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US bonds signal growing global distress

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The U.S. government bond market sounded alarms Wednesday as investors fleeing riskier assets drove the 30-year bond’s yield to a record low and the 10-year yield fell below the two-year for the first time since 2007.

The 10-year Treasury yield dipped as much as 1.9 basis points below the two-year yield in what’s considered a harbinger of a U.S. economic recession beginning in the next 18 months. That expectation, nurtured in recent weeks by worsening U.S.-China trade relations and signs global growth is slowing, was bolstered Wednesday by weak Chinese and German economic data.

“Bad European and Chinese data today are the trigger for the global bond rally,” said Praveen Korapaty, chief global rates strategist at Goldman Sachs Group Inc. “From the pace of the move, I suspect some long-held steepeners are being unwound as well.”

Another widely watched recession indicator, the yield difference between three-month and 10-year Treasuries, inverted in March and has been negative much of the time since, bedeviling investors who anticipated that the yield curve would steepen as the Federal Reserve began to cut interest rates. The global bid for bonds also inverted the two-year to 10-year U.K. yield curve Wednesday.

“The bond market is saying central banks are behind the curve,” said Marc Ostwald, global strategist at ADM Investor Services in London. “It’s all doom and gloom on the global economy.”

Global Slowdown

The inversion was brief as U.S. 10-year yields rebounded to about 1.60 per cent, two-year yields to about 1.58 per cent. Thirty-year yields fell to a record low of 2.01 per cent before stabilizing around 2.05 per cent. In the U.K., 10-year yields dropped to 0.45 per cent while two-year yields topped 0.48 per cent even as inflation exceeded the Bank of England’s 2 per cent target.

Yield curves normally slope upward as investors demand compensation for putting money at risk over longer periods of time. The willingness to accept lower yields on longer-dated assets than shorter-dated ones offer reflects the expectation that the longer-dated ones will produce higher returns over time as all yields decline, leaving holders of shorter-dated instruments to reinvest at lower rates when they mature.

The U.S. bond market has been a destination for haven flows given that there are fewer and fewer positive-yielding assets to park cash in globally, according to Richard Kelly, head of global strategy at Toronto-Dominion Bank. Roughly US$15.8 trillion of global bonds have negative yields.

“The curve inversion to this point is flagging a 55-to-60 per cent chance of a U.S. recession over the next 12 months,” Kelly said. “We can all debate whether those signals are as accurate as they once were, but we still seem to be in a slow grind lower for sentiment and momentum and need some positive surprises to change those trends.”

The curve isn’t the only thing flashing high alert. The Federal Reserve Bank of New York’s index showing the probability of a U.S. recession over the next 12 months is close to its highest level since the global financial crisis, at around 31 per cent.

Others aren’t ready to sound the alarm yet. There’s little evidence in U.S. economic data to suggest a recession is imminent, according to Goldman’s Korapaty, who sees the 10-year yield returning to 1.75 per cent by year-end. Independent strategist Marty Mitchell said the yield curve’s brief inversion is unlikely to materially sway traders’ behavior.

“Investors, portfolio managers, asset managers, hedge funds, and quants aren’t likely to change their market and economic thesis simply because the 2yr/10yr spread moves from +1bp to -1bp,” wrote Mitchell in a report Wednesday. “Yes, a more severe and prolonged inversion will cause them to make adjustments, but that’s not where we are today.”

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Telus email still down heading to the fifth day

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For the fifth day in a row, customers with Telus.net emails are still facing disruptions as the company works to fix ongoing issues.

“Telus technicians continue to work to restore access. This is a fluid situation, and we are doing everything we can to stabilize all servers to bring our final clients online,” said a spokesperson in a statement. “This is taking longer than we would like as remaining issues are very complex. We are incredibly sorry.”

Customers began noticing an issue with their emails on Aug. 15, and while the majority of users had service restored by the next day, plenty have still been left without the service.

The issues are said to affect customers in the Lower Mainland, Kelowna, Vernon, Edmonton, Calgary and more. The majority of customers that have reported an issue with Downdetector say only their email has been affected, but some say there is also a problem with internet usage.

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Ontario Cannabis Store returns $2.9M in CannTrust products

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CannTrust

VAUGHAN, Ont. – CannTrust Holdings Inc. says the Ontario government‘s cannabis retailer is returning all of the company’s products it has because they do not conform with the terms of its master cannabis supply agreement.

The company says the total value of the products is about $2.9 million.

The move by the provincial retailer comes as CannTrust faces problems with Health Canada.

The federal regulator found problems at the company’s greenhouse in Pelham, Ont., earlier this year and later raised issues regarding a manufacturing facility in Vaughan, Ont.

Health Canada has placed a hold on CannTrust’s inventory including approximately 5,200 kg of dried cannabis and the company has also instituted a voluntary hold of approximately 7,500 kg of dried cannabis equivalent.

CannTrust noted that the Ontario retailer operates independently of Health Canada, which has not ordered a recall on any of the company’s products.

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OPEC downgrad its forecast for global oil

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In its latest report, OPEC only slightly downgraded its forecast for global oil demand, lowering it to 1.10 million barrels per day (mb/d) for 2019, down only a minor 0.04 mb/d from a month earlier. That estimate could end up being too optimistic, and OPEC itself said the forecast is “subject to downside risks stemming from uncertainties with regard to global economic development.”

Notably, OPEC said that global supply could grow by 1.97 mb/d this year, significantly outpacing demand growth. Still, that figure is down by 72,000 bpd from a previous estimate, due to lower-than-expected production growth in the U.S., Brazil, Thailand and Norway.

In another worrying sign of a brewing supply surplus, OPEC said that oil inventories in OECD countries rose by 31.8 million barrels in June from a month earlier, rising to 67 million barrels above the five-year average. In other words, just as OPEC+ was meeting to extend the production cuts for another 9 months, inventories were rising, an indication of an oversupplied market.

On a slightly positive note (for OPEC), the group revised up demand for its crude by 0.1 mb/d for both 2019 and for 2020. Still, it said that demand for its oil, often referred to as the “call on OPEC,” would drop to 29.4 mb/d in 2020, down from 30.7 mb/d this year.

Based on those numbers, OPEC+ is staring down a serious supply glut next year absent further action. The group can either stick with current production levels and risk another market downturn, or it can swallow further production cuts.

What happens next is largely outside of OPEC’s hands. Recent price movements are almost entirely the result of shifting sentiments regarding the global economy. “The yo-yoing on the oil market continues and the oil price remains highly prone to fluctuations. After sliding massively on Wednesday, Brent was hit hard once again [Thursday], shedding over 3% in a matter of hours,” Commerzbank said in a note on Friday. “The oil price currently remains at the mercy of expectations for the global economy, and is thus caught between economic concerns and hopes that the trade dispute might end soon.”

U.S. retail sales eased some concerns on Friday, but the global backdrop remains worrying, and a steady release of data from around the world continues to point in a negative direction. Just in the last week, there was the inverted yield curve for U.S. treasuries, a stock market and currency meltdown in Argentina, volatile oil prices, and widespread fears of a global economic recession.

Even the U.S. is not immune, despite mostly healthy data up until recently. For instance, Wall Street analysts have slashed their outlooks for corporate earnings for the third quarter in recent weeks. “Everyone in April and through the beginning of May thought that the economy was going to get better in the back half of the year, trade war was going to sort of settle, certainly not escalate,” Eastman Chemical Chief Executive Mark Costa said on an earnings call last month, as the WSJ reported. “And now we’re just in a very different world where I don’t think that’s true…There’s not a lot of signs of economic recovery coming in the second half.”

Ultimately, the U.S. will struggle to outrun a global slowdown. The World Trade Organization (WTO)  painted a bleak picture for the third quarter, saying that trade volumes are “likely to remain weak.” The global auto sector has been hit hard this year, with a sharp contraction in China, India and Germany. The U.S. auto industry is starting to show some signs of strain as well.

The problem for oil prices is that the outlook for 2020 is already pretty bearish, with supply growth outpacing demand. That’s the base case right now. But the odds of economic recession continue to grow, which threatens to make the supply overhang that much worse.

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