A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
Markets are looking more positive this morning but you wouldn't know it from a Morgan Stanley research report suggesting the Canadian dollar is about to head substantially lower.
"We suggest selling the CAD. Out of the four liquid oil currencies, which are the RUB, COP, NOK and CAD, the CAD has held up best. … falling oil prices will lead to falling oil sector investment which will weaken overall economic activity. The banking industry has increased exposure into the oil and Canadian real estate sectors over recent years. Now, as real estate eases and the energy sector faces overcapacity, Canada's banking sector may see its asset base weaken. Consequently, lending activities should ease tightening domestic financial conditions. Canadian banks' weak performance in the equity market provides a strong warning signal, suggesting that it is now time to sell the CAD."
The report is a pile-on to an economist note from Nomura International Ltd yesterday advising their clients to double down on a short position in the loonie versus the U.S. dollar.
"Loonie has a lot further to fall, argue economists" – Barlow, Inside the Market
"Canadian growth seen slipping behind U.S. on oil slump" – Canada Real Time blog, Wall Street Journal
A Wall Street Journal report implies Canadian investors should not expect a major recovery in the West Texas Intermediate crude oil price for some time. The story highlights the extremely high debt loads for many U.S. oil producers that will force them to keep pumping oil even at drastically lower prices. This means that the expected supply cuts that would address the current market glut will be postponed, at least.
"The upshot of cash conservation and higher borrowing costs will be less money spent on producing oil and natural gas. However, it is unclear whether overall U.S. output will decline, since some larger producers still expect to produce more oil and natural gas in 2015 than last year by focusing on their best drilling prospects."
"Deep debt keeps oil firms pumping" – Wall Street Journal (subscription may be required)
Also in energy news, FT Alphaville 's Izabella Kaminska provides evidence that crude and energy stocks are close to a bottom. The post also shows why the U.S. regulatory system will prevent a major decline in gasoline prices.
"Prices are now too low to provide the cash flow to sustain drilling programmes and nowhere near enough to provide the financial incentive to make equity or debt available… Thousands of new wells must therefore be drilled each year simply to sustain output at its current level of more than 9 million barrels per day."
"Of crude bottoms and Rins" – Kaminska, FT Alphaville
CNBC reported that the most popular hedge fund trade at the end of 2014 was to short U.S. Treasury bonds in expectation of higher interest rates. This is unfortunate because every fund that put on this trade has been killed so far in 2015.
"Short positions that gain when U.S. 10-year notes fall outnumbered longs by 261,282 contracts on the Chicago Board of Trade in the week ended Dec. 30, according to the Commodity Futures Trading Commission. That was the biggest wager against Treasuries since May 2010, … Treasuries have surged in January as falling oil prices pushed down the outlook for inflation. The Bloomberg U.S. Treasury Bond Index (BUSY) returned 1.2 percent this month through yesterday, adding to a 7.2 percent gain in 2014. "
"Bond bears experts at bad timing in building Treasury shorts" – Bloomberg
Tweet of the Day: "@groditi I buy bonds for a living and I'm telling you, don't buy them. Cost-push disinflation is short lived and accrues to demand-push inflation"
Diversion: "The top-viewed Wikipedia page for every day of 2014" – Quartz
Follow Scott Barlow on Twitter @SBarlow_ROB