Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Industrial metals prices are already down significantly from their 2021 peaks but Citi strategist Shreyas Madabushi believes they have further to fall.
“Our July ’22 global soft manufacturing indicators add to our view that weakness is likely to persist for the next 6-9 months on the back of a Europe-led global economic slowdown. Based on a tight historical correlation with deteriorating PMI data, there is also scope for a further reduction in net spec copper positioning. Based on our July indicators we believe that global copper consumption for July ’22 likely fell ~1% y/y (versus +0.3% y/y in June) and broader metals consumption faces headwinds. We remain bearish on copper and nickel, and believe zinc will outperform its peers as a European power shortage plays out. Our 6-12 month per ton price of copper, nickel and zinc is $6,600/t (15% from spot), $19,500/t and $3,000/t respectively… Base metals prices bounced by an average of 10% since mid-July as risk-assets found broad macro-support on growing expectations for a Fed-pivot. However, we recommend accumulating a bearish position in copper and nickel at any strength over the coming weeks owing to a likely European downturn over the next 6-9 months. For both metals, strong supply growth prospects and lack of exposure to the European power crisis reinforce this view”
“Citi: “We remain bearish on copper and nickel ‘” – (research excerpt) Twitter
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TD economists continue to forecast a soft landing for the domestic economy but risks from the housing market are rising quickly (my emphasis):
“A recent softening in global PMIs has introduced new uncertainty around near-term growth as conversations around the broader outlook shift from runaway inflation to looming recession risks. While some G10 economies are seeing recession indicators flash red, notably Europe and the US, we believe there is less risk to the Canadian economy, and we continue to look for a mostly soft landing. Activity data has held up reasonably well through Q2, where we are tracking 4.5% growth, and the labour market remains historically tight. .. yield curves continue to offer the strongest insight as a leading indicator, with relatively few false positives .. The current level of Canadian yield curves is consistent with a 20-40% chance of a recession over the next 12 months, or 35-60% probability over the next two years, although other measures such as the ISM Manufacturing Index or labour/equity markets suggest a lower probability… The housing indicator is the most alarming of the group, as it signals an 85% likelihood of recession over the next year or two; although we think this overstates the probability of a downturn, it is also alarming in an environment where residential investment makes up a larger share of total activity than any period since 1990. Overall, we see a 40% probability of a recession over the next 12 months, or 50% probability over the next two years.”
“TD: “The housing indicator is the most alarming of the group, as it signals an 85% likelihood of recession over the next year or two”” – (research excerpt) Twitter
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Also from Citi, U.S. equity strategist Scott Chronert made a number of changes to his small and midcap Value Creators stock picks.
“The new additions to our Value Creators SMID Focus List fall in one of broad categories: improving quality, ESG thematic, rate/inflation hedges and growth resiliency…DKS [Dick’s Sporting Goods Inc.] has seen an expansion in margins and return metrics from pre-COVID levels… DEN [Denbury Inc.] provides exposure to carbon capture as well as oil production. PNR [Pentair Ltd.] is a water pure play with a long runway for growth…ESTC [Elastic NV] has a large total addressable market that can sustain growth. WEX [Wex Inc.] has tailwinds from higher fuel and return to travel.”
The full list of Value Creators outside of those mentioned above includes PulteGroup, Petco health, Yeti Holdings, Owens & Minor Inc., Guardant Health Inc., MasTec, Vertiv Holdings, DXC Technology, Jabil, MKS Instruments, Berry Global, and Eagle Materials.
“Citi’s Value Creators stock picks, SMID” – (table) Twitter
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Diversion: “Is Old Music Killing New Music?” – A Journal of Musical Things
Tweet of the Day: " “Without clear signs of a positive shift in macro momentum, temporary re-risking could actually increase risks of another leg lower in the market rather than signal the end of the bear market.” – Goldman " – Twitter
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Scott Barlow