This week the capital markets essentially took the long way round to end
up in the same spot they were last week, but that is not to say the global
markets were not bumpy this week. Greece was again at the forefront
with an “on again off again” ability to make their upcoming IMF debt
payment June 5th. However, things got really volatile in China on
Thursday with news that Investment Brokers were tightening margin
lending requirements. At one point on Thursday this created enough
selling pressure to cause the Shanghai Capital Market to be down 6.5%
for the day.
While we do not have any direct exposure to the Chinese equity markets
for clients, a move like that does ripple through the global markets to
some degree. To put the Shanghai market volatility into perspective that
would be equivalent to the TSX dropping 1000 points, or the Dow Jones
being down nearly 1200 points in a single day.
On this side of the pond, we are fundamentally bullish but are in the
midst of a general market consolidation where we have only seen the
markets gain between 2% and 3.5% thus far in 2015. North American
economic data continues to be mixed but moderately positive, with a
little bit of everything. For example, today we saw that for the first
quarter of the year the U.S. Gross Domestic product (GDP) actually
shrank by 0.7%, which is the third time since 2009 that we have seen a
contraction in US economic data. Although severe weather in the
Northeastern United States is the main culprit (as it is hard to move
goods around and go shopping when you have 7 feet of snow on the
ground) we do not foresee this leading to a reversal in longer term
The most recent economic data we have seen does point to an
improvement on the first half of the year, with housing starts in the
United States up 20% for the month of April, a with positive revisions for
March and permit data supporting further strength. Jobless claims have
also shown strength as the 4 week average has dipped to the lowest
level in over a decade. In her speech this week, Fed Chair Janet Yellen
noted that the U.S. economy seems well-positioned for continued growth
and that households are seeing the benefits of the improving job
situation. So on balance, the second half of the year continues to look
more positive to us.
An interesting note out of Bloomberg this morning is that China has now
surpassed the U.S. as the world’s largest buyer of crude oil, and is
poised to get even bigger largely due to new rules in China allowing
smaller Chinese refiners to nearly double their capacity. This increased
capacity has been driving new crude import quotas for these smaller
“teapot” refineries, leading Sanford Bernstein Ltd to comment that this
flow of oil could help create a global supply deficit later this year.
According to a note Sanford put out to clients this week, they are
forecasting a global shortfall of nearly 1.5 million per day, fueling their
forecast of $80 Brent Crude pricing by the end of the year.
Canaccord’s Portfolio Strategist has also recently increased his view
of the sector, and with West Texas Intermediate (WTI) once again
picking up through the $60 per barrel level today, we feel that we are
beyond the trough. Now we may not be as bullish as Sanford
Bernstein, but their argument does corroborate our own, thus giving
us confidence in continuing to hold a modest ownership of well-run
energy companies such as Suncor within our portfolios.
For those of our readers who enjoy taking in any of our Province’s
beautiful parks or enjoy camping at a nearby fishing lake, please be
careful out there. It was reported last night that British Columbia has
received less than 10% of the its normal rainfall for the month of May,
so our forests are very dry.
We never forget that working for our clients is an expression of your
trust, and we promise to always uphold that trust. Thank you.
As always, we welcome your feedback.
Have a great weekend.
The Dekker Hewett Group