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It’s been a difficult week trying to put into words the emotions felt by not just us but investors as a whole. We whole heartedly approve the strategies enacted by Western Nations but cannot help but think they could do more to support the people of Ukraine. In the meantime, it has been a gong show in various asset classes as traders ping pong across the spectrum of strategies trying to second guess where things will be an hour from now or a day from now. Fearful of supply disruptions that could escalate beyond a rationale level saw crude jump to $130 dollar a barrel on Monday, from $115 last Friday. On Wednesday it hit $99 and today it is closing at roughly $106. Gold bullion meanwhile spiked up to $2078 an ounce on Tuesday followed by a low of $1960 an ounce today. It’s ending the week back at $1986 up about $26 or just over 1%.

This unfortunately spilled over into the stock markets this week and the action may have been driven in part by option traders trying to capture or protect gains in the most volatile sections of the market. The gold sub index moved considerably more than the underlying commodity, and energy stocks are actually higher than their closing levels last week despite crude oil finishing down on the week.

Furthermore, in looking at the options market particularly the price swing in the “VIX” aka “the volatility index” aka the fear gauge, its overall volatility increased. It spiked 17% on Wednesday but will also close lower on the week by about 7%, implying more confidence in markets. Remember as this index goes up, implied volatility also goes up and so does the general level of nervousness by investors. In this case it fell even though markets fell further. Logic does not always apply to markets, but who wants to go long over the weekend if things get worse? Traders clearly want to take money off the table and wait for Monday.

We note the tech heavy Nasdaq officially hit bear market territory on Tuesday after it dropped 20% from its previous peak on November 22^nd. It gained back some of the losses on Wednesday but still closed down on the week.

Mind you that might have more to do with a melt down in the high growth tech stocks as investors diversified into companies with actual positive earnings. Explains why the Dow has only dropped roughly 10% from its record high set January 5^th. And it should be noted that despite losses from Coke, Disney and McDonalds all with Russian assets in limbo.

As for the TSX, it hit a record high of 21796 on November 16^th drifted slightly lower for the next 2 months and then rallied back to 21784 on February 10^th. Today its still just a couple hundred points away from another record high and looking behind the top line stat, material stocks are up 20%, gold stocks up 21% and energy stocks up 34% in 2022. Way to go Canada.

Speaking of Canada, we added a jaw dropping 336,600 new jobs in February sending our unemployment rate down to 5.5%. That is great news for our economy. However, average hourly earnings also jumped 3.3% last month and our inflation is now running at 5.1% a 30 year high. That will put a lot of pressure on the Bank of Canada to raise interest rates again next month, only now the likelihood of a 50bp point increase is also on the table. That is generally good news for banks and insurance companies but for consumers… not so much. And, with oil firmly above $85 a barrel, expect the Alberta economy to heat up quickly. “They’re back baby!” Sadly, I wish I could say the same for the BC economy.

Turning to next week, we expect Producers’ Prices (the key inflation stat at the manufacturing level) to rise given the change in energy prices (natural gas traded well over $5.00 per btu), but we are less certain forecasting changes to housing and retail sales. Mind you most of this will be overshadowed by Jay Powell at the Federal Reserve, who on Wednesday, will no doubt raise short term interest rates, the issue is whether it’s a 25 bp move or 50 bp. We have seen some speculation that suggests the Federal Reserve will hold off until the Russian invasion concludes, but we discount those rumours based on the 0.8% jump in the Consumer Price Index and the 0.5% jump in the core rate. The Federal Reserve has to get proactive to prevent a stagflation environment repeating itself.

Last but not least we need to be mindful of corporate earnings and the unwritten rule on Wall and Bay Street…Thou shall not miss the analyst median estimate! Given the overall market sentiment, misses could result in price hits with extreme prejudice. On Thursday NFI group, once the darling of Bay Street and the ESG folks for their leadership in zero emission vehicles, saw its stock plummet 22% in one day. Plus, it is now down 50% from its 52 week high no doubt due in part to the unexpected cutting of its dividend. Mind you that pales in comparison to the slide in Rivian Automotive. You might recall its Initial Public Offering (IPO) in New York last November at $78 per share which then opened at $106 and within a week hit $179. At that point it had a market capitalization 1.5 time greater than Ford Motor company, which by the way happens to own apx 10% of the stock. The electric truck maker reported a loss from operations of $2.4 billion for the fourth quarter and $4.2 billion for fiscal 2021. Ouch. Stock closed at just over $38 today…Double Ouch. Mind you they raised $13 billion in gross proceeds in the IPO, so I am guessing they have a fat financial cushion as they drive the company to future profitability. Its an electric vehicle maker but they might still run out of gas before that happens. Ford Motor btw earned $4.43 per share and trades at less than 8 times earnings with a 2.4% dividend.

Well that is enough for now.

Happy trading, stay safe and our thoughts go out to Ukraine.

Cheers Steve and Michele.

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