Blame Canada

By Peter Tchir of Academy Securities

Blame Canada

You know it’s going to be a long day when it starts with a South Park song in your head. For those in the U.S. suffering through record levels of poor air quality, it may even be right to “Blame Canada”. I know Canada has nothing to do with the Nova Kakhovka Dam which Academy issued a SITREP on.

But to “Blame Canada” for yesterday’s sell-off seems a bit of a stretch.

Yes, 2-year yields shot up after Canada surprised the market by hiking interest rates to 4.75% yesterday, even though expectations were for 4.5% and a very low probability of a rate hike was priced into Canadian money market prices.

Yes, the Nasdaq 100, went from trading marginally to the upside to having a reasonably weak day.

But, has anyone ever really focused on Canada for anything? Let alone interest rates? I’m not saying we shouldn’t, as it remains a top trading partner, but more market participants always still seem to cling to every word uttered than the BoE than anything the Bank of Canada says or does. Maybe it is because Bank of Canada is too long to write and say, or because everyone would confuse BoC with Bank of China (which is an actual bank, unlike the People’s Bank of China, or PBC of PBOC, which is China’s central bank).

Maybe it was just an excuse and exposed the fragility of some recent gains?

It seems difficult to believe that the Fed intends to “surprise” markets. They had plenty of opportunity to surprise markets at the start of the hiking cycle (when it presumably would have been more effective) and chose not to.

It seems easier to believe that the news triggered a theme, which triggered price action, and from there it was all about price action, triggering more price action. As discussed in Markets Heat Up while Global Relations Cool, the narrative that “everyone is short” or “everyone is bearish” doesn’t seem to be consistent with much of the sentiment data. Yesterday, markets felt like they were trading “long” and investors had rushed in to jump on the “bull market” bandwagon. The Russell 2000 outperformed by a lot, as did the equal weighted indices, which could set up for a nice compression trade between the winners and the laggards of the past couple months. For all the chatter about “bull markets”…

The S&P did reach a 20% gain from some low autumn to some recent high, but the reality remains, for all the brash headlines, away from a couple sectors and a select group of stocks, markets haven’t done much. All the talk of a “bull market” seems to create the hype that investors are “missing” something, but that really isn’t what has been happening.

Was yesterday just a blip in the trends? A sign that trends could be shifting? Or just a day to keep us in a more or less rangebound area?

I don’t know the answer to that (I remain in the bearish camp, looking for compression trades), but I do know we shouldn’t blame Canada for yesterday, eh!