturing PMI for Canada for June.

    (1030 am ET) Bank of Canada second quarter Business Outlook Survey of Consumer Expectations

    With Reuters and The Canadian Press

  • Investors brace for pivotal July after dismal first half

    Investors brace for pivotal July after dismal first half

    The U.S. stock market is reeling from its worst first half of any year since 1970, with investors girding for a series of potential flashpoints in July that may set Wall Street’s course for the coming months.

    Second-quarter corporate earnings, hotly anticipated U.S. inflation data and the Federal Reserve’s monetary policy meeting are among potentially pivotal events after the S&P 500 fell 20.6 per cent in the initial six months of 2022.

    For now, the mood on Wall Street is grim. Bonds, which investors count on to offset stock declines, have tumbled alongside equities, with the ICE BofA Treasury Index on pace for its worst year in the index’s history. Some 90 per cent of respondents in a recent Deutsche Bank survey expected a U.S. recession by the end of 2023.

    The key factor behind the turmoil in markets is the Fed, which has been rapidly tightening monetary policy to fight the highest inflation in decades following almost two years of emergency measures that helped buoy stocks and stoke growth.

    “We could really use just slightly less bad news in July,” said Eric Kuby, chief investment officer at North Star Investment Management. “Hopefully, it could turn the back half of 2022 in a more favourable light.”

    History, however, “does not offer very encouraging news” for those hoping the bleak first half will be followed by a bounce in the latter part the year, wrote CFRA chief investment strategist Sam Stovall.

    Of the 10 worst starts to the year for the S&P 500 since the Second World War, the index has posted gains in the second six months of the year only half the time, rising an average of 2.3 per cent, Mr. Stovall said in a recent report.

    On the data front, reports on employment and inflation will give investors a snapshot of the economy after 150 basis points of rate increases already delivered by the Fed.

    A disappointing jobs report next Friday could exacerbate concerns of a potential recession. The following week brings data on U.S. consumer prices, after a hotter-than-expected report last month triggered a selloff in stocks and prompted the Fed to deliver a hefty 75-basis-point rate increase in June.

    There has been recent evidence of waning growth. Data on Friday showed U.S. manufacturing activity falling to a two-year low in June, following a report earlier in the week that showed that June consumer confidence at its lowest in 16 months.

    “The key question is, what will roll over first: Will it be inflation or growth?” said Angelo Kourkafas, an investment strategist at Edward Jones.

    Second-quarter earnings start arriving in force the week of July 11, indicating whether companies can keep living up to estimates despite surging inflation and growth worries.

    Analysts expect quarterly earnings to grow by 5.6 per cent from a year ago, revised down slightly from early April’s estimate for 6.8-per-cent growth, according to Refinitiv IBES.

    If companies “can just match or maybe hurdle over lower expectations, I think that will be a positive tailwind for stock prices,” said Anthony Saglimbene, global market strategist at Ameriprise.

    Strategists at Goldman Sachs are less sanguine, warning that consensus margin forecasts suggest earnings estimates are “likely too optimistic” and margins for the median S&P 500 company will likely decline next year “whether or not the economy falls into recession.”

    “While investors are focused on the possibility of recession, the equity market does not appear to be fully reflecting the downside risks to earnings,” Goldman said in a note this week.

    July’s data should factor into the Fed’s actions at its next meeting on July 26-27, when it is broadly expected to raise rates by another 75 basis points.

    Some investors predict slowing growth will prompt the Fed to eventually soften its stance sooner than policy makers project. But analysts at Capital Economics disagreed, writing on Friday that such a rapid reversal would be inconsistent with the central bank’s behaviour in recent decades.

    As a result, “we don’t expect US equities and Treasuries to fare well in the second half,” they said.

  • Recession fears flare and June jobs report looms as jittery markets head into third quarter

    Recession fears flare and June jobs report looms as jittery markets head into third quarter

    • With increased worries about a recession swirling everywhere, Friday’s jobs report and the minutes from the last Fed meeting on Wednesday should be highlights of the week ahead.
    • Economists expect that employers created another 250,000 jobs in June, less than the 390,000 added in May, according to Dow Jones.
    • “I think the market is caught between two narratives,” said one strategist. “I don’t know if it wants good news or bad news. At first, the hot economic news was bad because the Fed could go another 75 basis points and keep going, but now the market wants softer news. But is the landing going to be soft or hard? It’s like threading the needle right now.”

    https://www.cnbc.com/2022/07/01/recession-fears-flare-and-jobs-report-looms-as-markets-head-to-q3-.html