Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
There have been a number of reports suggesting that Bank of Canada monetary tightening will push short-term bond yields higher and support the loonie. But the Canadian dollar has continued as a reflation trade, tracking the copper price.
RBC economist Josh Nye implied that the peak value for the loonie is behind us in a Monday report,
“After tumbling early in the pandemic, the Canadian dollar went on its strongest run in more than a decade, rising to a six-year high of 83 US cents in early June. The run-up made it the best-performing advanced-economy currency through the first five months of 2021 … Some of the factors behind the loonie’s impressive run are now, conversely, contributing to its softening. A key one: commodity prices. WTI oil has risen from around US$40 per barrel in the second half of last year to more than US$70. Non-energy commodity prices were up 25% year-to-date in May. We expect oil prices to remain in their recent range into 2022 … Meanwhile, some non-energy commodity prices have started to turn lower (lumber being one example), and could fall further as supply responds, and reopening-driven growth expectations top out… The Canadian dollar’s highs are likely in the rearview mirror. We see it remaining within range of the 80 US cent level over the second half of this year and weakening slightly in 2022.”
“Has the Canadian dollar already reached its peak for the year? In our view, yes” – RBC Economics
Citi strategist Edward Morse’s view is similar to RBC’s, as they see a new commodity supercycle as highly unlikely. Mr. Morse does see the supercycle term applying to industrial metals,
“There is little doubt that the surging prices in bulk commodities – iron ore (and steel), thermal and coking coal – will be short-lived and result from temporary supply constraints and in all likelihood bulk commodities will be the first to start a longer secular price decline. Steel’s constraints today are a function of China’s anti-pollution policies. Iron ore’s prices reflect supply chain/inventory losses that are largely a function of the pandemic and are rapidly easing. Thermal coal’s recent demand growth has been a function mostly of higher natural gas prices and supply limitations due to lower production of high carbon-content coal … The metals complex is the only one for which we believe the term ‘supercycle’ applies, and even there our expectations on duration are fairly limited. We are especially bullish aluminium and copper, in part because of their durability from a long-term demand perspective (power generation and distribution, light weight cars, EVs, consumer products) and their supply constraints.”
“@SBarlow_ROB Citi: Supercycle for metals, but not bulk commodities” – (research excerpt ) Twitter
BofA U.S. quantitative strategist Savita Subramanian, my favoured source for U.S. earnings analysis, warned clients to watch cost pressures carefully as reporting season heats up this week,
“A handful of companies has warned about rising cost pressure. Delta Airlines’ unit cost (ex-fuel) outlook of +11- 14% in 3Q was well above consensus at up low single digits. Fastenal (Industrials) saw significant cost inflation and said offsetting cost pressure via pricing will be a bigger challenge in 3Q given the rate of inflation. Conagra (Staples) saw inflation accelerating and lowered its prior guidance due to a lag in raising prices … We expect inflation to remain as the biggest topic as earnings broaden out this week. In 1Q, despite a 900% jump in mentions of ‘inflation’ and near-record negative sentiment around inflation, net margins (ex-Fins) rose to a record high, indicating inflation was a tailwind to earnings. Similarly, our Corporate Misery Indicator (profits cycle indicator) jumped to a record high (“least miserable”) reading in May, pointing to strong 2Q earnings/margins (vs. consensus expectation of margin compression QoQ). Our guidance ratio also remains strong so far in 2Q. But rising cost pressure (particularly from wages) could reverse the trend, posing risks to the earnings outlook”
“@SBarlow_ROB BofA: ‘We expect inflation to remain as the biggest topic as earnings broaden out this week”” – (research excerpt) Twitter
Newsletter: “The market is now in mid-cycle and it’s going to get bumpy” - Globe Investor
Diversion: “How China’s Hacking Entered a Reckless New Phase” – Wired
Tweet of the Day:
My hottest take is that interest rates will remain low forever. The downward trend has been playing out for centuries: pic.twitter.com/D0kAF7NcFi— Nick Maggiulli (@dollarsanddata) July 19, 2021
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