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It was an interesting day:

Wall Street surged on Thursday as investors weighed the prospect of economic recovery against bellicose remarks from President Donald Trump regarding U.S.-China trade and a whistleblower’s dire warnings about the U.S. response to the coronavirus pandemic. It was a volatile session in both the U.S. and Canada, where the TSX closed flat.
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Unofficially, the Dow Jones Industrial Average rose 1.61% to end at 23,622.19 points, while the S&P 500 gained 1.16%, to 2,852.63.

The Nasdaq Composite climbed 0.92% to 8,944.66.

In Canada, the S&P/TSX Composite Index closed up 6.45 points, or 0.04%, at 14,509.66. It was a mixed session overall, with the energy sector only managing a 0.39% advance despite a 9% rally in the price of crude oil.

TXPR closed at 507.95, down 0.85% on the day. Volume today was 2.00-million, well below the average of the past thirty days.

CPD closed at 10.13, down 1.27% on the day. Volume was 152,641, fourth-highest of the past 30 trading days.

ZPR closed at 7.86, down 1.38% on the day. Volume of 316,241 was high in the context of the past 30 trading days.

Five-year Canada yields were down 1bp to 0.38% today.

Credit availability for retail real-estate speculation is tightening:

Big lenders are tightening their requirements for real estate investors, mortgage brokers say, which could further slow activity in places such as Southern Ontario where investor demand had driven up prices and sales.

Bank of Nova Scotia, for example, is no longer allowing home buyers to use funds from a home equity line of credit for a down payment on a rental property, according to a memo the bank sent to mortgage brokers.
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For example, banks have told brokers they want to see that real estate investors have liquid assets or assets that can easily be turned into cash to cover mortgage payments if renters are unable to make their payments. They are asking to see bank deposits for rent whereas previously the borrower could simply show the rental lease agreement. Banks are also constantly reconfirming a borrower’s income. Before the pandemic, a home buyer’s income would be verified during the mortgage application.

And the BoC is warning of higher corporate funding costs:

The Bank of Canada said that its extraordinary efforts to soothe rattled financial markets are working, but it warned that credit downgrades and rising funding costs remain key threats to the corporate landscape – and the struggling energy sector in particular.

In its annual Financial System Review, the central bank said that 73 per cent of Canadian investment-grade debt is BBB-rated, which is just above speculative grade status. Sweeping credit-rating downgrades could swell the number of junk bonds, forcing companies to refinance at higher rates.

“The risk of credit downgrades is intensifying refinancing risks,” the Bank of Canada warned in its review, adding that the energy sector is particularly vulnerable.

“The energy sector has the most refinancing needs over the next six months ($6-billion) and faces the most potential downgrades. This sector’s ability to secure refinancing will be particularly tested with low oil prices,” the bank said.
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Even though the Bank of Canada said that its liquidity and bond-buying helped to calm financial markets, redemptions from bond funds totalled $14-billion in March, or 4.5 per cent of assets under management, as investors ran for the exits

Although this total was considerably better than the central bank’s model simulation, which implied that redemptions could have hit $31-billion or 9.5 per cent of assets under management, the central bank warned that bond funds could be more vulnerable to another wave of redemptions, which can force funds to dump assets.

Fixed income funds have already used up part of their cash buffers to meet redemptions, and as a result the cash holdings of bond funds have fallen from an average of 4.2 per cent to just 3 per cent at the end of March.

The full text of the report is on the BoC website and has many interesting charts. As far as I can tell, it’s no longer being provided as a PDF any more; a change to which I cannot help but ascribe sinister motivations. But perhaps production of the PDF has merely been delayed …

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Powell reminded us today that monetary policy is one thing and fiscal policy is another thing:

The Federal Reserve chair, Jerome H. Powell, delivered a stark warning on Wednesday that the United States was experiencing an economic hit “without modern precedent,” one that could permanently damage the economy if Congress and the White House did not provide sufficient financial support to prevent a wave of bankruptcies and prolonged joblessness.

Mr. Powell’s blunt diagnosis was the latest indication that the trillions of dollars that policymakers have already funneled into the economy may not be enough to forestall lasting damage from a virus that has already shuttered businesses and thrown more than 20 million people out of work.
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“The recovery may take some time to gather momentum,” Mr. Powell said at a Peterson Institute for International Economics virtual event. “Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.”

The markets hated this heresy:

U.S. and Canadian stocks fell sharply Wednesday after Federal Reserve Chairman Jerome Powell warned of extended economic weakness due to the coronavirus pandemic and called for Congress to agree on additional fiscal support.

Investors appeared to price in a deeper economic downturn than they had previously expected as they worried that Powell’s call for additional stimulus would go unanswered.

Sentiment for Toronto Stock Exchange stocks was further undermined by news that Norway’s US$1-trillion wealth fund blacklisted some Canadian oil companies such as Canadian Natural Resources Ltd and Suncor Energy Inc. The fund operates under ethical guidelines set by that country’s parliament and said it was excluding the companies for producing excessive greenhouse gas emissions.

The benchmark U.S. S&P 500 index fell 1.75 per cent and Canada’s S&P/TSX Composite Index lost 2.54 per cent to a two-week low as the energy sector tumbled 5.75 per cent.

TXPR closed at 512.29, down 2.03% on the day. Volume today was 2.71-million, roughly average in the context of the past thirty days.

CPD closed at 10.26, down 1.44% on the day. Volume was 237,998, the highest of the past 30 trading days, exceeding second-place April 29.

ZPR closed at 7.97, down 2.33% on the day. Volume of 397,224 was third-highest of the past 30 trading days, behind April 23 and April 30.

Five-year Canada yields were up 1bp to 0.39% today.

PerpetualDiscounts now yield 6.06%, equivalent to 7.88% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.31%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened dramatically, to 455bp from the 435bp reported April 29. We are now back above the pre-2020 record of 445bp briefly touched in 2008.