Category: Market Action

Assiduous Reader AB passes on his latest collection of derivative notes based on preferred shares:

• BMO JHN12319, based on Evolve Active Canadian Preferred Share ETF, closing 2019-4-26
• BMO JHN12313, based on ZPR
• NBC NBC23348, based on ZPR
• BMO JHN12327, based on ZPR
• BMO JHN12328, based on ZPR

…to which I will add

• NBC NBC23354, based on ZPR, which I found through the NBC Structured Solution web-page
• TD Coupon Notes, series 329, linked to ZPR, which I found through the TD structured notes search page

The BMO ‘Principal at Risk’ Notes page is here.

The TD Structured notes page is here. Search for the product class ‘Principal at Risk Notes’ with the keyword ZPR.

So were notes like this responsible for BMO’s buying bout of ZPR at the close today?

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I didn’t look carefully at all the details for all the notes, but I got the impression that a selling commission of 2.5% applied to these notes. Nice work, if you can get it!

The Bank of Canada rate announcement was today:

The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.

Global economic growth has slowed by more than the Bank forecast in its January Monetary Policy Report (MPR). Ongoing uncertainty related to trade conflicts has undermined business sentiment and activity, contributing to a synchronous slowdown across many countries. In response, many central banks have signalled a slower pace of monetary policy normalization. Financial conditions and market sentiment have improved as a result, pushing up prices for oil and other commodities.

Global economic activity is expected to pick up during 2019 and average 3 ¼ per cent over the projection period, supported by accommodative financial conditions and as a number of temporary factors weighing on growth fade. This is roughly in line with the global economy’s potential and a modest downgrade to the Bank’s January projection.

In Canada, growth during the first half of 2019 is now expected to be slower than was anticipated in January. Last year’s oil price decline and ongoing transportation constraints have curbed investment and exports in the energy sector. Investment and exports outside the energy sector, meanwhile, have been negatively affected by trade policy uncertainty and the global slowdown. Weaker-than-anticipated housing and consumption also contributed to slower growth.

The Bank expects growth to pick up, starting in the second quarter of this year. Housing activity is expected to stabilize given continued population gains, the fading effects of past housing policy changes, and improved global financial conditions. Consumption will be underpinned by strong growth in employment income. Outside of the oil and gas sector, investment will be supported by high rates of capacity utilization and exports will expand with strengthening global demand. Meanwhile, the contribution to growth from government spending has been revised down in light of Ontario’s new budget.

Overall, the Bank projects real GDP growth of 1.2 per cent in 2019 and around 2 per cent in 2020 and 2021. This forecast implies a modest widening of the output gap, which will be absorbed over the projection period.

CPI and measures of core inflation are all close to 2 per cent. CPI inflation will likely dip in the third quarter, largely because of the dynamics of gasoline prices, before returning to about 2 per cent by year end. Taking into account the effects of the new carbon pollution charge, as well as modest excess capacity, the Bank expects inflation to remain around 2 per cent through 2020 and 2021.

Given all of these developments, Governing Council judges that an accommodative policy interest rate continues to be warranted. We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive. In particular, we are monitoring developments in household spending, oil markets, and global trade policy to gauge the extent to which the factors weighing on growth and the inflation outlook are dissipating.

As usual, there was no reporting of the vote or of dissenting opinions because our illustrious masters do not feel any need for accountability.

The dovish stance hurt the loonie:

The Canadian dollar fell to a nearly four-month low against its broadly stronger U.S. counterpart on Wednesday, as investors raised bets on a Bank of Canada interest rate cut this year after the central bank slashed its economic growth outlook.

Canada’s central bank held its benchmark interest rate steady at 1.75 per cent as expected but removed wording about the need for future rate hikes and lowered its growth forecast for 2019 to 1.2 per cent from 1.7 per cent.
…
Chances of an interest rate cut by December rose to 65 per cent from 57 per cent before the policy announcement, data from the overnight index swaps market showed.

At 4:03 p.m., the Canadian dollar was trading 0.5 per cent lower at 1.3484 to the greenback, or 74.16 U.S. cents. The currency touched its weakest intraday level since Jan. 3 at 1.3522.

… and the GOC five-year yield dropped 7bp to 1.50%.

PerpetualDiscounts now yield 5.49%, equivalent to 7.14% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.78%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 335bp, a significant widening from the 325bp reported April 17.

It was another busy day for the MOC facility, with 68 preferred share issues listed on the imbalances, many of them in lots of 5,000 shares.

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FAIR Canada, that superannuation scheme for tired old regulatory hacks, is in some well-deserved trouble:

The primary advocacy group for Canadian investors is losing money, looking for an executive director – and struggling to survive.
…
FAIR Canada has survived in large part in recent years on a $2-million gift from Stephen Jarislowsky, the founder of investment firm Jarislowsky Fraser Ltd., and an additional $2-million contribution from the Ontario Securities Commission, which used money collected in settlements and from fines.

Mr. Jarislowsky’s 2014 gift was conditional on FAIR finding $4-million in matching gifts, but outside of the OSC money, it has fallen far short, Mr. Pascutto said. Mr. Jarislowsky has extended a deadline for the match several times, most recently agreeing to postpone it to this coming September from March 31.
…
The Investment Industry Regulatory Organization of Canada (IIROC), which provided the initial funding for FAIR Canada, has given a total of $4.9-million over the years, including a $250,000 grant in the fall of 2018 from its restricted fund that comes from fines and settlements, spokeswoman Andrea Zviedris said in an e-mailed statement.

On March 28 I highlighted an issue of structured notes from TD. Assiduous Reader AB writes in and provides me with a link to the National Bank Structured Solutions Group page, who issued five separate notes “linked to a Canadian preferred share ETF” between April 10 and April 18.

There was a disorderly close in the market today, as TXPR lost 49bp in the last five minutes to close down 28bp from yesterday on high volume of over 4-million shares.

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One of the hard-working geniuses who are such a feature of Canadian investment management made extensive use of the Market-on-Close facility, which I assume helped him leave early for the long weekend.

On March 18 I reported:

Assiduous Readers will remember that Manulife was bailed out by the regulators again after a hedge fund claimed the terms of its contract with the firm allowed it to deposit unlimited funds with the firm at a guaranteed rate of up to 5%.

It turns out the bail-out was unnecessary! Manulife won the court case

‘Not so fast!’ scream the plaintiffs:

A pivotal court ruling that dismissed three lawsuits against Canadian life insurers has been formally appealed, extending a battle between the companies and three investment funds over the fine print of decades-old contracts.
…
This week the funds appealed all three cases, arguing that the core argument made by Justice Brian Scherman of the Court of Queen’s Bench for Saskatchewan when dismissing the lawsuits is incorrect. Justice Scherman ruled that the contracts were designed to be used for insurance purposes only, and that “in the some 30 years since universal life insurance policies have been sold, there is no judicial record of these policies being used in the manner proposed” by the investment funds.

In its appeal of the ruling that related to Manulife, Mosten Investment LP argued “the learned Chambers Judge erred in law in his interpretation of the contract.”

There is a fascinating chart made available in the OECD release of its publication “Taxing Wages”:

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Of course, this just refers to taxes on wages; it does not include things like sales tax and property tax. In the interest of avoiding vitriolic attacks by worshippers of the Awesome and Holy United States of Free America, I will also publish a chart more favourable to that glorious nation:

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Of course, neither chart includes the cost of health insurance, which is a big ticket item in the Awesome and Holy United States of Free America, but that’s because health insurance is FREE ENTERPRISE, dammit, and any free citizen has a CHOICE between between buying Health Insurance, dying, or being bankrupted by medical bills.

Reasonable people can argue all day and all night regarding whether a single-payer system like Canada’s is better or worse than the US system. Each has its own advantages and disadvantages. But to take tax rates as a straight-up, single-number meaningful comparison of anything at all is simply ridiculous and annoys me.

PerpetualDiscounts now yield 5.45%, equivalent to 7.08% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.82%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 325bp, unchanged from the figure reported April 10.

I noticed another recent corporate long bond issue, this one some thirty-year notes from Pembina:

Pembina Pipeline Corporation (“Pembina” or the “Company”) (TSX: PPL; NYSE: PBA) is pleased to announce that it has closed its previously announced offering of $800 million of senior unsecured medium-term notes (the “Offering”). The Offering was conducted in two tranches consisting of $400 million in senior unsecured medium-term notes, series 12 (the “Series 12 Notes”) having a fixed coupon of 3.62% per annum, paid semi-annually, and maturing on April 3, 2029, and $400 million in senior unsecured medium-term notes, series 13 (the “Series 13 Notes”) having a fixed coupon of 4.54% per annum, paid semi-annually, and maturing on April 3, 2049.

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TXPR closed at 627.58, up 0.57% on the day. Volume was 2.48-million, on the high side but nothing special in the context of the past thirty days.

CPD closed at 12.55, up 0.72% on the day. Volume of 94,423 was low in the context of the past thirty days.

ZPR closed at 10.12, up 0.60% on the day. Volume of 474,940 was very high in the context of the past thirty days, second only to March 13, when a stunning 1,007,639 shares changed hands.

Five-year Canada yields were up, up 6bp to 1.52% today, but that’s not sufficient to be considered a glib explanation.

So it was a fine way to close the month, but not enough to save the TXPR total return index, which saw performance of -0.46% in March but (thank heavens for small mercies) +1.11% for the quarter.

There was a late afternoon rally in the market yesterday which I mentioned but did not even guess at a cause. Assiduous Reader AB writes in and says:

TD issued a note tied to ZPR. They had to hedge some of their risk into the close.

He even provided a link to the product description. There’s an ongoing link to the prospectus, which states:

As of the date of this Pricing Supplement, the Bank estimates that the value of the Notes is $97.10 per $100 in principal amount.

There are a lot of moving parts in the valuation of this note and I’m not even going to try to come up with my own valuation. But the issue sold out, $20-million worth, so there’s clearly some speculative interest in buying at these levels.