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Frank Mueller

Weekly Update – July 13, 2018

“Someone’s sitting in the shade today because someone planted a tree a long time ago” – Warren Buffett

Bank of Canada Raises Overnight Rate to 1.50 Per Cent

 The Bank of Canada, as widely expected, hiked its benchmark interest rate on Wednesday. The rate now sits at 1.50 per cent. Two key growth engines – business investment and increased exports – pushed the BoC to raise their key rate.

In its policy statement, the BoC said “The composition of growth is shifting. Exports are being buoyed by strong global demand and higher commodity prices. Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors.”

Record-high household debt levels will be pressured with the rate increase as servicing costs will be driven upward. However, households have reacted to previous rate hikes in the last year, as the numbers show a deceleration in debt accumulation and by extension, household spending. The unexpected growth of business investment and exports picked up the slack, and helped solidify the BoC’s rate hike decision. Future rate hikes were not ruled out.

On the street, Canadians can expect to see further increases to mortgage rates as well as variable lines of credit such as HELOCs. Before taking on increasing debt, you should strongly consider the potential impact on servicing costs, especially considering the possibility of future increases.

 

Sources: Advisor.ca, Financial Post

The information provided on this blog is intended for informational purposes only and is not intended to constitute financial, accounting, and legal or tax advice. For information specific to your situation you should consult a professional.

 

Frank Mueller

Weekly Update – June 22, 2018

“When you invest, you are buying a day that you don’t have to work” – Aya Laraya

CSA Publishes New Mutual Fund Industry Proposals

 Canadian Securities Administrators (CSA) published a consultation paper of interest to investors of mutual funds. The paper contained three main proposals, all aimed at enhanced client protection.

You can read our detailed breakdown here.

Weekly Market Wrap-Up

North America

  • The TSX closed at 16450, up 136 points or 0.83% over the past week. YTD the TSX is up 1.49%.
  • The DOW closed at 24581, down -510 points or -2.03% over the past week. YTD the DOW is down -0.56%.
  • The S&P closed at 2755, down -24 points or -0.86% over the past week. YTD the S&P is up 3.03%.
  • The NASDAQ closed at 7693, down -53 points or -0.68% over the past week. YTD the Nasdaq is up 11.44%.
  • Gold closed at 1271, down -21.00 points or -0.94% over the past week. YTD gold is down -2.98%.
  • Oil closed at 69.28, up 4.85 points or 7.53% over the past week. YTD oil is up 14.66%.
  • The USD/CAD closed at 0.75, down -0.0079 points or -1.04% over the past week. YTD the USD/CAD is down -5.70%.
  • The MSCI closed at 2106, down -36 points or -1.68% over the past week. YTD the MSCI is up 0.14%.

Europe/Asia

  • The Euro Stoxx 50 closed at 3442, down -63 points or -1.80% over the past week. YTD the Euro Stoxx 50 is down -1.77%.
  • The FTSE closed at 7682, up 48 points or 0.63% over the past week. YTD the FTSE is down -0.08%.
  • The CAC closed at 5387, down -115 points or -2.09% over the past week. YTD the CAC is up 1.39%.
  • DAX closed at 12580, down -431.00 points or -3.31% over the past week. YTD DAX is down -2.62%.
  • Nikkei closed at 22517, down -335.00 points or -1.47% over the past week. YTD Nikkei is down -1.09%.
  • The Shanghai closed at 2890, down -132.0000 points or -4.37% over the past week. YTD the Shanghai is down -12.61%.

Fixed Income

  • The 10-Yr Bond Yield closed at 2.9, down -0.0200 points or -0.68% over the past week. YTD the 10-Yr Bond Yield is up 20.83%.

 

Sources: Mackenzie, Advisor.ca, Dynamic

Frank Mueller

CSA Publishes New Mutual Fund Industry Proposals

This week, the Canadian Securities Administrators (CSA) published a consultation paper of interest to investors of mutual funds. The paper contained three main proposals:

Prohibiting Deferred Sales Charge and Low Service Charge Loads

Once a staple of the mutual fund industry, many advisors have begun to move away from DSC and LSC, as investment flexibility can be affected. You First has been in the process of transitioning away from DSC and LSC fund loads for the last three years. Note that existing positions held in DSC or LSC funds cannot be moved to Front-End Load (FEL) until the funds have matured.

Related to this proposal, the CSA has signalled that embedded    compensation is here to stay, provided the fund’s embedded load structure is the unlocked FEL with no upfront commission.

Prohibiting Trailing Commissions Sold Via Discount Brokerages

Discount brokerages’ business model is a do-it-yourself investment style, so CSA has proposed that advisor compensation should not be paid for any such investment setups.

Firms and advisors will be able to continue to offer clients mutual funds with trailing commissions, provided certain targeted reforms (point 3 below) are met.

Enhanced Conflict of Interest Scrutiny

As advisors, it is our job to put the client first. The CSA proposes heightened scrutiny as part of targeted reforms to demonstrate that both the fund selection and client recommendation are based on the quality of the mutual fund, without influence from the embedded commission.

The targeted reforms also propose changes to the know-your-client (KYC), know-your-product (KYP) and suitability obligations.

If you have any questions about these proposals and how they might affect your investments, don’t hesitate to contact us.

 

Sources: Mackenzie Investments, Advisor.ca

Frank Mueller

Weekly Update – June 15, 2018

“Never let facts get in the way of a good story” – Mark Twain

Weekly Market Wrap-Up

On Friday, US President Trump announced a 25 per cent tariff on strategically important Chinese imports, worth around $50 Billion, along with the threat of further tariffs should Beijing impose their own tariffs in kind. Chinese President Xi responded with retaliatory threats.

Thus, a potential trade war between the world’s two largest economies is one step closer. Global stock prices dropped on the news and increased tension.

Earlier in the week, the US Federal Reserve raised its key overnight rate by 0.25 per cent and signalled up to two further rate hikes for 2018.

It is highly anticipated that the Bank of Canada will follow suit with a rate hike of its own at the next policy meeting on July 11th.

As usual, interest rate increases will generally weigh on bond pricing; as a result, investors may see a further pullback on their fixed income holdings. On the other hand, rising rates are an effective measure against inflationary pressures.

In other news, oil dropped on fears of a supply increase.

Yield Versus Return of Capital

One benefit of holding a balanced mutual fund, an income fund, or some equity funds, is that you are issued distributions. However, there is a common misunderstanding when considering how a fund distributes “yield” on a monthly or annual distribution.

A distribution is comprised of dividends, investment income such as interest, capital gains, and return of capital (ROC). Whereas dividends, interest and capital gains income are the result of the investment choices made by fund managers, ROC essentially amounts to refunded contributions.

There is nothing inherently wrong with return of capital within a distribution, especially when you opt to re-invest your distributions (the default option when investing in mutual funds). In fact, including ROC within distributions can be used to withdraw money in a tax-efficient manner in Non-Registered Accounts.

However, it is important to consider that return of capital, when included in a distribution, should not be confused with real yield.

Should you have any questions about yield versus return of capital, don’t hesitate to ask us.

 

Sources: Fidelity, Advisor.ca

Frank Mueller

Weekly Update – June 8, 2018

“Life is a long lesson in humility” – James M. Barrie

Beware: “CRA” Phone Scams Continue

We would like to, once again, remind you that scammers are still at it. The ruse is simple, yet effective: you receive a phone call from a person who claims to be from the CRA or representing the CRA; the caller threatens you with legal action unless you pay some amount “immediately”; the caller attempts to convince you to give your credit card number and secret code to them; they may also ask you for other sensitive information (date of birth, Social Insurance Number, etc).

Do not ever give these callers any information. The CRA will never call and threaten legal action or ask for your SIN # – they already have your SIN #!

If you receive a call from someone claiming to be from the CRA and asking for this type of information, hang up the phone. Then, call or email us. We can call CRA on your behalf to inquire on your tax status.

Weekly Market Wrap-Up

 North America

  • The TSX closed at 16203, up 159 points or 0.99% over the past week. YTD the TSX is down -0.04%.
  • The DOW closed at 25317, up 682 points or 2.77% over the past week.YTD the DOW is up 2.42%.
  • The S&P closed at 2779, up 44 points or 1.61% over the past week.YTD the S&P is up 3.93%.
  • The NASDAQ closed at 7646, up 92 points or 1.22% over the past week.YTD the Nasdaq is up 10.76%.
  • Gold closed at 1304, up -9.00 points or 0.46% over the past week.YTD gold is down -0.46%.
  • Oil closed at 65.56, down -0.19 points or -0.29% over the past week.YTD oil is up 8.51%.
  • The USD/CAD closed at 0.7739, up 0.0021 points or 0.27% over the past week.YTD the USD/CAD is down -2.69%.
  • The MSCI closed at 2138, up 45 points or 2.15% over the past week. YTD the MSCI is up 1.66%.

Europe/Asia

  • The Euro Stoxx 50 closed at 3447, down -2 points or -0.06% over the past week.YTD the Euro Stoxx 50 is down -1.63%.
  • The FTSE closed at 7681, down -21 points or -0.27% over the past week.YTD the FTSE is down -0.09%.
  • The CAC closed at 5450, down -16 points or -0.29% over the past week.YTD the CAC is up 2.58%.
  • DAX closed at 12767, up 43.00 points or 0.34% over the past week.YTD DAX is down -1.17%.
  • Nikkei closed at 22695, up 524.00 points or 2.36% over the past week.YTD Nikkei is down -0.31%.
  • The Shanghai closed at 3067, down -8.0000 points or -0.26% over the past week.YTD the Shanghai is down -7.26%.

Fixed Income

  • The 10-Yr Bond Yield closed at 2.94, up 0.0400 points or 1.38% over the past week.YTD the 10-Yr Bond is up 22.50%.

 

Sources: Dynamic, Advisor.ca

Frank Mueller

Weekly Update – June 1, 2018

“As history has repeatedly proven, one trade tariff begets another, then another – until you’ve got a full-blown trade war. No one ever wins, and consumers always get screwed” – Mark McKinnon

Canada, U.S. Impose Tariffs On One Another

Thursday saw volleys of trade tariffs imposed. Citing “national security”, United States Commerce Secretary Wilbur Ross and President Trump tariffs on imported Canadian steel and aluminum worth about $20 billion, taking effect today (June 1). President Trump also threatened to impose an auto tariffs.

Canadian Foreign Affairs Minister Chrystia Freeland and Prime Minister Justin Trudeau responded only hours later, announcing tariffs of up to $16.6 billion on a wide assortment of U.S. products to take force on July 1.

Tariffs always hurt the end consumer, and they can also hurt market growth. Companies that pay tariffs on imported goods will, to the extent they can, pass the cost on to the end consumer. For instance, tariffs on aluminum could lead to a rise in the production cost of beer cans, and thus, the cost of purchasing beer at the till.

Higher costs over time will put upward pressure on inflation. One option a central bank can employ to counter inflation is to raise their key interest rate. Rising rates drag on market growth and reduce credit availability, leading to lowered returns.

About 75 per cent of Canadian exports go to the U.S., so the beleaguered Canadian economy could be hurt even further.

Bank of Canada Holds Rates Steady

On Wednesday, the Bank of Canada opted to hold its key interest rate at 1.25 per cent, as analysts had expected. However, cautious wording during the previous rate hold were not present this week, signalling a rate hike at the July policy meeting.

The new tariff war between Canada and the U.S. will likely only add to the expectation of a rate hike, as inflation, a natural by-product of tariffs, could be kept in check with rising rates.

Increased borrowing costs for businesses and individuals alike will weigh on the Canadian economy. Canadians already have high levels of household debt, so discretionary spending is likely to decrease – never a good sign for an economy.

Italian Political Chaos

Italy’s “anti-establishment” parties’ plans to form a coalition government fell apart, as the President refused a controversial choice for Economic Minister. Now, the possibility of a snap election has arisen. Markets reacted by putting Italian bonds and specific equities, like bank stocks, under heavy selling pressure.

Italy is a top-5 bond market in the world, so a bond market disruption would have a ripple effect worldwide. Some analysts feel the European Central Bank should steer clear of this, while others feel they should announce their intention to purchase all Italian bonds, should yields hit a certain level (effectively, a yield cap).

Those in favour of ECB intervention feel that simply announcing the intent to put a yield cap on Italian bonds will help calm the waters. It is likely still too early for the ECB to step in, and until they do, investors will likely seek safer, less volatile bond markets around the globe.

Weekly Market Wrap-Up

North America

  • The TSX closed at 16044, down -32 points or -0.20% over the past week. YTD the TSX is down -1.02%.
  • The DOW closed at 24635, down -118 points or -0.48% over the past week. YTD the DOW is down -0.34%.
  • The S&P closed at 2735, up 14 points or 0.51% over the past week. YTD the S&P is up 2.28%.
  • The NASDAQ closed at 7554, up 120 points or 1.61% over the past week. YTD the Nasdaq is up 9.43%.
  • Gold closed at 1298, down 15.00 points or -0.69% over the past week. YTD gold is down -0.92%.
  • Oil closed at 65.75, down -2.13 points or -3.14% over the past week. YTD oil is up 8.82%.
  • The USD/CAD closed at 0.77185, up 0.0008 points or 0.10% over the past week. YTD the USD/CAD is down -2.95%.
  • The MSCI closed at 2093, down -18 points or -0.85% over the past week. YTD the MSCI is down -0.48%.

Europe/Asia

  • The Euro Stoxx 50 closed at 3449, down -66 points or -1.88% over the past week. YTD the Euro Stoxx 50 is down -1.57%.
  • The FTSE closed at 7702, down -28 points or -0.36% over the past week. YTD the FTSE is up 0.18%.
  • The CAC closed at 5466, down -77 points or -1.39% over the past week. YTD the CAC is up 2.88%.
  • DAX closed at 12724, down -214.00 points or -1.65% over the past week. YTD DAX is down -1.50%.
  • Nikkei closed at 22171, down -280.00 points or -1.25% over the past week. YTD Nikkei is down -2.61%.
  • The Shanghai closed at 3075, down -66.0000 points or -2.10% over the past week. YTD the Shanghai is down -7.02%.

Fixed Income

  • The 10-Yr Bond Yield closed at 2.9, down -0.0300 points or -1.02% over the past week. YTD the 10-Yr Bond Yield is up 20.83%.

 

 Sources: Dynamic, Advisor.ca