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

Citi global strategist Chris Montagu sees further strength in value stocks as interest rates climb,

“Yields are rising and this is negatively impacting equity markets, but one relative beneficiary is Value. Not all Value is the same, however, and in this report we revisit the concept of Risky and Quality Value to examine how investors have been pricing Value in this recent Value/Growth rotation. We find that the ‘second stage’ of the rally is yet to come. As a result we remain positive on Value and in the short term we see Risky Value driving Value overall performance while the derating of Growth continues. … 2022 has seen a large shift higher in risk-free yields with a corresponding sell-off in equity markets. In the US rotations have principally been from Risky Growth to Risky Value, indicating a higher sensitivity to yields for the Risky Growth sector … Expectation of rising risk-free yields should still support Value style performance. Financials Value stocks will benefit directly from higher rates and more broadly relative Value performance as Growth derates. Investors may favour Risky Value near term, then switching towards Quality Value as uncertainty reduces and yields stabilize at higher levels.”

The strategist screened for higher quality value stocks. The resulting list included Pfizer, Verizon Communications, CVS Health, Amgen, Target, Altria Group, Duke Energy, Cigna, Northrup Grumman, Dollar General, Humana, American Electric Power, L3Harris Technologies, Walgreens Boots Alliance, Sempra Energy General Mills, Xcel Energy , Public Service Enterprises, WEC Energy Group, Eversource Energy, and Ameren.

“Citi sees ‘quality value’ as the next outperforming group” – (table) Twitter


BMO chief economist Doug Porter reports that U.S. credit markets are not concerned with inflation pressure,

“Even with the palpable widespread inflation angst, the bond market is mostly playing it cool. Perhaps emboldened by the Fed’s pivot to hawk-talk, the 30-year yield is still holding close to 2%, and inflation expectations imbedded in the Treasury market are hardly running amok. Quite the opposite. In recent sessions, inflation expectations have been fading, even as oil prices push towards $90. For example, the 5-year/5-year implied inflation rate has eased to around 2.0% in recent days after pushing 2.4% three months ago. (The 5/5 inflation rate is the assumed 5-year average inflation rate, starting five years from now — so, truly a medium-term outlook.) Notably, this longer term view on inflation is now all the way back to precisely where it stood a year ago. Thus, even as the Fed has ditched the transitory talk, the bond market is still keeping the faith (albeit with a more elastic definition of transitory—more like years, not months). Note that the 5/5s inflation forecast has not been a good leading indicator of inflation; it’s more of a coincident indicator. However, in the latest run-up, bonds simply don’t believe this pop will be sustained. While we don’t disagree, the risks to that implicit call seem quite one-sided”

“BMO: Credit markets aren’t buying inflation pressure” – (research excerpt) Twitter


BofA Securities chief investment strategist Michael Hartnett remains bearish in his weekly report on asset flows,

“‘Rates shock’ = ‘speculative theme crash’…De-Fi -30% (IPAY), Clean Energy -47% (ICLN), Social Media -40% (SOCL), Innovation -56% (ARKK ), Crypto -48% (Bitcoin), China tech -68% (KWEB); ‘manias’ & ‘crashes’, t’was ever thus, albeit very rarely before the Fed had actually hiked … Largest outflow from bonds since Mar’21, largest outflow from HY since Sep’20, largest outflow from TIPS since Nov’20, largest outflow from munis since Apr’20; largest inflow to gold since Feb’21; largest inflow to EM equities since Mar’21 … We remain bearish…1. Fed can’t cut inflation on Main St without deflation on Wall St; 2. central banks so “behind-the-curve” the speed of their necessary rate hikes threaten a. recession panic, b. fear of big deleveraging/volatility events on Wall St as yield curves invert (see Nat Gas futures); what is very different this cycle is policy & market excesses that precede 1st rate hike … lowest rates in 5000 years, >$30 trillion policy stimulus since COVID, global stock market cap up $61 trillion in 20 months, GDP >10%, CPI>7%, house prices >20%, largest worker shortages in 50 years, QE directly causing tech dominance & wealth inequality.”

Outflows from fixed income ETFs are notable and a potential source of credit market volatility where underlying holdings are illiquid.

“Hartnett (BofA) is still really really bearish” – (research excerpt) Twitter


Diversion: “Watch an AI Play the Best Game of Tetris You’ve Ever Seen” – Gizmodo

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