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Frank Mueller

Weekly Update – October 13, 2017

“Try not to become a (wo)man of success. Rather become a (wo)man of value” – Albert Einstein

TSX Hits 7-1/2-Month High on Rising Commodity Prices

The Toronto Stock Exchange’s S&P/TSX composite index rose by 64.97 points (0.41%) on the day to close at 15,807.17. This represents a gain of 78.85 points (0.50%) over last week’s 15,728.32 finish.

Gains were driven primarily by commodities & resources, with helpful assists from telecoms & financials.

Gold rose by about $20 USD per ounce week-over-week, boosted by a Friday gain of $9.60 per ounce, to finish the week at $1,306.10 per ounce.

Encouraging Chinese import data, as well as tensions in the Middle East – and President Trump’s ominous tones regarding the Iran Nuclear Deal – all played a part in driving oil prices. Brent crude jumped nearly a dollar per barrel to settle at $57.17 (USD) per barrel.

The Loonie rose 27 basis-points for the week, rising from an even 80 cents (USD) to 80.27 cents.

NASDAQ Hits Another Record High; S&P 500 and Dow Jones Industrial Average All Gain on the Week

NASDAQ struck another record high on Friday, as technology sector shares experienced healthy gains. Settling at 6,605.80, the NASDAQ saw a weekly increase of 0.24%.

The S&P 500 and the Dow Jones Industrial Average also enjoyed gains week-over-week, with 0.15% and 0.43% jumps, respectively. The S&P 500 finished Friday up 2.24 points (0.09%) at 2,553.17; meanwhile, the Dow Jones Industrial Average rose by 30.71 points (0.13%) to settle at 22,871.72.

Retail sales numbers for September experienced their highest jump in nearly 3 years, helping push indices higher. Residual demand for consumer goods on the heels of Hurricane’s Harvey and Irma also pushed prices higher, helping markets.

Sources: Globe Advisor

Frank Mueller

Weekly Update – October 6, 2017

“Once the speculative tide starts running, few can resist its pull” – John Train

TSX Retreats on Sagging Oil

The Toronto Stock Exchange’s S&P/TSX composite index dropped 47.98 points (0.30%) on the day to close at 15,728.32. On the week, the TSX gained 88 points (0.56%).

The main drag on the TSX on Friday was the cost of a barrel of oil, which dropped by 3%. November Oil Futures shed $1.54USD per barrel to settle at $49.25USD per barrel.

Gold crept higher by 0.45% ($5.70USD per ounce) to finish the week at $1,278.90USD.

The Loonie rose by almost half a penny against the Greenback and settled at an even 80 cents USD.

S&P 500 Ends 6-Day Streak of Record Highs on Declining Jobs Numbers

U.S. non-farms jobs numbers declined for the month of September by 33,000 jobs, according to the Department of Labor. This marks the first monthly jobs decline in 7 years, when the U.S. was still digging its way out of the Great Recession. Analysts believe the aftermath of Hurricanes Harvey and Irma left many southern workers either temporarily displaced, or resulted in new hires being delayed.

The S&P 500’s 6-day streak of record highs was snapped due to the jobs data, settling at 2,549 on a loss of 2.74 points (0.11%); however, the previous streak of record highs lifted the S&P to a weekly gain of 1.19%.

Changes Coming to Canadian Tax Proposals

Finance Minister Bill Morneau confirmed on Wednesday that, after the close of the 75-day consultation window – the Federal Government’s tax proposals will be reviewed and will likely be changed somewhat.

The 3 major changes originally proposed by Minister Morneau centered mostly around Privately Controlled Canadian Corporations, and included: restricting income sprinkling/splitting, limiting passive investments within the corporation, and limiting business owners’ ability to convert regular income into capital gains. You can get a more complete picture of these initial proposals by reading Anthony’s blog.

It can reasonably be assumed that the pushback received during the 75-day consultation window was strong and steady, causing the Federal Government to reconsider the initial proposals. It should be noted, however, that there will not be another consultation period, so any changes made to the initial proposals will not be subject to future feedback.

WEEKLY MARKET WRAP-UP

North America
The TSX closed at 15723, up 88 points or 0.56% over the past week. YTD the TSX is up 2.92%.
The DOW closed at 22774, up 368 points or 1.64% over the past week. YTD the DOW is up 15.24%.
The S&P closed at 2549, up 30 points or 1.19% over the past week. YTD the S&P is up 13.85%.
The Nasdaq closed at 6590, up 94 points or 1.45% over the past week. YTD the Nasdaq is up 22.42%.
Gold closed at 1277, down -19.00 points or -0.39% over the past week. YTD gold is up 12.21%.
Oil closed at 49.31, down -2.27 points or -4.40% over the past week. YTD oil is down -5.57%.
The USD/CAD closed at 0.8, changed 0.0000 points or 0.00% over the past week. YTD the USD/CAD is up 7.83%.

Europe/Asia
The MSCI closed at 2016, up 24 points or 1.20% over the past week. YTD the MSCI is up 15.00%.
The Euro Stoxx 50 closed at 3603, up 8 points or 0.22% over the past week. YTD the Euro Stoxx 50 is up 9.48%.
The FTSE closed at 7523, up 150 points or 2.03% over the past week. YTD the FTSE is up 5.32%.
The CAC closed at 5360, up 30 points or 0.56% over the past week. YTD the CAC is up 10.24%.
DAX closed at 12956, up 127.00 points or 0.99% over the past week. YTD DAX is up 12.85%.
Nikkei closed at 20691, up 335.00 points or 1.65% over the past week. YTD Nikkei is up 8.25%.
The Shanghai closed at 3349, changed 0.0000 points or 0.00% over the past week. YTD the Shanghai is up 7.89%.

Fixed Income
The 10-Yr Bond closed at 2.37, up 0.0400 points or 1.72% over the past week.YTD the 10-Yr Bond is down -3.27%.

Sources: Globe Advisor, Dynamic Funds

Frank Mueller

Weekly Update – September 29, 2017

“Only when the tide goes out do you discover who’s been swimming naked” – Warren Buffett

TSX Hits 4-Month High, Now Positive for the Year

The Toronto Stock Exchange’s S&P/TSX composite index gained 16.69 points (0.11%) on the day to close at 15,634.94. The TSX gained 180.71 points this week (1.17%) over last Friday’s close of 15,454.23. In the process, the TSX rose to a 4-month high. 7 of the TSX’s main sectors were up on the day.

September saw the TSX gain nearly 3%.

The Loonie dropped to 80.14 cents to the U.S. Dollar, as the Canadian economy was flat for July, ending an 8-month streak of growth. After surpassing the 82-cent mark, the Loonie has started to pull back somewhat; indeed, the July economic numbers weighed on our Dollar.

U.S. Markets Continue to Sizzle

The S&P 500 and the NASDAQ both hit record highs (again) on Friday. Year-to-date returns in the U.S. have been stellar, with the NASDAQ up over 20%, the Dow Jones Industrial Average up 13.37%, and the S&P 500 up a touch over 12.5%. The Technology sector was the top S&P 500 sector – this is not a recording.

However, as mentioned in Anthony’s Year-To-Date Market Recap, Canadian investors have not felt the full impact of these gains due to the rising Canadian Dollar (up 7.83% YTD).

For the month, the S&P 500 posted a 1.9% gain, the DJIA jumped 2.1%, and the NASDAQ increased by 1.05%.

Weekly Market Wrap-Up

North America

The TSX closed at 15635, up 181 points or 1.17% over the past week. YTD the TSX is up 2.34%.
The DOW closed at 22406, up 56 points or 0.25% over the past week. YTD the DOW is up 13.37%.
The S&P closed at 2519, up 17 points or 0.68% over the past week. YTD the S&P is up 12.51%.
The Nasdaq closed at 6496, up 69 points or 1.07% over the past week. YTD the Nasdaq is up 20.68%.
Gold closed at 1282, down -23.00 points or -1.46% over the past week. YTD gold is up 12.65%.
Oil closed at 51.58, up 0.92 points or 1.82% over the past week. YTD oil is down 1.23%.
The USD/CAD closed at 0.8, down -0.0100 points or -1.23% over the past week. YTD the USD/CAD is up 7.83%.

Europe/Asia

The MSCI closed at 1992, up 2 points or 0.10% over the past week. YTD the MSCI is up 13.63%.
The Euro Stoxx 50 closed at 3595, up 54 points or 1.52% over the past week. YTD the Euro Stoxx 50 is up 9.24%.
The FTSE closed at 7373, up 62 points or 0.85% over the past week. YTD the FTSE is up 3.22%.
The CAC closed at 5330, up 49 points or 0.93% over the past week. YTD the CAC is up 9.63%.
DAX closed at 12829, up 237.00 points or 1.88% over the past week. YTD DAX is up 11.74%.
Nikkei closed at 20356, up 59.00 points or 0.29% over the past week. YTD Nikkei is up 6.50%.
The Shanghai closed at 3349, down -4.0000 points or -0.12% over the past week. YTD the Shanghai is up 7.89%.

Fixed Income

The 10-Yr Bond closed at 2.33, up 0.0700 points or 3.10% over the past week. YTD the 10-Yr Bond is down 4.90%.

Sources: Globe Advisor, Dynamic Funds

Frank Mueller

Weekly Update – September 22, 2017

“The stock market demands conviction; it victimizes the unconvinced” – Peter Lynch

TSX Flat to Finish the Week, But Gains 1.25% Overall

The Toronto Stock Exchange’s S&P/TSX composite index finished with a drop of 0.69 points on the day, settling at 15,454.23. For the week, the TSX rose by 281.20 points (1.85%), and hit a 14-week high in doing so. 7 of the 10 main index sectors were up on the day.

The TSX concluded the week on Friday with a 0.31-point rise to settle at 15,173.03. This finish represents a rise of 1.25% over last week’s finish at 14,985.32. Declines in energy and utilities weighed on the TSX, while the consumer discretionary/staples sector gained on the day.

The Loonie barely moved vs the Greenback on Friday, and sat at 81.10 cents USD as of 2:45pm PST, off by about a cent compared to last Friday’s finish of 82.08 cents.

Light, Sweet Crude Oil Barrel futures finished the week above $50 at $50.66 per barrel.

Gold again dropped this week – off $23.00 USD on the week – to finish the week at $1,300.50 USD, as investors eased away from the safe-haven asset.

U.S. Federal Intends to Reduce Balance Sheet, Signals Rate Hike to Close Out 2017

The U.S. Federal Reserve announced its intention to reduce its balance sheet of ≈ $4.2 Trillion (USD) in U.S. Treasury bonds and mortgage-backed securities. Fed Chair Janet Yellen also signaled a rate hike before the end of 2017.

The market pegs the odds of a December rate hike at about 70%. Prior to the Federal Reserve meeting earlier this week, the odds of a December rate hike sat at 51%, according to investors.

The Federal Reserve offered no answers for the inflation decrease this year, and Michael Dowdall – investment strategist at BMO Global Asset Management – offered that “Clearly, the Fed doesn’t have answers on the 2017 low inflation weakness, but they’re still very sensitive to falling behind the curve so they want to stay in front of the inflation curve.”

On the heels of the Fed announcement to hold rates and reduce the balance sheet, valuations spiked. The S&P 500 was trading at 17.6 times expected earnings as of end-of-day Thursday; comparatively, the S&P 500’s 10-year average is 14.3 times expected earnings.

Sources: Globe Advisor, Advisor.ca

Frank Mueller

Trade Settlement Shortened to Two Days

Effective September 5, 2017, the financial industry in Canada and the U.S. has reduced the trade settlement cycle for purchases and redemptions from three business days (“T+3”) to two business days (“T+2”) after the trade date (“T”).

This change stems from a global trend in shortening investment settlement dates. Markets in the European Union and Asia/Pacific have already moved to T+2 settlement.

For example, if we put through a redemption on Monday, the investment company will transfer the proceeds to your bank account on Wednesday. You should have the funds on Wednesday, but some banks have their own processing windows causing delays of 1-2 days.

Money-market fund transactions, which are subject to T+1 regulations, are not affected by this change. If you redeem from a money market fund on Monday, the trade will settle and the funds should be in our account on Tuesday.

Frank Mueller

OSFI to Make Conventional Mortgage Approvals More Difficult

As we mentioned in our Weekly Update for July 28th 2017, the Office of the Superintendent of Financial Institutions (OSFI) released a set of proposals that would serve to tighten up the conventional mortgage market. The objective of these proposals is to protect would-be home buyers from over-extending themselves during our current low-rate environment against further rate increases; additionally, the measures look to protect banks from creditor default risk.

On a more basic level, the proposed measures have been put forth to protect the economy overall. Canadians owed an average of $1.67 per $1 of disposable income, according to a debt-to-income report released by Statistics Canada in December of 2016. The Bank of Canada, as well as many of the “Big 5” banks, has been vocal about household debt levels. The Bank of Canada has also raised concern over inflated house prices in major Canadian markets such as Toronto, Vancouver, and recently including Victoria and Hamilton. Rising rates and an uptick in unemployment could lead to increased mortgage defaults.

How Would It Work?

The counteractive proposal for uninsured, conventional mortgages would require potential buyers to qualify for their mortgage using a new stress-test qualifying interest rate. Where the high-ratio stress-test rate is simply the Bank of Canada’s 5-year fixed rate (recently raised to 4.84%), the conventional stress-test rate would be the street rate offered by the lender plus 200 basis-points (2%).

So, let’s say you have a mortgage rate offered by your bank or credit union for 2.85%. When qualifying, your bank/credit union would use the stress-test rate of 2.85% + 2.00% = 4.85%. The logic is simple: if you can qualify – and afford – your payments at a rate of 4.85% in this case, then surely, you’ll be able to absorb an interest rate hike of 25bps (as we’ve experienced twice now in the last 3 months).

Of course, it’s important to remember that the borrower would only be exposed to the increased rate when their current mortgage term expires.

What’s the Bottom Line?

Analysts believe that if enacted, prospective borrowers would lose about 20% of their purchasing power. For instance, if without the stress-test, a borrower could qualify for a $1 Million mortgage, when using the stress-test, the same borrower would only qualify for an $800K mortgage.

If enacted, this proposal would look to cool the overheated Canadian real estate markets with a more precise, surgical approach, rather than the more broad-based interest rate hikes (which affect the economy overall due to cost of borrowing, the effect on the Canadian dollar, etc).