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

Canada’s need for foreign debt buyers is intense relative to other major countries, and Bank of America analyst Ben Randol sees potential trouble ahead (my emphasis),

“Canada’s net portfolio investment (PI) balance with the rest of the world (RoW) remained in deficit at -C$9.8bn (-C$8.1bn debt, -C$1.7bn equity) in July vs. -C$24.8bn (-C$8.1bn debt, -C$16.7bn equity) in June (Chart 1). This repeat deficit was driven largely by foreign sales of Canadian corporate bonds… We continue to see foreign liquidation of debt holdings over June-July as reflective of reduced demand following sharp curtailment of BoC QE activity. Potential for further liquidation of Canadian debt amid a persistently-negative equity flow balance does not bode well for Canada’s external financing prospects looking forward … Given Canada’s sizable structural (basic balance) deficit produced by deficits in the current account and net direct investment, net PI inflows are needed, potentially increasingly so if the structural balance further deteriorates as we think is likely. Unfortunately, continued PI deficits are all we are seeing. Accordingly, USD/CAD adjustment risks continue to rise, in our view.”

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Less foreign investment flows into Canada is a distinct negative for the loonie.

“@SBarlow_ROB BoA: 'Potential for further liquidation of Canadian debt amid a persistently-negative equity flow balance does not bode well for Canada’s external financing prospects looking forward” – (research excerpt) Twitter

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CIBC economist Avery Shenfeld believes the easy economic gains have been made from the recovery and further progress will be more difficult,

"There will be a lot of work to dole out billions of [vaccine] doses worldwide, and a lag to see the resulting slowing in transmissions. The ‘post-vaccine’ easing in Covid-19 constraints, and the next big wave of growth after Q3 of this year, is therefore more of a second-half 2021 story … The jobs and output that remain to be recovered are now heavily tilted to sectors where social distancing requirements pose major limitations on activity… We don’t see the Bank of Canada hiking rates until 2023 … "

"@SBarlow_ROB CIBC: “The jobs and output that remain to be recovered are now heavily tilted to sectors where social distancing requirements pose major limitations on activity.” – (research excerpt) Twitter

“What to do as a second wave of COVID looms” – Macleans

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Also from BofA Securities, U.S. quantitative strategist Savita Subramanian expressed concerns about the overall S&P 500 in the short term, and recommended three cyclical sectors,

“Volatility returned this month, with the S&P 500 falling by 3% and the NASDAQ by 6% so far. The sell-off was entirely driven by multiple contraction, with the forward P/E ratio slipping 5% to 21.2x (consensus EPS rose 2%). Despite that, stocks continue to trade at statistically expensive levels on all valuation metrics we track except on Free Cash Flow and relative to bonds. Stocks' dividend yield vs. the 10-yr Treasury yield remains compelling (highest since the 1950s), but other extremes point to frothiness, like market cap vs. GDP (highest in our data history since 1964), PE to Growth (highest in our history since 1986) and the S&P 500 vs. Russell 2000 (highest since 2001).Top tactical industry picks: Housing, Autos, Metals/Mining. In tandem with hedge funds closing their defensive vs. cyclical bias this past month (where we have found that HF positioning changes have been positive indicators), our tactical quantitative work has grown increasingly positive on cyclicals, with Household Durables, Autos, and Metals & Mining ranking highest.”

"@SBarlow_ROB BoA: “Top tactical industry picks: Housing, Autos, Metals/Mining” – (research excerpt) Twitter

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Diversion: “Coffee is under Attack” – The Atlantic

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