Month: April 2020

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.

Click for Big

There is more hope that the coronavirus is under control, or at least getting there:

The Toronto Stock Exchange’s S&P/TSX composite index was up 311.57 points, or 2.29%, at 13,925.71.

The energy sector climbed 4.2% as oil prices strengthened, buoyed by hopes that OPEC and its allies will strike a production cut agreement, shrugging off bearish signals from surging U.S. crude inventories.

Brent crude was up $1, or 3%, at $32.87. U.S. West Texas Intermediate (WTI) crude rose $1.55 cents to $25.18 a barrel.
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Thursday’s video conference meeting between the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia – a group known as OPEC+ – was expected to be more successful than their gathering in March, which ended in a failure to extend supply cuts and a price war between Saudi Arabia and Russia.

TXPR closed at 488.19, up 1.13% on the day. Volume today was 4.06-million, the highest since March 26.

CPD closed at 9.73, up 0.21% on the day. Volume was 176,238, about average in the context of the past 30 trading days but the highest since March 26.

ZPR closed at 7.52, down 0.13% on the day. Volume of 442,451 was below average in the context of the past 30 trading days.

Five-year Canada yields were down 3bp to 0.65% today.

PerpetualDiscounts now yield 6.45%, equivalent to 8.38% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.84%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has spectacularly narrowed, to 455bp from the 515bp reported April 1. But we’re a little wider 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.

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Globalism is getting a kicking. It began with export prohibitions of N-95 masks:

[Chaun] Powell, [vice president of strategic supplier engagement at North Carolina-based healthcare company] … Premier Inc., says that although China has not formally announced any embargoes on exports of personal protective equipment, he believes that no such gear has shipped out of China since mid-January. Other places, like Thailand, Taiwan and India have also restricted exports of masks to protect their domestic supply.

And then the anti-globalists in the White House got going, with Trump reportedly wanting exclusive rights to a vaccine:

German ministers have reacted angrily following reports US president Donald Trump offered a German medical company “large sums of money” for exclusive rights to a Covid-19 vaccine.

“Germany is not for sale,” economy minister Peter Altmaier told broadcaster ARD, reacting to a front page report in Welt am Sonntag newspaper headlined “Trump vs Berlin”.

The newspaper reported Trump offered $1bn to Tübingen-based biopharmaceutical company CureVac to secure the vaccine “only for the United States”.

… after which he banned export of N-95 masks and other material himself:

President Donald Trump said Friday the U.S. would ban export of critical N95 masks and other precious medical gear – as he blasted a manufacturer who criticized the administration for halting its shipment to Canada.

‘It includes everything,’ Trump said of a ban he has described of export of masks, gowns and other equipment.

Trump also tore into 3M Co, saying he was ‘not happy’ with the company after its CEO called the ban short-sighted and would harm the U.S. on a net basis. Trump had threatened the company with use of a defense production law earlier this week.

We’re also seeing plans for a more protectionist world:

As much of the rest of Canada has focused on immediate responses, Quebec has in recent days been talking more about its future once the health crisis subsides. Mr. Legault’s government says it has begun working on plans to increase the province’s self-sufficiency in health care and food, to make sure it has enough locally made medical equipment, medication and other supplies needed to weather a future crisis.

More broadly, Quebec has begun a detailed analysis of its trade balance in an attempt to prepare for a new economic reality once the peak of the global coronavirus pandemic has passed. The Premier is even evoking the possibility of using the province’s plentiful hydro power to warm indoor greenhouses in the winter and grow fruit and vegetables all year round instead of importing them.

… and now WHO, like the World Trade Organization, is under attack:

World leaders are putting the World Health Organization on notice if they don’t shape up. President Trump is threatening to cut 40 percent of U.S. funding from international organizations, while the United Kingdom released a report this week in which they say WHO must reform quickly or it “will result in decreased U.K. funding.”

Even with public health focus on threats such as the Zika and Ebola viruses, vaccines, and mental health, critics have accused the WHO of mission creep, putting resources into too many issues and not focusing enough on the important ones.

The journal Nature even took the unprecedented step of issuing an editorial demanding reform at the WHO, which they see as too bloated to tackle essential global health issues.

These are worrisome developments for Canada, as a small trading nation that has to gain whatever clout it can through participation in international bodies.

Don’t get me wrong; I’m not suggesting we place all our trust in open borders and hugs. By all means, let’s have a federal stockpile of equipment for forseeable disasters, backed up by an official body that would approve and publish open-source plans for things like 3-D printed ventilators; let’s have open tenders for contracts that would give companies an annual payment for a fixed term in exchange for the maintenance of an ability to manufacture X items per month on Y weeks notice. But if the isolationists win the coming battles, we will all lose.

Update, 2020-4-15 : I’m very pleased to see that the first part of my plan is being implemented in the States:

TXPR closed at 482.72, up 1.09% on the day. Volume today was 3.62-million, low in the context of the past thirty days but highest since March 26.

CPD closed at 9.71, up 1.68% on the day. Volume was 155,861, low in the context of the past 30 trading days but the highest since March 31.

ZPR closed at 7.53, up 1.62% on the day. Volume of 472,081 was below average in the context of the past 30 trading days.

Five-year Canada yields were up 3bp to 0.68% today.

Doctors to the rescue!

Stocks rallied on Monday as investors seized on signals that the coronavirus outbreak may be peaking in some of the world’s worst-hit places.

The number of new confirmed deaths and infections is slowing in parts of Europe, and the number of deaths in New York has been steady for two days. In Italy and Spain, the total number of patients continues to climb, but the rate of new infections is no longer rising.

Wall Street analysts have been closely tracking the growth path of infections, with some spotlighting recent news as an indication that the outbreak could be near a peak in the United States. Analysts highlighted the tentative deceleration of infections in New York as a good sign for other virus hot spots in the country, as well as for stock market sentiment.
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The optimism drove shares sharply higher. The S&P 500 rose 7 percent, its biggest gain since March 24, when it climbed more than 9 percent.

Some areas of the market that have been hit hardest by shutdowns of economic activity soared. The hotel chain Marriott and the casino company Wynn Resorts, for example, each rose more than 15 percent. Credit card companies also rallied, after being hammered by soaring unemployment in recent weeks, which makes people less likely to pay their bills. Capital One and Discover Financial both jumped more than 15 percent.

… and in Canada …:

Canada’s S&P/TSX Composite Index rose 5.1 per cent in a remarkably broad rally that included energy stocks (even though the price of oil fell sharply) and gold producers (even though gold is widely seen as a haven investment).
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The price of crude oil fell though, as a much-anticipated meeting between Saudi Arabia and Russia to discuss oil production levels on Monday was postponed until Thursday. West Texas Intermediate oil, a U.S. benchmark, fell 6.9 per cent to US$26.39 per barrel.

Canadian energy stocks joined the rally, though. Suncor Energy Inc. rose 4.2 per cent and Canadian Natural Resources rose 1.5 per cent.

… and there are a lot of jobless:

More than three million Canadians have applied for jobless benefits and emergency income aid with the federal government since mid-March, the latest sign of historic levels of devastation in the labour market.

Government officials said Monday that 3.18 million people have applied for employment insurance and the Canada emergency response benefit since March 16. More than 794,725 Canadians filed for benefits on Monday alone, the launch day for CERB’s application system.

CERB is intended to capture workers affected by COVID-19 who aren’t covered by EI, such as the self-employed or those missing work because they’re caring for someone who is sick.

Once the damage is tallied, Canada’s job losses will likely be record-setting. The Conference Board of Canada on Monday said a combined 2.8 million jobs could be shed during March and April, equal to nearly 15 per cent of total employment.

Don’t make summer plans just yet:

Public-health officials, infectious disease experts and provincial data show that B.C.’s and Alberta’s efforts to flatten the curve may be starting to pay off. By contrast, Ontario and Quebec appear to be in an uphill battle.

The number of confirmed cases in B.C. was 1,266 on Monday, compared with 970 one week ago. Alberta reported 1,348 cases on Monday, up from 690 a week ago.

The changes in Ontario and Quebec are more dramatic. On Monday, Ontario reported 4,347 cases, more than 2.5 times the number of confirmed cases from a week earlier. In Quebec, there were 8,580 cases on Monday, a significant rise from 3,430 one week earlier.

… particularly if they involve the Shaw Festival:

Based on the Public Health Agency of Canada’s statement regarding mass gatherings, along with the guidance of the provincial and federal governments, the Shaw Festival has ceased all business on-site, including cancelling all public events and performances, with the intention of resuming on July 1, 2020. Mahabharata, scheduled to hit the stage in August, is cancelled for 2020 however we are committed to bringing it back in a future season.

And, as I so often reiterate, every portfolio manager is at the mercy of his clients. They sell, you sell.

Royal Bank of Canada’s asset management business saw $2.8-billion in net mutual fund redemptions last month as investors scrambled for cash and moved from longer-term funds into less volatile money market funds.

Mutual fund assets under management fell by 9.5 per cent in March, RBC Global Asset Management said Monday. Around 1 per cent of that drop was due to investors cashing out of their funds, said Doug Coulter, president of RBC’s asset management division. The rest of the drop was because of the decline in asset prices.

I love this line from a Globe article on pension plan funding:

“Given the massive drop in bond yields on government bonds, pension deficits should rise significantly, precisely at the wrong time when companies may have to face a potential economic downturn,” says Dimitry Khmelnitsky, an analyst at Veritas Investment Research Corp. who has authored the company’s reports on pension health at TSX-listed companies.

One would hope that this ‘wrong-way risk’ (a significant probability that two bad things will happen together, being highly correlated) would always be uppermost in the mind of any corporate treasurer having to address the issue.

TXPR closed at 477.53, up 2.76% on the day. Volume today was 3.54-million, low in the context of the past thirty days but highest since March 26.

CPD closed at 9.55, up 1.70% on the day. Volume was 113,608, very low in the context of the past 30 trading days.

ZPR closed at 7.41, up 1.51% on the day. Volume of 503,813 was below average in the context of the past 30 trading days.

Five-year Canada yields were up 6bp to 0.65% today.