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February 27, 2024
  
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Today


Stock futures are pointing up this morning as investors await key data releases later in the week – the closely watched PCE price index and personal income data will be out Thursday while GDP tomorrow is expected to provide further insights into the health of the U.S. economy. This morning’s moves follow a down day for the markets, except for crypto markets which saw Bitcoin surging to its highest level in over two years, exceeding $57,000 yesterday. The cryptocurrency rallied after trading in a narrow range for over a week, supported by strong ETF inflows and optimism surrounding its future trajectory.

It’s earnings week for the Canadian banks, with BMO and Scotia kicking things off today. Amongst the concerns is the deteriorating quality of some real estate loans in the U.S., particularly in the commercial-property market. Commercial-property lending comprises about 10% of the loan books of Canada’s largest banks, with elevated interest rates and declining valuations putting pressure on the sector. Analysts anticipate volatility in earnings due to higher provisions for potential credit losses, which have increased for several quarters. While Canadian banks aren’t facing solvency issues over commercial-loan losses, profitability remains a question mark, with provisions potentially having an outsized impact on earnings. Investor focus will also be on net interest margins in addition to higher loan loss provisions. More in company news below. 

The tech sector has seen significant growth, with the Nasdaq up close to 7% YTD, driven by the ongoing artificial intelligence boom. Despite the positive outlook for the sector, there has been a notable increase in layoffs among tech workers. According to a new report, about 42,324 tech employees have been laid off in 2024, averaging more than 780 layoffs per day, surpassing the numbers from 2023. This trend is attributed to various factors, including the need for companies to reallocate funds towards AI infrastructure, such as chips and servers, and the evolving preferences of investors prioritizing growth over profitability. Despite the layoffs, companies implementing these measures have been met with positive responses from investors, with rising stock prices. 

Canada’s decision to extend the ban on foreigners purchasing property for another two years is viewed as a move that will have minimal impact on addressing the country’s acute housing shortages. Despite the ban extension, foreign ownership has significantly declined in recent years with some arguing that it was never a primary driver of property demand. The timing of the announcement, amid growing concerns over housing affordability and ahead of next year’s election, has led some to criticize it as a political maneuver rather than a meaningful solution to the housing crisis. While the government has implemented various measures to boost housing supply, there isn’t much hope for immediate relief. Canada has experienced a surge in population driven by immigration, yet housing construction has not kept pace, leading to a widening gap between supply and demand. With that, critics argue that there should be a focus on increasing the pace of home construction to meet the needs of a rapidly growing population. 

In response to central banks keeping interest rates at levels not seen in decades, companies are reevaluating their financing strategies. Blue-chip firms in the U.S. are now finding it cheaper to sell shares than to issue debt, the first time we’ve seen this in over two decades. This shift has prompted companies across various sectors to increasingly turn to equity markets to raise capital, marking a departure from the long-standing trend of decreasing equity issuance, known as “de-equitization”. While debt will continue to play a vital role in corporate financing, the increasing cost of borrowing may drive more companies to explore equity financing as a viable option, potentially leading to a resurgence in equity issuance and providing investors with greater access to diverse investment opportunities. 

The “Online Harms Act” bill was introduced by the Federal government yesterday with the objective of improving online safety by targeting what the Justice Minister described as “the worst of what we see”. The bill will propose new requirements for platforms to regulate and remove harmful content and will establish a new oversight committee to enforce the new rules. Like European countries, the federal government would like to propose a specific “duty to protect children” and introduce age-appropriate features on platforms such as content warning labels, safe search settings, and minimize targeted ads. Firms such as Alphabet (YouTube), Meta, and TikTok are expected to be affected as the bill targets social media and live streaming platforms. If you’re a parent of a tween or teen, these rules will be a welcome assist to your ongoing efforts to manage content on devices. 

Forget what you learned in Economics 101 about complementary goods. A new report found that the resurgence in vinyl sales hasn’t necessarily led to a corresponding increase in turntable ownership, with about half of vinyl LP buyers surveyed in the U.S. don’t own a record player. The report suggests that this discrepancy may be attributed to “superfans,” avid music enthusiasts who wish to support their favourite artists, even if they don’t have a means to play them. Notably, top-selling vinyl albums in recent years have been from artists like Taylor Swift, Harry Styles, and Olivia Rodrigo, known for their dedicated fan bases. Despite the vinyl trend, most music revenue still comes from streaming services and live performances (that may be obvious if you bought a ticket recently).    



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Company news


Bank of Montreal missed analysts’ estimates as it dealt with weak capital-markets revenue and reported an increase in loan-loss provisions. Adjusted earnings were affected by a number of one-time items, including a special assessment by the U.S. Federal Deposit Insurance Corp. of C$417 million before taxes. BMO reported net income of C$393 million, down 19% from a year earlier, with lower trading revenue countered by higher underwriting and advisory fee revenue. Provisions for credit losses in the three months through January totaled C$627 million, more than the C$514.2 million analysts had forecast.

Bank of Nova Scotia beat consensus earnings but missed analysts’ estimates for loan-loss provisions amid growing stress in consumer lending as the Canadian economy weakens as well as higher delinquencies among retail borrowers in its Latin American businesses. Provisions for credit losses rose to $962 million in the fiscal first quarter compared to the average estimates of $922 million. Scotiabank, which unveiled a new strategy under chief executive Scott Thomson in December, was the only large Canadian lender to shrink its domestic mortgage book last year, and it actively sought out more core deposits to lower its cost of funding.   

Lowe’s beat quarterly earnings and revenue estimates, despite customers tackling fewer home projects. However, Lowe’s reported its sales will fall further this year as consumers continue to hold off from sprucing up their homes amid higher mortgage rates and a drop in new construction projects. Comparable sales for the current fiscal year will be down between 2% and 3%, a slightly larger dip than analysts were expecting. Lowe’s saw like-for-like sales fall 6.2% for the fourth quarter, though analysts were expecting an even worse performance.  

Macy’s Inc. said it plans to close 150 unproductive locations as the department-store chain seeks to fight off a pair of activist firms seeking to buy the company. The company didn’t give an estimate of the number of employees that will be impacted by the closures, which represent almost a third of the company’s US Macy’s stores and will happen over the next three years. Many of the stores are near other Macy’s locations, which could allow some workers to transfer. Macy’s also plans to add 15 new Bloomingdale’s and 30 Bluemercury locations by 2026 — an effort to accelerate growth of its higher-end brands. 


Commodities


Oil prices are slightly lower after yesterday’s gains as pockets of strength in physical markets supported wider sentiment. Time spreads have strengthened, signaling near-term tightness that should keep prices supported. Oil is trying to grind its way toward a second monthly advance, although it’s yet to break decisively out of its recent, narrow range. While tensions in the Middle East and OPEC+ supply curbs have supported crude prices, higher production from outside the group, especially the U.S., has capped the gains.

Cobalt (a key battery metal) prices have slumped two-thirds since mid-2022 on the back of new production and concerns that the shift to EVs may not be as smooth and fast as previously predicted. According to specialist trading house Darton Commodities, rising cobalt production from the Democratic Republic of Congo and Indonesia have also helped fuel a record surplus of the battery metal last year. Mined cobalt production climbed 17% to just over 221,000 tons last year, resulting in an oversupply of more than 27,000 tons, Darton said in a report on Monday. Congo’s share of supply increased to 77%, while Indonesia’s rose sharply to 8%. Darton forecasts the surplus to fall to about 10,000 tons this year as the production ramp-up slows amid low prices, before widening again in 2025 and 2026. Darton estimates the market will return to a deficit toward the end of the decade. 


Fixed income and economics


The latest minutes from the ECB’s January meeting echoed sentiments similar to those of the Fed. While officials acknowledged that the goal of reaching their inflation target was becoming more likely, they concluded that it was premature to discuss rate cuts. One key factor supporting this decision is robust wage growth, which is keeping domestic inflation elevated, with the Governing Council emphasizing the need to see hard data confirming a turnaround in wages. Although there was a slight deceleration in negotiated wage growth from 4.7% to 4.5% in Q4 2023, marking the first slowdown since Q2 2022, it wasn’t enough to convince ECB members that things have really turned around. ECB President Christine Lagarde has emphasized the importance of further data, particularly Q1 2024 wage data expected in May, to gain confidence that inflation is moving towards the 2% target. The central bank’s March economic projections will also influence the timing of any potential policy easing. All in all, the data and comments from officials point to the likelihood of the first ECB rate cut occurring in June.

US Treasury investors are bracing for another auction, after sales of two- and five-year notes drew only average demand, despite yields near the highest levels of the year. Appetite for short-end debt on Monday failed to benefit from a rise in rates heading into the sales, a poor outlook for the week’s final note auction of seven-year securities. Rates have soared as Treasury investors contend with an erosion in expectations for how much the Federal Reserve will lower interest rates this year (a policy shift that would likely fuel a bond rally). Not only that, there has been a slew of new corporate issuance that has given yield-seeking investors ample alternatives – investment-grade companies sold more debt in the U.S. this month than in any other February on record. 


Chart of the day

 


Markets


Quote of the day

 

Age does not matter if the matter does not age
Carlos P. Romulo

Contributors: A. Innis, A. Nguyen, P. Kwon

Charts are sourced to Bloomberg unless otherwise noted.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. Richardson Wealth Limited, Member Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.

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