Divergence Remains a Strong Theme in this Multi-Polar World

I recently saw the movie Divergent with my children, so I thought this would be a good subject for discussion.


Silly Central Bankers and Currency Wars

We should note that the Fed minutes were not the only Fed-centric headlines of the day. Speeches from two Fed members were recapped in a midday Reuters article that noted June was still “in play” regarding a rate hike. As inaugural members of the “FOMC: One and Done” crowd, we disagree and furthermore, we’d note that prominent economic blogger Ben Bernanke seems to disagree as well. His latest post dismantles the “hike-rates-to-promote-financial-stability” argument. In the absence of building inflationary pressures and a labor market in which “appreciable slack still remains,” this is, for many, the paramount reason for tightening policy.

Fed watchers as saw a weak employment report led to some risk on behavior early in the week. The report reflected hiring was the weakest in 15 months — with only 126,000 new hires in March. Only 62.7 percent of the potential workforce was working and employees continue to wait for sizable pay increases. In addition, companies cut back the number of hours their employees work. Market participants interpreted that as delaying the Fed rate increase and income producing equities jumped 1.5 – 2.5% on Monday…

Other notable events this week as Switzerland became the first to issue 10-year government bonds with a negative yield. (the Swiss government is the first that will actually profit from its long-term 10-year debt) Mexico, not to be outdone, just sold 100-year bonds denominated in EUROS. Also, the first ever of its kind.

Despite looming liftoff, Treasury yield curve is lower and flatter.

Interest rates

Yeild curve


Weather Summary: Last week in the US, dryness persisted in the plains and allowed planting to resume in the south. This week, light rainfall might alleviate plains dryness, while heavy rains once again impede southern planting. South America was drier than normal last week, allowing for decent crop progress in most areas. Next week’s forecast calls for showers in central and eastern Brazil and more dryness in eastern Argentina.

Progress Report Highlights: USDA’s first crop progress report of the spring showed the national cotton crop only 2% planted, 4 pts behind avg. Though down from the fall, the share of winter wheat rated G/E (44%), was up 9 pts YoY. By last week in Parana, Br, corn was 77% and soybeans were 87% harvested, both several pts ahead of normal. Safrinha corn planting was 97% complete, on pace to finish timely. The Mato Grosso soybean harvest was 98% complete, on pace to finish timely too. Argentine corn was 11.4% harvested, 2 pts behind last year. Soybeans were 7% harvested, 2.5 pts behind last year. (Source: Morgan Stanley)

Agriculture Further Reading


USDA’s Grain Stocks and Prospective Plantings reports dominated last week’s price action in the grain markets although to mixed results. May corn futures fell sharply in response to both higher than expected March 1 corn stocks and planting intentions. Stocks exceeded trade estimates by 136 million bushel at 7.745 billion, the highest in 9 years. Prospective Plantings came in at 89.2 million acres, 500,000 acres above the average trade estimate. Initially futures fell 20 cents per bushel, but prices rebounded late in the week, limiting losses to about five cents.

In contrast to corn, soybean futures were higher amid lower than expected planting intentions and March 1 stocks. Prospective plantings, at 84.6 million acres, were 1.3 million below expectations and March 1 stocks were about 10 million bushels below trade guesses. While the increase in planting intentions was less than expected, soybean acreage would still be record-high and ending stocks are projected to increase in the season ahead. Last week’s rally turned the short term trend from lower to sideways for soybeans as well as meal and oil. Initially, wheat prices fell along with corn in response the USDA reports, but prices bounced back as the week progressed; May Chicago closed 28 cents higher for the week. Spring and durum wheat planting intentions were below expectations. Dry conditions in the Plains remains a concern for the winter wheat crop. Cotton planting intentions are down 13% from 2014 to 9.55 million acres. While ideas about acreage varied widely, USDA’s intentions came in near the mid-point of trade views. The short-term price trend is higher.

June live cattle futures continued to consolidate after posting 2½ month highs on March 23, still trading from 152 to 154 cents/pound. Beef prices continued to strengthen and cash cattle prices were $2 to $3 higher, trading up to $168 in the Plains. May feeder cattle also consolidated but maintained the higher short-term price trend. Hog futures held steady as the market absorbed USDA’s Hogs and Pigs report fairly well. Price weakness ahead of the report tended to limit the price response to the slightly larger than expected increase in hog numbers. May crude oil futures edged slightly higher once again, challenging the $50/barrel level, but large inventories held prices in check. Gold futures were little changed, but the corrective rally that began in mid-March is still unfolding. (Source: Doane)

Commodities Further Reading


This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system. The creation of the Asian Infrastructure Investment Bank, a new banking consortium led by China that will back investment in Asian and emerging-market economies. This bank serves as a direct challenge to the World Bank and the IMF, the traditional sources of international funding, and organizations in which US economic interests have a strong voice. (Source: Business Insider)

Real Estate

We expect economic growth in most developed markets will continue, and the underlying fundamentals that drive cash flow growth for REITs (occupancies and rents) will maintain a positive upward trend. The result of economic expansion, we believe, will be a modest rise in interest rates during 2015.

Despite a modest rise in rates, many REITs will still have the ability to lower their average cost of debt by renewing at lower-than-expiring levels. Canadian REITs are trading at a roughly five percent discount to NAV and in spite of this valuation discount, we believe Canadian REITs should provide roughly four-to-five percent cash flow growth in 2015 and experience the same positive trends in occupancy and rents previously discussed, making Canada one of the more attractive REIT markets in the first half.

Real Estate Further Reading

Metals and Mining

Market turbulence is continuing into 2015 for platinum group metals, even as last year’s five-month mining strike in South Africa has faded from the headlines. Aftershocks continue to reverberate, including a one-week strike hitting Northam Platinum, and significantly lower earnings at both Anglo American (Amplats) and Impala Platinum, the world’s top two producers. Impala recently advised that earnings per share may be as much as 77 per cent lower for the final six months of 2014, compared to the same period a year earlier. Amplats has forecast a 55 per cent drop in profits for 2014. Expectations that last year’s strike would push up prices in the near term have been disappointed by the strengthening U.S. dollar. The dollar has put downward pricing pressure on the precious metals complex led by gold along with the other bulk commodities. Sales from long-term stockpiles are also considered a downward factor for platinum prices.

Metals and Mining Further Reading

By the way, Real Assets options increase in government sponsored defined contribution plans. Here is link to a survey of those plans.

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