Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO chief economist Doug Porter attempted to explain the seemingly aberrant behavior of the loonie price,
“Apparently, oil still matters for the Canadian dollar after all, at least to some degree. After basically ignoring the gyrations of crude for the first 10 weeks of the year (in fact, actually negatively correlated in that period), the currency has suddenly found a bit of spark in the past week. And, it is quietly forging higher on the crosses amid the persistence of oil above $100. To pick but one example, the Canadian dollar has strengthened to nearly 95 against the yen, its highest since 2015. To be sure, this is mostly a weak yen story, but the fact that the loonie is moving up against others alongside the US dollar is notable. Of course there are other factors at play beyond oil, including the likelihood that the BoC will largely match coming Fed rate hikes, while the BoJ and ECB mostly watch from the sidelines (for now).”
“Loonie stronger, just not against USD (BMO)” – (research excerpt) Twitter
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Citi strategist Chris Montagu noted that futures positioning (largely determined by hedge funds) remains extremely bearish,
“Equities rebounded strongly over the past week. In contrast, bearish futures positioning only marginally faded with last week’s covering activity. The lack of new flows in a rising market has been telling, suggesting that futures participants continue to take a cautious approach, and have been less convinced in partaking in the recent rally … Positioning across U.S. futures remains almost exclusively one-sided bearish. A moderate amount of short covering took place last week during the futures roll and expiry, which saw short levels reduced for S&P (-1.2), less so for Nasdaq (-3.3). Equally, short positioning which had seen falling profit margins the week prior are now completely offside. A rally above 4,500 would see losses on these positions extend beyond 5%, increasing the risk of unwinds. Only a limited amount of new longs were added over the week, in-line with the overall weaker picture.”
We can take from this that some of the market strength in recent days was short covering. This alleged “smart money” is often wrong so all we can really predict from positioning is that markets will be more volatile than usual.
“Citi: “[futures] Positioning across US futures remains almost exclusively one-sided bearish”” – (research excerpt) Twitter
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BofA quantitative strategist Savita Subramanian (whose reports I’ve featured a lot lately but not by design) emphasized the positive outlook for U.S. bank stocks,
“In our 2022 Year Ahead we maintained an overweight in Financials–it offered inflation protected yield, was more domestically focused than other cyclical sectors, sported record low leverage and earnings volatility, and was still underweight by funds despite its strong 2021 performance. These themes remain intact, but much has happened since November … In the 1990s, S&P 500 Banks’ earnings were 80% correlated with the yield curve. Correlations dropped to 17% since 2000, and today, our Banks team cites the short end as more important than in the 90s. Historically, Financials have outperformed 50% of the time during curve inversions … Long Only (LO) fund managers have been underweight Financials since Sept. 2018 but prior to then had been overweight in some periods by as much as 7-8% even post-GFC; hedge funds have reduced exposure since 2011 and are near decade net-short lows. And based on our valuation work, even though the sector has re-rated, it and most of its sub-sectors still trade at an historical relative discount to the S&P 500″
The extent to which this bullish case applies to domestic bank stocks is something I’ll need to look into.
“BofA: “Historically, Financials have outperformed 50% of the time during curve inversions” – (research excerpt) Twitter
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Diversion: “Toronto, the Quietly Booming Tech Town” – New York Times
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