Market Brief - May 25th, 2018

Erica Szczech - May 29, 2018
After a strong start Monday on the back of easing trade tensions, the S&P 500 is flat and the TSX down a fraction for the week. Dovish Fed minutes and the adoption of the Dodd-Frank reform bill that will reduce regulation for many small US banks were

After a strong start Monday on the back of easing trade tensions, the S&P 500 is flat and the TSX down a fraction for the week. Dovish Fed minutes and the adoption of the Dodd-Frank reform bill that will reduce regulation for many small US banks were not enough to outweigh concerns about Italy and the possible election of a populist government that will drive up budget deficits.


Today we saw a greater than 4% pullback in oil prices which contributed to market jitters. Rumours continue to circulate that Saudi Arabia and Russia are ready to ease supply curbs that have propelled oil and gasoline prices to multi year highs. The silver lining behind the increase in investors’ risk aversion is that bond yields have enjoyed a notable decline, dropping below 3%. Also, gold rebounded back near its 200-day moving average of $1,307 despite a further strengthening of the US$. Undoubtedly, with the Fed mentioning that “a temporary period of inflation modestly above 2% would be consistent with the Committee’s symmetric inflation objective”, this was all that was needed to rekindle inflation fears and boost gold and gold stocks.

 

Our focus this week is on the Canadian economy, with the Bank of Canada expected to forego a rate increase Wednesday. High debt levels have left theeconomy vulnerable to higher bond yields. When also incorporating the new B-20 qualifying rates for mortgage lending, higher gasoline and food prices, and the uncertainty surrounding NAFTA negotiations; all ingredients are in place for a soft GDP print next week. Therefore, we expect a July Bank of Canada rate hike remains in the cards should global economic and/or NAFTA green
shoots emerge.


Regarding economic statistics this week, the Fed Minutes suggested that, after several years of undershooting, a symmetric view on inflation could lead the Fed to allow for a slight overshoot. As a result, odds of a fourth rate hike this year decreased materially. On housing, new and existing home sales declined -1.5% and -2.5% in April and we learned today that durable goods orders fell 1.7%, mostly the result of aircraft orders (see last week’s note). In all, the economic slowdown witnessed YTD is still ongoing and should lead
central banks to adopt a more dovish tone – which is good for investors.


Most of Canada’s bank reported this week and we continue to see year-overyear strength in this sector. Royal Bank’s (RY) earnings were strong, up 8% YoY, which will likely fall into the mid-range vs. peers this quarter. Revenue growth remained solid, but expenses increased resulting in less operating leverage. RBC had a positive tone on Canadian housing and reiterated their mortgage growth guidance of around 5%, while stating a Bank of Canada rate increase would offset lost income from mortgage growth – ergo higher rate of interest but they anticipate less mortgages.

 

TD Bank (TD) reported a stellar quarter with a high-quality beat of 8%, complemented by solid results in Canadian retail, US retail, and Wholesale. Their exposure to the US is a clear differentiator vs. their peers. The US segment generated close to C$1 Billion, accounting for over 1/3 of total earnings. Their Canadian operations also posted double-digit growth and will rank in the upper range among peers. Similar to RY, TD maintained their mortgage growth guidance of 5% for rest of 2018, however combined with their commercial, they should track slightly above the industry. It’s the last weekend in May in sunny Vancouver - let’s be thankful we are not in Newfoundland where they picked up over 30cm of snow yesterday!


If you have any questions or would like to chat, please give me a call.