With the price of oil finding some stability this week all eyes turned to the conflict in Ukraine where a truce was reached Thursday morning. The truce was brokered by the leaders of France, Germany and Russia who engineered a ceasefire due to take effect February 15 at midnight. Although the deal ends the fighting between Ukraine and pro-Russian separatists it does not settle the issue of borders which could prove to be its undoing. There also appeared to be forward progress between Greece and its creditors over debt repayments, economic overhauls and budget cuts. The Greek finance minister and 19 other euro zone finance chiefs initially came to an agreement that extended the country’s bailout program but Greece withdrew at the last minute. Talks are expected to resume. Elsewhere, figures released Sunday by China showed surprisingly weak trade data as exports were up a scant 3.3% in January from a year ago while imports fell 19.9%. And in the US, retail sales fell for the second month in a row dropping 0.8% in January. The fall comes despite the savings from sharply lower gas prices, which is surprising some analysts. Finally, the price of West Texas Intermediate oil appears to be finding a floor around the US$50 a barrel mark but it’s unclear whether that will hold and for how long. On Wednesday, the US Energy Information Administration said there is more oil in storage – 417 million barrels – than at any time in its 33-year record-keeping history which helps explain why the number of new wells drilled across the US dropped 28% in January versus last June.
Stocks rise, milestones near
For the four-day period covered in this report, the Dow added 148 pts. to close at 17,972, the S&P 500 moved ahead 33 pts to finish at 2,088 and the Nasdaq advanced 113 pts. to settle at 4,857. Pricing milestones near for the Nasdaq and Dow thanks to the current bull market as the tech-laden Nasdaq is now within shooting distance of the 5,000 pt. plateau while 18,000 is within reach for the blue chips. In Canada, the TSX ended the week positive rising 145 pts. to close Thursday’s session at 15,228.
We’re warming up to oil; fixed income and preferreds to remain volatile as another rate cut is expected
Equity: Himalaya Jain, Director, Portfolio Advisory Group wrote: “There is still a ~2 million barrel/day surplus globally, but we think the foundations of a meaningful supply response have been laid by non-OPEC producers, particularly in North America. Dramatic capital expenditure cuts announced by energy producers since the oil price slide started in October has resulted in US drilling activity that is 25% lower than the November peak. In Canada, the seasonal winter surge in drilling is nonexistent as drilling rig activity is running 39% lower than last year. With the path toward flatter North American production now more visible, we are becoming more constructive on energy equities. Our investment strategy during the past few months had been to high-grade energy exposure by trading sideways into the highest quality producers (integrated and senior producers), while maintaining an overall market weight exposure to energy. This defensive strategy has proven to be worthwhile as many of these equities have recovered most of their earlier losses. However, with many of these equities now discounting US$70-US$80/bbl oil, we think it’s time to begin shifting to an offensive strategy by slowly returning to intermediate and junior producers which remain well below September 2014 levels. However, with balance sheets and dividend policies still on unstable terrain, we prefer to add this exposure via an ETF rather than selecting individual names. While the oil services sector could eventually experience significant torque under an oil price recovery scenario we are not ready yet to venture into this subsector.”
Portfolio Advisory Group
The Investment Committee of the Portfolio Advisory Group meets regularly to formally discuss markets, sector allocation and investment recommendations. Below is a brief synopsis of our current views. For specific investment strategy relating to your investment portfolio, please contact us.
Oil took the spotlight back this week as the price of crude dramatically rose and fell on conflicting reports of growing surpluses and reduced production plans. After surging 19% over a period of six days, the price of WTI crude crested Tuesday to a year-to-date high north of US$50 a barrel. A day later – Wednesday – the move was downward with oil falling 8.7%, the largest one-day price drop in two months. By session’s end Thursday, it appeared oil would be on track to end the week on the plus side. The next important cue for the oil market will be the weekly count of rigs drilling for oil south of the border. A drop in the count would signal further production plan pullbacks – a bullish sign for the price of the commodity. Elsewhere, the ECB is playing hardball with Greece refusing to take their bonds as collateral for central bank loans. The last time these two locked horns was 2012 when the ECB also refused to accept Greek debt which was, and is now, junk rated. Although Greece has indicated it will do whatever it can to avoid default the prospects look increasingly bleak unless a compromise can be reached. In China, the PBoC echoed the moves of other central bankers announcing new stimulus measures by loosening reserve requirements for banks. The move is expected to free up an estimated US$100 billion for lending which points to further worry among Chinese officials about the state of the economy. Finally, the escalating violence in Ukraine appears to be coming to a head as the leaders of Germany and France head to Russia to meet with President Putin to try to forge a lasting peace.
Stocks surge to positive territory ytd
For the four days covered in this report the Dow jumped 715 pts. to close Thursday at 17,884, the S&P 500 moved ahead 66 pts. to end at 2,062 and the Nasdaq added 115 pts. to finish at 4,765. The TSX also put in a positive week rising 411 pts. to settle at 15,124. Due to the strength of the past week’s rally all major North American stock benchmarks are positive for the year.
BoC cut confirms Canadian economy slowdown; rate moves impact financials unevenly.
Equity: Caroline Escott, Director, Portfolio Advisory Group wrote: “Equities have been volatile since the start of the New Year and we expect this volatility will remain a theme over the near term. This has been true of commodities, too, and bond yields, while having moved higher in February, remain lower on a YTD basis. Our 2015 equity return expectations have moderated, and while we continue to favour US over Canadian equities, the current valuation of the S&P 500 is less compelling than in recent years. We believe the Bank of Canada’s surprise interest rate cut on Jan. 21/2015 confirms our concerns of a slowing Canadian economy. In addition to commodity price weakness (in spite of the recent uptick in crude), the rate cut by the Bank of Canada is the latest item to weigh on banks, reinforcing management comments during Q4 reporting season that struck a cautious note regarding the prospects heading into 2015. Lifeco shares have also been pressured by lower rates, though sectors like REITs and utilities are likely to benefit from this trend.”