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

Morgan Stanley U.S. equity strategist Michael Wilson believes markets could rally in the near term, but it won’t last

“The short-term rolling correlation between equities and real yields is now deeply negative once again... this recent decline in bond yields has been perceived as positive for equities—ultimately a misread, in our view. For this read to continue to hold, we’d likely need to see a continuation of falling yields in the context of cresting inflation pressures, an associated less hawkish Fed policy path, more durable economic growth than we expect and a re-acceleration in earnings revisions. The combination of those factors is feasible, but is not likely, in our view. Thus, we see the recent rebound in equities as another bear market rally that could rise another 5-7% in the best case scenario. The S&P 500 is trading back at 16.3x or 1 turn higher than where it was trading at the prior week’s lows... this seems hard to justify given the growing concern about earnings. As a result, we continue to believe any near term rally is nothing more than a bear market bounce with lower lows ahead. The only question is whether we have a soft landing (base case) in which the S&P 500 bottoms near 3400-3500 or we have a recession (bear case) in which the index falls toward 3000.”

“MS: “any near term rally is nothing more than a bear market bounce with lower lows ahead”” – (research excerpt) Twitter


Scotiabank energy analyst Jason Bouvier is pounding the table for his sector in a Monday research report,

“Normally we don’t identify a $20 drop in oil prices and significant share price weakness as a positive, but in this case we believe it represents a great opportunity for investors to increase their energy weighting … Since the recent peak of oil prices until today, Cdn oil weighted producers are down about 23.5% … Although not at recent highs, WTI remains above $100/bbl. Coupled with steady capital discipline, FCF levels are still VERY robust, and now SBB [share buyback] programs have the opportunity to take in more shares for the same amount of capital … We believe the macro environment is set up for continued strength in oil prices … In the near-term we continue to favor the integrateds (CVE and IMO are our top picks; both Sector Outperform) given the robust crack spread environment. For SMID caps, we like VET (strong exposure to European gas prices) as well as CPG and ERF (although these two are more exposed to light oil price weakness) (all Sector Outperform).”

“Scotiabank: ‘a great opportunity for investors to increase their energy weighting”” – (research excerpt) Twitter


CIBC analyst Paul Holden believes the domestic banks will have trouble maintaining current loan growth and net interest income(NII) as the Bank of Canada’s quantitative easing program winds down,

“During the QE period (April 2020 to April 2022) the BoC purchased $326B of bonds from investors. The BoC bond purchases contributed to lower benchmark bond yields and thereby lower borrowing rates for bank customers. Investors who sold bonds to the BoC received cash, a portion of which flowed to the commercial banks as deposits, and the commercial banks in turn placed settlement balances with the BoC ($289B at the peak). This boosted liquidity coverage ratios (LCRs) across the banks, providing additional lending capacity. This was the high-octane effect of QE – lower borrowing rates and the additional liquidity to fund more loans. Within this report you will find more details behind QE mechanics, the numbers, and how QE translated to the commercial banks. … net interest income (NII) forecasts should not be extrapolating recent loan growth and layering on disclosed interest rate sensitivities. Put another way, we think there is downside risk to NII forecasts even absent a recession”

“CIBC on Cdn banks: “we think there is downside risk to NII forecasts even absent a recession”” – (research excerpt) Twitter


Diversion: I was unaware there was a hacking industry.

“The hacking industry faces the end of an era” – M.I.T. Technology Review

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