A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO chief economist Doug Porter provided details on the widely discussed topic in markets today - the inverted yield curve,
“The ominous message can’t be ignored, but this particular move does come loaded with caveats and asterisks ... Two-year yields have rocketed by more than 170 bps since the start of the year, as the market scrambled to readjust to a Fed that is scrambling to keep up with inflation. That’s the fastest rise in a quarter (plus a day) for twos since the early 1980s, and simply blew away a nearly as impressive 90 bp surge in 10-year yields … In February, Canada’s unemployment rate tumbled to close to 50-year lows of just 5.5%, while the inflation rate famously surged to 30- year highs of 5.7%. Little remarked on at the time of these releases, this was the first time since June 1982 that the Canadian inflation rate was higher than the unemployment rate … What’s the implication of this seemingly quirky crossover in inflation and unemployment rates? Simply put, it’s a loud signal that policy has been far too loose for far too long … Inflation pressures are now so intense that they require an all-hands-on-deck policy response. In other words, this is not just a job for central banks”
“The Revenge of the Phillips Curve” – BMO Economics
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RBC’s mining and materials equity team published their top investment ideas,
“We recommend Fertilizers at Overweight, as Russia’s invasion of Ukraine tightened an already tight fertilizer and ag market, especially for potash and nitrogen, which supports high prices in the near term. For potash in particular, the pace and magnitude of Belarusian/Russian potash return is key to understanding the long-term impacts… We maintain Base Metals at Market Weight, as, while elevated metals prices are supported by low inventories and a tight supply/demand picture, we see risks around weakening metals demand … We keep Precious Metals at Market Weight, as we think rising real rate expectations remain a headwind for gold prices, while cost inflation could pressure margin … We remain cautious on Diversified/Bulk Commodities, which we keep at Underweight, as we think bulk commodity prices have gotten ahead of themselves and see downside risk to prices at current levels, although until then, high prices support strong FCF generation from bulk commodity producers.”
RBC recommends Nutrien Ltd. and U.S.-based Mosaic Co. in their favoured fertilizer sector. For base metals, the picks are Capstone Mining, First Quantum, Hudbay Minerals, Ivanhoew Mines and Sandfire Resources. Agnico Eagle, Silver Lake Resources and Endeavour Mining are among the precious metals picks and the team also recommend Cameco.
“RBC global mining best ideas” – (table) Twitter
“Monday’s analyst upgrades and downgrades” - Globe Investor
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Morgan Stanley U.S. equity strategist Michael Wilson says “the bear market rally is over,”
“The first quarter was one of the worst on record for the collective performance of stocks and bonds, with the latter worse than the former. This makes sense given investor concern focused more on the “Fire” (inflation and the Fed) than the “Ice” (growth slowdown) … The bear market rally is over. While 1Q was rough for most stocks, the second half of March was exceptionally strong. The rally was predictable from a technical perspective, but it was always a bear market rally in our view, and now we think it’s over. Our analysis of Friday’s ISM manufacturing survey shows the orders component is now below inventories for the first time since the expansion began… Boring is beautiful. Defensive sectors and stocks have outperformed both growth and value since our 2022 Outlook was published. The exceptions have been Energy and Materials, which have been the biggest beneficiaries of geopolitical turmoil. Despite the windfall for these sectors, defensives have even outperformed cyclicals at the broader level … Our latest quantitative analysis shows the market has been paying more for dividend yield rather than dividend growth since late last year. We think this is also supportive of our view that growth is becoming the primary concern for equity investors rather than higher rates.”
“”MS: The bear market rally is over”” – (research excerpt) Twitter
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Diversion: I really enjoyed this Conan O’Brien interview with singer songwriter Aimee Mann,
“Conan Needs a Friend” – Spotify (open)
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Scott Barlow