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Stock market gains alongside economic pain; some worry about over-optimism – Reuters

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(Reuters) – The U.S. stock market has rebounded swiftly despite a raft of terrible economic news, driven by a massive boost from the Federal Reserve, hopes of a successful reopening of the economy and possible coronavirus treatments, as well as investors’ fear-of-missing-out. But not everyone is buying the bounce.

FILE PHOTO: People pass a public seating area marked with yellow tape to encourage social distancing, during the coronavirus outbreak (COVID-19), at a mall in Singapore April 17, 2020. REUTERS/Edgar Su/File Photo

The S&P 500 .SPX closed on Friday at 2,874, more than 28% above its recent trough reached on March 23 and just under 18% below its record high close reached on Feb. 19. That rally has been spurred by the U.S. central bank going into overdrive to try to keep the economy from suffering lasting damage, as well as a $2.3 trillion federal stimulus package.

Investors and analysts have turned more positive. Goldman Sachs last week said the unprecedented monetary and fiscal policy actions by the Fed and Congress had “precluded the prospect of a complete economic collapse,” meaning its previous near-term downside forecast for the S&P of 2000 was no longer likely.

Andrew Sheets, a strategist at Morgan Stanley, wrote in a research note that the economic downturn “will be more severe, but less prolonged” than the financial crisis, but he expects the economy to hit its low point in the second quarter. If that is the case, Sheets said, “it’s very reasonable that the low for equity/credit prices happens before that.”

The stockmarket has changed its mood swiftly since March 23 – when the S&P 500 dropped as much as 35% below its Feb. 19 peak. But trading has been volatile. Since then the index has closed up more than 1% in ten sessions with its biggest daily gain at 9.4% on March 24. It has fallen more than 1% six times and the deepest cut was 4.4% on April 1.

Other risk assets have also benefited: Junk-rated bonds saw record inflows of $10.5 billion in the week to Wednesday, BofA said on Friday.

The turnaround in optimism comes against an awful economic picture. Data on Thursday showed a record 22 million Americans have sought unemployment benefits over the past month, manufacturing activity in the mid-Atlantic region plunged to levels last seen in 1980 and homebuilding tumbling by the most in 36 years in March. That followed dismal reports of a record drop in retail sales in March and the biggest decline in factory output since 1946.

Some investors are arguing for more focus on fundamentals such as corporate earnings.

“The market’s forecasting can be error-prone and currently there is little mention of head fakes, value traps, potentially impotent policies, and significant later-order effects,” Richard Bernstein, chief executive of Richard Bernstein Advisors, wrote in a report late on Friday. He thinks we are in only the first phase of a bear market.

Bernstein says fundamentals, not short-term technicals or FOMO – meaning fear-of-missing out, “will ultimately determine the direction of the markets.”

Chris Beauchamp, analyst at online trading firm IG, said investors “continue to be confounded by the strength of the rebound in stock markets, which have apparently decided that the coronavirus crisis is receding in intensity.” However, he said that with earnings season intensifying this week, “the rally faces more hurdles.”

Citigroup’s chief U.S. equity strategist, Tobias Levkovich, wrote that he worried about “sentiment moving out of panic so rapidly” in what he described as a “somewhat treacherous” and volatile investment environment.

While policy moves like those by the Fed and congressional stimulus programs may deserve big reactions if risks are removed, Levkovich says he is looking at fundamentals and worries about “difficult-to-assess issues such as the potential for second wave infection outbreaks as the economy re-opens.”

Investors have also been reassured by signs U.S. coronavirus cases may be peaking and on Friday stocks were buoyed by a report that COVID-19 patients with severe symptoms had responded well to a drug from Gilead Sciences (GILD.O) even though full trial data for that drug had yet to been analyzed. [.N]

Russell Price, Ameriprise’s chief economist, sees government stimulus, reports of virus treatments advances and signs of peaking infections as good reasons for the more positive stock market, but he expects the U.S. economy to take between six and eight quarters to get back to where it was at the end of 2019.

“What’s not fully been embraced is how difficult it’s going to be to get the economy up to speed,” said Price. “What the market doesn’t seem to be appreciating is how long it takes.”

Bernstein argues that if economic progress in China – the first country to report coronavirus cases- is any guide it doesn’t bode that well for the U.S economy in the near term.

“China’s path has been very saucer-shaped at best,” according to Bernstein which notes that the country is about 50 days ahead of the United States in its outbreak and recovery.

Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey, is also skeptical of the rally.

“You don’t fight the Fed. You have the momentum people are chasing,” said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey, who is also skeptical of the rally. “Is it fundamentally justified, absolutely not.”

Reporting By Sinéad Carew; Editing by Megan Davies and Daniel Wallis

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Canadian Dollar Price Outlook: USD/CAD Grinds Around Big Fig Support – DailyFX

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Canadian Dollar, CAD, USD/CAD Price Analysis

  • This morning brought a Bank of Canada rate decision, this Friday’s economic calendar brings Canadian jobs numbers to be released at the same time as US Non-Farm Payrolls.
  • The bank held rates, and given the change in leadership the big question is forward-looking strategy at the bank.
  • USD/CAD broke down from a descending triangle formation, and is now finding support around the 1.3500 big figure. But sellers haven’t yet been able to establish any significant trends around that support, leading to the prospect of short-term pullback.

BoC Leaves Rates Flat, USD/CAD Remains Around 1.3500

Earlier this morning we heard from the Bank of Canada as the BoC left rates flat; but the prospect of change in leadership atop the BoC does highlight potential changes in the future after outgoing Bank of Canada Governor Stephen Poloz had previously stated that rates were as low as they could go. Taking over at the bank this week is Tiff Macklem, and as noted by our own Thomas Westwater earlier today, this morning’s statement likely had little input from the newly-installed BoC Governor. This does, however, point to the possibility of change on the horizon given how aggressively the coronavirus slowdown has hit global economies.

In USD/CAD, the pair has largely clung on to support around this rate decision, temporarily testing below the big figure of 1.3500 but, so far, failing to establish any continued bearish trends below that level. And this comes on the heels of an earlier-week breakdown, as USD/CAD had built into a descending triangle formation, with a series of lower-highs from late-March into mid-May, combined with horizontal support around the 1.3850 area on the chart.

USD/CAD Four-Hour Price Chart

USDCAD Four Hour Price Chart

Chart prepared by James Stanley; USDCAD on Tradingview

Can USD/CAD Bears Drive Through Psychological Support?

Of recent, commodity currencies have been on a tear against the US Dollar, USD/CAD included. AUD/USD has been on a similar display of recent and the same can be said for NZD/USD.

The trouble at this point for USD/CAD bears is the fact that the short-side move is already fairly well-developed; and prices are showing continued support around the 1.3500 big figure. Can USD/CAD bring sellers in at sub-1.3500 prices to continue pushing lower? Or, will the pair need a retracement first before continuing that bearish trend?

Change in Longs Shorts OI
Daily-2%-5%-3%
Weekly-9%-13%-10%

On the chart is a nearby area of interest for resistance potential. As looked at in yesterday’s webinar, the space around the 1.3600 area seems especially interesting, as there are two very recent Fibonacci levels within close proximity of each other. This is the 61.8% retracement of the 2020 major move, and the 78.6% retracement of the March major move. At this point, that zone hasn’t yet been tested for resistance and a show of sellers here could re-open the door for bearish continuation strategies in the pair.

USD/CAD Hourly Price Chart

USDCAD Hourly Price Chart

Chart prepared by James Stanley; USDCAD on Tradingview

— Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

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Canadian trade plummets amid global shutdowns – BNNBloomberg.ca

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Canadian exports and imports plunged by the most ever in April amid a shutdown of global trade.

Exports plunged 30 per cent during the month, more than offsetting a 25 per cent drop in imports. The nation’s trade deficit widened to $3.3 billion ($2.4 billion), from $1.5 billion in March. The median estimate of economists surveyed by Bloomberg had called for a $3 billion shortfall.

The report illustrates the extent to which global trade has collapsed amid pandemic-related lockdowns and travel restrictions. In Canada’s case, the economy is facing a double whammy from the pandemic and tanking oil prices. Combined imports and exports at $68.6 billion were the lowest since 2010.

Energy exports dropped 44 per cent in April, as the value of crude oil shipments fell 55 per cent on lower prices and lower volumes due to weaker global demand.

In volume terms, total exports were down 20 per cent in April, with imports falling 25 per cent.

-With assistance from Erik Hertzberg.

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The biggest banks in Canada are seeing a surge in energy loans – BNNBloomberg.ca

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Canadian banks’ exposure to oil-and-gas loans has surged to a record as energy firms tapped credit lines to combat plunging oil prices.

Energy loans at the country’s six largest lenders jumped 23 per cent to $71.6 billion (US$52.9 billion) in their fiscal second quarter from the prior period, disclosures show. Toronto-Dominion Bank had the largest increase at 29 per cent, while Bank of Nova Scotia remained the biggest lender with $21.6 billion in loans.

The banks’ rising exposure comes as impaired energy loans almost doubled, topping $2 billion. Energy firms have been hard hit this year as global oil prices plummeted, with some grades even briefly turning negative in April as measures to combat the spread of the coronavirus hammered worldwide demand.

“We’re clearly seeing the impact of price wars and supply-demand considerations, storage considerations beginning to play havoc on some producers,” Toronto-Dominion Chief Financial Officer Riaz Ahmed said in a May 28 interview. “In the last few weeks we’re watching prices recover with some degree of hope that things will continue to get better here.”

Royal Bank of Canada$9.4 billion1.30%
Toronto-Dominion Bank$12.2 billion1.60%
Bank of Nova Scotia$21.6 billion3.30%
Bank of Montreal$15.0 billion3.00%
Canadian Imperial Bank of Commerce$10.5 billion2.50%
National Bank of Canada$2.9 billion1.80%

With the price plunge making much of their output unprofitable, Canadian oil and gas producers have taken steps to conserve cash. They’ve reduced production, cut operating costs, slashed at least $8.5 billion in planned capital spending and tapped credit lines to help them weather the downturn.

Those drawdowns were the main reason for the 22 per cent increase in energy lending at Royal Bank of Canada, according to CFO Rod Bolger.

“The growth was driven by higher draws on existing facilities and we did make select new lending facilities to existing investment-grade clients where the risk-return was appropriate given the low oil prices,” Bolger said in a May 27 interview.

Signs of Stress

Most of Royal Bank’s exposure is to exploration and production companies and loans are secured by the value of proven and producing reserves, Bolger said. Still, the Toronto-based lender had the highest gross impaired loans among the Canadian banks, at $664 million.

Bank of Montreal posted the second-highest total for impaired energy loans, at $616 million.

“In our oil and gas portfolio we do have some signs of stress just given the weaker price of oil that we’ve seen over the last few months — it’s not totally new and we’re managing through it,” CFO Tom Flynn said in an interview. “We’ve done this before as a bank and we’re confident in our ability to manage through this stress that the industry is in.”

Canadian Imperial Bank of Commerce CFO Hratch Panossian said he is seeing more downgrades and impairments in the oil-and-gas sector, reflecting price weakness, but called the bank’s energy portfolio “relatively stable”.

“Only about half of it is in the exploration and production space and our clients do have some hedging as well that protects them in the short term,” Panossian said in a May 28 interview. “We remain comfortable with the space. Our clients are strong and managing through this and we’re committed to continuing to support them.”

Scotiabank’s Chief Risk Officer Daniel Moore said on a May 26 earnings call that exploration and production and oilfield services — which are most sensitive to weakness in oil prices — account for 1.7 per cent of total loans. More than 40 per cent of those energy loans are investment grade and the majority of non-investment grade exposure is to secure reserve-based loans or sovereign-controlled entities, he said.

While bank figures show increased borrowing, many producers are seeing the total amount of credit available reduced. That’s particularly true of producers’ reserve-based credit lines, which are tied to the value of their oil-and-gas reserves and are adjusted regularly to account for current prices.

This year’s first adjustment period, known as redetermination, is going on now, and early results show banks have been shrinking those credit lines in response to falling prices.

At least five Canadian oil-and-gas producers have announced results of their redeterminations, and all have had their credit lines cut. Notably, oil-sands producer Athabasca Oil Corp. had its credit facility reduced by 65 per cent to $42 million, while natural gas driller NuVista Energy Ltd. saw its line cut by 14 per cent to $475 million.

At least seven producers have extended the date on their redetermination processes to June 30 because of volatile prices. Five of those have had their available credit reduced on an interim basis before the final evaluation is competed.

“The best-case scenario for our junior E&P companies this year is likely a small reduction in credit capacity, a slightly higher cost to borrow, and the ability to continue to act autonomously from the influence of its banks,” Stifel FirstEnergy analyst Cody Kwong said in a note.

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