Category: Market Action

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TXPR closed at 501.84, up 0.97% on the day, which was about 172bp higher than the day’s low, with a late recovery commencing at 3:30 that put even the last two day’s late rallies to shame. Volume today was superb at 7.21-million, behind only March 18 in the past thirty days.

CPD closed at 9.88, down 0.30% on the day. Volume was 147,035, near the median of the past 30 trading days.

ZPR closed at 7.73, up 0.91% on the day. Volume of 138,961 was the lowest of the past 30 trading days, behind even April 15.

Five-year Canada yields were up 3bp to 0.46% today.

S&P downgraded First Quantum Minerals one notch to CCC+:

• We see increased risks across Canada-headquartered copper miner First Quantum Minerals’ (FQM’s) countries of operation, which could negatively affect production and operating costs.
• Given our lower EBITDA forecast for 2020, we now expect a material deterioration in the company’s liquidity position and a covenant breach at the June testing date.
• We are therefore lowering to ‘CCC+’ from ‘B-‘ our long-term issuer credit rating on FQM and its senior unsecured bonds.
• The stable outlook factors in our expectation that the company would be able to secure an amendment to its coming financial covenants testing in June 2020, as well as no further deterioration in production or copper prices beyond our current EBITDA forecast.

S&P also downgraded Ensign Drilling Inc. four notches to CCC+:

• We expect Canada-based Ensign Drilling Inc.’s credit metrics to weaken materially due to significant cuts in capital budgets by exploration and production (E&P) companies, driven by the substantial drop in crude oil prices.
• Although we expect the company to generate positive free cash flows, limited availability on the credit facility and the potential for covenant breaches constrain the rating.
• Accordingly, S&P Global Ratings lowered its long-term issuer credit rating on Ensign and its issue-level rating on the company’s unsecured debt to ‘CCC+’ from ‘BB-‘.
• The negative outlook incorporates our view that credit measures will remain weak over the next 12 months due to reduced drilling activity and that there is potential for liquidity to further deteriorate, if activity levels don’t recover.

OSFI released a statement titled Statement from the Superintendent on Canadian bank capital and dividends:

When there are periods of economic uncertainty or a downturn, releasing capital buffers is the first step in OSFI’s contingency plan, as it enables banks to use the funds that had been set aside. To this end, on March 13, OSFI released 1.25 percentage points, which was about 55% of the Domestic Stability Buffer and at the same time, OSFI prohibited dividend increases and cancelled future share buybacks. OSFI will continue to monitor institutions’ capital and liquidity levels and if conditions warrant, is prepared to release the remaining 1.0 percentage points of the buffer.

OSFI has built other contingency measures into Canada’s capital regime. Specifically, as banks move through capital layers, there are disbursement restrictions. For example, if sustaining a bank’s capital level requires it to access funds that are in the Capital Conservation Buffer, the bank will be automatically required to restrict disbursements, including dividends and share buybacks. Restrictions for larger banks would apply earlier when its capital levels fall within the D-SIB surcharge threshold.

OSFI has long signalled its expectations that banks use their capital buffer in the event of a downturn or period of economic uncertainty. For example in 2016 and 2017, I noted “…of course, a bank that is using up its capital needs to recapitalize. If this goes on long enough, or happens quickly enough, dramatic measures may be required. But for a bank that starts with capital well above its regulatory minimum, we all need to see the idea of using some of the bank’s capital buffer as the normal first step in the process …”

Is this a sign they’re feeling a little bit of political pressure? Bank dividends have been a hot topic lately, as mentioned on April 9 and April 2. For all that the implied reassurance may be welcome, this is a sign of an unhealthy economy: Canada’s financial system is grossly overweighted in banks and retirement portfolios reflect that in spades, given retirees need for income. Having all one’s eggs in one basket is not a good idea – I can only hope, rather forlornly, that the banks will be broken up once this idea becomes more acceptable in polite society. So we can expect a burst of bank hiring of ex-politicians in the near future!

Meanwhile Mutual Funds that own bonds are now allowed increased borrowing to fund redemptions, if they’re having trouble selling bonds:

As a result of the Coronavirus pandemic (“COVID-19”), the Ontario Securities Commission (the “Commission”) is providing to mutual funds temporary exemption from the borrowing limits set out in Ontario securities law, subject to terms and conditions, in order to accommodate requests for the redemption of mutual fund securities under securities legislation.

Description of Order

The order provides a temporary exemption to mutual funds that are subject to National Instrument 81-102 Investment Funds (“NI 81-102”), other than labour sponsored or venture capital funds, and which invest in fixed income securities from the borrowing limit imposed in subparagraph 2.6(1)(a)(i) of NI 81-102 for the period from April 17, 2020 to July 31, 2020 (the “Effective Period”), provided that the outstanding amount of all borrowings made by the mutual fund does not exceed 10 percent of its net asset value at the time of borrowing during the Effective Period.

The relief provided above is subject to the following terms and conditions:

• Any mutual fund relying on the order must use the temporary exemption from the borrowing limit only for the purpose of facilitating an orderly liquidation of fixed income securities to deal with the short-term dislocation in the fixed income securities market due to the COVID-19 pandemic, in order to accommodate requests for the redemption of securities of the mutual fund received during the period from April 17, 2020 to July 30, 2020.

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The big news today was the US unemployment numbers:

In the last four weeks, the number of unemployment claims has reached 22 million — roughly the net number of jobs created in a nine-and-a-half-year stretch that began after the last recession and ended with the pandemic’s arrival.
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The emergency relief enacted by Congress expanded benefits and eligibility to plug holes in an unemployment program that differs from state to state. The act extended jobless benefits to freelancers, part-timers, recent hires and other workers usually ineligible, added a $600 weekly supplement and offered an extra 13 weeks of benefits. But the surge in applicants has tested the ability of state agencies to keep up with claims and payments.

According to the Labor Department, 33 states are now able to pay out the additional $600. One is Washington, where the volume of jobless claims last week was seven times the record pace set in the last recession, said Nick Demerice, public affairs director for the state’s Employment Security Department. A 2017 software upgrade helped avoid the backlogs that have plagued other states, he said.
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In Rhode Island, another state where the $600 payment is now available, technology remains a sticking point, said Scott R. Jensen, director of the state’s Department of Labor and Training. Its system is capable of handling a few thousand people daily who call or log in online. On Sunday, the department expects 90,000 people to try to access the system.

TXPR closed at 497.04, down 0.59% on the day, which was about 47bp higher than the day’s low, with a late recovery echoing yesterday’s. Volume today was 2.97-million, low in the context of the past thirty days.

CPD closed at 9.91, down 0.60% on the day. Volume was 152,770, near the median of the past 30 trading days.

ZPR closed at 7.66, down 0.78% on the day. Volume of 230,234 was second-lowest of the past 30 trading days, ahead of only April 15.

Five-year Canada yields were down 2bp to 0.43% today.

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Retail sales in America were “pretty catastrophic“:

Retail sales plunged in March, offering a grim snapshot of the coronavirus outbreak’s effect on consumer spending, as businesses shuttered from coast to coast and wary shoppers restricted their spending.

Total sales, which include retail purchases in stores and online as well as money spent at bars and restaurants, fell 8.7 percent from the previous month, the Commerce Department said Wednesday. The decline was by far the largest in the nearly three decades the government has tracked the data.

Even that bleak figure doesn’t capture the full impact of the sudden economic freeze on the retail industry. Most states didn’t shut down nonessential businesses until late March or early April, meaning data for the current month could be worse still.

… and business was even worse in Canada:

The Canadian economy plunged by about 9 per cent in March, and the Bank of Canada expects the downturn to be the “sharpest on record” as COVID-19 inflicts devastation on business activity.

In a preliminary estimate, Statistics Canada on Wednesday said March’s decline in gross domestic product would be the largest one-month contraction in records dating back to 1961. For the entire first quarter, GDP would decline by 2.6 per cent, or greater than a 10-per-cent drop at an annualized rate.

Under normal circumstances, Statscan releases its March GDP figures in May. However, given the swift downturn resulting from the novel coronavirus, Canada’s national statistical agency moved to publish a timelier estimate of activity. Statscan stressed that the estimates will change once more information is used in the full report released next month.

So bad, in fact, that the Bank of Canada has given up on statistics:

The Bank of Canada made the extraordinary move of omitting eagerly awaited new economic projections from its quarterly Monetary Policy Report Wednesday, saying that forecasting can’t be done “with any degree of confidence” in light of the uncertainty surrounding the COVID-19 crisis.

Instead, the bank outlined in its quarterly update alternative scenarios that would affect the pace of recovery from the economic shock delivered by the pandemic, which has triggered government-imposed business shutdowns, massive unemployment and a severe slump in oil prices.

In terms of a near-term forecast, the bank would only say that its “scenario analysis” indicates that real gross domestic product would be between 15 and 30 per cent lower in the second quarter (April through June) than it was in the fourth quarter of 2019, after an estimated decline of 1 to 3 per cent in the first quarter, on a quarter-over-quarter basis. It also predicted that the second-quarter inflation rate would be “close to zero per cent,” slumping from slightly above the central bank’s 2-per-cent target in February, before the COVID-19 shock derailed the Canadian economy.

The BoC’s press release was unusually lengthy:

The Bank of Canada today maintained its target for the overnight rate at ¼ percent, which the Bank considers its effective lower bound. The Bank Rate is correspondingly ½ percent and the deposit rate is ¼ percent. The Bank also announced new measures to provide additional support to Canada’s financial system.

The necessary efforts to contain the COVID-19 pandemic have caused a sudden and deep contraction in economic activity and employment worldwide. In financial markets, this has driven a flight to safety and a sharp repricing of a wide range of assets. It has also pushed down prices for commodities, especially oil. In this environment, the Canadian dollar has depreciated since January, although by less than many other currencies. The sudden halt in global activity will be followed by regional recoveries at different times, depending on the duration and severity of the outbreak in each region. This means that the global economic recovery, when it comes, could be protracted and uneven.

The Canadian economy was in a solid position ahead of the COVID-19 outbreak, but has since been hit by widespread shutdowns and lower oil prices. One early measure of the extent of the damage was an unprecedented drop in employment in March, with more than one million jobs lost across Canada. Many more workers reported shorter hours, and by early April some six million Canadians had applied for the Canada Emergency Response Benefit.

The outlook is too uncertain at this point to provide a complete forecast. However, Bank analysis of alternative scenarios suggests the level of real activity was down 1-3 percent in the first quarter of 2020, and will be 15-30 percent lower in the second quarter than in fourth-quarter 2019. CPI inflation is expected to be close to 0 percent in the second quarter of 2020. This is primarily due to the transitory effects of lower gasoline prices.

The pandemic-driven contraction has prompted decisive policy action to support individuals and businesses and to lay the foundation for economic recovery once containment measures start to ease. Fiscal programs, designed to expand according to the magnitude of the shock, will help individuals and businesses weather this shutdown phase of the pandemic, and support incomes and confidence leading into the recovery. These programs have been complemented by actions taken by other federal agencies and provincial governments.

For its part, the Bank of Canada has taken measures to improve market function so that monetary policy actions have their intended effect on the economy. This helps ensure that households and businesses continue to have access to the credit they need to bridge this difficult time, and that lower interest rates find their way to ultimate borrowers. The Bank has lowered its target for the overnight rate 150 basis points over the last three weeks, to its effective lower bound. It has also conducted lending operations to financial institutions and asset purchases in core funding markets amounting to around $200 billion.

These actions have served to ease market dysfunction and help keep credit channels open, although they remain strained. The next challenge for markets will be managing increased demand for near-term financing by federal and provincial governments, and businesses and households. The situation calls for special actions by the central bank. To this end, the Bank is furthering its efforts with several important steps.

Under its previously-announced program, the Bank will continue to purchase at least $5 billion in Government of Canada securities per week in the secondary market, and will increase the level of purchases as required to maintain proper functioning of the government bond market. Also, the Bank is temporarily increasing the amount of Treasury Bills it acquires at auctions to up to 40 percent, effective immediately.

The Bank is also announcing today the development of a new Provincial Bond Purchase Program of up to $50 billion, to supplement its Provincial Money Market Purchase Program. Further, the Bank is announcing a new Corporate Bond Purchase Program, in which the Bank will acquire up to a total of $10 billion in investment grade corporate bonds in the secondary market. Both of these programs will be put in place in the coming weeks. Finally, the Bank is further enhancing its term repo facility to permit funding for up to 24 months.

These measures will work in combination to ease pressure on Canadian borrowers. As containment restrictions are eased and economic activity resumes, fiscal and monetary policy actions will help underpin confidence and stimulate spending by consumers and businesses to restore growth. The Bank’s Governing Council stands ready to adjust the scale or duration of its programs if necessary. All the Bank’s actions are aimed at helping to bridge the current period of containment and create the conditions for a sustainable recovery and achievement of the inflation target over time.

And the markets took all this poorly:

A double whammy of economic data showing the U.S. economy in a deep downturn and reports of persistent crude oil oversupply and collapsing demand slammed global markets on Wednesday as vivid reminders of the damage from coronavirus-related lockdowns.

Oil prices sank after the International Energy Agency (IEA) forecast a 29-million-barrel per day dive in April crude demand to levels not seen in 25 years and said no output cut could fully offset the near-term decline facing the market.
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The Toronto Stock Exchange’s S&P/TSX composite index fell 2.1% to 13,958.58, pulling back from a one-month high on Tuesday, as dismal first-quarter earnings reports weighed on U.S. stocks.

The heavily weighted financial sector fell 3.4%, while the energy group was down 5.3%.

Canadian bond yields fell and the loonie slumped to a one-week low as the Bank of Canada broadened the suite of assets it is purchasing to cushion the economic blow of the coronavirus pandemic.
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The Dow Jones Industrial Average fell 442.91 points, or 1.85%, to 23,506.85, the S&P 500 lost 62.24 points, or 2.19%, to 2,783.82 and the Nasdaq Composite dropped 122.56 points, or 1.44%, to 8,393.18.

TXPR closed at 500.01, down 0.73% on the day, which was about 60bp higher than the day’s low. Volume today was 3.19-million, relatively low in the context of the past thirty days.

CPD closed at 9.97, down 1.29% on the day. Volume was 85,285, second-lowest of the past 30 trading days, ahead of only April 14.

ZPR closed at 7.72, down 1.15% on the day. Volume of 142,781 was the lowest of the past 30 trading days, below second-place April 3, when volume was 165,030.

Five-year Canada yields were down 9bp to 0.45% today.

PerpetualDiscounts now yield 6.30%, equivalent to 8.19% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.75%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed, to 445bp from the 455bp reported April 8 – just little narrower than the old record set on November 26, 2008 when trouble with the BCE buyout caused a short-lived spike in PerpetualDiscount bid yields, moving the Seniority Spread to 445bp.

Amidst all the gloom, it was interesting to see the details of a recent Scotia covered bond issue:

Bank of Nova Scotia (BNS) became the first bank outside Europe to issue a deeply negative yielding covered bond in a good size on Wednesday. The transaction provided a beacon for other issuers and was perfectly timed to benefit from a window of market stability between Monday’s and Thursday’s shocking volatility.

It’s Series CBL26, with details available on the Scotiabank covered bond page. The term sheet specifies:

Specified Currency or Currencies: €, EUR or EURO
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Issue Price: 101.198% of the Aggregate Nominal Amount
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Final Maturity Date: 18 March 2025
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Rate(s) of Interest: 0.01% per annum payable annually in arrears on each Interest Payment Date
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Indication of yield: -0.228% per annum

Who needs jobs when we’ve got Central Banks?:

Global equity benchmarks moved higher on Thursday following signs of some success by governments and central banks which have taken additional steps to bolster their economies during the COVID-19 pandemic, while oil prices pulled back from an earlier surge.

Canada’s main stock index rose on Thursday as the U.S. Federal Reserve’s massive program to shore up the world’s largest economy overshadowed record domestic job losses in March.
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However, bolstering investor sentiment was a broad, $2.3 trillion effort by the U.S. Federal Reserve to bolster local governments and small and mid-sized businesses in its latest move to keep the U.S. economy intact.

The Toronto Stock Exchange’s S&P/TSX composite index was unofficially up 240.92 points, or 1.73%, at 14,166.63.

Eight of the 11 major TSX sectors were higher, with materials leading gains with a 6.9% rise.

The sector, which mostly comprises of precious metal miners, was helped by a surge in prices, which jumped to their highest in a month on Thursday.

Energy stocks reversed course in afternoon trading and slid 2%.

Oil prices slumped on Thursday, giving back an earlier 10% surge as investors doubted the emerging supply-cut agreement between members of OPEC and its allies would adequately address the global fuel demand collapse caused by the coronavirus pandemic.

So, yes, the Fed took more action today:

The Federal Reserve on Thursday announced an expansive effort to help companies and state and local governments gain access to funding, ramping up its already extensive efforts to protect the economy and financial markets from the impact of a severe downturn.

The central bank said it could pump $2.3 trillion into the economy through the new and expanded programs. It rolled out the relief package just as the government announced that 6.6 million more Americans were newly jobless, laying bare the severe damage to the economy from the coronavirus pandemic.
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The Fed’s new program makes use of funds recently authorized by Congress to buy municipal bonds and expand corporate bond-buying programs to include some lower-rated and riskier debt. Doing so will keep credit flowing through the economy, including to companies and state and local governments that might otherwise struggle to get access to it.

Mohamed El-Erian passes on a chart:

Here’s another astounding graph — also unthinkable just a few weeks ago — with another sharp and unprecedented spike in a very short period of time:

The Fed’s balance sheet has expanded to above $6 trillion … and it’s going much higher.

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And the UK has taken a big step towards monetizing its debt:

The Treasury has announced it is to extend its overdraft facility at the Bank of England in a fresh sign of the mounting financial pressure on the government caused by the Covid-19-enforced lockdown of the economy.

Amid growing speculation that the quarantining will be extended next week, the Treasury said it needed extra firepower to support its cashflow and to ensure financial markets ran smoothly.

The Treasury has a long-established overdraft facility at the Bank through the “ways and means” facility. It currently stands at £400m but at times of crisis the chancellor can draw on it as a source of cash, and during the 2008 recession it rose to £19.8bn.

Canada had some horrific jobs numbers:

More than one million people in Canada lost their jobs in March and the unemployment rate climbed to 7.8 per cent, reflecting the first wave of layoffs resulting from the COVID-19 pandemic.

The March job losses easily surpassed a record one-month decline set in January of 2009 – when employment dropped by roughly 125,000 – according to Labour Force Survey data from Statistics Canada that dates back to 1976. March also saw the largest one-month increase of the country’s jobless rate, which had been 5.6 per cent in February.
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Since Statscan’s survey week, layoffs have intensified as governments have implemented tighter restrictions on business operations and social interactions to curb the virus’s growth. Since March 16, more than 5 million Canadians have applied for emergency financial assistance with the federal government, a sign of unprecedented labour disruption.

As such, the April labour report (released early next month) is widely expected to show even worse job-loss figures.

There seems to be some progress towards an oil deal:

OPEC and it allies held talks on Thursday on record oil output curbs of 15 million to 20 million barrels per day (bpd), or 15 per cent to 20 per cent of global supplies, to support prices hammered by the coronavirus crisis, OPEC and Russian sources said.

They said the cuts included contributions of up to 5 million bpd from producers outside their group known as OPEC+ and could be made gradually, potentially overcoming resistance from the United States, whose involvement is seen as vital to win broad backing for an agreement.
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Three OPEC+ sources said the group wanted non-members such as the United States, Canada, Norway and Brazil to contribute 5 million bpd to the overall cut, with OPEC+ would add at least another 10 million to 12 million bpd.

I do not support Canada joining the global oil cartel, however exciting it might be to rub shoulders with Big Men such as Putin and MBS. In extremis, I think, we should be imposing tariffs. The thought sticks in my craw, but there is little alternative that I can see; OPEC is simply another cartel and the current flood of oil should be viewed as simply another example of predatory pricing; OPEC would love to drive US shale oil and Canadian tar sands producers out of the game; once the western industry has been destroyed they will be free to jack prices up as far as they like.

There’s no global competition board to complain to; tariffs are the only solution. But please, keep them as low as possible. The objective should be to keep the Canadian oil industry on life-support, not to create a new class of welfare recipients.

And here’s some more on bank dividends:

During a bank CEO conference in early January, Canada’s banking regulator pledged to be more transparent about its work.

Assistant superintendent Jamey Hubbs said the Office of the Superintendent of Financial Institutions wants to build trust with Canadians. While he cautioned that OSFI has no plans to share top-secret information, he conceded that the regulator must do a better job of keeping regular folks informed.
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Consequently, as regulators around the world free up hundreds of billions of dollars in capital reserves, and in some cases restrict banks from paying dividends, OSFI owes it to Canadians to be frank about how our banks compare with their international peers. That means providing clear answers about whether our banks are capitalized differently than those abroad, and whether it’s realistic to believe that dividends will remain sacrosanct throughout this crisis without a complete explanation about why regulators are sure lenders won’t need that money down the road.
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Some banks have more latitude on how they meet capital requirements. The Big Six, for instance, use what’s known in industry parlance as the “advanced internal ratings-based approach” to calculate credit risk, which means they determine “all variables” for calculating risk weights. Risk-weighted assets are used to determine how much capital banks must set aside.

“The accuracy of measures of risk-weighted assets is a key concern especially for large banks in high-income OECD countries,” the World Bank Group stated in a 2019 policy research working paper.
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It’s incumbent on OSFI and banks to explain whether their black-swan stress-testing scenarios are based on assumptions that mirror the conditions of this crisis.

Bay Street analysts say many levers can be pulled before dividends are cut, but they’re in the business of selling stock. Maintaining public confidence in Canada’s financial system requires clear answers from regulators, not a request for the unquestioning belief of the masses.

Clear answers? From OSFI? In my experience, they regard any question as a direct insult.

And now it’s time for PrefLetter.