Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Scotiabank strategist Hugo Ste-Marie sees rising downside risks for the loonie,
“What’s wrong with the CAD? Essentially, the Canadian economy is relatively weaker than the U.S., with more levered consumers, and the unemployment rate rising faster than the U.S. as well. The mortgage wall still lies ahead (2025/2026), and it will add an extra burden on the shoulders of Canadian households. The BoC indicated in May that ‘about half of all outstanding mortgages are held by borrowers who have yet to face higher rates because their payments were fixed for five years’. We won’t spend too much time on weak business investments and productivity issues, but that’s also limiting the pace of growth. To rekindle growth, the Canadian easing cycle could be faster, and more pronounced than the Fed, leading to a growing monetary policy disconnect … Our latest institutional investors survey showed that roughly 50% of analysts, portfolio managers and asset allocators polled think the CAD will depreciate further against the greenback over the next 12-months versus less than 20% seeing some appreciation ... Moreover, speculators are already betting aggressively against the loonie. According to the most recent data, net short positions (as a % of open interest) stands near record levels”.
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BMO analyst Michael Markidis provided an update on the REIT sector and residential construction,
“The S&P/TSX Capped REIT Index was +2.0% for the week ended July 19. This marks the fourth consecutive week of gains, bringing the YTD price-only return to -2.4%. Index constituents that stood out this week include GRT (+4.2%), BEI (+4.2%), DIR (+3.6%), and KMP (+3.0%); NWH (-2.0%) and PMZ (-0.9%) were the only two names in the negative territory. Recent data from the BoC (Business Outlook and Consumer Expectations Surveys for Q2/24) and StatsCan (June CPI) have increased the probability of a second consecutive rate cut, in our view … Looking at TTM [trailing 12-month] starts, we note that building activity has accelerated significantly over the past year in Halifax (+87% to 6.5k), Edmonton (+33% to 16.6k), Calgary (+31% to 22.7k), and Montreal (+17% to 18.7k). Major markets that have experienced a notable y/y decline include Ottawa (-20% to 8.5k) and Toronto (-14% to 44.2k) … Per Urbanation, only 727 condo units started construction in the Greater Toronto Hamilton Area in Q2/24. This marks a >20-year low”
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Goldman Sachs chief U.S. equity strategist David Kostin notes that the rally in small cap stocks was historic,
“Small-caps just posted the most powerful weekly return vs. large-caps on record. Against a backdrop of extreme equity market concentration, four factors explain the reversal: (1) Decelerating inflation and increased confidence the Fed will cut in September; (2) steady economic growth data; (3) jump in prediction market probability of a Republican sweep; and (4) forecast compression in the EPS growth premium of large-cap stocks vs. peers. Small-cap and equal-weight benchmarks will continue to outperform unless the big Tech stocks’ 2Q reports cause analysts to raise sales estimates for 2H 2024 and 2025. Investors are concerned that sales forecasts for hyperscalers have not risen commensurate with AI investment spending”
Relative small cap performance is important as an indicator of rising U.S. market breadth beyond AI-focused tech.
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JP Morgan global strategist Mislav Matejka provided an interesting note on S&P 500 earnings,
“At a sector level, Mag-7 EPS growth projections remain punchy, but are set to decelerate somewhat. SPX ex Mag-7 earnings are projected to be positive at +5% y/y, for the first time in 5 quarters. However, we note that the convergence in the earnings delivery was the expectation in each of the last 5 reporting seasons, but the end result was always a bigger positive surprise for Mag-7 than for the rest of the market … Within Tech, we reiterate the call from last month to move away from hardware/semis, and into software, on lower yields, on geopolitical uncertainty and given strong past outperformance of Semis”
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Diversion: “Is rock dead? Not if you look at the data” – A Journal Of Musical Things