Interest rates and oil price volatility are still a big concern !

March 27, 2015

 

 

Weekly Statistics:

Today

Week Ago

Year Ago

27-Mar-15

20-Mar-15

28-Mar-14

S&P TSX

14,812

14,942.41

14,260

S&P 500

2,061

2,108

 1,849

DJIA

17713

18,128

16,264

OIL

$48.34

$45.53

 $91.03

USD vs CAD

0.7937

0.7929

0.9041

Gold

$1,198

$1,182

 $1,298

Federal Reserve Chair Janet Yellen said that interest rates could possibly increase in 2015 and made the case that the Fed would be cautious and subsequent rate hikes would be gradual. In a speech in San Francisco on Friday, she emphasized that the coming tightening cycle will be unlike any other in recent times, as the U.S. economy continues to heal from the worst recession since the Great Depression. She emphasized that it’s the expected path of short-term interest rates that matters and not the precise timing, when asked about when the Fed will finally raise interest rates for the first time in nine years. Meanwhile investors are selling US equities at a record pace and making investments in European assets while speculating that the interest rates in US will increase by this year, sooner rather than later. The US stock funds have seen an outflow of $44 Billion in the year-to-date period for their worst start to the year since 2009.  On he other hand, European equity funds have enjoyed an inflow of $46.6 Billion so far in 2015. A stronger Dollar and increasing probability of interest rate hike in US are probably the main reason for this movement of funds. Ahead of the start of the earnings season, about 84% of the companies that have provided first quarter outlook gave negative outlooks. Many companies blamed strengthening dollar or weak commodities or both for poor outlooks. This outlook is more than 81% of the companies that warned in Q1 2014 and the five-year average of 68%.

Last week was very volatile for crude oil. Oil prices gained around 15% in the first four trading sessions of the week but lost 6% on Friday. Recently there have been news of disturbances in Yemen and that drove the prices up. Yemen is the 39th biggest oil producer in the world and produces roughly 130,000 barrels of crude oil a day. But its not the amount of oil produced by Yemen which has shot up the prices, rather its the geographic importance of Yemen in the transportation of crude oil across different nations. Its sits at Bab-el-Mandab Strait, a key choke point in international shipping. About 3.8 million barrels of oil a day passed through this strait in 2013 and a closure would keep tankers away from reaching Suez canal and SUMED pipeline.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch

Are US interest rates turning ? How will the rising US$ affect the US economy ?

    Schwaben Blog

 

March 20, 2015

 

Fed not patient anymore- Interest rates hike soon?

 

Weekly Statistics:

Today

Week Ago

Year Ago

20-Mar-15

13-Mar-15

21-Mar-14

S&P TSX

14,942.41

14,731.50

14,335.76

S&P 500

2,108

2,053.40

 1,866.52

DJIA

18,128

17,749.31

16,302.77

OIL

$45.53

$45.00

 $89.80

USD vs CAD

0.7929

0.7820

0.8913

Gold

$1,182

$1,156

 $1,338.80

 

 

The Federal Reserve released their policy statement on Wednesday. The Fed removed the word “patient” from their statement and opened the door for an interest rate hike as soon as June 2015, while also indicating it will go slow once it gets started. The equity markets were positively surprised by this statement and all major indices posted gains of about 1%.  In the currency markets, the US dollar posted losses against major currencies, which led to a gain in oil prices. The continued strengthening of the US dollar did not allow many oil-importing nations to reap the full benefits of the more than 60% reduction in oil prices (from their peak prices in June 2014). The Fed is preparing for a rate hike while stagnant growth in Europe, China and Japan is pushing their central banks to ease their monetary policy. This has put upward pressure on US dollar, which has gained more than 4% since last meeting of Fed policy makers on January 28. “Just because we removed the word patient from the statement doesn’t mean that we are going to be impatient”, Fed chair Janet Yellen said during a press conference in Washington on Wednesday. She also said “This change does not mean an increase will necessarily come in June, although we cannot rule that out”. She has previously said that the Federal Reserve would be patient in increasing the interest rates but now that the word “patient” has been removed, different economists and financial commentators are speculating about different timings for a rate hike. Charls Evans, the Chicago Fed President, told reporters that he still thinks that a rate increase in 2016 is more likely than an earlier move, based on the economic conditions as he sees them. In a recent survey conducted by BNN, maximum number of economists favoured a rate hike in October with a probability of more than 50%.  There was also a poll conducted by Reuters which showed an even split for a rate hike between June and in the later part of the year. The last time the Fed raised the interest rates was in June 2006, when a roaring housing market and strong economic growth prompted it to push its target rate to 5.25% (Financial Post).

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch

Low Oil Prices – economic impact felt in Canada and no end in sight with tightening storage capacity in the US

    Schwaben Blog

 

March 6, 2015

 

Weekly Statistics:

Today

Week Ago Year Ago
13-Mar-15 06-Mar-15 14-Mar-14

S&P TSX

14,731.50 14,952.50

14,227.66

S&P 500

2,053.40

2,071.26

 1,841.13

DJIA

17,749.31

17,856.78

16,065.67

OIL

$45.00

$49.78

 $90.07

USD vs CAD

0.7820

0.7945

0.9022

Gold

$1,156 $1,168

 $1,382.10

The Canadian economy shed 1,000 positions last month amid declining oil prices and mounting problems in Western Canada. This led to the jobless rate climbing to 6.8% in the month of February compared to 6.6% in January. The impact of declining oil prices is evident in Canada’s natural resources sector. The sector lost around 26,000 jobs in the last two months. Provincially, Alberta, Nova Scotia and Newfoundland lost 14,000, 4,400 and 3,300 positions respectively as energy sector is battling with steep decline in oil prices, which in turn leads to fall in energy exports. We always believed that this decline in oil prices could reverse the fortunes for Canadian provinces and it is becoming evident with the passage of time. While Alberta’s  unemployment rate jumped to 5.3% from 4.5% a month earlier, Quebec added 16,800 positions (all part-time). This was the worst unemployment rate for Alberta since September 2011. According to Avery Shenfield, chief economist at CIBC World Markets, “the numbers are conveying the early stages of the headwinds to the economy from weaker oil prices”.

The oil prices continued to slide and registered sharp losses on Friday as International Energy Agency’s (IEA) monthly report stated that the glut of crude oil supplies and tightening storage capacity in US may cause prices to drop further. The prices dropped around 9% during last week. The report indicated that the oil production in US increased by 115,000 barrels a day in the month of February. Increasing inventories coupled with the danger of storage space running out could spell serious troubles for oil prices. Some analysts now believe that prices could go as low as $30 before normalizing. According to Doug King, chief investment officer of London based Merchant Commodity Fund, “the second quarter of the year is usually the weakest for demand.  The global demand is also fading as Chinese economy appears to be struggling with maintaining its growth and US dollar continues to rise against other currencies.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch

US economy running at full steam – maybe the end of interest rate declines and a bumpy road for Equities for the next few weeks ?

March 6, 2015

 

Weekly Statistics:

Today

Week Ago Year Ago

06-Mar-15

28-Feb-15

07-Mar-14

S&P TSX

14,952.50 15,234.34

14,299.08

S&P 500

2,071.26 2,105  1,878.04

DJIA

17,856.78 18,133

16,452.72

OIL

$49.78 $49.52

 $91.66

USD vs CAD

0.7945 0.7991

0.9022

Gold

$1,168

$1,214

 $1,341.50

The US economy added a robust 295,000 jobs in February, taking the country’s unemployment rate to lowest level in about 7 years. The median forecast in a Bloomberg survey of economists expected an increase of about 235,000. The unemployment level dropped to 5.5% from 5.7%, best since May 2008- Pre recessionary levels. Economists are now of the opinion that US economy could grow at 3% annual growth for the first time in a decade. This jobs report clearly points towards an improving and growing US economy, which is good news for equity markets. But, the increased confidence in US economy also led markets to speculate about a rate hike from Federal Reserve sooner rather than later. This in turn led to a sharp decline in equity markets with major indices like Dow Jones, S&P 500 and TSX down by about 1.5%. The Fed has always maintained that it would not rush into increasing the borrowing costs but financial commentators are of the opinion that a rate cut could be possible in mid 2015. Though the US economy has been posting solid gains in unemployment numbers, the wages of US workers are not raising as fast. The hourly wages rose at 0.1% or 3 cents to $24.78- a disappointment after an increase of 0.5% in January.

Meanwhile, the Canadian dollar sank after Canada reported its second highest trade deficit on record in January as the nation had to account for a slump in prices of oil shipments. According to Statistics Canada, the deficit widened to $2.45 Billion, doubling from a revised trade gap of $1.22 Billion in December. Economists had projected a deficit of $1 Billion. The loonie fell by almost half a cent to 79.48 USD. Total exports fell 2.8% in January, the biggest monthly decline in more than a year, while the imports were largely unchanged from December. As we discussed in our previous newsletter, the plunge in oil prices could reverse the fortunes of Canadian provinces. While Alberta has to bear the falling prices of crude oil, Ontario could benefit from a lower loonie which could give a boost to the province’s manufacturing industry.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch

 

Canada’s changing fortunes – West to East

February 27, 2015

 

Weekly Statistics:

Today

Week Ago

Year Ago

27-Feb-15

20-Feb-15

28-Feb-14

S&P TSX 15,234.34 15,172.24 14,209.59
S&P 500

2,105

2,110

 1,859.45

DJIA

18,133

18,140

 16,321.71

OIL

$49.52

$50.75

 $91.56

USD vs CAD

0.7991

0.7978

0.9039

Gold

$1,214

$1,203

 $1,324.80

 

In a major setback to TransCanada Pipeline’s Keystone XL project, President Obama has vetoed a bill from Congress that approved construction of pipeline. Earlier this month when Congress passed this bill, Obama promised to Veto the bill and he made good on his promise. It was only the third veto of Obama’s presidency,  fewer than any US president since the 19th century. Senate majority leader Mitch McConnell said that his chamber will consider overriding the veto but according to major DC commentators, they will not be able to secure enough votes required for two-thirds majority. Obama believes that through this bill, the Congress attempts to circumvent longstanding and proven processes for determining whether or not building and operating a cross-border pipeline serves the national interest. The White House had regularly insisted that the veto does not represent an opinion on the merits and demerits of the pipeline, but rather an insistence that the state department evaluation not be circumvented. First proposed in 2008, the Keystone pipeline would connect Canada’s oil sands to US refineries. When approved, the pipeline could be operational in next two years.

 

According to a new research by Bank of Nova Scotia, Canada’s economic growth will lag the US, Britain and Mexico, due to a slump in crude oil prices. Canada is projected to grow by 1.9% and 2% in 2015 and 2016 respectively. The research showed a widening gap between economic growth of Canada and the United States. The slump in crude prices has changed the fortunes for Canadian provinces. Alberta, which used to be Canada’s economic leader, is projected to grow by just 0.6% and 1.6% in 2015 and 2016 respectively. Alberta’s jobless rate will also spike to 5% this year as the province is  already trying to cover a $7 Billion hole in its budget by cutting salaries and reducing workforces. Ontario, a laggard over the past decade, will lead the nation, with economic growth of 2.7% and 2.4%.  Companies like GM, Linamar and Ford have already promised to make large investments in the province and this will create jobs in the foreseeable future. Overall, the next two years could be difficult for the Canadian economy and unemployment will remain at 6.7% for 2015 and 2016, though down from 2014’s 6.9%.