Category: Market Action

DBRS commented on the Federal budget:

As anticipated at the time of DBRS’s last review, Canada’s debt burden appears to have reached an inflection point and reducing debt remains a long-term goal of the government. Gross market debt (the measure tracked by DBRS) is projected to fall by 3.1% to $647 billion by March 31, 2014, resulting in a debt-to-GDP ratio of roughly 35%, down from 37% a year earlier. For 2014-15, market debt is expected to remain relatively flat, pointing to a debt-to-GDP ratio of 34%. Total borrowing requirements are forecast at $232 billion in 2014-2015, comprised almost entirely of refinancing needs. The government plans to continue to reduce refinancing risk by replacing maturing treasury bills with longer-term bonds, which should lengthen the average term to maturity of the debt portfolio. In addition, the issuance of 50-year bonds is being contemplated, after having considered 40-year issuance in the previous budget.

… but there were also some cogent words from Konrad Yakabuski of the Globe:

Hence, Mr. Flaherty’s latest, and perhaps last, budget includes another $500-million for Ottawa’s so-called Automotive Innovation Fund, increasing the total to $1-billion. The funds are supposed to be doled out in “repayable contributions to automotive firms that are undertaking strategic large-scale research and development projects focused on new vehicle technologies.”

Don’t be fooled. About as much R&D goes on in Canada’s auto sector as in my kitchen. The AIF is a slush fund used to subsidize the wages of auto workers whose “quality,” according to a 2012 study by the Institute for Research on Public Policy, has “not proven to be an important factor in productivity growth in motor-vehicle assembly over the past 45 years.” Yet, Chrysler reportedly wants up to $700-million from Ottawa and Ontario to assemble a “new generation” of minivans in Windsor.
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According to the IRPP study by economists Leslie Shiell of the University of Ottawa and Robin Somerville of the Centre for Spatial Economics, the rescues cost Canadian taxpayers more than $500,000 for every job saved.

At least there’s a little good news for granny:

Canadian banks are slashing the trading fees charged by their online investing platforms, a sudden about-face after years of ignoring intense competition from independent rivals with cheaper prices.

In the past month, Royal Bank of Canada, Toronto-Dominion Bank and Bank of Montreal each cut their discount brokerage prices. Now any of their clients, regardless of their portfolio size, can buy or sell a stock for $9.95 to $9.99 – a low fee historically reserved for clients with tens of thousands of dollars to invest.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 22bp, FixedResets gaining 6bp and DeemedRetractibles flat. Volatility was minimal. Several issues saw heavy volume, but overall it was a light trading day.

PerpetualDiscounts now yield 5.61%, equivalent to 7.29% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.6%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 270bp, a slight (and perhaps spurious) narrowing from the 275bp reported February 5.

There were no surprises in Yellen’s testimony to Congress:

Federal Reserve Chairman Janet Yellen pledged to maintain her predecessor’s policies by scaling back stimulus in “measured steps” and signaled that the bar is high for a change in that plan.

Only a “notable change in the outlook” for the economy would prompt policy makers to slow the pace of tapering, Yellen said in response to a question today during testimony to the House Financial Services Committee. “It’s important for us to take our time to assess” the significance of recent reports showing payrolls expanded less than projected, she said.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets gaining 1bp and DeemedRetractibles winning 18bp. Floating Rate issues were atop the Performance Highlights table. Volume was below average.

Nothing happened today.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts off 17bp, FixedResets up 10bp and DeemedRetractibles gaining 6bp. The Performance Highlights table is dominated by losing Floating Rate issues. Volume was extremely low.

Golly, what a surprise:

Bank of England officials told currency traders it wasn’t improper to share impending customer orders with counterparts at other firms, a practice at the heart of a widening probe into alleged market manipulation, according to a person who has seen notes turned over to regulators.

A senior trader gave his notes from a private April 2012 meeting of currency dealers and two central bank staff members to the Financial Conduct Authority about six weeks ago because of mounting media coverage of the investigation, said the person, who asked not to be named while probes are under way.

Traders representing some of the world’s biggest banks told officials at the meeting that they shared information about aggregate orders before currency benchmarks were set, three people with knowledge of the discussion said. The officials said there wasn’t a policy on such communications and that banks should make their own rules, according to the people.

I don’t see anything wrong with sharing this information, anyway. To me, it’s all part of the ‘beat bankers up’ hysteria, led by people who act as if they do not understand what it is that institutional desks do – though I’m quite sure this is disingenuous.

It will be interesting to see how Danish mortgages turn out:

Denmark, which in 2010 became the first European nation to pass a law preventing bank bailouts, is now signaling it will take an equally hard line with its mortgage industry. The stance comes from a country whose $550 billion home-loan market — the world’s biggest per capita — is more than 1 1/2 times gross domestic product.

About a third of Danish mortgages are refinanced annually in bond auctions. The government has proposed a law that seeks to address refinancing risks by forcing bond investors to accept 12-month maturity extensions if an auction fails or if interest rates jump more than 5 percentage points.

The Danish mortgage industry’s size and systemic importance this week led Standard & Poor’s to conclude that the government would have to step in should auctions fail. According to the rating company, Denmark’s economy will already be in a crisis warranting some form of intervention if mortgage banks can’t sell their bonds.

From an investor’s perspective, the law brings a lot of wrong-way risk with it (i.e., bad news is correlated). What effect will this have on mortgage rates?

Crumby jobs number in the US:

Payrolls rose less than projected in January and the jobless rate unexpectedly dropped to the lowest level in more than five years, clouding the outlook for the U.S. economy and Federal Reserve.

The 113,000 gain in hiring fell short of the 180,000 advance that was the median forecast of economists surveyed by Bloomberg and followed a 75,000 increase the prior month, Labor Department data showed today in Washington. Unemployment declined to 6.6 percent, the least since October 2008, from 6.7 percent in December.

Contrariwise, the the Canadian number looked OK…

The Canadian economy added 29,400 jobs in January after a month-earlier drop, led by gains in self employment and in the public sector.

The employment gain and a drop in the number of people looking for work sent country’s jobless rate down two notches to 7 per cent in January. The increase comes after employers shed 44,000 positions in December, Statistics Canada said Friday.

… but has been criticized:

“The January Canadian jobs report was good on the headline but weak in the details,” said senior economist Krishen Rangasamy of National Bank Financial.

“The job gains were driven by self-employment and the number of paid jobs grew a meagre 1,000 as gains in government offset further declines in the private sector,” he added, referring to a loss of 14,000 jobs among corporations.

“After the weather wreaked havoc in the prior month, causing a massive 44,000 drop, employment bounced back in affected sectors such as agriculture, construction, and accommodation services.”

He cited the “more reliable” six-month moving average, which shows employment up 15,000 a month since August, with 12,000 of them in the private sector.

That, he added, is “not a bad performance, and consistent with the pick-up in economic growth in the second half of 2013.”

Meanwhile, the Toronto Exchange is losing subscribers:

TMX Group Inc. disclosed on Wednesday that there was an 8 per cent slump “in the average number of professional and equivalent real-time market data subscriptions to Toronto Stock Exchange and TSX Venture Exchange products.” That is by far the steepest drop in the past eight years, and takes the number down to 139,939 from 151,799 in 2012.

Maybe they’ll cut the price to increase subscriptions. Ha-ha.

The hot new topic is flexible exchange rates:

In October 2001, [Fed vice-governor nominee] Stanley Fischer traveled to the London School of Economics to speak on the lessons of his seven years battling turmoil in emerging markets as the International Monetary Fund’s No. 2 official.

Lecturing in the Old Theatre at the university where he studied in the 1960s, Fischer posed a question: What would he have done differently to thwart the Asian financial crisis of 1997-1998? Among his answers: Pushing harder for exchange-rate flexibility.
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Emerging-market stocks and exchange rates have had the worst start to a year since 2010. Even so, said Dominic Wilson, chief markets economist at Goldman Sachs Group Inc. in New York, “currency weakness itself is unlikely to be as sharply disruptive as it was in the late 1990s.”

That’s when Asian nations including South Korea and Thailand spent reserves trying to defend exchange-rate pegs, only to eventually devalue and seek IMF bailouts. As one currency after another became delinked from the U.S. dollar, investors attacked in waves that would culminate in Russia’s debt default and the collapse of Long Term Capital Management.
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Following Fischer’s prescriptions, emerging markets have made other changes to ensure they are less vulnerable than they were in the late 1990s, [former IMF economist Eswar] Prasad said. Their external debt as a share of exports has fallen to 70 percent from about 160 percent in 1998; interest payments on foreign debt have declined to less than 3 percent of exports from 8 percent; and reserves as a percentage of total debt have doubled to more than 100 percent, according to Goldman Sachs.

… and it was also Tiff Macklem’s swan-song:

Since 1995, the target has been to achieve an annual total rate of inflation of 2 per cent – the midpoint of our control range of 1 to 3 per cent – as measured by the consumer price index (CPI). The target is reviewed jointly with the federal government approximately every five years, and was last renewed in 2011.3

To achieve that target, an essential component of our monetary policy framework is a flexible exchange rate. The floating exchange rate is part of the monetary transmission mechanism. It allows the Bank to pursue its own “made-in-Canada” monetary policy that is directed at achieving 2 per cent inflation in Canada and stabilizing our economy. The flexible exchange rate also serves as a kind of shock absorber for the Canadian economy, helping it absorb and adjust to shifts in the global economy. [Conference reference]

In light of the recent depreciation of the Canadian dollar, it bears stressing that the Bank does not have a target for the exchange rate – it has an inflation target. The exchange rate is determined in markets, and we neither promote any specific value for the Canadian dollar, nor thwart its movements.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 2bp, FixedResets down 10bp and DeemedRetractibles gaining 5bp. Floaters bounced back after getting hit in the past few days and dominated the good part of the Performance Highlights table. Volume was below average, but the highlights were exclusively FixedResets – probably due to the new issue.

Hands up, everybody who didn’t see this coming! Suing CRAs is fashionable!

Today’s looniest financial story is surely that Italy’s state auditor, the Corte dei Conti, has opened an investigation into Standard & Poor’s, Moody’s and Fitch for downgrading Italy’s debt over the past couple of years. Loony first of all for the reasoning:

Notifying S&P that it was considering legal action, the Corte dei Conti wrote: “S&P never in its ratings pointed out Italy’s history, art or landscape which, as universally recognised, are the basis of its economic strength.”

But also for the size of the claim: “Standard & Poor’s revealed on Tuesday it had been notified by Corte dei Conti that credit rating agencies may have acted illegally and opened themselves up to damages of €234bn.”

It was another mildly poor day for the Canadian preferred share market, with PerpetualDiscounts off 6bp, FixedResets down 12bp and DeemedRetractibles losing 14bp. The surprisingly lengthy performance highlights table is dominated by losers. Volume was high.

DBRS doesn’t like the New Brunswick budget:

DBRS notes that the Province of New Brunswick (the Province or New Brunswick; rated A (high) with a Stable trend) kicked off the provincial budget season with its 2014 budget on February 4, 2014, which calls for a slow and protracted path back to balance by 2017-18. Although last year’s budget incorporated no firm time commitment to restore balance, the plan presented in 2012-13 did point to a balanced budget by 2014-15. DBRS was aware that some slippage had been incurred in light of weak economic performance but did not expect the full extent of deterioration revealed in yesterday’s budget. As a result, the revised fiscal targets raise the possibility of as much as $400 million to $500 million in additional debt over the next four fiscal years, which was not factored into last year’s rating review. While the revised outlook is potentially manageable for the credit profile, DBRS remains concerned that continued sluggish economic growth for an extended period of time or weakening fiscal resolve could push credit metrics to levels no longer consistent with the current ratings.
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Based on the revised fiscal forecasts, DBRS-adjusted debt is estimated to have risen by 5% in 2013-14 to $12.5 billion. As a result of Statistics Canada’s downward revisions to historical GDP figures in December 2013 combined with very slow nominal GDP growth in 2013, debt-to-GDP is forecast to reach almost 40% at March 31, 2014. The Province’s debt burden is expected to peak around 41% in 2015-16. This exceeds the peak at the time of last year’s review and, more importantly, is well above pre-recession levels of less than 30%. As a result, even if the Province successfully executes its fiscal recovery plan as currently envisioned, DBRS believes little flexibility will be left within the current rating for further erosion. Additional fiscal slippage pushing the debt-to-GDP ratio toward 45% would be cause for concern for DBRS and could result in downward pressure on the rating.

It was a mildly negative day for the Canadian preferred share market, with PerpetualDiscounts down 7bp, FixedResets off 3bp and DeemedRetractibles losing 9bp. A surprisingly lengthy Performance Highlights table is notable for the presence of losing Floating Rate issues. Volume was below average.

PerpetualDiscounts now yield 5.58%, equivalent to 7.25% interest at the standard conversion factor of 1.3x. Long Corporates now yield about 4.5% (maybe a little less), so the pre-tax interest-equivalent spread is now about 275bp, the same as that reported on January 29.

Nothing happened today.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 38bp, FixedResets gaining 11bp and DeemedRetractibles up 16bp. The performance highlights table is short, but comprised entirely of winning PerpetualDiscounts. Volume was average.

More blather about housing prices:

The price-to-rent ratio pegs the level at 60 per cent, [TD economist] Ms. [Diana] Petramala said, but is “skewed” by rent controls, and thus it’s hard to determine whether the prices are too high or if the rents are too low.

The price-to-income ratio puts overvaluation at up to 30 per cent, she added, but that really depends on what you consider income.

“A more encompassing definition of income, including government transfers and investment income, suggests the housing market is only 8 per cent overvalued.”

But it’s affordability that is key, she said, and various readings don’t factor in declining interest rates over the last 20 years. A “more normal interest rate environment” suggest 25 per cent, while current rates suggest fair value.

“However, current interest rates are likely unsustainable, nor are they expected to increase to more normal levels in the near future,” Ms. Petramala said.

“Over all, given the expectations of a modest increase in interest rates, home prices are likely 10-per-cent overvalued.”

Make of it what you will. Personally, I think forecasting the real estate market is about as useful an exercise as timing the financial markets. When I bought my place in 2000, I had lots of people tell me what an idiot I was; but I needed a place to live.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 20bp, FixedResets off 1bp and DeemedRetractibles gaining 3bp. Floaters got hammered, dominating the bad part of the Performance Highlights table. Volume was very extremely awfully low.

The blame game has begun:

India central bank Governor Raghuram Rajan warned of a breakdown in global policy coordination after the Federal Reserve further cut stimulus, weakening emerging-market currencies from the rupee to the Turkish lira.

Rajan, a former chief economist at the International Monetary Fund, called for greater cooperation among policy makers weeks before finance chiefs from the world’s top developed and emerging markets gather in Sydney.
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The Fed shouldn’t be blamed for turmoil in emerging markets, former Fed Governor Randall Kroszner, a professor at the University of Chicago where Rajan once lectured, said on Bloomberg Radio’s “The Hays Advantage.”

“Countries that are being hit tend to be ones that have high current-account deficits, high fiscal deficits and relatively high inflation, and the challenge is brought on by their own domestic policies,” Kroszner said. “It’s unfair to say it’s all the Fed’s fault.”
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In 2011, Rajan co-authored a report that called for the creation of an International Monetary Policy Committee composed of representatives from major central banks that would regularly report on the aggregate consequences of individual central bank policies. Central banks from bigger countries should be encouraged to internalize the spillover effects of their policies, it said.

Rajan said yesterday developed countries might not like adjustments emerging markets take to cope with the outflows, without elaborating on specific measures. His surprise Jan. 28 move to raise the benchmark repurchase rate by a quarter point – – adding to increases of 50 basis points since he took over the Reserve Bank of India in September — was to stem consumer-price inflation running at close to 10 percent, he said.

Some economists are taking a stab at quantifying the effects of quantitative easing:

The economists, Jing Cynthia Wu and Fan Dora Xia, used a concept known as the “shadow rate” to gauge the impact of quantitative easing and the Fed’s forward guidance on the likely path of interest rates.

Their findings: as of December, Fed policy was the equivalent of cutting the benchmark interest rate to minus 1.98 percent, according to Wu at the University of Chicago Booth School of Business and Xia at the University of California at San Diego.

Fan Dora Xia’s web page also shows his estimates for the ECB (-0.24% as of 2013-05-31) and the UK (-3.06% as of 2013-10-31).

Meanwhile, Argentinian bonds are doing what Argentinian bonds do best:

Argentine dollar bonds tumbled the most in emerging markets on concern government measures from devaluation to rate increases aren’t enough to improve the country’s deteriorating debt payment capacity.

Argentine government dollar bonds due 2015 fell 3.88 cents on the dollar to 85.75 cents, driving yields up to 19.12 percent, the highest since June 2012.
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Argentina is losing foreign currency reserves at the fastest pace in more than a decade as estimated 28 percent inflation and currency controls spur capital flight. The funds, which the country relies on to pay debt and finance energy imports, dropped to a seven-year low of $28.3 billion. The government devalued the peso 15 percent last week and raised benchmark interest rates as much as 6 percentage points. The moves, coupled with less risk appetite for emerging market assets, haven’t settled investor concerns.

The Canadian preferred share market closed the month on a happy note, with PerpetualDiscounts winning 20bp, FixedResets gaining 5bp and DeemedRetractibles up 8bp. BAM Floating Rate issues were notable on the downside of a relatively lengthy Performance Highlights table. Volume was above average.

I’m all in favour of ETFs (most of them, anyway. Not the silly ones). By reducing friction, they make it easier for small investors to construct a well diversified portfolio. Trouble ensues when all these small investors collectively become a tidal wave of dumb money:

Investors are pulling money from exchange-traded funds that track emerging markets at the fastest rate on record, as China’s slowing growth and cuts to central-bank stimulus sink currencies from Turkey to Brazil.

More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created, data compiled by Bloomberg show. The iShares MSCI Emerging Markets ETF has seen its assets shrink by 11 percent, while the Vanguard FTSE Emerging Markets ETF is poised for the biggest monthly redemption since the fund was started in 2005. The WisdomTree Emerging Markets Local Debt Fund is on track for an eighth straight month of withdrawals.
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Withdrawals from the iShares fund and the Vanguard ETF, the largest such products by assets for emerging markets, totaled $1.9 billion on Jan. 27, the biggest one-day redemption since 2005, data compiled by Bloomberg show. About $58 million has been withdrawn from the WisdomTree debt fund this month, bringing the total redemption since June to $752 million.

It will be most interesting to see if any smaller, derivative-based ETFs get into trouble as a result of all this.

Assiduous Readers will remember that I am most interested in good statistics regarding actual default rates of AAA US RMBS, as opposed to downgrades. The politicians are always whimpering about downgrades and seek to make them sound like defaults in their speeches. Today I found – free! – S&P’s Global Structured Finance Default Study, 1978-2012: A Defining Moment For Credit Performance Stability. Yep, downgrades are awful! No less than 70.68% of US RMBS were downgraded in 2009, as shown in the table on page 19. More seriously, 57.3% of investment-grade global structured finance instruments issued in 2006 have defaulted (page 24) and, even more seriously the Global Structured Finance Five-Year Default Rate for AAA issues for the five years ending 2012-12-31 was 12.91% (page 35). Regrettably, it’s not clear to me whether the US agencies’ default is included in these figures, or what the recovery on default was. Still, it’s a fascinating topic and I continue to keep my eyes peeled for solid analysis.

David Parkinson of the Globe writes a good piece about wage inflation:

Average weekly earnings, including overtime, were up 2.5 per cent in November compared with a year earlier – the fastest pace in six months. In November alone, average weekly wages jumped 0.9 per cent.
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Statscan data show that average hourly earnings excluding overtime have barely moved in the past six months, but average earnings including overtime are up 1.2 per cent.

Curiously, though, the November wage growth came despite a drop in average weekly hours worked (to 33.1 from 32.8 a year earlier). This would seem to contradict the notion that overtime has been ramped up. However, given that most of the job growth in the past year has been in part-time positions, this could be a function of overtime shifts being spread among part-time workers.

It was a mildly negative day for the Canadian preferred share market, with both PerpetualDiscounts and FixedResets off 6bp and DeemedRetractibles flat. Volatility was very low. Volume was average.