June 27, 2018
Oil, Cannabis, Emerging Markets & More
Market Recap & Box Score
June mirrored May as far as equity markets were concerned with the TSX again leading (+2.5%) the way on the back of oil strength. The S&P 500 and MSCI World Index registered gains of 0.1% and 0.4% as we enter Q2 reporting season.
More than 200 domestic Chinese stocks were included in the MSCI World Index beginning in June. However, it wasn’t a promising start, as both the Shanghai and Shenzen stock exchanges officially entered a bear market during the month, falling over 20% from their January highs. Trade tariffs and the slide in yuan have been popular reasons to justify the decline, but it is hard to overlook Chinese banking regulator’s clampdown on Rmb 13.8Tr (USD 2.13Tr) of entrusted lending business. These loans are often made by shadow banks and the restriction specifically prevents them from being used to buy equities, bonds, or derivatives by the borrowing company.
Oil once again experienced increased volatility. The 22-Jun-18 OPEC announcement provided a tailwind to the commodity, rising 11.2% in the final five trading days prior to 27-Jun-18, ending the period with a 6.8% gain. Energy’s weight in the TSX is almost 20%; as such, the benchmark’s outperformance is largely attributed to the sector. The main catalysts for oil were the anticipated sanctions on Iran (cut off supply) and the announcement of a lower-than-anticipated combined production increases from OPEC and Russia. Fundamentals were further confirmed when the 27-Jun-18 inventory report revealed a higher-than-expected drawdown. All this comes at a time when US oil exports reached a record 3 million barrels per days and production achieved 10.9 million barrels per day – more than any country, except Russia.
The USD continued to strengthen in June, with the US Dollar index (DXY) rising 1.3%, bringing its performance from its February low up to 7.7%. Some have cited the relative monetary policy positioning (tightening vs. loosening in EU and Japan) as the primary driver as US dollar supply shrinks. However, it may be a short-term break in a long-term downtrend. Certainly the US fiscal position should continue to weaken with Trump’s tax policy and the possibility of a massive infrastructure spend if the Republicans are successful in the November mid-term elections. Either way, Emerging Market equities have been impacted due to their reliance on USD-denominated debt. The iShares Emerging Markets ETF dropped 7.6% in June and 13.7% since the DXY hit its February low.
In Canada, a historic bill was passed on 20-Jun-18 to legalize the recreational use of cannabis as of 17-Oct-18, representing a sea-change in government attitudes toward the plant. Beyond the recreational side, another historic milestone was achieved with the FDA’s approval of Epidiolex, GW Pharmaceuticals’ (NYSE: GWPH) drug derived from cannabis which provides children with two rare and serious forms of epilepsy a new treatment for the disease. However, the major development will occur when the Drug Enforcement Administration’s reschedules Cannabidiol (CBD), which is anticipated within 90 days. CBD is the active ingredient in cannabis and it is currently a Schedule 1 drug, which indicates that it has no therapeutic value. Rescheduling will open the door for the ongoing testing and potential availability of treatments to address a variety of ailments, with indications ranging from epilepsy to cancer, autism, MS and schizophrenia, among others.