Category: Market Action

PerpetualDiscounts now yield 5.42%, equivalent to 7.05% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.90%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 315bp, a slight (and perhaps spurious) narrowing from the 320bp reported March 7.

Today’s gloom comes to us courtesy of Moody’s:

Canada’s mountain of consumer debt is triggering multiple alarms about the threat to the country’s banks.

Moody’s Investors Service joined the Bank for International Settlements and S&P Global Ratings which have all warned in the last month that Canada’s banking system, dominated by five giants, is facing a growing threat of souring consumer loans amid rising interest rates. The country’s ratio of household debt to disposable income reached a record 171 percent in the third quarter of last year.

The proportion of uninsured mortgages has increased to 60 percent from 50 percent five years ago, including home equity lines of credit, amid government efforts to reduce taxpayer exposure, according to the report from Moody’s on Tuesday. Canada Mortgage and Housing Corp., a government agency, insurers the bulk of mortgages in Canada.

Almost half of outstanding mortgages, many of them on fixed-rate terms, will have an interest-rate reset within the year, increasing the strain on households’ debt-servicing capacity, Moody’s said.

This looks like bad news for Aimia:

PC Optimum points will replace Aeroplan miles as the loyalty program of choice at Esso stations across the country effective June 1, as Imperial Oil Ltd. shifts its relationship to Loblaw Companies Ltd.

Aimia Inc.-operated Aeroplan notified members of the change to its 14-year partnership in an email on Tuesday.

It noted that up to 1.5 miles for every dollar spent will continue to be earned when using Aeroplan-affiliated credit cards for purchases at any retailer, including Esso.

Canadian consumer confidence took a hit:

Economic sentiment cooled for a second straight month in February, according to polling by Nanos Research Group for Bloomberg News, with Canadians increasingly concerned about the sustainability of the nation’s expansion.

It’s been a dramatic reversal in consumer confidence. Over the past two months, sentiment has dropped from near record highs to below average levels, reflecting an overall deterioration in economic conditions for households. These include three rate hikes by the Bank of Canada since July, a weakening Canadian dollar, sharp declines in stock prices, renewed worries about the housing market and a slowing economy.
…
Highlights of the Consumer Confidence Report

•The decline in February was largely driven by expectations, rather than pocketbook issues
•For example, Canadians are becoming more negative on the economy’s outlook, with pessimists outnumbering optimists. About 22 percent of Canadians see the economy strengthening, versus about 28 percent who see it worsening. That’s the biggest negative month-end gap since last May
•A month ago, optimists outnumbered pessimists 28 percent to 23 percent
•Expectations for real estate prices also showed a small deterioration in February
•Pocketbook issues like job security and personal finances were largely stable or better in February, after posting large declines in January
•Regionally, Alberta and British Columbia recorded sharp declines in sentiment in February, possibly reflecting a pipeline dispute between the two provinces.

Meanwhile, sabre-rattling over trade continues:

The top U.S. trade envoy said on Monday that bilateral deals could replace NAFTA if the pact is not renegotiated soon, ramping up pressure on Canada and Mexico, already smarting from President Donald Trump’s plan to impose steel and aluminum tariffs.

U.S. Trade Representative Robert Lighthizer said political headwinds would increase the longer the negotiations dragged on, warning that time to rework the 1994 trade deal was running “very short.”

“We would prefer a three-way tripartite agreement. If that proves impossible, we are prepared to move on a bilateral basis,” Lighthizer said, reading from a statement in Mexico City at the end of a seventh round of talks.
…
The Mexico City round of NAFTA talks was thrown into disarray after Trump announced a plan last week to impose a 25 per cent tariff on steel imports and a 10 per cent tariff on aluminum imports, arguing they were needed to protect U.S. industries and jobs.

Trump tweeted earlier on Monday that “Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed.”

Lighthizer said that meant Canada and Mexico would enjoy tariff exemptions once a NAFTA deal was reached, calling the tariffs an “incentive” to conclude the talks.

But there is no unanimity:

U.S. House Speaker Paul Ryan urged the Trump administration not to move forward on the tariffs, citing risks to the economy, after Trump’s threats led to warnings about retaliatory moves from trading partners.

But it’s entirely possible that the whole tariffs kerfuffle is just a negotiating tactic. Hasn’t Trump bragged about the power of bluster when making deals?

U.S. Trade Representative Robert Lighthizer said the Trump administration has offered to exclude Canada and Mexico from tariffs on steel and aluminum as an incentive to reach a deal on a new Nafta before a string of elections make it difficult.

President Donald Trump’s “view was that it makes sense that if we get a successful agreement, to have them be excluded,” Lighthizer told reporters in Mexico City on Monday following the seventh round of talks to renegotiate the North American Free Trade Agreement. “It’s an incentive to get a deal.”

More trade-war chatter:

World Trade Organization Director General Roberto Azevedo expressed concern at U.S. President Donald Trump’s plan for tariffs on steel and aluminum on Friday, an extremely rare intervention into a WTO member’s trade policy.

“The WTO is clearly concerned at the announcement of U.S. plans for tariffs on steel and aluminum. The potential for escalation is real, as we have seen from the initial responses of others,” he said in a brief statement issued by the WTO.

“A trade war is in no one’s interests. The WTO will be watching the situation very closely.”

And Trump’s boasting that he’s got a bigger button than the rest of the world put together:

U.S. President Donald Trump struck a defiant tone on Friday, saying trade wars were good and easy to win, after his plan to put tariffs on imports of steel and aluminum triggered global criticism and a slide in world stock markets.

The European Union raised the possibility of taking countermeasures, France said the duties were unacceptable and China urged Trump to show restraint. Canada, the biggest supplier of steel and aluminum to the United States, said it would retaliate if hit by U.S. tariffs.

Trump said on Thursday that tariffs of 25 per cent on steel imports and 10 per cent on aluminum products were designed to safeguard American jobs in the face of cheaper foreign products and would be formally announced next week.

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,” Trump tweeted on Friday.

“Example, when we are down $100-billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!” he wrote.

Sure. Messrs. Smoot and Hawley won their war back in the thirties.

So, despite more pointed comments about US inflation…:

Speaking of the Fed, it was behind the S&P 500’s travails Tuesday and Wednesday, a 2.4 percent retreat that before last month would’ve qualified as the worst selloff in a year. Stocks slid as Powell, who has vowed continuity with predecessor Janet Yellen’s pace of interest-rate hikes, hinted the central bank may be faster on the draw than anticipated.

“Powell surprised people by being a bit more frank than folks expected,” said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors. “That doesn’t necessarily work as a Fed chair, especially when we’re latching onto every single word that the Fed officials say.”

The new chairman been at the helm for just a month, obviously too little time to say if the markets like him. What is clear is that a combination of rate angst and Trump’s saber rattling has erased half the S&P 500’s 7.7 percent rebound from a Feb. 8 low.

For the week, the S&P 500 ended down 2 percent, almost twice as much as any decline registered in 2017. The Dow Jones Industrial Average fell 3.1 percent, while the Nasdaq 100 index lost 1.22 percent. Small-caps lost 1 percent.

… Canadian bond yields were down today, with the five-year closing at 2.00%.

Of course, poor GDP numbers probably had something to do with that:

Canada’s economy decelerated more than expected in the second half of last year, amid signs indebted households have begun slowing down spending.

The economy grew at an annualized pace of 1.7 percent in the fourth quarter, Statistics Canada reported Friday, versus economist expectations for 2 percent growth. Third-quarter gross domestic product growth was also revised down.

After leading the Group of Seven in growth last year, Friday’s numbers show a Canadian economy that has lost momentum, seemingly hampered by longstanding productivity issues and the growing potential of a hangover from the real estate boom. The U.S. economy recorded growth rates of 3.2 percent in the third quarter and 2.5 percent in the last three months of 2017.
…
What may be worse is that fourth-quarter GDP figures were exaggerated by temporary factors in housing. Spending on residential structures surged in the last three months of 2017 to an annualized 13.4 percent, the strongest quarterly increase since 2012. The gain was led by stronger-than-expected new home construction, and as buyers rushed to get ahead of tighter mortgage qualification rules that came into effect Jan. 1.

The increase in residential spending was responsible for 1 percentage point of the 1.7 percent growth rate, Statistics Canada said.

Let’s have a trade war!

Canada is vowing to retaliate if U.S. President Donald Trump makes good on his pledge to impose steep tariffs on steel and aluminum producers — while holding out hope that it could be exempt.

Trump said he intends to slap a 25 percent duty on steel imports and 10 percent on aluminum in order to protect the national industry, though details remain unclear. His words sent U.S.-based producers rallying but could hurt companies that ship steel and aluminum from Canada, including Rio Tinto Group and Stelco Holdings Inc., without an exemption.
…
“The President has just initiated an all-out trade war,” said Jean Simard, chief executive officer of the Aluminum Association of Canada. Aside from the direct impact on the countries affected, Europe will need to protect itself from a flood of redirected metal because the U.S. is not an open market anymore, he said.

“We have to keep hoping” for an exemption for Canada, Simard said.

London-based Rio Tinto, which ships more than 1.4 million metric tons of aluminum to the U.S. annually from Canada, said it will continue to lobby Washington for an exemption given the highly integrated Canada-U.S. market for autos and other manufactured goods.

Surprisingly:

President Donald Trump’s closest Republican allies on Capitol Hill are criticizing his plan to impose tariffs on steel and aluminum imports to protect national security, while some Democrats are applauding.

The upside-down reaction comes a day after Trump irked Republicans and pleased many Democrats by backing stricter gun-control measures and suggesting the government could take guns, initially without due process, from some citizens viewed as dangerous.

Enough of this could choke off the recovery and therefore delay the return to interest-rate normalcy:

Investments by foreign companies in Canada slumped last year to the lowest level since 2010, amid mounting concerns about national competitiveness and uncertainty surrounding the renegotiation of the North American Free Trade Agreement.

Foreign direct investment nosedived 26 per cent to $33.8 billion in 2017, Statistics Canada reported, continuing a trend of declining interest by foreign firms. And for the first time since data collection on the topic began in 2007, foreign firms sold more Canadian companies than they bought.

And it may be that we are finally getting our come-uppance for our cheap labour industrial strategy:

Energy companies are chopping their budgets even as global oil prices climb back from a crash, and may lose about C$16 billion ($12.4 billion) of revenue this year because of discounts on Alberta’s heavy crude — a problem blamed on a lack of pipeline space. Foreign direct investment in Canada, meanwhile, has fallen to the lowest since 2010.

Another unknown for investment prospects is how companies are dealing with production constraints. As firms bump up against production capacity at this high point in the economic cycle, you’d expect capital expenditure intentions to be widespread across industries. Yet capex is expected to increase just 0.8 percent even with capacity utilization hitting a 10-year high of 85 percent.

It’s possible companies are increasingly turning to the labor market to address excess demand, which would explain Canada’s string of red-hot jobs reports last year. That preference could further constrain business investment.

PerpetualDiscounts now yield 5.43%, equivalent to 7.06% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 3.90%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 315bp, a sharp widening from the 300bp reported February 21.