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Financial Markets weekly newsletter

Posted on: December 16, 2016

The stats sheet

  • 3 mos CDOR – .92 bps
  • 2 year GOC bonds - 0.83%
  • 5 year GOC bonds - 1.23%
  • 10 year GOC bonds –1.85%
  • 3 mos US libor - .9703
  • 5 yr Treasuries - 2.08%
  • 10 yr Treasuries - 2.59%
  • USD/CAD – 1.3370
  • EUR/CAD – 1.3935
  • CAD/JPY - 85.40
  • GBP/CAD – 1.6860

Canadian News

The BOC released its Financial System Review this week. It highlighted the “elevated” risks of “national household financial stress, combined with house price correction.”

Housing still worries the BOC but Gov Poloz did state unequivocally that he expects the new regulations to work in stabilizing prices (one wonders what they make of the BC government throwing money at millennials like a high roller to the cocktail waitresses as Caesars Palace).

Not worrying the BOC is the shock from commodity price weakness. They’ve downgraded that risk to “low.” The real dichotomy for the BOC is in consumer debt. At $2 trillion in q3, with Debt-to-income at 167% (both all time highs), this is a major headache in raising rates. But, a large part of how we got in this mess is – you guessed it –low rates. One sympathizes with our Central Bank on this one. This author believes that the BOC would like to see the cost of debt rise, but at a steady and manageable pace. In a world of bears, they are hoping goldilocks will show up.

US News

As we highlighted in our post-Federal Reserve update, the Fed surprised the market on Wednesday. Not with a hike, that was a given, but with the forward projections. The “dot plot” – the graphical representratikon of where each member sees rates moving forward – suggested an extra hike in 2017, and several more in to 2018.

The pathway and pace will differ by member, but the vast majority see rates in the very high 2pct to middle 3pct range by 2019. This news hit the market like the office xmas party punch on an empty stomach.There was some slurring, some dizziness and…well, you know the rest.

Yields on everything from 2 to 10 year bonds have risen another 12-15bps. Chair Yellen remarked that full employment could be reached, even without the impending fiscal stimulus .With rates where they are (and even where they will likely go in 2017), there must be some concerns on potential inflation pressure. The minutes will be key here –the Fed had suggested in November that a stronger dollar may be disinflationary and “postpone the need for policy firming.” Well, the dollar has powered stronger- yet Wednesday made no reference to the consideration. Safe to assume it’s a backburner concern? I’m not so sure…

There will be rallies along the way –but these are retracements. The trend is to higher rates- dare I say it – this is a bear market. And that could stay ugly because QE and regulation have reduced liquidity in the bond market in recent years- increasing volatility. And, while we might be fairly priced for now, take a look at the chart below for context – yields on 2 year US treasuries since 2005. The numbers are hard to read, but they don’t really matter – the picture is worth a thousand numbers. We have barely scratched the surface of the back up in yields.

Currency News

The big dollar keeps on rolling – There are plenty of reasons to buy it, and plenty of reasons to sell everything against it. GBP, JPY and EUR all have rates on hold at various levels between negative and below US rates, and in the case of the UK and the Eurozone, they have more than a little political risk on the horizon in 2017.

The move may be mature at this stage – but retracements will likely be shallow. After all, its hard to short the greenback when it means being long something else –and there’s nothing else you want to own! As noted above, keep an eye out in 2017 for rhetoric stateside on the strength of the US dollar – In a global race to the bottom – how long can the US swim for the surface?

We at Financial Markets remain, as ever, All In.

Mark Johnson
Director, Financial Markets-Interest Rate Sales


Most Recent Market Updates

November 20, 2017

Natural gas gains 4.4 cents

NYMEX natural gas climbed 4.4 cents higher on Friday.

November 20, 2017

Crude gained $1.41

Crude prompt futures gained $1.41 on Friday to close the day at $56.55.

November 17, 2017

Natural gas falls 2.7 cents

NYMEX natural gas continued it’s decent on Thursday.

November 17, 2017

Crude prices slide $0.19

Crude prompt futures traded in a 69 cent range.

November 17, 2017

USDCAD range bound as Canadian CPI uneventful

Domestically we saw the biggest release of the week a few minutes ago.

November 14, 2017

Natural gas loses 5 cents

Cold weather emerged over the long weekend in the US Midwest to East as anticipated.


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