Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
NEW NEWSLETTER! Market Factors: $60 oil and six other ‘high conviction’ commodity trade ideas
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BMO senior economist Sal Guatieri highlighted busy Canadian homebuilders,
“After sagging for much of the year, U.S. housing starts rebounded 9.6% in August, though the current level is still less than before the pandemic. Meantime, Canadian starts plunged 22.3% in August, albeit from elevated levels for most of the year. Over the past six months, Canadian starts have averaged nearly 19% of U.S. levels, which is moderately above the past-decade mean of 17% and well above the long-term average of 16%. This mostly reflects population growth differences in the two countries, and a faster pace of multiple-unit construction in Canada. All in, Canadian home builders are pulling up their socks, which should help improve affordability as population growth slows”
“Canadian home Builders Doing Their Part” – (excerpt, chart) X
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UBS strategist Andrew Garthwaite attempts to find market performance patterns after Federal Reserve rate cuts,
“On average, the market was up by 4% in the 8 months after the first rate cut (since 1981). If there was a recession, markets were down 10%; if there was not, they were up 20% - (with recessions happening on average 5 months after the start of the rate cut with a recession occurring 55% of the time over the period). But critically in the 6 months prior to the first rate cut when we had no recession, markets were up only 3% … Since 1981, 50bp as a first cut has been associated with a recession, but this time around we think it would be a sign of an aggressive Fed, not a recession. In the 6 months after the first rate cut, pharma is the only sector to have outperformed on all occasions since 2000 … We think there is a clear risk that rates eventually fall more than expected (the market prices in a trough Fed Funds rate of c2.8%, yet the Fed has indicated it believes a neutral rate is 2.8% and at the trough of the cycle, rates should be below neutral … For equities, as above, it is a much closer call. It is hard to see the market pricing in much lower rates without worse economic (and thus earnings) news”.
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Investors that care about commodity prices care about China’s economy whether they know it or not. Scotiabank strategist Hugo Ste-Marie argued that there’s “no easy way out of protracted slowdown” for China,
“China reported another set of lackluster data last Friday, with new yuan loans, retail sales, and industrial production for the month of August all missing expectations. Retail sales (+2.1% YOY) and industrial production (+4.5%) decelerated further. In another report, the monthly decline in new and used home prices accelerated despite plunging bond yields. China 10-yr yields trade at 2.04%, their lowest level since the series inception in 2005. While some easing measures have been adopted, with targeted ones to support the real estate market, the economy just appears unable to regain traction … our in-house China economic surprise index has been stuck in negative territory for some time, and the latest stint above the zero bound in March 2024 was short and mild. If earlier this year economists were cranking their 2024 GDP forecasts, the tide has turned. 2024 growth forecasts have been revised down to 4.8% from a peak of 5.0% in June. As we indicated several times, as long as the real estate market will struggle and easing measures remain limited, it could be difficult for China to enjoy a sustained period of decent growth. From an investment standpoint, with or without China, emerging markets struggle relative to the U.S. – both the EEM to SPY ratio and the EMXC to SPY ratio are trending down, with no signs of imminent turnaround”.
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Wells Fargo strategist Scott Wren forecasts choppy equity markets until the U.S. election,
“Seasonal tendencies and the upcoming election that polling shows is tight are injecting uncertainty into financial markets. We think the SPX is likely range-bound in coming months and suggest that when the index trades toward the top of the range as it is currently, investors trim positions in our least-favored sectors such as Real Estate, Utilities, Consumer Discretionary, and Consumer Staples. Should we get equity downside toward recent lows, sidelined funds intended for investment in the stock market should be put to work in favored sectors such as Energy, Communication Services, Financials, Industrials, and Materials. We see these favored sectors as offering more robust balance sheets and dependable cash flows as well as more reasonable valuations than our least-favored areas”.
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Diversion: “Why virologists are getting increasingly nervous about bird flu” – M.I.T. Technology Review