Today’s agenda: Global investors had been betting furiously against the loonie ahead of the Fed’s rate cut and might be poised to do it again according to Goldman Sachs. A BofA Securities analyst notes a major generational change in shopping behaviour which hurt my feelings as a child of the eighties. And Gizmodo sponsored a science fair uncovering some brilliant scientific achievements.
Currencies
Global investors bet against CAD
Global hedge funds continue to hate on the loonie although not quite as much as before the Federal Reserve’s 50 basis point rate cut. But, if Goldman Sachs is right, bets against the Canadian dollar are set to surge again.
The U.S.-based Commodity Futures Trading Commission provides weekly data on derivatives positioning for “non-commercial” entities, a category dominated by hedge funds.
At the end of June 2023, the net positioning on the Canadian dollar was 4,527 contracts, indicating there were that many more bullish derivative bets on the loonie than bearish bets. By July 26 of this year, that figure had dropped to -196,263 contracts.
Expectations for relative bond yields were responsible for the mass cynicism on the domestic currency. Global bond investors look for higher yields. When Canadian bond yields are attractively high, for instance, foreign investors have to buy loonies in foreign exchange markets to execute trades to buy domestic bonds. This pushes the currency higher. (Higher bond yields also imply stronger economic growth and increased foreign buying of growing businesses in higher yielding countries, but we’ll keep it simple here.)
The point of recent maximum pessimism on the Canadian dollar reflected global investor belief that the Bank of Canada would cut interest rates more aggressively than the Federal Reserve and push Canadian bond yields lower.
The infamous, stratospheric household debt levels in Canada make the economy more sensitive to higher rates and it was (correctly, as it turns out) believed that the domestic economy would slow more quickly than in the U.S. Subsequently, once inflation was addressed, the Bank of Canada would have to cut rates more aggressively to sidestep recession.
Hedge funds took profits on the bearish CAD bets at the end of July, before chairman Powell signaled impending U.S. rate cuts at Jackson Hole meetings in late. The net futures positioning has improved to -73,150 since, but Goldman Sachs analyst Kamakshya Trivedi is suggesting they should reload.
Mr. Trivedi noted that while most of the world’s central banks are cutting rates to limit downside growth risks, the Bank of Canada is confronted with actual sluggish growth, and will be slashing rates until the economy accelerates This is a far more aggressive stance than the Federal Reserve, putting more downward pressure on Canadian bond yields and the currency.
Goldman Sachs strongly suspects the Bank of Canada will cut by 50 basis points in November because of softness in the labour market and the need for accelerating activity data.
Mr. Trivedi believes the loonie will drop to 72 cents U.S. in the next three months from the current 74 cents.
Retail
Younger generations are bargain hunters
A recent research report by BofA Securities analyst Lorraine Hutchinson shows how much has changed from the glorious Ralph Lauren-driven mall culture of my teen 1980s. Millennials and Gen Z prefer value apparel over luxury brands according to Ms. Hutchinson, driving U.S. value apparel market share higher by four percentage points over the past 12 months alone.
Apparel pricing is higher by only 5 per cent since 2019 in the U.S., indicating a strong move towards bargain hunting limiting pricing power. By comparison, U.S. grocery prices are up 30 per cent for the same period.
I am generally not a huge fan of retail stocks. The first IPO of Krispy Kreme in 2000 – the stock went from US$21 to US$50 by mid-2003 and then fell 80 per cent before the company filed for Chapter 11 bankruptcy – is only one of thousands of examples of fickle consumers causing stock price volatility.
The recent success of discount apparel might be a different, more sustainable case. BofA recommends TJX Companies (TJX-N), operator of TJ Maxx stores in the U.S. and Winners in Canada, which has been around for more than 40 years and is no flash in the pan.
The lure of low prices is a more consistent business model than a brief elevation into hottest new trend territory, and furthermore, environmental concerns in younger generations makes conspicuous consumption a less popular pastime (outside of Instagram, obviously).
In addition to TJX, Ms. Hutchinson has buy ratings on Ross Stores Inc. (ROST-Q) and Burlington Stores Inc. (BURL-N)
Three views of the desiccated remains of an extinct marsupial mammal called the Tasmanian tiger, or the thylacine, from a collection at the Swedish Museum of Natural History in Stockholm are seen in this undated handout image. Researchers managed to recover genetic material called RNA from the remains, a scientific first for an extinct species.EMILIO MARMOL SANCHEZ/Reuters
Diversions
Brilliant People have been busy in 2024
The science-based Gizmodo site, thankfully one of the few public sources available freely, recently highlighted the top innovations of the year as Winners of the 2024 Gizmodo Science Fair.
Brilliant people have been busy in 2024. A team of geneticists recovered RNA from a museum specimen of a Tasmanian tiger. Researchers from West Virginia University uncovered a potential treatment of Alzheimer’s disease using ultrasound. Another group made progress on drugs that could increase longevity for dogs, another is building a supersonic aircraft without the sonic boom, and another created recyclable plastic.
There are 11 winners in total, providing a comforting reminder that great things are happening in the world even if it often seems like things are falling apart.
The essentials
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Globe Investor highlights
Reuters reports on how the Federal Reserve’s aggressive start of the easing cycle has rekindled inflation worries in the U.S. bond market, as some investors fear looser financial conditions could re-ignite price pressures.
Trying to identify a Canadian copper miner that could be a takeover target? Hugh Smith of the London Stock Exchange Group has crunched the numbers to find four candidates.
Mining investment conferences have a great track record of pointing to the next growth area for commodities. But at the 121 Mining and Energy Investment conference this week in Singapore there was no clear choice, and no real consensus on where the best opportunities lie.
What’s up next
The only domestic data of note coming up is GDP for July on Friday. Consensus economist expectations point to 1.4 per cent year over year growth.
In the U.S., GDP is also up but a day earlier - a 3.0 per cent quarter over quarter expansion for Q3 is expected. ISM Manufacturing for September will be reported next Tuesday and economists expect more contractionary data at 48 (over 50 indicates growth).
U.S. durable goods numbers for August will be released next Thursday along with ISM Services results. Non-farm payrolls employment data will be out next Friday.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)