Junk Bonds Signaling Trouble Ahead for Canada?

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More trouble in the second half of 2015.

By Christine HughesCanada. Chief Investment Strategist, OtterWood Capital:

The high-yield bond market is typically a leading indicator of stocks. So when it signals trouble, stocks generally follow their lead. The graph below shows how high-yield credit sectors (“junk bonds”) have started to weaken in recent weeks, with the energy sector leading the drop.

High yield credit

Energy equities have also fallen with high yield energy bonds, and the combined weakness in both equities and bonds is a real concern for the price of oil.

Check out the relationship between the price of oil (brown) and energy shares (blue) in the chart below.

Oil vs SP500

Canada’s monthly GDP data for April came in lower than expected, and when you strip out inflation it’s downright ugly. It was the fourth month in a row of negative GDP growth. And continued weakness in the energy sector could mean more trouble in the second half of 2015.

As you can see in the chart below, real GDP growth is at its worst level since the Financial Crisis!

june30

Energy continues to take a large toll, but the manufacturing sector is also weak.

june302

The Bank of Canada is scheduled to meet on July 15 for its interest rate decision and growth outlook. It will be interesting to hear what they are thinking. The weaker Canadian dollar has been helpful, but data is still looking downright recession-like. By Christine Hughes, OtterWood Capital

Nevertheless, in the US, the M&A Boom, the biggest ever, is far bigger than the last two, and they ended in crashes. Read…  “Everyone Is Wondering When the Volcano Will Erupt”

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  5 comments for “Junk Bonds Signaling Trouble Ahead for Canada?

  1. Paulo
    Jul 6, 2015 at 8:28 am

    Article seems pretty self-evident. Oil prices low = drop in activity and risk of junk energy bonds default. House prices are insane in major metro centres. People are in debt up to their eyebrows in many places.

    Plus, western Canada is on fire and all forestry activity is now on hold.

    Meanwhile, in the sensible rural areas people continue on with their lives and watch the impending collapse from the sidelines. All is well in my little valley….we always get by just fine. Paper wealth people don’t live here as a rule.

    Good luck for those in that fast lane. You know the one that doesn’t go anywhere? Maybe there will be some roles on those new Toronto housing reno shows? “Pay As You Go”, “Forclosed Dreams”, “Unrealistic Expectations”, and “Day of Reckoning”.

    Where is the popcorn?

    regards

  2. Mark
    Jul 6, 2015 at 8:45 am

    Well I’ve said this before and i’ll say it again. Shit is going to hit the fan on the final term of the Harper Gov’t. Between 2016-2017. He will resign early on his last term and the country will be in economic ruin and the PC’s will be destroyed again much like the Mulroney Gov’t. It’s already happening now with loyal PC members jumping ship. Smart ones have been getting out early.

    So what does that leave for Canada. It leaves the next Gov’t to hike the GST back up to 7%. It leaves the Canadian Dollar back down to the Mexican Peso standing, more then likely around 60-70 Cents US. And it leaves higher taxes and new taxes being imposed. IE: Carbon Taxes.

    As a Canadian business owner I don’t agree with what is going on. My family has suffered through the lose of the manufacturing sector, textile sector and I have done what I needed to do for the Retail store. I am only thankful that our family has assets both here and Europe and has made its money in the 80’s.

    Best part is my customers think im dumb for leaving the city and going to the rural area HA ! None of them have a clue what is going on in the world. I remember just before I moved about a year ago, I had a young Millennial girl ask me ” why is the dollar losing value ” ? Take a guess sweetheart

    • James
      Jul 6, 2015 at 9:07 am

      So despite all of the turmoil going on right now in the EU, you think your assets are safe? Good luck with that.

  3. Julian the Apostate
    Jul 7, 2015 at 6:47 am

    Just got back home from a three day trip to Branson MO. The place is doing well, took the lake cruise on the Branson Belle and took in the Puttin’ on the Ritz show, a tribute show to Gershwin, Irving Berlin, and Cole Porter, amongst others. The young dancers and singers put on a marvelous show, and for a brief time my wife and I were able to forget about the world’s troubles. The mini vacation was primarily for my wife, who hasn’t had a decent vacation since ’99. Take some time for yourselves people, while it’s still possible. Regards, JULIAN

  4. Michael Mears
    Jul 9, 2015 at 8:14 am

    stocks and the high yield credit market are bets on the same capital structure. As Zero Hedge has pointed out, there can be a divergence between the two at the end of a cycle – when the specs decide to reduce their risk taking – but it ends with both stock and credit markets weakening together.

    I guess the Bank of Canada will attempt to slow this process with its pending rate cut.

Comments are closed.