Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Citi strategist Alex Saunders looks to currencies to assess the global market reaction to events in the Middle East,
“The market is taking the risk of a strike by Iran very seriously, but further escalation is not the base case yet. Oil prices are the main channel for macro-event risk. Positioning is usually key during these volatility spikes, and we update our EM positioning basket based on CitiFX’s flow data. Our trigger level for action is an average of equity [volatility] and FX [volatility] moving to the 70th percentile. On a trailing 1Y basis, equity vol is there (intraday) but FX implieds [based on derivatives] have not moved as much. We find that positioning explains some of the moves in EMFX today. We therefore flag which currencies are vulnerable to an unwind if volatility were to rise further next week. PLN, TWD, ZAR are vulnerable, while CZK, THB, and CNY could outperform”
Investors might want to keep an eye on the Polish zloty (PLN), the Taiwan dollar (TWD) and South African rand [ZAR] as significant weakness may indicate a broader geopolitics-related sell-off.
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RBC Capital Markets head of global energy research Greg Pardy sees a risk that new taxation may limit returns in the oil sector,
“Our bullish stance toward Canada’s oil-weighted producers remains predicated upon a favorable outlook punctuated by balance sheet deleveraging (via absolute debt reduction), capital discipline, moderate upstream growth, rising shareholder returns, and decarbonization initiatives via the Pathways Alliance. These corporate measures should gain a powerful tailwind as the federally owned 590,000 bbl/d Trans Mountain Pipeline Expansion (TMX) makes its debut in the second quarter at a cost of about $34 billion.1 TMX should serve to alleviate western Canada’s oil export constraints and narrow the discount at which WCS (and other streams) trades vis-à-vis WTI. At the same time, we are mindful of potential risks to global investor sentiment and ultimately capital investment that incipient shifts in government policy (including incremental corporate taxation) can have. In our view, Canada’s upcoming Federal budget could fall into this bucket … From where we sit, Canada’s forthcoming 2024 Budget, to be released in the House of Commons on Tuesday, April 16, at 4PM ET, poses moderate risk in the form of potentially higher corporate taxation aimed at Canada’s energy sector.”
Mr. Pardy has outperform ratings on Canadian Natural Resources, Suncor Energy, MEG Energy Corp., Cenovus Energy, Baytex Energy and Enerplus Corp.
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Morgan Stanley chief U.S. equity strategist Michael Wilson published Rates Matter Again for Equities over the weekend,
“In our first note of the year, I cited three potential macro outcomes for 2024 with similar probabilities: 1) A soft landing with slowing/below-potential GDP growth and inflation falling toward the Fed’s target of 2%; 2) A no landing scenario under which GDP growth re-accelerated with stickier inflation; and (3) A hard landing … the macro data have started to support the no landing outcome, with recent growth and inflation data points exceeding most forecasters’ expectations, including the Fed’s … while cyclically sensitive stocks and sectors have started to outperform, quality [low debt, consistent growth] remains a key attribute of the leaders. We think this combination of quality and cyclical factors makes sense in the context of what is still a later- rather than an early-cycle reacceleration in growth. If it were more the latter, we would expect to see more persistent outperformance of low-quality cyclicals and small caps … we continue to believe that much of the upside in economic growth over the past year has been the result of government spending … As with most fiscal stimulus packages, the plan is for this bridge of support to buy time until a more durable growth outcome driven by organic private income, consumption and spending arrives … Our recent upgrade of large-cap Energy fits the shift in the narrative to the no landing outcome, and it remains one of the cheapest ways to get exposure to the reflation theme”
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Diversion: “Elon Musk’s Worst Predictions and Broken Promises of the Past 15 Years” – Gizmodo
Scott Barlow