Despite the U.S. market remaining closed, headline risks remain

Posted: Thursday, December 6, 2018 - 08:38 EST

Despite the U.S. market remaining closed yesterday to honour the life of President Bush, headline risks related to oil, trade and Brexit remain in the background.  Oil is lower this morning, tracking around $51/barrel, after Saudi Arabia proposed more moderate cuts to oil production than anticipated.  The cuts will amount to approximately 1 million barrels per day from OPEC members that will allow for a pace of reduction which does not shock the overall market.  Tensions between the Chinese and U.S. are escalating again this morning after the daughter of Huawei’s founder was arrested for potential violations of U.S. sanctions on Iran.  The Chinese government has demanded her release as well as an explanation on her arrest.  In regards to Brexit, five days remain before the vote in parliament.  There continues to be substantial divide, with Prime Minister May noting that she would be willing to extend the transition period beyond 2020 if necessary to secure a backstop arrangement.

The Bank of Canada released it monetary policy statement yesterday that left the overnight rate unchanged at 1.75%.  The statement introduced new rhetoric around oil prices that remain weak as a result of global growth prospects, expansion of U.S. production, transportation constraints and inventory buildups.  The energy sector in Canada will likely be materially weaker than expected going forward.  Despite the USMCA agreement, uncertainty has led to constrained business investment with incoming data suggesting less momentum going into the fourth quarter.  Inflation is also expected to ease in the coming months than the BOC previously forecasted due to lower gasoline prices.  Overall, the appropriate pace of rate increases will depend on the effect of higher interest rates on households, global trade developments and the persistence of oil shocks.  The more dovish stance by the Bank understandably led to rate hike expectations for January declining from 42% to 26%.

The Canadian corporate credit market was quiet yesterday as a result of the market closure in the U.S.  Most investors stayed on the sideline most of the morning awaiting the Bank of Canada policy statement.  Headwinds persist related to headline risks and continue to keep volumes low leading up to year-end.  As a result, spreads ended the day mostly unchanged.

Equity Markets:

 

  Index Level % Change QTD YTD Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018
S&P 500 2,760.17 0.82% -4.94% 5.11% 3.09% 4.48% 6.64% -0.76% 3.43% 7.71%
TSX

15,182.63

0.79%

-5.06%

-3.77%

-1.64% 3.68% 4.44% -4.52% 6.77% -0.56%

Rates:

 

Today

% Change

QTD change

YTD change

Q2 2017

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Canada 5 Year

2.05%

-0.09% -0.29% 0.18% 1.39% 1.75% 1.87% 1.97% 2.07% 2.34%
Canada 10 Year 2.10% -0.07% -0.33% 0.05% 1.76% 2.10% 2.05% 2.09% 2.17% 2.43%
Canada 30 Year 2.25% -0.01% -0.17% -0.02% 2.15% 2.47% 2.27% 2.23% 2.21% 2.42%
30yr Generic Corporate A rated Spread 1.30% 0.02% 0.00% 0.02% 1.21% 1.24% 1.21% 1.24% 1.28% 1.30%
30yr All-in Corporate A rated Yield

3.55%

0.01% -0.17% 0.00% 3.36% 3.71% 3.48% 3.47% 3.45% 3.72%
US 10 Year 2.89% -0.02% -0.17% 0.49% 2.31% 2.33% 2.41% 2.74% 2.86% 3.06%
CDX IG 81.483 2.337                

The information contained herein is intended for advisors for general information only and is compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made as to its accuracy. All opinions contained in the commentary and expressed by the portfolio manager are subject to change without notice and are provided in good faith without legal responsibility. All market data is sourced from Bloomberg.