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View from Toronto: Awaiting Trade Talks, TSX Underperforms US Markets

09/04/2018 3:40 pm EST

Focus: MARKETS

Ziad Jasani

Managing Director and Partner, Independent Investor Institute

The TSX continues to underperform U.S. markets as NAFTA is unclear. We expect TSX to remain below 16,285 more likely pointed down toward 16,095-55 into Sept. 5/6 with better chances for support to hold, writes Ziad Jasani Tuesday. He’s presenting at MoneyShow Toronto.

View my Market Strategy Session video here:

video

Recorded: Sept. 4, 2018
Duration: 1:18:58.

This shortened week of trade has started off on shaky ground driven by:

  • Russians bombing Idlib, Syria = Risk-Off for Equities + ↑USD on fear + ↑Oil on fear.
  • Emerging Market currency implosion on global trade-wars; today it’s about the South African rand (ZAR) & Indonesian rupiah (RP).
  • NAFTA woes with Mexico not supporting a bi-lateral agreement; decision on Canada pending.
  • Technically we’re at the top of an up-trend channel for the S&P 500 (SPX) and entering a month where volatility usually rises, not to mention a rate hike planned on Sept. 26.

While the S&P 500 remains below 2,895 we are likely pointed down into Wednesday (Sept. 5), and if the S&P 500 implies a close below 2,884.69 (Aug 27th Gap Level) we have an 80% chance of continuing negatively on Sept. 5.. 

We recognize that U.S. markets are dislocated and expensive on annual relative routines with the globe, while markets outside North America present as dislocated and cheap but are the epicenter of negative risk-sentiment. 

While the Global Equity Market (ACWI) remains above key support at $73.03 (half way marker between Jan. 26, 2018 highs and Feb. 9, 2018 lows, we see a better chance for a bounce in Equities, Commodities and Currencies on the other side of the USD on Thursday, Sept. 6 and Friday.

The catalyst is likely a neutral weaker US Payrolls print on Thursday (ADP) and Wage Inflation number on Friday (Official) that softens the USD and reinforces the Fed’s stance that inflation is under control. This may be just enough to take the negative pressure off Emerging Markets, the Eurozone Far East & Australasia and Commodities to fashion a bounce into week’s end.

We’ll be looking to accumulate the following items on Thursday/Friday assuming we see the USD -0.5% or more and the Global Equity Market (ACWI) remaining above support of $73.03:

  • Precious Metals & Producers: GLD, SLV, CGL-T, XGD-T, GDX, SIL
  • Materials, Base Metals & Miners: XLB, XMA-T, XME, CPER, SLX, DBB
  • World Ex-US: ACWX, EEM, EFA, FEZ
  • US Financials: XLF, KBE, KRE
  • Canadian Financials: XFN-T, ZEB-T, ZWB-T
  • US Technology: QQQ, XLK, IYW, FNG
  • Canadian Technology: XIT-T

Current correlations between the USD and U.S. Treasury yields are inverse. Hence, we could actually see North American government bond yield curves steepen into week’s end while the USD softens. This precludes us from entertaining Swing-Trades in Defensive interest rate sensitive sectors (Telecom, REITs, Staples, Utilities) or Bonds (XBB-T, AGG, IEI, IEF, TLT).

If U.S. Payrolls Data “does the trick” to soften the USD and this is coupled with Positive-Headlines related to Trump’s trade war we would add to the accumulation list:

  • US Industrials: DIA, XLI

We are expecting Oil inventories to hurt the price of Oil vs help this week, and are staying away from Oil and Energy Equities (HOU-T, USO, UCO, XLE, RYE, XOP, XES, XEG-T, ZEO-T).

If Oil can remain toggling around $70 with no more than a 50 cent margin lower, we see validity to remain Hold on short-to-mid-term long-side swing-trades in Oil and Energy Equities.

We are expecting a stronger Canadian Dollar (CAD) into week’s end. On Wednesday Poloz is set to release his rate statement.

Our trading community’s consensus vote is that we see a less-hawkish presentation from Poloz leading to a weaker CAD. However, recent economic data (Inflation, Jobs) suggest Poloz takes a more hawkish stance.

Either way we are expecting progress on NAFTA into week’s end and a stronger CAD (FXC). We’ll time our swing-low entry on FXC or Short on USD/CAD with tomorrow’s BOC rate statement (if hawkish), or on headlines related to NAFTA progress by week’s end.

Join Ziad at MoneyShow Toronto Sept. 15 when he discusses Portfolio Management Strategies for Active Investors. Information: ZiadJasani.TorontoMoneyShow.com

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