Launch Pad

Daily market commentary



Friday March 5, 2021
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It’s the first Friday of the month and you know that means all eyes are on the NFP data. The U.S. gained 379k jobs in February, compared to consensus estimates of 200k. Besides the horrible accuracy of these professional guessers, what this also means the economy is doing better than expected. This is good news right? Yes and no. It’s great for everyone who managed to get back to work, but it’s bad in the sense that it sent bond yields up again, tightening financial conditions further. 
U.S. 10-year rates are now through 1.6%, this could very well end up as one of those good news could be bad situations. For now they are stalling around the Feburay 25th high. Futures are jumping higher following yesterday’s big down day which saw over 400 members of the S&P 500 decline, but anything could happen over the course of the day. Less than half of the members of the S&P 500 are above their 50-day moving average, oh and did we mention that the NASDAQ officially entered correction territory and that the S&P 500 turned negative for the year.
Today is a new day and a new beginning however oil is just continuing its merry path higher, up over 2% again this morning with WTI now over $65/bbl. The OPEC+ surprise decision to leave production as is has been the main driver. Yesterday’s biggest development, arguably, was a surprising strengthening of the dollar. Maybe it shouldn’t be such a surprise as it is typically a winner on large risk-off days, but when the primary cause of worry is falling U.S. Treasuries it’s still surprising. The DXY Index is now above its 100-day moving average for the first time in 10 months, suggesting that the trend is turning.
While our data feed doesn’t go back this far, and we’re a little skeptical about the accuracy of the data we’ll trust Deutsche Bank has vetted the numbers. If you think it’s been a rough start of the year to be a bond investor you’re not wrong, it’s the third worse start to a trading year for Treasuries since 1820!
Mohamed El-Erian shares some thoughts on what yesterday's interaction between Fed-speak and the volatile market price action tells us about the current operating paradigm for markets and the Fed's policy flexibility. For now at least, the markets move with just a few words from J-Pow.  What he really needs is a stock selloff to act on bond yields according to John Authers.

The Equifax Canadian debt report revealed that non-mortgage debt is declining in Canada. Overall consumer debt did increase but that was due to mortgages. Seems Canadians have opted to reduce some of their Credit Card debt during the pandemic.  

Deal activity in Canada slowed for this week, with 36 new issues coming to market so far as of the time of writing since the beginning of the month.  For more and a return-to-work food review, check out this blog.  We strongly disagree with the Marcello’s jab and – since it’s priced by weight – think it’s a great value play for those who are busy and on-the-go.

Diversion: We definitely like our analogies on our team,  investing like a Pronghorn is a great strategy. 
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Some years it really pays to be tactical, and 2020 was certainly one of those years with multiple all-time highs and a very deep multi-year low. Of course the hard part is how to be tactical.  The Purpose Tactical Asset Allocation Fund / ETF is a quantitative rules-based portfolio best used as a sidecar strategy to add a tactical component to a portfolio. The main goal of Tactical is to get defensive quickly when markets turn negative, providing a stabilizer for the overall portfolio, while still capturing reasonable upside in rising markets. The asset allocation can range from 100% equity to 100% fixed income / cash. In the Primer we share our models, sensitivities, how and why we developed the strategy, analytics on what kind of market it works best, and what kind of market it does not work as well.
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Company news

It has been announced that this Monday, TMX Group will launch a new trading platform for sustainable bonds that will begin by offering $13 billion worth of green bonds from eight different issuers as they plan to expand in the near future. This fourth quarter, MEG Energy Corp managed to exceed expectations reporting CAD $47 million of cash flow which is CAD 20 million more than their third quarter. Microsoft’s $10 billion contract to provide cloud computing services to the pentagon is at risk after Amazon’s controversial allegations. Shopify was the biggest contributor to the S&P/TSX index decline yesterday by decreasing 5.8% yesterday. The well-known jet manufacturer Bombardier will collaborate with luxury automaker Aston Martin to give their jets a unique design as the company moves towards narrowing its focus on business jets.


Crude prices advanced past the US$65/bbl mark this morning amidst signals from OPEC+ pointing towards supply stability; at the time of writing, NYM WTI Crude futures were up +2.4% to US$65.34/bbl while ICE Brent Crude futures were up +2.6% to US$68.50/bbl.  OPEC+ will not be relaxing their supply curbs anytime soon, to the surprise of most of the street.  Saudi Arabia said that it will maintain its 1mn bpd voluntary production cut.  In other news, Canadian oil sand producers are poised to idle ~0.5mn bpd of production next month, which will also bring down the global supply part of the crude equation.  On the demand side, China surpassed pre-pandemic levels of fuel demand after a faster-than-expected return of factory activity and infrastructure building following the holiday season.
Gold prices continued to disappoint, as the spot price fell -0.10% to US$1,696.08/oz this morning.  The move is largely driven in part by a US$1.83bn flow out of commodity ETFs last week.  SPDR Gold Shares, or example, had the largest outflow of US$1.2bn.  All eyes are now on bond yields; if a protracted selloff continues, gold may likely be more vulnerable to further pain.

Fixed income and economics

Treasury yields are higher at time of writing on the back of a blowout labor update out of the U.S. that saw nonfarm payrolls rise by +379K in February. That topped the +200K consensus and more than doubled the +166K revised gain from the month prior. Private sector hiring was on fire with +465K new adds that similarly bested the +200K forecast and marked the most since October. While the headline print was strong, the details show a slightly mixed picture as +355K of the gains came solely from the leisure/hospitality component --- a notoriously unstable category that varies with both seasonal patterns and the likelihood of the pandemic waning. The more sticky group of goods-producing work fell by -48K highlighted by a -61K drop in manufacturing and the most since before the coronavirus was a household term. Government associated labor slipped by -86K across the nation and has now posted net losses in five of the past six months. The unemployment rate ticked lower to 6.2% while the more important U6 measure stayed flat at 11.1%. While consumer inflation is all the rage (and worry) thus far in 2021, it hasn’t quite translated into higher incomes --- average hourly earnings were up just +0.2% while annualized wage growth stayed flat at 5.3%. Note that the labor survey finished tallying to the third week in January and doesn’t include the recent decline in Covid-19 cases nor the re-opening of business in several states which would have pushed the gains likely further. Ten year U.S. bond benchmarks topped 1.62% immediately after the release to match their recent high and with Fed Chair Powell signaling his intention to watch from the sidelines, we’re likely to see further curve steepening in the near term.

Chart of the day


Quote of the day

I skate to where the puck is going to be, not where it has been.

- Walter Gretzky

Contributors: C. Basinger, D. Benedet, C. Kerlow, D. Mak, A. Tjiang, B. Gustafson

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.