Launch Pad

Daily market commentary

Monday, July 4, 2022
  
Click here to sign up for the Launch Pad
     
Today

Markets today should be quiet as investors in the U.S. take a break to celebrate Independence Day. Canadian equity futures, however, nudged higher this morning along with European and Asian stocks. It has been a tough start for investors in 2022, with the year only half over.  Both the S&P 500 and Nasdaq officially hit bear market territory (decline of 20% or more from its high), while fixed incomed markets did not provide the typical respite, also declining double-digits.  Canadian markets could not escape the market’s wrath, down 9% in June alone, despite holding up relatively well the previous months. In the months ahead, investors face more potential headwinds of sticky inflation, recession risks, and the threat to corporate profits from sinking consumer confidence. 

Driven by a drop in oil production, Canada’s economic expansion suffered a minor setback last month after a strong start to the year. Preliminary data shows GDP contracted by 0.2% in May as output slid in oil and gas, due to maintenance shutdowns at oil production facilities. The decline in GDP comes after a strong gain of 0.3% in April and 0.7% in March. While the drop in GDP surprised many economists, it is unlikely to deter the BoC from its aggressive interest rate hike plan. Still, the economy is on track to post second-quarter growth of nearly 4% annualized even with a poor reading in June leaving us well ahead of the U.S. and large European economies that are struggling to eke out any growth. 

Equities certainly have had a difficult start to the year, but they are still outperforming crypto. Bitcoin just recorded its worst quarter since 2011 and its worst month on record, losing 58% of its value in the second quarter of 2022. Macroeconomic pressure is certainly at play, with aggressive rate hikes weighing on investors and pushing them to flee risky assets. On top of that, crypto exchanges and other coins have had some bad press, from refusing withdrawals to coins completely collapsing, which has put downward pressure on the asset class as a whole. Amid the chaos, crypto firms have announced layoffs and the industry is moving toward consolidation via acquisitions. 

Inflation in Europe hit a fresh record, strengthening support for aggressive interest-rate increases. Driven by soaring food and energy costs, consumer prices jumped 8.6% from a year earlier in June, up from 8.1% in May. The ECB is now on the brink of its first rate increase in more than a decade, but has faced criticism for letting inflation get so out of control. Quick to point fingers, the ECB blamed the problem on a post-lockdown spike in energy costs that snowballed when Russia attacked Ukraine. With inflation at these levels, the ECB is all but expected to raise its deposit rate by 25bps in July. 

China’s economy showed further signs of improvement in June as Covid outbreaks and restrictions ease. Shanghai lifted its two-month lockdown at the start of June, allowing shops to reopen, factories to resume production, and for port operation to pick up. The easing of restrictions helped the manufacturing purchasing managers index rise to 50.2 from 49.6 in May (the first time since February that the index was above 50). The non-manufacturing gauge, which measures activity in the construction and services sectors, climbed to 54.7, the highest in more than a year and well above the consensus forecast of 50.5. On top of this, Chinese stocks have been boosted by news of further easing of virus-related travel curbs. 

Can you imagine a source of protein that requires less food, water, and land to produce, and is only a fraction of the cost of traditional meats? A new processing plant in London, Ontario will welcome its first batch of what will eventually be 4 billion of these little power packed sources of food. What are they? Crickets. The federal government announced an investment of up to $8.5 million into Aspire Food Group's London facility, with a goal of producing 13 million kilograms of the insect each year.  Most of this production will go towards the pet-food market in hopes of alleviating the high consumption of protein by animals. Ultimately, Aspire Food Group aspires to provide crickets as a sustainable food source to humans. Although a foreign concepts to North Americans, insect consumption is widely accepted as an affordable source of food in many countries around the world. The next time you’re craving a crunchy snack...too soon?  

DiversionHappy Fourth of July!  

The
Tactical model 
 
(% equity weight)

Our tactical fund is designed to complement your existing holdings to minimize portfolio volatility. To learn more, please click here.
 
 

Company news

TD Bank has been expanding through acquisitions and is now looking into a deal for the brokerage firm Cowen Inc. The deal would extend the reach of TD’s investment banking arm deeper into equity and debt offerings as well as research. Cowen, which went public in 2006, has acted as a bookrunner on 55 IPOs in the past year and served as the lead adviser on five of the listings. US bank mergers have been accelerating in recent years, as lenders turn to consolidation to cut costs and add scale to better compete with giants such as JPMorgan Chase & Co. and Bank of America Corp. 

The Covid-related shutdown in Shanghai crimped production with Tesla delivering 254,695 cars worldwide in the three months to June, snapping a two-year streak of quarter-on-quarter gains. This missed the forecast 261,181 vehicles and was much less than the record 310,048 cars Tesla delivered in the previous three months. In a statement, Tesla faces “ongoing supply chain challenges and factory shutdowns beyond our control.”  


Commodities

Palm oil is down to its lowest level since December after top producer Indonesia announced an increase in export quotas in an attempt to cut bloated domestic inventories. Prices have been whipsawing by the twists and turns of Indonesia’s palm oil policy with the country banning exports in April and May. It will now allow producers to export volumes at a rate of seven times their domestic sales obligation, up from five times.  Palm oil is found in hundreds of household items from candy to shampoo.  

Oil prices are higher this morning after posting its first monthly loss since November as energy markets continued to weigh on the balancing act of a global recession, tight supply amid lower OPEC output, unrest in Libya and sanctions on Russia oil. Data from Reuters is showing June OPEC+ output fell 100,000 bpd to 28.52 million bpd, way off their pledged increase of about 275,000 bpd. In a further hit to supply, a planned strike by Norwegian oil and gas workers this week could cut the country’s oil and condensate output by 130,000 bpd. Iran is cutting prices after being forced to discount its already cheap crude as it tries to gain a bigger foothold in the key Chinese market, which has become an important destination for Russian oil. China’s independent refiners are major buyers of Russian and Iranian crudes, and cheap supplies are important because they’re constrained by rules around exporting fuels, unlike state-run processors. 

Base metals have recorded its worst quarterly slump since the 2008 global financial crisis as fears of a world recession weighed, the LME Index is down –25% in the second quarter. Tin has been the worst performer, at –38%, while aluminum dropped by almost a third and copper by -20%. It was the first quarterly decline for the entire index since the start of the pandemic. 


Fixed income and economics

U.S. markets are closed today for Fourth of July celebrations but the fireworks in bond land already happened on Friday. A volatile session to kick off the second half of 2022 saw a significant repricing in rates with double digit yield declines in the front end and belly as weaker economic data drove a bull steepening move ahead of the holiday. Two year yields saw a -12 bps decline to 2.83% and a near -27 bps haircut between Wednesday morning to Friday. Five year rates led the move with a -14 bps intraday drop while 10’s fell -13 bps to below 3%. A miss in the PCE Deflator (+0.06% vs. +0.07% expected) as well as in personal spending (+0.2% against +0.4% estimates) fueled the rally, though did little to change market expectations for the Fed’s dot plot path. Fed futures are still very much predicting a 75 bps hike at the July meeting with another 100 bps in tightening being priced all the way to March 2023 before any signs of easing occur. This week brings forth an update on the labour situation in America with +273K new jobs expected to have been added to the economy. While all jobs reports are always important, this month’s release will bear extra weight given the difficulties markets have had thus far in 2022. Fundamentally, the importance of the labour market as the economic cycle appears poised to turn is extremely meaningful as a gauge of the forward path of consumption. Consumer confidence is already at record lows as higher prices continue to undermine real purchasing power; adding job insecurity to the picture will only serve to extend the angst of investors and consumers alike. Stay tuned for a potential belated fireworks party. 

Chart of the day
 

Markets

Quote of the day
 

We cannot change the cards we are dealt, just how we play the game.
Randy Pausch

Contributors: A. Innis, A. Nguyen, D.Mak, J. Price, 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.