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Top Links: Canadians should do some U.S. dollar shopping this week

A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web

HSBC economist David Watt predicted a Bank of Canada rate cut next week during an appearance on BNN yesterday. If this is true, the Canadian dollar is likely to take a major beating in the aftermath. U.S. bond yields have been climbing and the yield differential between domestic and U.S. two year bond yields have been driving the value of the dollar. A rate cut would widen the yield disparity quickly, and would likely send the loonie tumbling lower.

"HSBC's Watt: Poloz has no choice but to cut rates next week" – BNN (video)

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Along these same lines, a Bloomberg report details the growing suspicion that the U.S. is actually entering an inflationary environment – for real this time – as yields rise,

"A rise in commodity prices – best evidenced by China's factory gate prices rising for the first time in nearly five years – has quelled fears of an imminent global deflationary spiral… 'Interestingly, in the last few months, the increase in breakeven inflation mostly reflects a decline in the probability of below-target inflation,' writes Goldman Sachs Group Inc. Analyst Daan Struyven. 'We estimate that market-implied odds of inflation falling below 1.25 percent have dropped by roughly 10 percentage points since mid-June.'"

I wrote a piece for print today pointing out that a major portfolio overhaul will be required for most Canadian investors if inflation truly takes hold. Link below.

"Central Bankers Rejoice: There Are Signs That Inflation Is Actually Arriving" – Kawa, Bloomberg
"A bold Merrill Lynch forecast to give income investors pause' – Barlow, Inside the Market
"Treasury Long Bond's October Drubbing Approaches 4% Before CPI" – Bloomberg

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My pick for most important report of the day comes from The Financial Times. Michael Mackenzie outlines the high degree of complacency in bond and wider credit markets and why it could lead to big market losses for those who can least absorb them,

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"The release last week of Federal Reserve meeting minutes for September contained a gem buried deep within the usual policy conversations. 'A few participants expressed concern that the protracted period of very low interest rates might be encouraging excessive borrowing and increased leverage in the non-financial corporate sector,' the minutes said. That followed a warning from the Office of Financial Research, whose twice yearly financial stability monitor report from July noted: 'Credit risks remain elevated in US non-financial businesses. The ratio of debt to earnings among firms has also approached or exceeded peak levels from past credit cycles, even for borrowers with investment-grade ratings.'"

"Complacency is number one enemy of this ageing US credit cycle: The amount of US corporate borrowing should worry investors more than it does" – Financial Times

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U.S. portfolio manager Meb Faber believes that the slow death of buy and hold mutual funds is about to become a quicker slide. Mr. Faber cites surprising statistics showing that investors still drastically underestimate the amount of fees they're paying and concludes,

"the low fee ETF revolution is still in the early stages. Lots, and lots of fat to trim from the traditional high fee mutual fund space."

"How A Trump Or Clinton Win Will Impact Your Investments" – Meb Faber

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Tweet of the Day: "@HermsTheWord Even if every other car sold today was an electric car, global oil demand will still increase, @IEABirol says at #OM2016 #OOTT " – Twitter

Diversion: "Inside Nat Geo's Incredible Documentary Mission to Mars" – Wired

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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