Top of the morning
While bearish sentiment on the high-yield (or “junk”) bond market appears to be a tad overdone in the short-term, Reuters’ Luciana Lopez and Jennifer Alban provide an excellent look at why so many big names aren’t in love with this asset class:
Six years of interest rate suppression by the U.S. Federal Reserve has driven up prices for high-yielding assets and forced investors searching for income to overpay for everything from junk bonds to stocks that pay big dividends, top money managers told the Reuters Global Investment Outlook Summit this week.
“The high-yield market is sort of in a bubble and sooner or later there will be a price paid for that,” said Carl Icahn, the billionaire investor who said he owns credit default swaps on high yield debt against the 5-year U.S. Treasury note. That means he’s essentially shorting high yield debt while going long on the U.S. five-year note. “We think the risk-reward is great in that CDS,” he said…
Lower-quality corporate debt is “priced to perfection” relative to anticipated default rates, agreed Chris Hentemann, chief investment officer of 400 Capital Management. “You have very little room for error.”
On the homefront
The loonie caught a bid this morning after the People’s Bank of China unexpectedly cut its one-year deposit and lending rates, rising a quarter of a cent against the U.S. greenback to trade at 0.886.
Inflation data on deck. At 8:30am (EST), Statistics Canada will release readings on headline and core inflation for October. The consensus estimate is for these metrics to have risen 2 and 2.1 percent year-over-year, respectively, the same annual rates seen in September. CIBC’s Nick Exarhos reminds us that the “base effect” – a very soft print in October 2013 – will factor into this reading, limiting the scope for inflation to decline. The Bank of Canada has all but said that inflation doesn’t affect its the decision-making process too much at a time when there is an abundance of labour market slack. “Despite slightly above-target inflation, the Bank of Canada believes much of the move is transitory, and it therefore shouldn’t impact their neutral policy stance,” writes Bank of Montreal senior economist Robert Kavcic. Monetary policymakers aren’t going to fret even if inflation accelerates; we’d have to start seeing a number of core inflation prints around or above 3 percent for Poloz & Co. to really begin reassessing whether policy is too stimulative.
UPDATE: Inflation surprised to the upside in October, with the core rate hitting its highest level since February 2012.
Valeant plans to acquire…up to $2 billion of its own shares. Fresh off its failed acquisition of Botox-maker Allergan, Valeant Pharmaceuticals (VRX) announced a program to buy back up to $2 billion (U.S.) in its stock over the next year. The Canadian pharma giant’s previous share repurchase program expired today. It’s worth noting that the company never actually bought back any shares under that program, which might explain why investors weren’t too impressed by this news.
RBC restructuring, to shed 300 jobs. Sources familiar with the matter tell the Financial Post that the Royal Bank of Canada (RY) is closing its wealth management operations in the Caribbean and some international advisory businesses in North America. This restructuring could reportedly entail 300 job losses.
“Blame Canada” a mantra for mining exec. “I’m walking away from Canada big time – Canada for Cliffs has not been a good thing,” Lourenço Gonçalves, Chairman and CEO of Cliffs Natural Resources, told The Globe and Mail’s Nicolas Van Praet. Earlier this week, the company indicated that it was looking to shut down its high-cost iron ore mine in Quebec after it was unable to find partners to develop the project or a party interested in purchasing it. That could cost the firm up to $700 million (U.S.) over the next five years. In addition, Cliffs has the mineral rights in the Northern Ontario “Ring of Fire” project, which the CEO says is “beyond the point of no return.” This situation is not a mess of Gonçalves’ own making; he inherited these assets when he took over at the miner in August. And if he seems unusually blunt and colourful for an executive of a major company, well, that’s because he is.
China’s central bank cut two key interest rates this morning, as previously mentioned. Monetary policymakers in the world’s second-largest economy had opted for more targeted stimulus throughout the year, fearing that across-the-board rate reductions might fuel malinvestment. This decision comes on the heels of November’s HSBC Flash Manufacturing PMI, which suggested the sector failed to grow and spurred calls for additional accommodative policy. The Canadian dollar wasn’t the only beneficiary of the PBoC’s surprising move; a variety of commodity currencies moved higher. Earlier this morning, The Wall Street Journal’s Shen Hong reported that “China’s financial system is showing fresh signs of stress,” observing that short-term costs of interbank borrowing were on the rise.
Next week’s OPEC meeting is, without a doubt, the major event remaining on the agenda for November. However, there’s another big item on the docket that comes prior to that. The deadline for Iran to reach a deal with global superpowers on its nuclear program, which the world’s largest economies want to ensure does not lead to the proliferation of nuclear weapons, is November 24. There have been rumblings that this deadline may be extended, as the two sides appear to be far from an agreement. An accord to resolve this 12-year dispute would be, in all likelihood, a net negative for the price of oil, as more Iranian crude would soon become available on global markets once sanctions are removed.
Mario Draghi called it “essential that the ECB has acted —and is continuing to act—to bring inflation back towards 2 percent.” The decline in inflation expectations is a chief concern to Europe’s top central banker, who indicated that monetary policymakers “will do what we must” to get inflation back to target. These comments sparked a sell-off in the euro.
The lower house of Japan’s parliament was dissolved just as North America headed to bed last night. This move paves the way for Prime Minister Shinzo Abe to set a date for a snap election, which is widely expected to be held on December 14. Abe is looking for the Japanese people to support an 18-month delay in the next leg of the sales tax hike. The latest one, implemented in April, pushed the country into a technical recession. Though the prime minister’s approval rate is currently underwater, his party is expected to retain its majority following this election.
Japan’s finance minister deemed the depreciation of the yen to be too rapid. The island nation’s currency hit a fresh seven-year low against the greenback earlier this week, but rallied on Taro Aso’s remarks. “Recall corporate Japan would prefer to see the government talking up the JPY and even defending it on moves above ¥110, so the government has to be seen to be helping,” writes IG chief market strategist Chris Weston. “Expect more of this supportive language.”