Are economies slowing down or is this just an economic readjustment

Weekly Statistics:

Today

Week Ago Year Ago
16-Jan-15 09-Jan-15

31-Jan-14

S&P TSX

14,673.48

14,779.35

13,694.94

S&P 500

1,994.99

2,051.82

1,794.19

DJIA

17,164.950

17,672.60

15,848.61

OIL

$47.70

$45.33

$88.60

USD vs CAD

0.7867

0.8049

0.9038

Gold

$1,283.80

$1,294

$1,244.20

 

The US economy showed signs of slowing down today. The Gross Domestic Product, the value of all the goods and services produced by US, grew at 2.6% annual clip in the fourth quarter. This is well below the 5% growth recorded in the quarter ending September 2014. Analysts polled by MarketWatch forecasted that the GDP will grow by a seasonally adjusted 3.2% in Q4. The GDP growth rate in US has averaged 3.3% from 1947 until 2014 and reached an all time high of 16.9% in the first quarter of 1950 and  a record low of -10% in the first quarter of 1958. The news did not fare well with Wall Street. All the major US indices suffered more than 1% loss today. The S&P 500 broke the ‘psychological’ support level of 2,000 and closed the week at 1,994.99.

 

Oil prices jumped by 8% at one point today and settled up 6% from the previous day after news of a big drop in US rig count broke, as producers respond to oversupply. We believe that the main reason for the spike was short covering on the last day before the first delivery date for Feb crude. Even with the 6% spike on the last day of January, oil prices were still down 9.4% for the month of January. Alberta is facing the biggest economic struggles in many years due to the recent collapse in oil prices. Alberta’s Premier, Jim Prentice, is expected to discuss wage costs with public sector unions in the face of declining oil revenues. According to the Premier, the oil price decline will translate into $7 Billion loss in royalty revenue. Alberta’s union leaders are also concerned that a 5% cut in the provincial cabinet members’ pay, which was announced on Thursday, could affect other public sector employees’ salary as well.  The Alberta government is working to construct a budget with sub-$50 oil.

Source- Bloomberg, Zerohedge, Globe Investor Gold, CBC, Financial Post

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Canadian Dollar, and interest rates globally – Where is this going ?

January 23, 2015

 

Weekly Statistics:

Today Week Ago Year Ago
16-Jan-15 09-Jan-15 24-Jan-14
S&P TSX 14,779.35 14,309.41 13,717.76
S&P 500 2,051.82 2,019.00 1,790.19
DJIA 17,672.60 17,512.37 15,879.11
OIL $45.33 $48.33 $88.02
USD vs CAD 0.8049 0.8341 0.9038
Gold 1,294 1,280.10 1,266.20

 

 

In a surprising move, the Bank of Canada has cut its interest rates by 0.25%. The overnight loan rates had been at 1% since September 2010 and after this cut, they are at 0.75%. The news came as a surprise to Bay Street and Sal Guateri, Senior Economist at BMO capital markets, termed it as an “aggressive move”.  This rate cut could help fuel the growth in Canadian economy as it will reduce the rates at which consumers borrow money for their houses, cars etc, even though the big banks have decided not to cut their prime rate from 3%.  TD bank said that Bank of Canada’s overnight rate is one of  the “many” factors it takes into consideration while deciding their prime rate and the rate cut won’t affect it. Royal Bank and Bank of Nova Scotia also said that they won’t cut their mortgage rates at this moment.  The rate cut is seen as a response to the recent plunge in oil prices, which, according to bank of Canada is a negative catalyst for Canadian economy. The oil and gas investment will probably drop by 30% this year and could be same in 2016 as well. This will slow Canadian exports down to 1% from 6% in 2014. The interest rate move also saw the loonie dropping 2 cents against the USD to around 80 cents.

 

The European Central Bank (ECB) is following the footsteps of US fed, Bank of England and Bank of Japan, and announced a Trillion euro asset purchase plan to fight deflation in the euro area. The ECB will spend around 60 Billion euros and this amount will probably comprise of 45 Billion euros of sovereign debt, 5 billion euros of bonds issued by institutions and agencies, and 10 Billion euros under existing programs for asset backed securities and covered bonds. This is an open ended program and will last at least until 2016. The main motive of this program is to boost the region’s poor inflation rate, which came in at an annual minus 0.2 percent in December. The move came as good news for markets around the world, with both North American and European markets rallying yesterday.

 

 

Source- Bloomberg, Zerohedge, Globe Investor Gold, CBC, Financial Post

Havoc in Switzerland, in Canadian Target stores and in shale oil in the US

 Weekly Statistics:

Today Week Ago Year Ago
16-Jan-15 09-Jan-15 17-Jan-14
S&P TSX  14,309.41  14,384.92  13,888.21
S&P 500  2,019.00  2,045.00  1,838.70
DJIA  17,512.37  17,737.37  16,458.56
OIL  $48.33  $48.19  $86.87
USD vs CAD 0.8341 0.8429 0.9149

Gold

 1,280.10  1,216.10

 1,255.90

The major highlights of stock markets this week was a policy U-turn by the Swiss National Bank (SNB). The SNB had introduced a cap of 1.20 Franc per Euro in 2011 to fend off deflation and recession. Only a few days ago, SNB officials made a point that maintaining the cap is their policy cornerstone. This U-turn sent the Franc up nearly 30 percent higher and the Swiss stock markets down to around 10% in the early chaotic trading, the biggest intra-day loss in last 25 years. With more than 40% of Swiss exports going into Euro zone, many Swiss manufacturers warned of plunging losses. In order to discourage new flows into Swiss Franc, the SNB pushed down its interest rates on some cash deposits held at the central bank by commercial banks and financial institutions. The rates were already cut into negative territory last month, first time since 1970s, and now they were further cut by 0.5% to -0.75%. Rumors are rife that because ECB will soon start a huge bond buying program and SNB would not be able to maintain the floor anyhow, therefore SNB disbanded the floor.

In other shocking news, Target Corp has decided to shut down its Canadian operations. They will close their 130 stores, throwing 17, 600 people out of work. The company had around 15 million square feet of retail space and 5 million square feet of office and industrial space across Canada. According to real estate gurus, this decision will definitely put pressure on commercial real estate prices, if not on residential real estate.

Shale oil production in the US is coming under pressure. The US drillers have shut more than 200 oil rigs in the past six weeks as crude prices are headed for their longest losing streak since 1986.  According to Baker Hughes, the oil rig count declined by 55 to 1366 this week and down 209 from 1575 December 5, 2014. It looks like OPEC countries are finally winning this war for market share against the US shale oil producers.

Schwaben Blog – Lot’s of volatility – first in oil now in equities

Schwaben Blog

January 9, 2015

Weekly Statistics:

Today Week Ago Year Ago
09-Jan-15 02-Jan-15 10-Jan-14
S&P TSX 14,384.92 14,753.65 13,747.52
S&P 500 2,045.00 2,058.20 1,842.37
DJIA 17,737.37 17,832.99 16,437.50
OIL $48.19 $52.69 $86.87
USD vs CAD 0.8429 0.8521 0.9159
Gold 1,223.10 1,186.20 1,251.30

 

The first full week of trading started the year with immense volatility. There were a number of events that contributed to these wild swings. Oil prices have shown no sign of bottoming out. The main benchmarks saw a sharp sell off on Monday and Tuesday and then big rallies on Wednesday and Thursday. The DJIA moved by triple digits for the fifth session in a row. WTI (West Texas Intermediate) oil is trading well below $50 per barrel and went to a low of $46.83 before recovering to its current price of $48.21. According to Bloomberg New Energy Finance, 37 of the 38 US shale oilfields supposedly are below break-even point in other words, 97% of fracking is now operating at a loss at current prices. North Dakota, which relies heavily on fracking will experience hard times in the foreseeable future. December jobs report for US and Canada did not inspire enthusiasm in equity markets. In US 252,000 jobs were added while Canada shed 4,300 jobs. In the US it was mainly the decrease in wages and labor participation rate, which led to downward pressure on markets. Wages in the US decreased by 5 cents, biggest drop since 2006, and labor participation rate went down to 62.5% from 62.8%. Unemployment in the US is down to 5.6% from the previous reading in November of 5.8%. While employment is steady at 6.6%, the economic gap between the West and the rest of Canada will disappear this year.

Western Canada saw a ray of hope in Keystone XL pipeline issue when the US House of Representatives voted to approve the bill however the House’s 266-153 vote fell short of the two-thirds that would be required to override Obama’s veto. Earlier, Nebraska Supreme Court dismissed a lawsuit against the pipeline. This pending lawsuit was one of the main reasons for President’s opposition. The dismissal of the lawsuit may improve the chances that Obama may not veto the bill and clear the path for construction of pipeline. The pipeline is around 1,900 km long and would carry more than 800,00 barrels of oil from Canada to the refineries in US. The parent company of this pipeline, Transcanada Corp, had been waiting for a decision on this issue from last 6 years. The pipeline could increase the demand for oil from the Canadian oil sands.

Internationally, the decline in oil prices has given a real blow to Russia. Russia’s investment rating was downgraded by Fitch to BBB- from BBB, which is just one notch above junk or speculative sta