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Our regular summary of the capital markets. Check back each month for new updates.

Smart Money

May 31, 2021

What’s “Kraken” in Seattle?

Smart Money

On 21-Jul-21, the Seattle Kraken will announce the 30 players that will join the club for the inaugural 2021-22 NHL season. The league’s newest member must select at least one player from each NHL team (except Vegas), while ensuring they select a minimum of 14 forwards, 9 defensemen and 3 goalies. While fans of the NHL will be excited to watch the second expansion draft since 2000, th...

On 21-Jul-21, the Seattle Kraken will announce the 30 players that will join the club for the inaugural 2021-22 NHL season. The league’s newest member must select at least one player from each NHL team (except Vegas), while ensuring they select a minimum of 14 forwards, 9 defensemen and 3 goalies. While fans of the NHL will be excited to watch the second expansion draft since 2000, the 30 players who are moving cities have more to consider than the names of their new teammates. To better understand the new surroundings, check out this short video, or alternatively, take a deeper dive with our Seattle Fact Sheet.

Welcome to Seattle

May 26, 2021

Volatile Month Crushes Crypto But Stocks & Bonds Are Unshaken

Market Recap & Boxscore

Markets whipsawed in May, with the S&P 500 swinging over 4% within the month. Despite the volatility and several events that could have sunk markets, the S&P 500 is ending the month in positive territory, up 0.3%. European strength helped power the MSCI World Index to a 0.7% gain. Financials, energy, and materials paced the TSX to a 1.25% return. US Treasury bonds continue to ...

Markets whipsawed in May, with the S&P 500 swinging over 4% within the month. Despite the volatility and several events that could have sunk markets, the S&P 500 is ending the month in positive territory, up 0.3%. European strength helped power the MSCI World Index to a 0.7% gain. Financials, energy, and materials paced the TSX to a 1.25% return.

US Treasury bonds continue to consolidate since the 10-year yield hit its 2021-high in March at 1.74%. Similar to equity markets, which discarded negative news, US yields shook off the US inflation surprise. The Consumer Price Index jumped 4.2% for the 12-months ending in April. This was the sharpest slope since September 2008 and it briefly caused rates to reach 1.70% on 12-May-21. However, that benchmark settled back to 1.56%, as of 26-Mar-21. Bonds have been rising and falling in tandem with equities lately, which has temporarily impaired balanced strategies. The Bloomberg US Aggregate Bond Index is still down 2.2% this year, despite price gains in May.

Front and centre in May was the crypto crash of 2021. Newly minted Bitcoin bulls witnessed the value of their holdings fall by over 50% from the peak on 14-Apr-21. While Bitcoin was the main event, there was nowhere to hide across crypto world as alternatives such as Ethereum and Dogecoin also plunged 58% and 63%, respectively. There has been no shortage of narratives to justify the fall. For example, Elon Musk’s erratic tweeting which included his announcement that Tesla will no longer accept Bitcoin to purchase vehicle. Further, China announced on two separate occasions that financial and payment institutions were banned from facilitating crypto transactions. Additionally, the US Treasury demanded stricter tax reporting standards on cryptocurrency transfers.

Under-the-radar but perhaps most important were two additional factors. The first was around the long-debated backing of stablecoins, which are cryptocurrencies pegged to a specific instrument like the dollar, allowing for the benefits of cryptocurrencies without the volatility. They are also a key piece of plumbing within the $2 trillion global crypto market, facilitating transactions into and out of various cryptocurrencies without cash. The role of stablecoins resembles the traditional market liquidity function provided by money-market mutual funds. During May, Tether, the largest stablecoin, reported its holdings which back and maintain its USD peg. Rather than dollars or Treasuries as they had previously stated, it was reported that over half of its reserves were commercial paper of unknown issuers. This revelation cast doubt on Tether’s soundness and security as a mechanism for liquidity. The second factor was concern that companies such as Microstrategy (NYSE:MSTR) would selling their crypto holdings. Their well-promoted purchases helped stimulate interest in cryptos. However, MSTR and other buyers borrowed heavily to finance their investments. Accordingly, the market became frightened that lenders would pressure MSTR to sell its holdings to ensure that the loans could be serviced and recovered. So far there have not been any liquidity events and the peg on key stablecoins has held. The system appears to have passed this initial test.

Commodities had another eventful month. Starting with lumber, the futures market hit its daily limit (approximately +4%) multiple times but has since fallen 5.2% for the period. High prices seem to be its Achilles heel. Home builders are stuck with pre-sold homes that are now unprofitable to build. Also contributing to the record number of “homes-sold-not-built” reported in May, was the widespread shortage of appliances, doors, windows, moulding and other supplies.

High-flying grain prices pulled back in May. Corn fell 15% from its 10-May-21 high as China announced the cancellation of some imports. The soft commodity has been powered by seemingly endless demand from the Far East and record dry weather in the US and Brazil, which similarly has started to ease. Oil finished the period up 2.8%, but some of its strength waned as Iran readies sixty-nine million barrels of oil for export when U.S sanctions are lifted. Finally, gold is having a very strong month, up 6.9% to once again breach $1,900/ounce. It broke through its downward trendline since its August peak. Not surprisingly, the move corresponded to rates backing up a bit in May, while the USD also failed to appreciate. Surely the pace of future growth and inflation data, and in turn rates, will decide the extent to which gold continues its run.

April 29, 2021

Commodity Bull Rages

Market Recap & Boxscore

Gains were achieved in April across most global markets. The S&P 500 lead the way, up 5.9%, followed by the MSCI World at 5.4%, while the TSX lagged at 2.7%. The Energy sector was the primary headwind for the Canadian market. It is worth noting that these impressive results were registered despite Archegos’s large-scale blow-up (discussed below), global Covid re-emergence, and rum...

Gains were achieved in April across most global markets. The S&P 500 lead the way, up 5.9%, followed by the MSCI World at 5.4%, while the TSX lagged at 2.7%. The Energy sector was the primary headwind for the Canadian market. It is worth noting that these impressive results were registered despite Archegos’s large-scale blow-up (discussed below), global Covid re-emergence, and rumours of the US Fed tapering faster than expected.

In fixed income, yields backed-off of their 2021 highs. The US 10-Year fell from 1.71% to 1.54% but has recovered to 1.63% as the month wound down. However, Canadian long-term yields diverged and continued to rise as the Canadian central bank bucked the global trend of accommodative policy. We anticipate that inflation readings will reflect the economic re-opening, structural shortages and supply chain de-globalization.  As a result, the upward momentum in US yields should eventually resume, but our positioning will be tactical and data dependent.

Likely related to falling yields, gold caught a bid in April, rising 5.3% to $1,775.  This will be the first monthly gain for the yellow metal in 2021.  The gold price faltered in the first quarter as US Treasury Yields gained, the economic outlook brightened and  speculative money chased crypto currencies and other risky assets.

The commodity price rally is widespread, from grains and meats to industrial metals. Our readers are familiar with lumber headlines. In April 2020, lumber was priced under US$260 per board foot. It will close this month near US$1,500. Certainly, accelerating commodity prices are attributed to expectations of a post-COVID demand recovery that outstrips supply after years of underinvestment in capacity. But it is hard to ignore the simultaneous fall in the US Dollar, which is sharply down over 9% on the year.  Similarly, the Canadian Dollar continues its torrid pace, up 2.2% in April despite energy weakness, and 14.5% year-over-year. The big move came on 21-Apr-21 when the Bank of Canada became the first central bank to announce tapering of their quantitative easing program, reducing their bond buying program to $3Bn per week (from $4Bn), while also signalling their intention to pull forward interest rate hikes to the first half of 2022. Canada’s ties to commodity prices may have spooked the Bank into believing a more harmful inflation threat was imminent.  Alternatively, the Bank may be attempting to cool the red-hot housing market. Regardless, it is difficult to comprehend Canada’s willingness to act first, especially following an extremely accommodative budget, which is sure to leave the country with excess debt to service. Obviously, recent history lessons suggest that any announcement of tightening should be taken with a grain of salt, but in the meantime CAD currency is buying it.

Earlier in April, the frontpage belonged to Archegos Capital Management, run by Bill Hwang. On 26-Mar-21, rumours started to swirl of large-scale forced sales of companies from Chinese tech to Viacom and Discovery, previously boring telecom giants that had run up between 150%-160% in 2021 alone by 20-Mar-21. It later became evident that both the run-up and fall were driven through bank-provided leverage on behalf of their prime brokerage units, whereby the bank provides exposure to the gains or losses of the security in exchange for a set rate, called a Total Return Swap (TRS). This allows the investor to gain exposure to a name without putting up the capital to buy it outright or require ownership to be reported. While TRS is not unique, providing a family office as much as 10x leverage to gain equity exposure of up to $100 billion is nothing short of reckless. Even more so when the office is run by a convicted fraudster. At least eight banks were guilty of the careless loans. Credit Suisse accepted first prize for the greatest misconduct. It reported a loss of $5.5 billion associated with Archegos. Nomura ($2.3Bn), Morgan Stanley ($991MM) and UBS ($774MM) were runners-up. As with any blow-up on Wall Street, more details will become public over time. Some have speculated that Hwang was one of the primary players involved in GameStop and other high short-interest stocks originally attributed to Reddit. 2021 has seen no shortage of ‘interesting’ stock movements so we curiously wait for the craziness to be properly chronicled, while monitoring for any associated risks.

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Gavin Hockey Wealth Specialists
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416-861-1998