Weekly Market Wrap-Up: Another Week, Another High!
Equities kept their march upward this week despite a broad understanding among investors that following a 9% lift from the Brexit low, the stock market has become overbought and valuations have become somewhat stretched. That said, aside from performance-chasing and redeploying sidelined cash, a counterintuitive fuel for stocks could be the steady increase in global bond yields in July. Honestly, one could easily make the case that bonds are more overvalued than stocks and as such, a major asset allocation trade out-of-bonds-into-stocks could be underway. This is especially true considering that many equity indexes spot dividend-to-bond yield premiums near March 2009 highs when the global financial crisis was unravelling. Next week will be interesting, considering the policy meetings for the Fed and the BoJ in Japan. With the US economic surprise index at 19-month highs, the Fed could be inclined to reset rate-hike expectations higher. As for the BoJ, Governor Kuroda recently declined to deliver “helicopter” money. Should hawkish responses fail to deter the stock market advance, investors should have a very good idea of how long the momentum train is.
Our focus this week is on the price of oil. After nearly a doubling from its January low, the barrel of oil has gently drifted towards $44/bbl this week, the 100-day moving average. Fears revolve around a renewed increase in rig counts along with an inventory overhang in oil products which suggests weak crude demand from refiners this summer. We could add to these concerns the recent strengthening in the US$. Those are legitimate risk factors. Since we are quants and quants are allowed to use history as a guide, we compared this year’s oil price recovery with those following the 1986 supply shock and the 1998 demand shock. We wanted to see if WTI often corrected to and/or below its 100-day average. As our Chart of the Week shows, it appears that this is the line in the sand for crude. In other words, either WTI put in a low this week or a sustained break below $44/bbl could indicate that oil’s fundamentals are not as strong as believed. We are hopeful that the glut in oil product inventory is temporary and worked off rapidly as global oil markets accelerate their rebalancing in H2/16.
Regarding economic statistics this week, in Canada, headline and core inflation settled at 1.5% and 2.1% YoY respectively as shelter and the household operations, furnishings and equipment indexes contributed the most to the YoY change in the CPI. Otherwise, retail sales slowed down to 3.6% YoY in May (from 4.4%) owing to a higher comparison base and MoM declines from furniture stores (-5.0%) and new car dealers (-2.4%) notably. In the US, housing market conditions improved despite the NAHB index falling to 59 (from 60). Indeed, housing starts and building permits (4.8% MoM and 1.5% MoM respectively), home prices (0.2% MoM) and existing home sales (1.1% MoM) all advanced on a sequential basis. Elsewhere, in Europe, the ECB left its benchmark rates unchanged but President Draghi emphasized the need to provide a public backstop to banks’ NPLs. Otherwise, several indicators worsened, likely linked to the “Brexit” vote outcome. The ZEW economic sentiment index fell to -14.7 (from +20.2), consumer confidence dropped to -7.9 (from -7.2) while the mfg. and service flash PMI deteriorated to 51.9 and 52.7. UK mfg. and service PMI indexes plunged to 49.1 (from 52.1) and 47.4 (from 52.3). That said, another month of data is needed to gauge the net impact of Brexit.
Next week, aside from the Fed, we await new home sales, durable goods orders and Q2/16 GDP growth statistics in the US. In Europe, we will focus on inflation, Q2/16 GDP growth and loan growth. In Japan, inflation, retail sales, industrial production, the trade balance and the BoJ are on deck.
The Canaccord Genuity research included in the Legacy Wealth Weekly is solely for Canadian residents. To subscribe to our weekly newsletter, click here.
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