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Video / 11 May 2017 at 7:35 GMT

From the Floor: Canada banks downgrade sparks fears of 'Minsky moment'

#SaxoStrats
   • Moody's cuts ratings on six Canadian banks, sparking fears of wider collapse
   • 'You wonder if Canada is marching towards Minsky moment in credit markets': Hardy
   • CAD lower despite oil's rally due to Moody’s downgrade of Canadian banks
   • New Zealand dollar drops sharply on dovishness from RBNZ
   • Market caught off guard by RBNZ saying odds of a cut are as high as for a hike
   • Oil stages biggest single-day jump of 2017
   • Oil gains as drop in crude and fuel stocks triggers short-covering above key levels
   • WTI crude looking to establish support above $47/barrel, Brent above $50/b
   • Goldman and IEA see accelerating oil stockpile decline: Hansen 
   • Draghi gave no concession to German tapering wing : Boye
   • Snap Inc shares plunge 23% after Q1 results miss market estimates


Saxo Strats banner
By John Acher

A Moody’s downgrade of six large Canadian banks has sparked fears of a broader collapse in Canada’s credit market, denting the petrol-linked Canadian dollar on a day when oil prices staged their biggest single-day jump of 2017.

Moody’s cut the long-term debt and deposit ratings of Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada and Royal Bank of Canada on Wednesday due to worries about consumers’ debt burden, according to news reports.

The downgrade affected “essentially the entire banking sector in percentage terms, all on worries over the overall debt levels in the economy,” says Saxo Bank’s FX strategy chief John J Hardy. (Read also Hardy's latest FX Update here on TradingFloor.)

The ratings downgrade followed a run on deposits at mortgage lender Home Capital, which ignited worries of a broader slowdown in Canada’s real estate market, at a time when Canadians are piling up household debt.

“You wonder if Canada is marching towards some kind of Minsky moment in its credit markets,” says Hardy. 

Named for American economist Hyman Minsky, a “Minsky moment” is a sudden, major collapse of asset values as part of the credit or business cycle.

China’s curbing of capital outflows is hurting real estate markets across New Zealand, Australia and the west coast of Canada, says Saxo Bank’s equities strategy chief Peter Garnry.

“That’s obviously headwinds for the Canadian banking sector,” Garnry says, “and if we continue to see weak oil prices, or stay in this range for a long time, that should be negative.”

The Moody’s downgrade knocked the Canadian dollar on a day when oil prices staged their biggest single-day rebound of the year though the petrol-linked CAD tends to move in tandem with oil. (See more on the oil rally below.)

“Negative for Canada – the market is very well positioned though, we have very negative sentiment on the Canadian dollar, but there could be room for more,” Hardy says. “You can see on the chart here, we are marching back towards those highs near 1.38.”

Canadian dollar hit, USDCAD looks towards 1.38
USDCAD
 
Source: Saxo Bank

The US dollar has been relatively stable to well-bid despite the political turbulence in Washington and worries about the “Trump trade”, Hardy says.

The FX market is keenly awaiting news today at 1100 GMT from a Bank of England meeting and BoE governor Mark Carney’s news conference at 1130 GMT.

Kiwi dollar hit

The kiwi dropped sharply overnight on dovishness from the Reserve Bank of New Zealand.

Already at the RBNZ’s previous meeting it was clear that it was “trying to put expectations on ice for any sort of rate move well into 2019,” Hardy says.

Subsequent fairly strong economic data and a higher-than-expected inflation reading led the market to expect a shift in the bank’s tone.

“Instead they got more dovish rhetoric and a willingness to look through inflation and still peddling the phrase that odds are just as high for a cut as for a cut, and that caught the market off guard relative to its expectations, and we saw a pretty notable [NZD] adjustment lower,” Hardy says.

“Kiwi at new lows for the cycle, in recent months anyway,” Hardy says, adding that NZDUSD needs to hold, or else it would suggest that the market is second-guessing the RBNZ’s reasoning and dovish stance.

The FX market is keenly awaiting news today at 1100 GMT from a Bank of England meeting and BoE governor Mark Carney’s news conference at 1130 GMT.

Oil jumps

Recently beleaguered oil prices rallied on Wednesday on positive news for the market balance from the US Energy Information Administration's weekly inventories report.

“We had a big jump in oil prices yesterday, the biggest gain of the year so far,” says Ole Hansen. “It was the stockpile report from the US, which proved to be supportive on most counts.” (Read also Hansen's latest on the oil markets here on TradingFloor.)

Crude oil inventories dropped more than expected, gasoline stocks also declined slightly, and exports from Opec countries also fell, Hansen says.

“Any slowdown in imports from Opec gives the market a bit of a psychological boost at this stage,” Hansen says.

“So the market jumped – we are back above the $47 level [in WTI],” Hansen says.

WTI crude looking to establish support above $47/barrel

WTI oil price
Source: Saxo Bank

“The stress is now back in the court of the short sellers,” Hansen says, noting that last week featured aggressive short selling when the WTI price broke below $47/barrel and Brent sank below $50/b.

The gross short position in Brent and WTI is now probably “quite a bit above” the average for the past two years. “So that is going to be reduced, and that’s probably going to be the main driver just in the short term,” Hansen says.

Chartwise, the WTI price has retraced more than 38.2% and is now looking at the $50% retracement of the selloff, which could take the price back up to the $48.76/b area, Hansen says.

“The key for the week will be whether we manage to get a close back above that $47/b level – that would help reduce the tension in the market,” he says.

Goldman and the EIA issued bullish signals on Wednesday, saying they see an accelerating stockpile decline, which has not been visible up till now, Hansen says.

Gold is stuck in a range, with key levels of $1,200/oz and $1,250/oz as the ones to look out for, he says.

Draghi steady

Treasuries softened on Wednesday on a disappointing auction, says Saxo Bank’s fixed-income trader Michael Boye.

European Central Bank president Mario Draghi’s speech to the Dutch parliament on Wednesday gave no indication of any ECB policy change nor any concession to pressure especially from German central bankers for a policy tapering and more aggressive stance, Boye says.

“So it seems like it’s still this several years old conflict between the Italian chairman Draghi and the German central bankers demanding a tighter policy,” Boye says.

But momentum seems to be building in the market, nevertheless, for shift in policy, he says, noting that Bunds rebounded in relief, but erased all of the gains by the close.

“So it seems like the market is pricing in the likelihood of a tighter ECB,” Boye says. “In any case, the June meeting of the ECB is shaping up to be a very interesting one.”

Snapchat disappoints

Snap Inc., the parent of the photo app provider Snapchat, released first-quarter earnings in aftermarket. Revenue missed estimates, the figures for daily active users also disappointed, and the shares plunged 23%.

“It looks like from the quarter-on-quarter growth rates in daily active users that it is slowing down over the past year, and you wonder whether Instagram and Facebook over the long run will win this battle,” says Saxo's Garnry. 

“I am pretty sure Snapchat will see high growth rates in revenue, but can it really justify the valuation? That’s the big question, and at least there was some voting [on that] in the after-market shares yesterday,” he says.

Due to a public holiday in Denmark on Friday, this was the last morning call of this week. The next morning call will be on Monday, May 15.

Toronto's financial district
 Skyscrapers in Toronto's financial district. Photo: Shutterstock

John Acher is a consulting editor at TradingFloor
2y
Alan M Alan M
Good morning, do you still maintain a positive stance on aegon this morning? Down almost 5% right now even though earning were slightly higher. Could a solvency II ratio at 157% still be too low and be behind such a move??
2y
fredajerusha fredajerusha
This comment has been redacted

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