Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Morgan Stanley U.S. public policy and global macro strategists combined to attempt to predict the unpredictable – what Donald Trump will do in his first few days in office,
“Expect a lot of Day 1 executive orders (reports suggest 100 or more), but it’s unclear how much signal there will be amidst the noise on the four policy channels we’re watching for markets: regulation, tariffs, immigration, and taxes. Indications of tariff tactics are a particular focus for us. We’re watching for actions that could signal greater real-time optionality for raising tariffs … Contrary to our base case of fast announcements and slow implementation of tariffs, we think most investors fear the prospect of fast announcements and fast implementation – concerns we think market prices already reflect from a probabilistic standpoint. If coming executive orders surprise with faster-than-priced implementation of tariffs and/or larger-than-priced increases, then we would expect (1) U.S. Treasury yields at the short end of the curve to increase, and by more than at the long end, in the initial reaction, and (2) the U.S. dollar to appreciate – particularly against the CNY, CAD, and MXN”
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RBC Capital Markets analyst Maurice Choy identifies relative “safer havens” in the yield-heavy energy infrastructure sector,
“Canadian Energy Infrastructure stocks provide a good range of options for investors depending on their underlying scenarios … Midstream’s high degree of cash flows that are under rate-regulation or take-or-pay arrangements mean investors seeking to maintain exposure to Canadian Energy can find certain Midstream stocks to be “safer havens”, not to mention the roughly 6-per-cent dividend yield on offer while waiting for clarity to emerge. Moreover, many Midstream companies have meaningful U.S. assets and attractive growth options as well. If, however, a perception of a materially weaker Canadian economy takes hold in the market (i.e., macro impact from any tariffs/retaliatory actions or political uncertainty), we believe the Utilities provide investors solid defensive exposure … AltaGas (ALA-T) seems to have multiple ways to win. Tariffs on Canadian imports into the U.S. should lead to a better customer appreciation for AltaGas’ LPG export terminals, consisting of two operational assets today, with a third on the way that has multi-phase expansion potential. Meanwhile, its U.S. gas utilities should benefit from a stronger U.S. dollar (sans hedges), and the potential sale of its 10 per cent stake in MVP should position AltaGas closer to its long-term debt/EBITDA target … Enbridge (ENB-T), South Bow (SOBO-T), and TC Energy (TRP-T) have roughly 90 per cent or more rate-regulated/take-or-pay cash flows, with direct exposure to the U.S”
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National Bank economist Warren Lovely noted the important fact that global interest in Canadian bonds remains high,
“In debt markets we seemingly couldn’t keep foreign investors away (at least through November). That’s what fresh StatCan data tell us. Non-residents added to their holdings of GoC debt in November. For domestic GoC bonds, a $6.7 billion net investment in November made it 11-for-11 in terms of monthly inflows for calendar 2024 (with December data still to come). The corresponding YTD sum resides in unprecedented territory. Non-residents were also acquiring GoC T-bills like never before, a record $15½ billion (net) sucked up by foreign investors in November. So a hefty $22 billion of GoC risk was added to non-resident portfolios in November alone, pushing the total foreign investment position in our sovereign beyond the $500 billion threshold. Heady stuff …During the first 11 months of 2024, non[1]resident investment neutralized (absorbed) nearly 80 per cent of the $138 billion surge in outstanding GoC debt (T-bills and bonds) … Ottawa’s deficit may be nowhere near as ugly as Uncle Sam’s, but there’s non-trivial net financing to do”
“Canada: Foreign debt investors not exactly scared off” – National Bank Economics
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In a separate Morgan Stanley report, chief investment officer Michael Wilson surveyed the market backdrop,
“The breadth of the market has deteriorated, with higher-quality leadership emerging and earnings revisions for this cohort strengthening. This all makes sense in the context of rising back-end rates and US dollar strength … The recent move higher in rates has been driven mostly by a rise in the term premium rather than higher growth expectations. I attribute this to a newfound (and justified) concern about how the ongoing fiscal deficits will be financed, given the exhaustion of the reverse repo facility and the need to extend maturities after the elevated T-bill funding over the past several years … All this supports our latest thinking for US equities – i.e., index direction (beta) will be primarily determined by the level and direction of back-end rates and the term premium. And until the 10-year yield falls back below 4.50 per cent and/or the term premium declines on a sustainable basis, this negative correlation between stocks and yields is likely to persist. We continue to prefer higher-quality stocks across industries showing relative earnings revisions momentum – Financials, Media & Entertainment, and Consumer Services over Consumer Goods”
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Diversion: “This Anesthesia Gas Could Be the Next Big Alzheimer’s Treatment” – Gizmodo