Commodities and equities continued down opposite paths in June. While the S&P 500 and MSCI Indices notched gains of 2.5% and 1.3%, respectively, oil tumbled 15.3% during the month as fundamental concerns once again brushed off another OPEC rumour. The Bloomberg Commodity Index was down 5.2% in June and 11% for the year. This weakness also weighed on the TSX, registering a 1.3% drop on the month. Continuing the recent trend, large cap US tech names lead gains in the cap-weighted S&P 500 index. The most notable mover was Amazon (NYSE: AMZN) as it broke through $1,000 per share as the massive $14.3Bn takeover of Whole Foods Co. further cemented the fact that no sector is immune to Amazon’s ambition. Healthcare names have started to break to the upside following the release of Senate’s Healthcare Bill, which is aimed at repealing key sections of Obama’s Affordable Care Act. The S&P 500 Healthcare Index was up 6.5% for the month.
Home Capital Group (HCG) was highlighted in last month’s commentary. To recap, the Ontario Securities Commission alleged that the company and its executives mislead shareholders following the discovery of falsified information in its broker channel. Customers subsequently withdrew 95% of bank deposits, which HCG uses to fund its mortgage lending. Consequently, the stock price plunged from $32 to $5. On 22-Jun-17, it was announced that Warren Buffet’s Berkshire Hathaway provided financing to HCG and acquired a 38% stake. Where Buffett goes, investors tend to follow, and this time was no different. The stock jumped 27% to $19 on the day of the announcement, even though Buffet paid $10 for the stock. Investors are hoping that the deal, along with the sale of commercial mortgages to KingSett Capital for $1.2 billion, will shore-up finances for the company and allow it to get back to its core business. Real estate speculators and mortgage brokers are also applauding the deal. The combination of alternative lenders pulling back and the Ontario government measures to cool price appreciation led to a 20.3% drop in GTA home sales in May-17.
Rates in the US continue to diverge. The long-end has fallen to fresh 2017 lows on the back of mixed economic data and doubts around long-term growth prospects. On the short-end, the Fed announced it would raise its Federal Funds Rate by 25bps to between 1%-1.25% on 14-Jun-17. Accordingly, the spread between the 2-year and 10-year Treasury yields shrunk to 81bps. The spread widening that occurred following Trump’s election victory has now been erased. Moreover, the spread is at its lower level since 2008, prior to the financial crisis. When the yield curve flattens and eventually inverts, it tends to foretell a recession. The yield curve has predicted almost every US economic downturn since the World War II. Certainly, the curve is far from inverting, but it is a negative indicator that warrants some attention.