Market Recap & Box Score

Monthly Recap: May 25, 2017

The S&P500 and MSCI World Index extended their winning streaks by climbing 0.5% and 1.3%, respectively, during the period. The gains were achieved despite a mid-month head-fake, when the two benchmarks dropped 1.8% and 1.2%, respectively, on 17-May-17. Volatility briefly returned as rumours of a Donald Trump impeachment were sparked by the firing of FBI director James Comey and leaked ISIS-related intel to Russian leaders. Markets quickly shrugged it off and continued their ascent to new highs. The TSX didn’t fare as well, down 2.3%, despite stronger oil, as issues in the Canadian housing market began to show. The US 10-year Treasury yield remained steady over the month, ending at 2.25%, even though the Federal Reserve hinted at reversing QE toward the end of the year.

Home Capital Group made headlines on 26-Apr-17 as the stock dropped 65% in a single day. News surfaced that the largest alternative lender in Canada was forced to seek $2Bn in funding from the Healthcare of Ontario Pension Plan, at highly unfavourable terms, to replace fleeing deposits. Weakness soon extended to Equitable Group, a similar alternative lender, who also had to seek a rescue loan from a consortium of Canadian banks. Both companies provide mortgages to borrowers who do not qualify for traditional financing. Despite the lifeline, it will be difficult for these entities to continue to provide mortgage financing. Their absence could result in a void of capital needed to uphold home prices.

Automobile manufacturers continue to be under pressure. GM and Ford tumbled 9.5% and 12.5%, respectively, over the past 3-months due to fears of peak auto demand and loan delinquencies. The auto sales boom was fueled by cheap credit and long terms that extended beyond the useful life of the vehicle. However, sales are now falling below expectations and used car inventories continue to build. Announcements by Ford to cut their workforce by 10% and to replace CEO Mark Fields failed to generate any enthusiasm for its stock. Perhaps growth of self-driving and electric vehicles will reverse the downward momentum.

Chart May

Commodities were mixed for the month. Oil was particularly strong, climbing 2.7% before the OPEC meeting on 25-May-17. Investors hoped production cuts would be extended for a lengthy period, but the 9-month increase was viewed as a disappointment. However, we maintain a belief that this was a ‘sell the news’ situation as traders persistently play the OPEC headline strategy. It is clear that OPEC’s ability to manipulate prices beyond the short-term is diminished with the unrelenting rise in US oil rigs and the constant growth in US Shale production. Gold declined 1.3% as overall volatility remained subdued. Despite the decline, gold’s safe haven quality was evident during the Trump fiasco midway through the month of May. The yellow precious metal temporarily popped 3% when equity markets faltered and political uncertainty intensified.