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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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Week ended June 9, 2023: Canadian haze


The north-eastern US got plenty of smoke from its northern neighbour Canada this week, literally and figuratively. The literal bit came courtesy of more than 100 wild fires burning in the Canadian provinces of Quebec and Ottawa, with the smoke / haze drifting southeast into the New York City metropolitan area, creating some bizarre “skyscapes” mid-week. (As an aside, I doubt the fires are doing much good in Canada either, although this isn’t particularly newsworthy south of the border.) Figuratively, the smoke came on Wednesday courtesy of the Bank of Canada, which shocked investors by increasing its key overnight interest rates by 25bps (here), having kept rates constant at two prior monetary policy meetings (in March and April). This follows a similar pattern used by the Reserve Bank of Australia (“RBA”), which paused its rate increases in early April only to resume its rate rises in May (and again on June 6th). The culprit in both cases was, and continues to be, stronger-than-expected economic growth leading to sticky inflation, which is proving difficult to bring back to target in many countries. In essence, the actions by these two prominent central banks facing similar issues to those that the US economy is facing provides cover for the Federal Reserve to adopt the exact same strategy – they can pause (i.e. not increase the Fed Funds rate) at the upcoming FOMC meeting, with a “health warning” that further increases in rates are not off the table if inflation remains sufficiently sticky. As of press time, the CME FedWatch Tool is indeed indicating a 70% probability that the Fed holds rates at the FOMC meeting on June 13-14, but a 53% probability that they will increase the Fed Funds rate an additional 25bps at the subsequent FOMC meeting in late July.


To continue the metaphor, I suppose it is fair to say that most financial markets this week were rather dull and hazy too, seeking direction and mostly trending sideways. The S&P 500 is considered now to be in a bull market phase as the benchmark US equity index has rallied 20% since its lows on October 12th 2022 but gains this week (+0.4% WoW) were rather modest and hard-fought. All eyes are now focused on this coming week, which features not only an FOMC meeting but the release of US May CPI data on Tuesday (consensus 5.6% YoY core and 4.2% YoY headline) ahead of the FOMC rate decision. Both the ECB and the Bank of Japan also take policy decisions this coming week, with the former expected to jack up its key overnight bank rates by 25bps (decision June 15th), and the latter expected to do absolutely nothing, continuing its ultra-accommodative monetary policy (decision June 16th).


MARKETS THIS WEEK


Sideways is the apt description, with volatility settling to very low levels in both the US equity (VIX 13.84) and the US bond (MOVE 115.77) markets. In fact, the VIX is at its lowest level since just before the pandemic (Feb 2020), and MOVE is at its lowest level since mid-February, a few weeks before the US regional bank crisis.

  • Global equity indices were mixed, with European bourses losing ground and other indices gaining. The Nikkei 225 continues to be the best performer, hitting new high after new high as it chalked up another gain this week and is now up an amazing 23.6% YtD. I will extend my heart-felt thanks to the BoJ!!

  • Emerging markets stocks are being aggressively touted now, too, as one of the few remaining value plays. Living up to the hype, the MSCI EM index was up 1.9% this week, and has delivered a positive YtD return, too, of 4.9%, a nice reversal of rather poor performance in 2021 and 2022.

  • Similarly, there seems to be a rotation into value in the US, with the Russell 2000 far out-performing the other US indices this week. This might be finally coming at the expense of technology stocks since the NASDAQ Composite had the worst return of the US indices this week albeit still slightly positive (+0.1%).

  • US Treasury yields gently drifted higher most of the week, more perverse at the short end of the curve. The 2y-10y yield curve differential widened to –84bps, its most inverted since early March

  • Corporate credit improved, especially in USD- and EUR-denominated high yield. In both currencies, high yield credit spreads came in nicely this week by 25bps-30bps.

  • Both the USD and the JPY were a touch weaker this past week, as the EUR and GBP gained vis-à-vis the USD. Gold prices were a touch higher.

  • In spite of OPEC+’s announcement that it would reduce supply 1 million barrels/day starting in July (borne fully by Saudi Arabia – read EMC article here), the price of both Brent and WTI crude were lower WoW. I think OPEC+ is grasping at straws, but that’s just my opinion.

  • Bitcoin was lower on the week, no doubt hurt by SEC actions announced early in the week first against both Binance and Coinbase (mentioned in the following section).

You can find much more detail below in the section “The Tables”, with data over various periods of time, etc.


WHAT HAPPENED THIS WEEK THAT MATTERED?


The week started with OPEC+ announcing that it would reduce its daily supply by one million barrels/day starting in July, a reduction borne solely by Saudi Arabia. As mentioned above, I wrote about this earlier in the week here. The effect on oil prices was muted, as I had anticipated, with the price of WTI crude actually falling 2.2% WoW.


Crypto brokerage firms Binance and Coinbase both came under increased scrutiny from the SEC for trading crypto assets that – according to the SEC – should had been registered as securities. Bitcoin and its brethren (as the underlying assets) remain under some pressure, with the benchmark coin down 2.8% this week following the SEC’s actions.


US initial jobs claims for the week ended June 3rd rose to a 1.5 year high on Thursday (DOL release here), which offset some concerns about the path of future Fed rate increases that had surfaced the day before. This news caused UST yields to fall slightly across the curve, sending stocks higher on the never-ending saga of “how much and for how long” that grips risk markets.


The Eurozone is in a mild recession, at least technically according to Eurostat. 1Q23 GDP shrank 0.1% Q-o-Q in the common currency zone, matching a similar decrease in 4Q22 vs 3Q22. Keep in mind though that GDP increased 1.0% in 1Q23 compared to 1Q22 (i.e. Y-o-Y) in both the Eurozone and the broader European Union. I’m not sure this really mattered much, so let’s just call it what it is: Europe is an economy stuck in neutral for the time being.


I suppose I would be remiss not to at least mention the announcement by Apple of its new AR headset, the Apple Vision Pro, which will be rolled out starting early next year with a price tag of $3,499.. The

Apple website announcement for the new product is here, and a longer video about the new AR headset is on YouTube here. Apple is a core holding of mine, and the stock has performed well even as its growth has slowed. Will people pay $3,499 for Apple Vision Pro? I have my doubts, but I also thought no one would pay $1,000 for a mobile phone without a keyboard (i.e. the iPhone), and was concerned about newer products like the Apple Watch and AirPods getting traction. The reality is that Apple has nailed it time after time, so betting against them is risky. Let’s see.


THE TABLES


The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes. In summary, volatility remains low in equities and bonds, and the week was fairly uneventful in most markets.


Global equities


US equities


US Treasuries


Corporate bonds (credit)



Safe haven and other assets


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