Market update

A typical volatile week with a positive end. Markets closing for the week and the Volatility Index (VIX) ending ~18% lower than the spike on Thursday.

Consumer price inflation accelerated to a four-decade high in Canada to 7.7 per cent last month, up from 6.8 per cent in April. That’s the highest since January 1983 and well above economist expectations for a 7.3% increase. Excluding gasoline, the Canadian CPI rose 6.3% year-over-year in May, from 5.8% in April.

Canadian retail sales increased 0.9% in April. Sales were up in 6 of 11 subsectors, representing 43.3% of retail trade while led higher by sales at general merchandise stores rising 4.2%. Core retail sales which exclude gasoline stations, motor vehicles, and vehicle parts dealers increased by 1.0%.

Joe Biden proposed to cut taxes on gas in an attempt to counter a soaring ‘price at the pump’.

Jerome Powell remained hawkish on interest rates, sighting the hikes being "designed to drive growth down to a level that is more sustainable and give the supply side a chance to catch up."

US weekly jobless claims fell slightly, but remained near a five-month high, suggesting a slight cooling in a solid labor market as the U.S. economy slows.

UK inflation hit a new 40-year high of 9.1% year-over-year in May as soaring food and energy prices continue to deepen the country’s cost-of-living crisis.

UK consumer confidence fell to its lowest level since records began while German business sentiment weakened slightly in June.

Japan May core CPI was 2.1% in-line with expectations, but above the Bank of Japan’s 2% target, however, consumer prices rose 0.8% if fresh food and energy was taken out.

Oil prices fell as investors reassessed the risks of recession and how fuel demand will be affected by rising interest rates.

Weekly change: TSX: 0.7%; DOW: 5.4%; S&P 500: 6.4%; NASDAQ: 7.5%; GOLD: -0.5% WTI: -3.2%

Bloomberg Market Updates - https://www.bnnbloomberg.ca/markets

Schwab Market Updates Podcasts - https://www.schwab.com/resource-center/insights/section/schwab-market-update

 

Oil Equities: The Quality Compounders of the Next Decade? Written by the GQG Research Team Link to Article

Despite the current strength in the industry due to rising oil prices, GQG Research Team believes that the dynamics of the industry have changed. In addition to a supportive commodity price environment, energy companies are also generating record free cash flow, which is mostly being returned to shareholders in the form of dividends and buybacks.

The Energy Industry Has Underinvested Global upstream oil and gas CapEx has declined by half, from ~$700bn annually down to ~$350bn annually, while oil demand has grown from ~90mm barrels per day (bpd) in 2012 to ~100mm bpd in 2021.

Oil Demand Has Been Resilient Taking a longer-range view, oil demand has historically grown by ~1mm bpd, despite innovations around fuel efficiency and green technology. On a per capita basis, global demand has hovered around the 4.5 – 4.7 barrels per person, with a notable disruption due to COVID. If consensus expectations on demand for 2022 hold, we will be close to trend line that has persisted since the 1980’s.

Tightening Inventories As global economies have recovered and reopened, demand has recovered rapidly while supply has been slow to return due to shale/OPEC supply discipline and production issues. Sitting here in early 2022, we are at 2014 levels of inventories, when oil prices were above $100. Even excluding the geopolitical premium due to the Russia-Ukraine war, we think there is fundamental support for $100 oil.

THE BEAR CASE

The first risk is demand destruction. If oil prices keep spiking higher, the global economy will slow down, which would eventually reduce oil demand and thus negatively impact oil prices.

The second risk is US shale supply increasing. If US shale producers lose discipline, oil prices could head lower.

 

THE WEEK AHEAD - Comings and goings Written by Andrew Grantham Link to Article

Last week, Statistics Canada released its daily tourism data for May, covering arrivals at major airports. The data showed a rapid rebound, and if you’ve been to airport recently traffic would suggest demand appears to be recovering faster than supply. However, what’s also becoming clear is that the recovery in Canadians going abroad has moved well ahead of visitors coming into the country.

The data suggests that the slower recovery in incoming tourism is mainly due to lower numbers of travelers from Europe and, in particular, Asia. This aligns with the World Tourism Association’s global recovery tracker, which reports travel has rebounded more strongly in North America this year compared to Asia and Europe. In other words, travel from those regions has been slow to recover globally, not just towards Canada.

What does this mean for the Canadian economy? While 2022 will see tourism and hospitality recover significantly, it is difficult to see a full recovery back to 2019 levels, particularly as Canadians take fewer staycations and more vacations. It also means that Canadians are spending proportionally more of their excess savings built up during the pandemic outside of the country. That will see the deficit in services within the current account widen further and act as a drag on the Canadian dollar.

SOLUTION: Don’t forget to take a staycation or two this summer!

 

Global Insights

Scientists report ‘heartening’ 30% reduction in plastic pollution on Australia’s coast as a result of work by local governments to reduce litter, according to research by Australia’s science agency.

The Guardian

UK's biggest rail strike in 30 years disrupts travel, PM Johnson vows to stay firm. Tens of thousands of workers walked out on the first day of Britain's biggest rail strike in 30 years on Tuesday, with millions of passengers facing days of chaos as both the unions and government vowed to stick to their guns in a row over pay.

Reuters

"From now on, gas is a scarce commodity in Germany ... We are therefore now obliged to reduce gas consumption, now already in summer." Economy Minister Robert Habeck Germany triggered the "alarm stage" of its emergency gas plan on Thursday in response to falling Russian supplies but stopped short of allowing utilities to pass on soaring energy costs to customers in Europe's largest economy.

Reuters

Canada posts fastest first-quarter gain in population since 1990 Canada’s population grew at the fastest rate for the first quarter since 1990 thanks to continued immigration. The country welcomed 113,699 immigrants in the first quarter, the highest number in any first quarter since quarterly data became available in 1946.

BNN Bloomberg

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