“It’s easy to meet expenses – everywhere we go, there they are.” — Anonymous
TSX Flat (Again) as Rising Oil Offset by Financials, Energy and Consumer-Discretionary
The Toronto Stock Exchange’s S&P/TSX composite index closed at 15,128.65, a drop of 0.41% for the day. The Friday closing number is a small decrease compared to last week’s finish of 15,180.93. The Loonie was at 79.76 cents to the USD at time of market close. 9 of the 10 main index groups lost ground on Friday.
Fears of oil oversupply tend to wax and wane, and this week they waned. Consequently, Friday saw surge in oil prices, and U.S. crude finished at $49.71 (USD), its highest mark since May. The surge can be attributed not only to a recent demand run but also to potential signals that Saudi Arabia may reduce supply in August; finally, traders also felt some short-covering was at play as well.
S&P Earnings Season Continues
As earnings season continues, now just past the halfway mark, the S&P 500 was weighed down by negative investor reactions of some high-profile companies’ earnings reports. However, the Dow Jones Industrial Average (DJIA) was bolstered by some positive results.
So far, earnings season overall has been strong. In addition, data has shown the U.S. economy accelerated during Q2 on increased consumer spending and increasing business investment in equipment. The DJIA closed at 21,830.31, a modest increase of 33.76%, while the S&P 500 dropped 3.32 points to finish at 2,472.1. The NASDAQ dropped 7.51 points to 6,374.68.
Repeal of Affordable Care Act Fails, Investors Concerned About Tax Cut Agenda
In a stunning turn of events, the Republican-Majority Senate failed to win a simple majority vote to put into effect the so-called “Skinny Repeal” of the Affordable Care Act, dubbed “Obamacare”. It is unusual for a vote to be called without victory already assured, so this public defeat of the repeal was an embarrassing result for the Republicans.
The inability to follow through on what amounts to a 7-year long promise to repeal Obamacare has led investors to question President Trump’s ability to push through other major agendas, such as the Wall Street-friendly tax reform promise.
Naturally, this speculation acted as a counter to the promising Q2 economic data mentioned above.
OSFI Proposes a Conventional Mortgage “Stress-Test”
The Office of the Superintendent of Financial Institutions (OSFI), an independent agency of the Government of Canada, was established in 1987 with the task of ensuring a solvent Canadian financial system. They supervise and regulate federally regulated financial institutions as well as private pensions that are subject to federal oversight. “Federally regulated financial institutions” covers a broad base, including all banks in Canada, all federally incorporated or registered trust and loan companies, insurance companies, cooperative credit associations, fraternal benefit societies and private pension plans.
In the face of increasing Canadian household indebtedness, inflated housing markets in Vancouver and Toronto (among others), increasing numbers of new uninsured mortgages (20% down payment or greater) and a higher number of uninsured mortgages coming in at or near the minimum of 20% down, and of course the current low-rate environment, the OFSI has proposed the introduction of a second “stress-test” qualifying rate. The first such stress-test was introduced last year and applied only to high-ratio (less than 20% down payment, thus requiring CMHC default creditor insurance) mortgages.
This month, the OFSI released a set of proposals to tighten the conventional mortgage market. With the new proposals, buyers with greater than 20% down will now have to qualify using a stress-test rate of 200 basis points (2%) higher than the going street rate offered by the lender. For example, a lender offering a 5-year fixed rate of 3.00% would mean that a prospective borrower would need to meet GDS and TDS servicing ratios using a stress-test rate of 5.00%.
We’ll have a more concrete break-down on the new regulations if they come to pass, but in the meantime, an educated guess could see a hypothetical timeline of something like this:
• Federal Government announces new stress-test for uninsured mortgages per above, to take effect on January 1, 2018 (again, purely hypothetical date here)
• Would-be buyers who know they cannot qualify under the new stress-test, but can qualify currently, will most likely flood the market to try to make a purchase prior to the new regulations taking effect
• As a result, a short-term spike in housing prices prior to the new regulations is highly possible
• After the regulations take effect, there would be a natural reduction in demand (due to the stress-test rate introduction). This could lead to a pullback in real estate pricing
• There is the potential of an influx of sellers prior to the new regulation, in anticipation of the demand-side changes outlined above
In reality, it’s anyone’s guess if the OFSI will follow through on their proposal to the Federal Government, and if they do, that doesn’t mean the above hypothetical scenario will play out exactly as we’ve outlined it, but there is certainly a non-zero chance that our hypothetical scenario plays out as-is.
Sources: Thomson Reuters, Globe Advisor