Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Scotiabank strategists combined with the quantitative strategy team to publish After Months of Underperformance, Momentum Builds for Canadian Banks,
“The underperformance of Canadian banks versus the TSX has been significant, but their underperformance versus lifecos has been even more dramatic by historic measures … At this time however, we do see a window here for a tactical trade that is likely to see banks rally relative to the market as a whole and versus lifecos in particular. To be clear, we see this as a temporary phenomenon helped by moderating macro concerns and a relatively benign earnings season. Our longer-term outlook for banks remains bearish due to lingering secular (rising capital levels) and cyclical (the risk of rising rates) factors … Our SQoRE Canada model highlights that banks have rarely ranked so low in our model on an absolute basis or relative to Insurers. With Banks standing near a Momentum ranking low while Insurers are at a Momentum high, this is also highly supportive of a tactical switch into banks…
“We see a number of forces at play driving this tactical call, which we don’t expect to last. First and foremost is the fact that the market is getting more convinced that we are near the end of the current rate-tightening cycle … Another key catalyst is likely to be Canadian bank earnings which kicks off at the end of August, and should echo the theme of resilience that we have seen across the US banking sector when they reported Q2 results over the past few weeks”
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RBC Capital Markets analyst Robert Kwan previewed earnings for the yield-heavy energy infrastructure sector and noted an important buying opportunity,
“We believe investors will be focusing on AltaGas (first conference call for Vern Yu, the new CEO), Enbridge (Mainline and M&A commentary), TC Energy (asset sales and CGL construction updates), Emera (continuation of its strong cash flow generation from Q1/23), Capital Power (first conference call for Avik Dey, the new CEO, plus Genesee repowering and CCS economics in focus), Algonquin (outcome of strategic review of renewable business), and Superior Plus (new CEO started in April and closed $1 billion Certarus acquisition in late May)… Buying opportunity for AltaGas (ALA), which moves to our best midstream stock idea. Although AltaGas’ quarter could be a bit soft, we have become even more positive on the stock as we believe there may be a greater willingness under new leadership to take action on deleveraging (including reducing leverage below its long-term 4.5 times debt/EBITDA target), while increasing the contracted/ regulated nature of its cash flow. With that, we highlight AltaGas as our best stock idea and believe that any weakness as part of the quarterly results should represent an attractive buying opportunity”
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Venerable market analyst Ed Yardeni is hopeful of a “Nirvana Scenario” for U.S. equities as Bloomberg reports,
“In the bond market, the traditional warning that a downturn is near — an inversion of the yield curve — keeps getting louder. Ed Yardeni, an economist who’s been covering the market since the 1970s, has an explanation. The yield curve, he posits, is signaling the slowdown in inflation that typically accompanies a recession but not the actual recession itself. He calls this the ‘Nirvana scenario’ — all the gain (an end to nasty price increases for consumers) without much pain (a spike in unemployment or a major hit to the stock market). And that’s manifesting itself in the Treasury market the exact same way that a looming recession would: high yields on short-term debt and lower ones on longer bonds as traders anticipate the Federal Reserve will start cutting interest rates next year”
“Bond Traders Bet on ‘Nirvana Scenario’ in New Yield-Curve Theory” – Bloomberg
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Diversion: “Could there be upsides to being a psychopath?” – Ars Technica
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