June 24, 2016 Newsletter

Dear Friends,

Tangents:

On this day in 1914 the poet Edward Thomas and his wife Helen were going by train to see the American poet Robert Frost at Ledbury in Herefordshire.  Thomas made some jottings about these suspended moments in his notebook and much later, some time in the first five months of 1915 and after Frost had convinced him of his vocation as a poet, he wrote this, his most famous poem.  He was killed on the Western Front in 1917.  Adlestrop station was an early victim of Dr. Beeching’s rationalization of the rail network in the 1960s.

Adlestrop

Yes, I remember Adlestrop –
The name, because one afternoon
Of heat the express-train drew up there
Unwontedly.  It was late June.

The steam hissed.  Someone cleared his throat.
No one left and no one came
On the bare platform.  What I saw
Was Adlestrop – only the name

And willows, willow-herb, and grass,
And meadowsweet, and haycocks dry,
No whit less still and lonely fair
Than the high cloudlets in the sky.

And for that minute a blackbird sang
Close by, and round him, mistier,
Farther and farther, all the birds
Of Oxfordshire and Gloucestershire.

PHOTOS OF THE DAY

Traders from BGC, a global brokerage company in London’s Canary Wharf financial center, react as European stock markets open early Friday after Britain voted to leave the European Union in the EU BREXIT referendum. Russell Boyce/Reuters

Britain’s Prime Minister David Cameron leaves Number 10 Downing Street in London on Friday with his wife, Samantha, to speak after Britain voted to leave the European Union. Phil Noble/Reuters

People walk on the installation ‘The Floating Piers’ by Bulgarian-born artist Christo Vladimirov Yavachev, known as Christo, on Lake Iseo, northern Italy, on Friday. Stefano Rellandini/Reuters

Market Closes for June 24th, 2016

International Markets

Bonds

Currencies

Commodities

Number of the Day
17,410,742
17.4 million Britons voted to leave the European Union, 51.9% of total votes. 16,141,241 voted to remain, 48.1% of the total.

Market Commentary:

Canada

By Eric Lam and Allison McNeely

     (Bloomberg) — Canada’s currency fell with its stocks while bonds rallied after Britain’s decision to secede from the European Union spurred concern the global recovery will falter.

     The yield on the Canadian government 10-year bond fell 13 basis points to 1.163 percent as investors sought refuge in fixed income. The country’s currency declined 1.85 percent to C$1.3012, after earlier falling the most in six years. The S&P/TSX Composite Index dropped 1.7 percent, less than most global stock indexes, as a gold rally limited declines.

     “I went to sleep confident and woke up looking, what happened here? It was totally unexpected,” Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto.

     On a day when the surprise vote rattled global markets, Canadian assets fared relatively well. The loonie was the sixth- best performer among global currencies, while the equity decline was among the smallest in major markets.

     “We are well positioned to weather global market uncertainty as we have done in the past,” Prime Minister Justin Trudeau said in a statement from Ottawa. Trudeau was expected to speak later today in Quebec.

     The Bank of Canada, meanwhile, said the Group of Seven central banks are monitoring the situation closely. The Brexit vote may push back any rate increase into the fourth quarter of 2017, BMO Capital Markets economists said in a research note Friday. The vote also rules out a July increase by the U.S. Federal Reserve, they said.

     Trading in the swaps market suggests a 21 percent chance of a Bank of Canada rate cut in October, from just 7 percent Thursday.

     The U.K. was Canada’s fifth-largest trading partner last year, accounting for about $21.2 billion in total trade, according to data compiled by Bloomberg. That compared with more than $540 billion in cross-border commerce with the U.S., Canada’s largest partner by far.

     Canadian firms most exposed to the European market include Brookfield Asset Management Inc., CGI Group Inc. and Great-West Lifeco Inc.. Other firms with relatively large exposures include software company Open Text Corp.; plane and train maker Bombardier Inc.; aircraft simulator maker CAE Inc. and engineering firm WSP Global Inc.

     An index of the 19 Canadian companies most exposed to Europe dropped 3.6 percent, more than twice the drop of the main gauge, led by Great-West, Concordia Healthcare Corp. and Bombardier.

     Crude also fell, with the price for West Texas Intermediate dropping 4.9 percent, the biggest decline in four months. That may weigh on the Canadian currency, traders said.

     “We envision the Canadian dollar could weaken by up to 5 to 6 percent over the coming months based on the fact that this is a large-scale shock for global growth,” Bipan Rai, head of foreign exchange at the Canadian Imperial Bank of Commerce in Toronto, said by phone. “That’s not good for our export picture and our currency may bear the brunt of that pain.”                       

     Collectively, less than 3 percent of the S&P/TSX company revenue is derived from the U.K., according to Ian de Verteuil, a Toronto-based analyst with Canadian Imperial Bank of Commerce who created a Brexit index to track Canadian stocks most tied to the vote. For the year to date, the 19 so-called Brexit stocks have lost 0.3 percent, compared with the 6.8 percent gain for the benchmark S&P/TSX Composite Index.  

     “We have undertaken an in-depth analysis of the potential risks to our businesses, and notwithstanding the potential for increased market volatility and uncertainty that may arise, our businesses are resilient and we maintain significant financial flexibility, ” said Paul Mahon, chief executive officer of Winnipeg, Manitoba-based Great-West, said in a statement. Great- West, which has been in the U.K. since 1903, remains committed to Europe, Mahon said in the statement.

     Aimia Inc., the Montreal-based loyalty card company, which owns and operates Nectar, the largest loyalty program in the U.K., said the decline in the pound against the Canadian dollar would be unlikely to have material mid-term effects on the the company’s financial results. The pound was down 6.56 percent to C$1.7743.

     “The pressure on gross billings and operating costs from our U.K. business when the pound falls is counterbalanced by a reduction in costs related to global product development work that is also done in London,” said Rupert Duchesne, group chief executive at Aimia.

     Jason Russell, chief investment officer at Acorn Global Investments in Oakville, Ontario, said the firm, which manages about C$260 million ($199 million), reduced its risk ahead of the referendum though the result was still a shock.

     “Look, everyone walked into this thing last night knowing Remain was going to win,” he said. “Everyone felt that 12 hours ago. Strong opinions will get you in trouble.”

US

By Dani Burger and Anna-Louise Jackson

     (Bloomberg) — U.S. stocks plunged the most in 10 months, joining a selloff in global risk assets on speculation that the U.K. decision to leave the European Union will hamper worldwide growth.

     Equities sank to session lows in afternoon trading, with the Dow Jones Industrial Average sliding more than 600 points. The S&P 500 Index extended losses after falling below the 2,050 level, an area where other pullbacks during the prior two months found a floor. Banks, technology, raw-materials and industrial shares capped their worst single-day declines in more than four years.

     “Market participants are right to be concerned,” said Dean Maki, chief economist of investment firm Point72 Asset Management. “This is a legitimate risk-off event. We’re likely to see weaker growth as a result of this, and it’s appropriate that markets are reacting to this. Exports are likely to be weaker and earnings are a function of exports. U.S. exporters are going to have to deal with a stronger dollar again.”

     The S&P 500 fell 3.6 percent to 2,037.30 at 4 p.m. in New York, the most since August 24. The benchmark slid 1.6 percent for the week and erased its 2016 gain, which reached as much as 3.7 percent earlier this month. The Dow dropped 611.21 points, or 3.4 percent, to 17,399.86, also the biggest retreat since August. The Nasdaq Composite Index tumbled 4.1 percent, the most in almost five years. About 15 billion shares traded hands on U.S. exchanges, more than double the daily average during the past three months.

     The victory of the “Leave” campaign stunned many investors who’d put wagers on riskier assets over the past week as bookmakers’ odds suggested the chance of a so-called Brexit was less than one in four. The S&P 500 had gained 2 percent this week before the results were announced. The pound plunged the most in 30 years and European equities dropped as investors weighed the vote’s implications for the global economy.

     The day’s turbulence was accompanied by a chorus of central-bank assurances that policy makers stand ready to intervene. Governor Mark Carney said the Bank of England could pump billions of pounds into the financial system, while the European Central Bank said it will give banks all the funding they require to counter market turmoil. The Federal Reserve said it was “carefully monitoring” financial markets.

     As if results of the U.K. vote wasn’t enough, today was also the date of the annual rebalancing of FTSE Russell’s stock indexes, a procedure that reliably exacerbates trading. In 2015, the reconstitution helped fuel a jump in volume to more than 10 billion shares, the seventh-highest total of the year.                        

     Banks plunged after rallying the most in five weeks Thursday, with Citigroup Inc. down 9.4 percent, its steepest in four years. JPMorgan Chase & Co. and Goldman Sachs Group Inc. lost more than 6.9 percent, the most since at least 2012. Caterpillar Inc. and Boeing Co. sank more than 5.2 percent after pacing the Dow’s biggest gain in three months Thursday. Energy shares fell 3.5 percent as crude decreased 4.9 percent.

     “Fundamentally, this probably doesn’t impact many U.S. companies that aren’t invested in the U.K., though it impacts sectors like financials because it looks like there won’t be a Fed rate hike for a little bit longer, though even they don’t really know,” said Tim Ghriskey, who oversees $1.5 billion as managing director and chief investment officer at Solaris Asset Management.

     Traders abandoned bets on future interest-rate increases well into 2017, after expectations for higher borrowing costs this year had crept up yesterday on optimism the U.K. would remain in the EU. Odds of a Fed move by February plunged to 15 percent from 52 percent Thursday, while probability of an actual rate cut before the December meeting rose to more than 13 percent.

     In Friday’s session, nine of the S&P 500’s 10 main industries slid, with financials reversing their strongest climb since April with the biggest drop in four years. Seven groups sank at least 2.8 percent, with industrials, technology and raw- materials posting the worst one-day drop since 2011. Utilities were little changed.

     Ford Motor Co. lost 6.6 percent, the most since September 2014, after saying the Brexit will have an “adverse impact” on its operations. Parts makers Delphi Automotive Plc and BorgWarner Inc. slumped more than 9.5 percent. General Motors Co. slid 4.9 percent toward a four-month low.

     JPMorgan published a list last month of 22 stocks with the highest sensitivity to the Brexit outcome. The group is down an average 6.4 percent today. Among the companies identified by Dubravko Lakos-Bujas, JPMorgan’s chief U.S. equity strategist, Penske Automotive Group Inc. slumped 10 percent, the most since October 2009, while Invesco Ltd. has tumbled 14 percent for the biggest drop in seven years.

     The vote comes at a time when uncertainty already plagues U.S. stocks, with questions around the Fed’s ability to stoke growth after the worst month for hiring since 2010, a four- quarter decline in corporate profits, price-earnings ratios that are close to a decade high and a presidential election looming in the fall.

     The S&P 500 plunged 11 percent in its worst-ever start to a year before recovering through April. It’s virtually been stuck in place since, struggling to hold above the 2,100 level that has capped three rallies since November. It fell from that perch again after closing above it Thursday for the first time in two weeks.

     Fallout from the U.K.’s secession vote leaves global investors as reliant on their hedges as any time since the selloff that rocked markets in January and February. Trading of options and derivatives over the last week has risen in instruments that gain in times of market turbulence, among them futures on the CBOE Volatility Index. The measure of turmoil known as the VIX jumped 49 percent Friday, the most since August 2011.
 

Have a wonderful weekend everyone.

Be magnificent!

The spirit of democracy

is not a mechanical thing

to be adjusted by abolition of forms.

It requires change of heart.

Mahatma Gandhi

As ever,

Carolann

Remember your humanity, and forget the rest.

                    –Bertrand Russell, 1872-1970

Carolann Steinhoff, B.Sc., CFP®, CIM, CIWM

Portfolio Manager &

Senior Vice-President

Queensbury Securities Inc.,

St. Andrew’s Square,

Suite 340A, 730 View St.,

Victoria, B.C. V8W 3Y7