Market Insights: Commodity Super-cycle or Just a Temporary Spike?

Macroeconomic and Market Developments:

• North American markets recovered this week. In Canada, the S&P/TSX Composite Index was up 1.32%. In the U.S., the Dow Jones Industrial Average increased 1.22% and the S&P 500 Index was up 0.78%.
• The Canadian dollar was up this week on the back of strong oil prices and a positive jobs report, closing at 80.18 cents vs 79.14 cents last Friday.
• Oil prices were strong again this week. US West Texas crude closed at $79.35 vs $75.76 last week, and the Western Canadian Select price closed at $66.50 vs $63.60 last week.
• Gold prices were flat this week, closing at $1,757 vs $1,759 last Friday.
• A big story this week centered around the worsening energy crisis around the world. News reports discussed gasoline shortages in the UK, India being within days of running out of coal and the Chinese government announcing that they need to buy commodities at all costs to prepare for this winter. In addition, in Europe natural gas prices spiked as much as 60% before Vladimir Putin announced that Russia would come to Europe’s aid with natural gas supplies, which caused prices to drop later in the week.
• The markets have been following the U.S. government debt showdown for the past few weeks, with the debt ceiling projected to hit its maximum in the coming two weeks. However, this week both parties came to an agreement to extend the debt ceiling by $480 billion bringing the total debt limit to $28.9 trillion. This deal only buys the Biden government until December before the ceiling will again have to be lifted, but it was a relief to the markets.
• Last weekend, Sun Life Financial (SLF) announced that it will acquire DentaQuest, the second largest provider of dental benefits in the United States, serving more than 33M members. The purchase price of US$2.475 billion is expected to be immediately accretive, adding approximately C$0.17/share to earnings for Sun Life.
• Whitecap Resources (WCP) and Topaz Energy (TPZ) announced an agreement for Topaz to acquire a newly formed 5% Gross Overriding Royalty on Whitecap’s working interest in the Weyburn CO2 Unit for cash proceeds of $188M. In conjunction, Topaz announced a $131.7M bought deal equity financing, with the remaining purchase price financed through existing credit facilities.
• In another oil and gas deal Calgary-based Surge Energy (SGY) has reached an agreement to purchase Fire Sky Energy Inc. for total consideration of approximately $58M.
• In U.S. economic news, the ISM Non-Manufacturing (services) index increased to 61.9 in September, beating the consensus expected 59.9 (levels above 50 signal expansion; levels below signal contraction). The major measures of activity moved mostly higher in September, and all stand above 50, signaling growth. The business activity index rose to 62.3 from 60.1, while the new orders index increased to 63.5 from 63.2. The supplier deliveries index fell to 68.8 from 69.6, and the employment index ticked down to 53.0 from 53.7.
• Statistics Canada reported that our country’s trade surplus with the rest of the world expanded significantly in August due to larger energy exports. The country’s merchandise trade surplus was $1.94 billion, which increased from a revised $736 million surplus in July, much higher that the expected surplus of $430 million.
• On Friday, the jobs numbers for September were released. In Canada, the economy gained 157K jobs in September, well above the 60,000 jobs expected. The unemployment rate moved lower to 6.9% from 7.1% in August, which was in line with estimates. On the flip side, the US numbers disappointed with a gain of 194,000 jobs vs the 500,000 expected, although the unemployment rate dropped to 4.8%.
• Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Reiterating Buying Game Plan: DWYER VLOG

Weekly Diversion:

To celebrate Thanksgiving weekend, check out this video to help you explain Canadian Thanksgiving to Americans.

Chart of the Week:

Here is our Third Quarter Wrap-up summarizing markets for the past three months and this year, as well as some of our views on the current macroeconomic environment, in particular some focus on central bank expectations and inflation, and our outlook going forward.

This week, we wanted to highlight the fact that the Bloomberg Commodity Index surged to a record high on Monday amid tight supply and pent-up demand as economies reopen. Oil prices hit a seven-year high after OPEC+ opted to maintain a gradual output increase as natural gas remains in short supply across Europe and China. Agricultural commodities also hit new highs with bad weather impacting crops at a time when China is replenishing stockpiles. Cotton and sugar prices are being driven by a drought in Brazil while cotton hit a decade high due in part to shipping bottlenecks. Meanwhile, the metals complex has been underpinned by a supply deficit with aluminum and copper prices surging.

This broad-based nature of the commodity rally is driving concerns about persistently higher inflation and talk about a stagflationary environment down the road. However, strategist views on the outlook are very mixed, with some arguing that commodities are entering a super-cycle while others are anticipating new supply to bring markets back into balance. Although we are not currently in the super-cycle camp, we do believe that the present inflationary pressures, whether transitory or not, are certainly a positive for real assets in general especially on a near-to-intermediate-term horizon.

Source: Canaccord Genuity, Bloomberg

 

Sources: CNBC.com, Globe and Mail, Financial Post, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Bespoke Investment Group