Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA Securities commodity analyst Michael Widmer sees a “pivot” in the resources bull market,
“The unfolding slowdown is partially influenced by global growth peaking in the wake of the post-COVID rebound. That said, there are also some unusual dynamics at play. To that point, the slowdown in commodities demand from the auto industry is linked to chip shortages and has pushed down prices of the platinum-group metals; a rebound in platinum remains our base cause as dislocations normalize. At the same time, China’s authorities have taken a heavy hand in reorganizing commodity-intensive parts of the economy, with the slowdown and lack of stimulus in the property sector an immediate concern. … The current environment reminds us in many ways of a classical bull market pivot: prices rally, even though risks have been building, a combination that puts further cross-commodity upside at risk … Driven by higher EV penetrations, nickel demand is expanding exponentially and producers need to strap on their boots to keep the market well supplied. 80Kt of nickel units shipped from Indonesia may help in the short-term, but these tonnages are unlikely to keep the Class 1 market out of deficit beyond 2023. Linked to that, prices could rally to $25,000/t ($11.34/lb) over the coming 12 months. While copper fundamentals look strong beyond 2025, the market should move into surplus next year.”
“@SBarlow_ROB BofA sees ‘pivot’ in commodity bull market” – (research excerpt) Twitter
" Evergrande and the end of China’s ‘build, build, build’ model” – Financial Times (paywall)
Credit Suisse U.S. equity strategist Jonathan Golub thinks investors are too worried about equity returns,
“The VIX measures the level of anticipated/implied volatility in the options market. Realized vol captures the recent trend of actual market gyrations. Over the past decade, implied vol has traded at 6-6½ points above realized on average, reflecting the cost of hedging. ... The current spread is 14.3 today, the result of an extremely high level of risk aversion… a renormalization of this relationship—and an accompanying decline in the VIX—should send stock prices higher.”
In simpler terms, Mr. Golub sees option prices reflecting far more volatility than will actually occur, and this will lead to stock buying.
“@SBarlow_ROB CS: “Wall of Worry is Too high”” – (research excerpt) Twitter
Scotiabank strategist Hugo Ste-Marie sees a lot more damage to the Canadian equity market than appears in the headline TSX performance numbers,
“Equities sold off heavily [Monday], with the S&P 500 down 1.7% and the Nasdaq retreating 2.2%. In Canada, the TSX ended 1.6% lower… the S&P 500 drawdown from its recent high stands at 3.9%. The TSX pullback is even milder at 3.2%. Still, we see more damage beneath the surface. 74 stocks (31%) in the TSX are trading in bear market territory, i.e., they’re down more than 20% from their high, and another 55 (23%) are down between 10% and 20%. Granted, those down the most are smaller resource equities and cannabis stocks. Still, we are starting to see some larger cap equities also making the list of stocks off double-digits: LNR (-29%), AC (-26%), MG (-25%), BHC (-24%), RUS (-19%), QBR/b (-16%), AQN (-14%), MFC (-14%), AP-u (-13%), RCI/b (-12%), SHOP (-12%), CTC/a (-12%), and FTT (-12%). Near-term uncertainty remains elevated due to COVID-19, the U.S. debt ceiling, Fed taper and China Evergrande. However, we remain of the view that the bull market is not over yet and further volatility will create opportunity. "
“@SBarlow_ROB BNS: “More damage beneath the surface’ in Canadian equity market” – (research excerpt) Twitter
Diversion: “The science behind those extremely tall supertowers, and why they’re going to get even taller” – Bloomberg
Tweet of the Day:
"There is enough empty property in China to house over 90m people. Thus, countries such as France, Germany, Italy, the UK and Canada could fit their entire populations into those empty Chinese apartments with room to spare." FT Big Read. https://t.co/we4XyKJPdP— James Kynge (@JKynge) September 22, 2021
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.