Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web
Canadians follow the domestic economy because local growth affects them most.
Canadian investors focus on domestic stocks which also makes perfect sense from a currency and familiarity standpoint. The problem is that these tendencies lead to myopia, and Canadians' failure to follow global markets has gotten portfolios repeatedly blindsided in recent years. China backed off on its infrastructure binge in 2012, and this crushed mining stocks. U.S. oil production buried the domestic energy sector. U.S. central bank policy, by increasing the spread between Canadian and U.S. bond yields, got the loonie devalued by 20 per cent.
This morning, weak economic data and market-controlling shenanigans in China is the catalyst for what appears to be a difficult day ahead for the TSX (I have another theory we'll get to in a minute). The People's Bank of China is allowing the international version of its currency to trade sharply lower this morning and this is causing upheaval in foreign exchange markets. Chinese regulators have also decided to extend the ban on selling equities by major portfolio managers.
"Global Stocks Selloff Escalates as Oil Drops, China Weakens Yuan" – Bloomberg
"I'm shocked, shocked… to find that China is going to extend its share-sale ban" – Keohane, FT Alphaville
"Yuan Sinks to Five-Year Low as PBOC Surprises With Weaker Fixing" – Abramowicz, Gadfly
"CNH-Bomb" – Kaminska, Keohane, FT Alphaville
"China's market meltdown a tale of policy mis-steps" – Financial Times
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My alternate theory on the global market sell-off is underscored by a chart from Citi credit strategist Matt King. The chart shows that U.S. debt growth has far outstripped profits, leaving markets with low-growth, highly indebted stocks to choose from. Recent disappointing economic data in the U.S. – particularly in manufacturing sectors – is forcing investors to recognize the deteriorating risk to reward ratio.
"@SBarlow_ROB Matt King is the Wes Craven of debt charts pic.twitter.com/T2A8Z9tGXb " – Twitter (includes chart)
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Ex-PIMCO head Mohamed El-Erian presented some useful perspective on the weak start to trading in 2016 in "Five Facts About the Market Selloff". The column comes with a warning about the market's reliance on central bank stimulus,
"Central banks could find it a lot harder to continue to borrow growth and financial returns from the future by relying on experimental measures. Two outcomes are possible within the next few years: This path will either give way to a more comprehensive policy response that will provide a sustainable lift to fundamentals, which would validate financial asset prices and push them higher; or this approach will succumb to its growing internal contradictions, leading to asset price declines [ and market] contagion"
"Five Facts About the Market Selloff" – El-Erian, BloombergView
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Intrigue continues to swirl around Valeant Pharmaceuticals International Inc. as the company named Howard Schiller as interim chief executive officer to replace Michael Pearson, who has been on medical leave due to pneumonia.
"Pearson has been sick for weeks, and it was already known that he would not be presenting at next week's JPMorgan Healthcare Conference.
"The idea that he would leave the company entirely, though, is a huge departure from then Valeant investors know. Pearson originated the company's strategy of expanding its product line through aggressive acquisitions rather than by spending money on R&D."
"Valeant is appointing a new CEO" – Lopez, Business Insider
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The wretched history of market prognosticators is laid bare by a post from the Above the Market website. The report lists the S&P 500 predictions at the beginning of 2015 and how they did. The answer is, not good.
"Here We Go Again: Forecasting Follies 2016" – Above the Market
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Tweet of the Day: @AJRummer This chart is ominous for the US stock market, Bloomberg's @S__K__G says bloomberg.com/news/articles/… pic.twitter.com/eIxgJW252f " – Twitter
Diversion: "This Is How You Make A Hydrogen Bomb" – Foxtrot Alpha
Scott Barlow