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

March 27, 2015



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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


Canada’s changing fortunes – West to East

February 27, 2015


Weekly Statistics:


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S&P TSX 15,234.34 15,172.24 14,209.59
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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%.


US Equities making record highs, Greece on the last straw and Oil stockpiles at an 80 year high – what is next ?

February 20, 2015


Weekly Statistics:

Today Week Ago Year Ago
20-Feb-15 13-Feb-15 21-Feb-14
S&P TSX 15,264.61 15,264.61 14,054.76
S&P 500 2,097 2,097  1,838.63
DJIA 18,019 18,019  16,154.39
OIL $52.65 $52.65  $91.48
USD vs CAD 0.8001 0.8001 0.9102
Gold $1,227.90 $1,227.90  $1,322.40

US equities finished the week at record highs for 2015 as news was released that Greece would receive a 4-month bailout extension from its creditors. THE DJIA and S&P 500 closed at 18,140 and 2,110 respectively. The extension removes Greece’s immediate worry of running out of money next month and a possible eviction from the Eurozone. The Greek authorities will present a base plan of a list of reforms by the end of Monday, February 23 and then the lending institutions will review it. The news came as a surprise after Germany rejected the Greek request for a six month extension to its bailout programme just yesterday. The German Finance Minister also mentioned today that Greece would not receive any new funds before it completed its bailout programme.

Crude Stockpiles Feb 2015

The US Energy Information Administration (EIA) released its inventory data early Thursday with a jump of 7.7 million barrels in the crude supply for the week ended February 13. It was more than double the 3.1 million barrel increase estimate by analysts. Even though there has been a continuous decline in the number of new oil rigs in the US, this has not reduced the production of oil in any way. There has been a 33 percent reduction in oil rigs in the past 10 weeks but US crude production is still rising because of improvements in technology that are offsetting companies’ spending cuts., According to the EIA, the US stockpiles of crude continued to grow to a total of 425.6 million- barrel, the highest level for this time of the year in at least last 80 years. The EIA has also forecasted that US oil production will increase 7.8% to 9.3 million barrels a day by the end of this year, the most since 1972.  The 80 year record stockpile and the increasing production will certainly put a cap on oil prices for some time and may drive prices lower. Although Gary Schilling, a Bloomberg columnist, speculated that oil may reach $10 or $20, the likelihood of oil reaching $10 is almost non-existent and $20 may be a short lived bottom in our opinion. Lower oil prices will mean more cash in the consumers’ pocket. As the Fed has already hinted that an interest rate hike maybe around the corner. Further declines in crude prices will likely accelerate rather than decelerate inflation and the chances for an interest rate hike.

Canada’s changing economic picture with changing oil prices !


February 13, 2015


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Last week both, US and Canadian, indices showed modest gains as the S&P 500 closed at an all time high of 2,097. A rally in oil prices, better-than-forecast economic growth in Europe, and better Canadian manufacturing sales for December attributed to this confidence and optimism. Canadian manufacturing sales rose at 1.7 percent, much better than 0.5 percent expected by economists. Lower oil prices and lower Canadian dollar will help Ontario and Quebec to strengthen their position in the national economy, as companies such as Linamar and General Motors make further investments (around $500 million each) in Ontario. Companies are becoming confident again about Ontario’s manufacturing economy and could create more jobs in the foreseeable future for the province. While recent jobs report showed Alberta still leading, we believe that this trend could change with Ontario and Quebec likely to lead job growth in Canada. Western Canada’s loss could be eastern Canada’s gain. Major oil companies like Husky, Suncor, and Canadian Oil Sands etc. have already cut their expenditures for 2015 and large job losses are expected along the way. The Canadian Association of Petroleum Producers has already forecasted a drop of 33 percent in spending by Oil and Gas companies. Though the prices of crude have tumbled by more than 50 percent from their recent highs in June 2014, the production has followed a reverse trend and has increased since. A US government report last week showed oil inventories at record levels which is creating a global oil supply glut. According to Citigroup, this oversupply could push the prices of oil to as low as $20 a barrel. However, a BMO research report shows that corporate budgets still reflect Crude at $61 a barrel. We believe that $61 is a very optimistic price, taking into account the global flooding of oil. Oil companies should brace themselves for a lower oil prices and more pain.



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