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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Thursday’s remarkable jump in U.S. bond yields was likely caused more by technical, market plumbing factors than merely inflation fears,

“The main protagonist in the bond market was the five-year Treasury note, a maturity often associated with long-term Fed rate expectations, where yields closed 22 basis point higher on the day. The so-called butterfly-spread index -- a measure of how the note is performing against its two- and 10-year peers -- jumped 24 basis points, the worst daily performance for the sector since 2002.. . The selling was triggered after a U.S. auction of seven-year bonds saw record low demand… That sent five-year yields surging through 0.75%, a crucial technical level watched by investors as a signal that any bond selloff could worsen… The yield spike sent traders scurrying to manage their positions, in particular those linked to the popular reflation trade. Bets on a steeper yield curve were hit as the curve flattened thanks to heavy losses in shorter-dated bonds.”

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Inflation fears were involved, the root cause of the weak seven year auction, but the aggressive nature of the sell-off was likely position-oriented.

“Chaotic Treasury Selloff Fueled by $50 Billion of Unwinding” – Bloomberg

“10-year Treasury yield overtakes S&P 500 dividend payout as inflation concerns spark big moves in U.S., Canada bonds” - Globe Investor

“Big moves and liquidity woes in a U.S. bond ‘tantrum without the taper’” - Globe Investor/Reuters

“U.S. Treasuries’ selloff give European stocks an edge” - Globe Investor/Reuters

“Global bond rout turns up the heat on central banks” - Globe Investor/Reuters

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Scotiabank’s chief foreign exchange strategist Shaun Osborne believes the loonie rally has room to run based on technical analysis,

“For USDCAD specifically, the decline in the spot rate in the past few months has taken back more than three quarters of the long-term USD rally from the 2017 low; we think sustained USD losses below the 1.2675 area (the 76.4% Fibonacci retracement support of the 1.20/1.47 move up) means there is little—or nothing, in technical terms, at least—stopping the USD from returning to the 1.2062 low reached in September 2017. The underlying trend lower is strong and well-entrenched on the short, medium and longer run charts which should mean limited counter-trend corrections for the USD for now. We have a 1.23 year end forecast for USDCAD but that does not preclude a mid/late year overshoot to the downside to the 1.20 range potentially (recall that seasonal patterns indicate USDCAD typically weakens in Q2/Q3).”

“@SBarlow_ROB BNS: CAD has room to run higher’ – (research excerpt) Twitter

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An interesting report from Citi’s Scott Chronert examines three myths about ETFs and overall market structure,

“Myth #1: ETFs drove broad market gains. Busted. US-listed ETF flows attributable to US stocks totaled $181B in 2020. This pales in comparison to broad market value gains of $6.9T. Further, ETF flow activity ended up accounting for less than 4% of aggregate stock value traded… Myth #2: ETFs meaningfully contributed to Small Cap leadership. Plausible. Small/Mid Cap stocks have higher ETF ownership than their Large Cap peers. And ETF flows attributable to single stocks were higher than in Large Cap. However, ETF buying in aggregate was only 1.25% of market cap. Further, more heavily owned Small/Mid Cap stocks lagged lesser owned peers… Myth #3: ETFs are affecting certain single stocks. Confirmed. Outliers in our flows versus single stock performance analysis were likely heavily impacted by ETFs. There were 28 US stocks, all either Small or Micro Cap, where ETF flows totaled more than 10% of market cap in 2020, many of which had impressive returns. Increasingly popular Thematic ETFs that drifted into less liquid stocks feature prominently in our stock screens.”

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“@SBarlow_ROB Citi: 3 Myths about ETFs” – (research excerpt) Twitter

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Diversion: “’Literally everything the Canadian military buys turns into an obscenely expensive mess’ – Maclean’s

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