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A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

BofA Securities hosted executives from the major Canadian banks and analyst Ebrahim Poonawala provided a summary of the discussions:

“Our investor conversations during BofA’s annual Canada Banks Day suggests a high degree of caution on the macro outlook… While acknowledging slowing growth, management teams highlighted the strength of the consumer (~$200bn in excess savings; historically low unemployment rate) which is seen as buffering the blow from a recession-like economic backdrop … The group is trading at 9.2x P/E (2023E) and 1.4x P/B vs. 10yr medians of 10.9x P/E and 1.8x P/B…. No debate that rising interest rates and the lack of affordability are likely to drive home prices lower. Our discussions highlighted: 1) acute pressure in the pre-construction condo market dominated by speculative investors; 2) a particularly hot rental market with rents in GTA up 20% YoY in August; 3) cottage prices, second homes that boomed during the pandemic, hardest hit; and 4) potential for a policy response if things got materially worse that would enable banks to “work” with customers.”

The analysts’ most positive comments were reserved for Royal Bank, saying it holds “all the cards. Margin tailwinds on the back of a high quality retail deposit base, disciplined expense management and significant capital flexibility has positioned Royal particularly well for this period of heighted uncertainty. While mgmt. is open to M&A it remains focused on maintaining its best-in-class ROE.”

“Highlights from BofA’s annual ‘Canadian banks day’” – (research excerpt) Twitter

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BMO senior economist Sal Guatieri noted there’s “no letup” in the housing correction: in Vancouver:

“Vancouver’s housing correction showed no sign of slowing last month. Sales plunged another 10%, taking them down 46% in the past year and 36% below the September average of the past decade. As per the frenzy of 2016, sales look to reverse a similar runup in 2021. And prices won’t be far behind, with the benchmark clinging to year-over-year gains of 3.9% but down 2.1% in the month and 8.5% since peaking in March. Although Vancouver is one of the priciest cities in the world, look for broadly similar trends to unfold in many other Canadian markets that thumbed their nose at affordability when borrowing costs were 3 percentage points lower than today.”

“‘No letup in housing correction’ for Vancouver (BMO)” – (research excerpt) Twitter

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Wells Fargo U.S. strategist Christopher Harvey is sounding almost as bearish as BofA Securities chief investment strategist Michael Hartnett. Here’s Mr. Harvey from a Wednesday research report:

“Much to the chagrin of volatility traders, the VIX has been well-behaved YTD. Vol expectations, especially on far-downside options, have kept the “fear gauge” somewhat suppressed... for now. In today’s fragile market, we are troubled by market vol YTD mirroring 2008. Despite favorable contrasts (e.g., liquid credit markets, limited chance of a Lehman/TARP event), current global tail risks (e.g., currency collapse, failed fiscal/monetary policy, Putin’s threats) are the bigger but less imminent concern. Longer-term we expect a 2023 recession, Fed hawkishness, lower EPS, and growing tail risks to eventually catalyze a VIX spike. Look for a 40 handle. A VIX > 40 has historically coincided with SPX -4% (average 1-day) and helped trigger the “Powell Put”. In other words, the environment needs to get worse before a monetary policy pivot marks a longer-term buy-able equity bottom. .. The Fed’s dual mandate does not reference equities, but history shows an uncanny relationship between equity vol spikes and Fed activity. When the VIX has breached 40 (e.g., Sep ‘01, Jul ‘02, Sept ‘08, Feb ‘20, Oct ‘20), the Fed was about to start (or already in) an easing cycle.”

“Wells Fargo’s Harvey ‘troubled by market vol YTD mirroring 2008′” – (research excerpt) Twitter

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Diversion: “Controversial Chess Player ‘Likely Cheated’ in Over 100 Online Chess Games, According to Investigation” – Gizmodo

Tweet of the Day: " Trade growth to slow sharply in 2023 as global economy faces strong headwinds - #WTO “- Twitter

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