PrefBlog

The Stable Genius ratcheted up the trade war today:

Hours after Beijing said it would increase tariffs on American goods in response to President Trump’s latest round of Chinese levies, the president ordered companies in the United States to stop doing business with China and warned of additional retaliation.

In a series of angry Twitter posts, Mr. Trump said “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing our companies HOME and making your products in the USA.”

The president also said he was ordering the United States Postal Service and private American companies like FedEx, Amazon and UPS to search packages from China for the opioid Fentanyl and refuse delivery.

Powell came perilously close to criticizing policy:

As the year has progressed, we have been monitoring three factors that are weighing on this favorable outlook: slowing global growth, trade policy uncertainty, and muted inflation. The global growth outlook has been deteriorating since the middle of last year. Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States. Inflation fell below our objective at the start of the year. It appears to be moving back up closer to our symmetric 2 percent objective, but there are concerns about a more prolonged shortfall.
…
Turning to the current context, we are carefully watching developments as we assess their implications for the U.S. outlook and the path of monetary policy. The three weeks since our July FOMC meeting have been eventful, beginning with the announcement of new tariffs on imports from China. We have seen further evidence of a global slowdown, notably in Germany and China. Geopolitical events have been much in the news, including the growing possibility of a hard Brexit, rising tensions in Hong Kong, and the dissolution of the Italian government. Financial markets have reacted strongly to this complex, turbulent picture. Equity markets have been volatile. Long-term bond rates around the world have moved down sharply to near post-crisis lows. Meanwhile, the U.S. economy has continued to perform well overall, driven by consumer spending. Job creation has slowed from last year’s pace but is still above overall labor force growth. Inflation seems to be moving up closer to 2 percent. Based on our assessment of the implications of these developments, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

So Stable Genius had to bolster his excuses for the next recession:

Jerome H. Powell, the Federal Reserve chair, kept future interest rate cuts squarely on the table on Friday but suggested that the central bank was limited in its ability to counteract President Trump’s trade policies, which are stoking uncertainty and posing risks to the economic outlook.

Mr. Powell’s remarks drew a swift and angry reaction from Mr. Trump, who equated the Fed leader with the president’s adversary in the trade war, President Xi Jinping of China.

“My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?,” Mr. Trump wrote in one of a series of Twitter posts.

The markets noticed:

The Dow Jones Industrial Average fell 622.19 points, or 2.37 per cent, to 25,630.05, the S&P 500 lost 75.7 points, or 2.59 per cent, to 2,847.25 and the Nasdaq Composite dropped 239.62 points, or 3 per cent, to 7,751.77.

In Toronto, the S&P/TSX Composite index was unofficially down 215.88 points, or 1.33 per cent, at 16,037.58.
…
The two-year/10-year yield curve inverted last week for the first time since 2007, a signal that a U.S. recession is likely in one to two years. The curve has traded in and out of inversion over the past three days.

U.S. Treasury yields fell, with 10-year notes last up 25/32 in price to yield 1.5266 per cent, from 1.61 per cent late on Thursday.

The two-year/10-year yield curve tripped to negative territory early in the session and for a third consecutive day.

The U.S. dollar fell after Powell’s comments and dropped further after Trump’s tweets.

… and, just as I go to press, I learn that Stable Genius has freaked out again:

Twelve hours after China said it would retaliate against Mr. Trump’s next round of tariffs by raising taxes on American goods, Mr. Trump said he would boost existing tariffs on $250 billion worth of Chinese goods to 30 percent from 25 percent on Oct. 1.

And he said the United States would tax another $300 billion worth of Chinese imports at a 15 percent rate, rather than the 10 percent he had initially planned. Those levies go into effect on Sept. 1.

“China should not have put new Tariffs on 75 BILLION DOLLARS of United States product (politically motivated!),” Mr. Trump tweeted. “Starting on October 1st, the 250 BILLION DOLLARS of goods and products from China, currently being taxed at 25%, will be taxed at 30%.”

I’m sure we’re all shocked that the Chinese would do something “politically motivated”.

And the preferred share market was back to normal, with all three mainstream indicators setting new lows:

TXPR closed at 573.00, down 0.48% on the day after touching a new 52-week low of 572.88. Volume was 2.71-million, third-highest of the past 30 days, behind only August 14 and August 15.

CPD closed at 11.48, down 0.35% on the day after touching a new 52-week low of 11.44. Volume of 61,338 was low in the context of the past 30 days.

ZPR closed at 9.10, down 0.55% on the day after touching a new 52-week low of 9.08. Volume of 159,026 was a little above average but nothing special in the context of the past 30 days.

Five-year Canada yields were down 12bp to 1.21% today – but even that big drop leaves us 1bp higher than last Friday’s yield.

What a great day! Only one of the mainstream indicators made a new 52-week low!

TXPR closed at 575.74, up 0.11% on the day. Volume was 2.18-million, nothing special in the context of the past 30 days.

CPD closed at 11.52, up 0.17% on the day. Volume of 97,108 was above median but nothing special in the context of the past 30 days.

ZPR closed at 9.15, unchanged on the day after touching a new 52-week low of 9.145. Volume of 111,979 was a little above average but nothing special in the context of the past 30 days.

Five-year Canada yields were up 5bp to 1.33% today.

There was good news for Poloz in today’s inflation numbers:

The Canadian dollar strengthened against its U.S. counterpart on Wednesday, recovering from a two-month low it hit the previous day after stronger-than-expected domestic inflation data, but earlier gains were capped as the greenback rallied broadly.

The U.S. dollar gained against a basket of currencies after minutes from the Federal Reserve’s July meeting showed that policy-makers were united in wanting to avoid the appearance of being on the path to further rate cuts.

Canada’s annual inflation rate held steady in July at 2 per cent as lower costs for services were offset by higher prices for durable goods. Analysts had expected the annual rate to fall to 1.7 per cent from 2 per cent in June.
…
Canada’s retail sales data is due on Friday, with a Reuters poll forecasting a 0.1 per cent decrease, which could help guide expectations about the Bank of Canada’s interest rate decision.

Canadian government bond prices were lower across the yield curve, with the two-year down 10 cents to yield 1.395 per cent and the 10-year falling 53 cents to yield 1.213 per cent.

Each of the mainstream indicators made a new 52-week low today. This is getting monotonous.

TXPR closed at 575.08, down 0.41% on the day after touching a new 52-week low of 574.94. Volume was 2.44-million, above average but nothing special in the context of the past 30 days.

CPD closed at 11.50, a new 52-week low and down 0.26% on the day. Volume of 73,613 was above median and nothing special in the context of the past 30 days.

ZPR closed at 9.15, a new 52-week low and down 0.11% on the day. Volume of 163,912 was a little above average but nothing special in the context of the past 30 days.

Five-year Canada yields were up 8bp to 1.28% today.

PerpetualDiscounts now yield 5.58%, equivalent to 7.25% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.15%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to an eye-popping 410bp, a new post-Credit Crunch record (second only to the 445bp recorded November 26, 2008, a day on which

The TXPR index was down 5.94% on the BCE news.

) and a slight (and possibly spurious) widening from the 405bp the reported August 14.

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Each of the mainstream indicators made a new 52-week low today.

TXPR closed at 577.43, a new 52-week low and down 0.56% on the day. Volume was 2.40-million, above average but nothing special in the context of the past 30 days.

CPD closed at 11.53, a new 52-week low and down 0.69% on the day. Volume of 138,446 was above average but nothing special in the constext of the past 30 days.

ZPR closed at 9.16, a new 52-week low and down 0.97% on the day. Volume of 249,098 was high but oddly the “Price History” tab on tmxmoney refuses to display data for this issue. Yahoo Finance comes through with the information that today had the third-highest volume of the past thirty days, behind August 13 and August 14.

Five-year Canada yields were down 2bp to 1.20% today.

Mohamed A. El-Erian has again updated my favourite financial market chart:

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He also passed on another great chart:

Along with the chart showing that the stock of negative-yielding bonds now stands at some $17 trillion, this one, via Zerohedge on Austria’s 100-year bond, screams how unusual — very very very unusual — conditions are in global fixed income.

Issued two years ago with a yield of 2.1%, its price has doubled … implying that, if held to maturity, buyers today would recoup half of their investment.

Look tonight for a Bloomberg Opinion post on a related issue.

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Husky, which has been a feature on the price-movement highlights charts recently, saw a modest counter-move today:

Shares in Husky Energy Inc. are up by about five per cent after an RBC Dominion Securities analyst suggested its low share price makes this a good time for the company to be taken private.

The stock jumped by as much as 47 cents to $9.24 on Monday morning, still well off its 52-week high of $22.98 set last Sept. 27.

In a report over the weekend, analyst Greg Pardy suggests that Husky’s near-15-year-low share prices make privatization attractive for the entities controlled by Hong Kong billionaire Li Ka-Shing which own 69.5 per cent of the equity.

There was more good news, of sorts, today: neither CPD nor ZPR made a new low!

TXPR closed at 580.66, down 0.07% on the day after setting a new 52-week low of 580.61. Volume was 1.54-million, the lowest since August 2 and nothing special in the context of the past 30 days.

CPD closed at 11.61, up 0.09% on the day. Volume of 84,120 was at about the median of the past 30 days.

ZPR closed at 9.25, up 0.22% on the day. Volume of 66,962 was very low in the context of the past thirty days.

Five-year Canada yields were up 2bp to 1.22% today.

So what’s going on with Structured Notes? BMO’s page shows JHN12544, to be issued August 21 with a seven year term; and JHN12545, to be issued August 21 with a seven year term. TD’s page shows Series 416 to be issued August 26 with a seven year term. National’s page shows nothing cooking after one was issued August 2 and four issued in July.

There was good news, of sorts, today: ZPR did not make a new low!

TXPR closed at 581.09, down 0.27% on the day after setting a new 52-week low of 580.98. Volume was 1.92-million, the lowest this week and nothing special in the context of the past 30 days.

CPD closed at 11.60, down 0.30% on the day after setting a new 52-week low of 11.59. Volume of 865,587 was by far the highest of the past 30 days, trouncing second-place August 7 on which a mere 267,654 shares traded.

ZPR closed at 9.23, unchanged on the day after touching, but not breaking through the prior low of 9.21 set yesterday. Volume of 98,386 was low in the context of the past thirty days.

Five-year Canada yields were up 4bp to 1.20% today.

Here’s some more regulatory over-reach:

According to the SEC’s order, Canaccord published quotes and made markets in dozens of over-the-counter (OTC) securities without performing the review required by Exchange Act Rule 15c2-11, which requires that broker-dealers have a reasonable basis for believing the prospectus and other information made available by the issuer of the securities was accurate. The order finds that Canaccord delegated to a compliance associate the responsibility to obtain and review the information required by Rule 15c2-11 and to fill out and sign the necessary forms demonstrating compliance with the rule. The compliance associate had no trading experience and no formal training on conducting the requisite review, such as training related to the analysis of financial statements and other information. As a result of the deficient review performed by the compliance associate, Canaccord allowed dozens of OTC securities to be traded in U.S. markets without conducting the review required to protect investors. Canaccord has since revised and improved its policies and procedures with respect to Rule 15c2-11.

It’s a dealer’s job to make markets. There is nothing in the SEC statement to suggest that these securities were recommended, or even sold to, naive clients.

The slide wasn’t big today, but we did see new lows!

TXPR closed at 582.66, down 0.34% on the day after setting a new 52-week low of 582.32. Volume was 3.33-million (within rounding error of yesterday’s figure), second only to July 19 in the past 30 days.

CPD closed at 11.635, down 0.13% on the day after setting a new 52-week low of 11.61. Volume of 120,970 was high, but not extraordinary in the context of the past thirty days.

ZPR closed at 9.23, down 0.32% on the day after setting a new 52-week low of 9.21. Volume of 219,493 was high, but not extraordinary in the context of the past thirty days.

Five-year Canada yields were down 3bp to 1.16% today.

Mohamed El-Erian provided an update of my favourite financial market chart:

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Not a pleasant day for global markets:

The global economy is under increasing stress as growth cools and trade tensions take a mounting toll. On Wednesday, the tremors were felt worldwide.

Shares on Wall Street were off sharply, only a day after they had rallied as President Trump narrowed the scope of his next round of tariffs. The S&P 500 was down 2.9 percent. And bond markets offered an ominous warning on American growth prospects, with yields falling to levels not seen in years.

The financial jitters, which continued Thursday as markets in Asia were down in early trading, came after new data showed the German economy hurtling toward a recession and factory output in China growing at its slowest pace in 17 years.

The trouble in two of the world’s manufacturing powerhouses indicated, in part, how hard both have been hit by Mr. Trump’s tariffs. And it increased concern that the United States, too, is headed for an economic reckoning.

Treasuries reaped the benefits:

Investors were intensely attuned Wednesday to downbeat economic signals from the bond market. Yields on long-term United States Treasury securities continue to plumb lows not seen in recent years. The yield on the benchmark 10-year Treasury note fell to 1.58 percent, a level it last reached in late 2016. The yield on the 30-year bond fell to 2.03 percent, the lowest level on record.

And Canada was not spared:

The S&P 500 fell 2.9 per cent. The Dow Jones Industrial Average suffered its worst selloff since October, 2018, tumbling 800.49 points or 3.1 per cent.

Canada’s benchmark index, the S&P/TSX Composite, fell 1.9 per cent, also its biggest one-day decline since October and erasing $47-billion from the index’s market capitalization, according to Bloomberg.

But the bond market, which has been sending gloomy economic signals for much of this year, reflected some of the biggest concerns among many investors as the rush into safe holdings raised bond prices and lowered yields.

The yield on the Government of Canada 10-year bond fell to 1.14 per cent, a 3 1/2-year low and down from a yield of 2.6 per cent in October.

TXPR closed at 584.66, down 1.58% on the day after setting a new 52-week low of 583.85. Volume was 3.33-million, second only to July 19 in the past 30 days.

CPD closed at 11.65, a new 52-week low and down 1.31% on the day. Volume of 158,542 was the fourth-highest of the past thirty days.

ZPR closed at 9.26, a new 52-week low and down 1.70% on the day. Volume of 391,261 was the second-highest of the past 30 days, beaten only by the August 13 volume of 557,210.

Five-year Canada yields were down 6bp to 1.19% today.

PerpetualDiscounts now yield 5.59%, equivalent to 7.27% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.21%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to an astonishing 405bp, a new post-Credit Crunch record (second only to the 445bp recorded November 26, 2008, a day on which

The TXPR index was down 5.94% on the BCE news.

) and significantly wider than the 390bp the reported August 7.

Hostilities cooled in the trade war:

The Trump administration on Tuesday delayed imposing a 10 per cent import tariff on laptops, cellphones, video game consoles and a wide range of other products made in China, in an abrupt pullback from a hard line stance on Chinese trade.

The U.S. Trade Representative’s Office action was published just minutes after China’s Ministry of Commerce said Vice Premier Liu He conducted a phone call with U.S. trade officials.

The delay in the tariffs that had been scheduled to start next month provides some relief to retailers. Although most stores would have stocked their holiday merchandise before the earlier September deadline, some might have faced the tariffs for fill-in orders late in the holiday shopping season.

“We’re doing this for the Christmas season, just in case some of the tariffs would have an impact on U.S. customers” President Donald Trump told reporters as he prepared to depart from New Jersey for an event in Pittsburgh.

For what it’s worth, I will note that Trump has an election to fight next year – and the concept of ‘voting with your pocketbook’ is so well-known it’s trite. So I believe that Trump will win a headline concession from China (never mind all the fine print), declare victory and lift the tariffs well before the election. I’d be hesitant to estimate a probability for that scenario, though!

The Treasury market, though, ignored my prating as usual and flattened:

The U.S. Treasury yield curve hit its flattest level in more than 12 years on Tuesday, suggesting increased market anxiety over the state of the economy amid trade war concerns and global political tensions.

The spread between U.S. 2-year and 10-year note yields, a closely watched metric for recession signals, declined to 0.6 basis point, the narrowest since June 2007, according to Refinitiv data. The last time this yield curve inverted was also in June 2007 in the midst of the U.S. sub-prime mortgage crisis
…
Despite weak signals from the yield curve, U.S. yields rose across the board on Tuesday after the Trump administration delayed imposing a 10% import tariff on laptops, cellphones, video game consoles and a wide range of other products made in China. Analysts said the U.S. move served to ease trade tensions between the two world’s largest economies, at least for now.

U.S. two-year and 10-year note yields hit session highs after the trade news, while those on 30-year bonds rallied from more than three-year lows. Traders earlier were bracing for 30-year yields sinking to a record low below 2.08%.
…
The Labor Department said the U.S. consumer price index climbed 0.3% last month, lifted by gains in the cost of energy products and a range of other goods. Excluding the volatile food and energy components, the CPI gained 0.3% after rising by the same margin in June.

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There is some nervousness regarding the trade war:

Banks and technology companies drove a broad slide in stocks on Wall Street on Monday afternoon, knocking the Dow Jones industrial average down more than 300 points.

The sell-off added to losses the market racked up last week amid heightened anxiety over the continuing trade war between the United States and China.

The week of wild swings was fueled by investors’ worries that the fallout from the costly trade conflict would hurt corporate profits and hamper an already slowing global economy.

Traders shifted money into government bonds on Monday, sending bond prices higher. Yields move lower when bond prices rise, and as investors poured money into the bond market, the yield on the 10-year Treasury fell to 1.65 percent from 1.73 percent late Friday. The yield is used as a benchmark for interest rates on mortgages and other consumer loans.

The Bank of Canada has released a Staff Analytical Note by Rohan Arora, Guillaume Ouellet Leblanc, Jabir Sandhu and Jun Yang titled Using Exchange-Traded Funds to Measure Liquidity in the Canadian Corporate Bond Market:

Market participants in Canada have suggested that the liquidity of corporate bonds worsened in recent years. Yet, previous analysis by Bank of Canada staff (Fan et al. 2018b) shows that corporate bond market liquidity has generally improved since 2010. That conclusion relies on two commonly used liquidity proxies that are computed using data from transactions. However, most corporate bonds trade infrequently; in fact, only about 200 bonds transact on any given day. Consequently, infrequently traded bonds are missing from the existing liquidity proxies. This raises the concern that these proxies do not provide a complete picture of the liquidity conditions of the overall market.

We construct a new liquidity proxy using the price of exchange-traded funds (ETFs), the ETF-based proxy of Canadian corporate bond market liquidity (ECML). ECML measures the average liquidity of about 900 corporate bonds each day. Many of these bonds transact infrequently and are consequently missing from the existing liquidity proxies. Nonetheless, using ECML leads us to the same conclusion as Fan et al. (2018b):

corporate bond market liquidity has generally improved since 2010

But, the longer sample available with ECML also shows that liquidity has remained relatively stable since 2014.

TXPR closed at 592.89, down 0.78% on the day. Volume was 2.09-million, high, but not notably so in the context of the past 30 days.

CPD closed at 11.83, down 0.76% on the day. Volume of 141,299 was the fourth-highest of the past thirty days.

ZPR closed at 9.42, down 1.15% on the day. Volume of 211,213 was the second-highest of the past 30 days, beaten only by the August 7 volume of 242,011.

Five-year Canada yields were down 1bp to 1.20% today.