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Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Every day, I'll be joined by guests from across TD, many of whom you'll only see here. We are going to take you there with moving the markets and answer your questions about investing. Coming up on today show: with fears of a recession on the horizon, we'll hear from TD Asset Management's Hussein Allidina on the outlook for commodities heading into next year.
And in today's WebBroker education segment, Caitlin Cormier will show us how you can make in-kind transfers using the platform.
So here's how you can get in touch with us. Just email moneytalklive@td.com or fellow that viewer response box right under the video player your own WebBroker.
before we get our guest of the day, let's get you an update on the markets. We're about two hours away from a fairly significant market event, that would be the US Federal Reserve expected at 2 PM Eastern time with its latest rate decision. We do have some greed on the screen south of the border. The 20,063, 40 points to the upside on the TSX. We have West Texas intermediate crude, the American benchmark, up to 1/2% today.
let's check in on some of those energy names.
Earlier, I see a lot of the oil companies writing that way. Indeed, Suncor right now is $0.32, three quarters of a percent.
First Quantum is at 32 bucks and change, a little bit more than 3%. South of the border, we do have some positive momentum heading into the 2 PM Eastern time rate decision.
With the S&P 500, the broader read of the American market, up about half a percent.
And the NASDAQ, let's see how it's pacing against the broader market. About three quarters of a percent. Of course, we saw big jump in the equity trade yesterday morning after the softer than expected inflation print which were off growth today and now today of course it is the Fed.
Let's check in on Microsoft, they were making some gains earlier along with other mega-cap tech names.
At 261 box per share, it's up almost 2%.
And that's your market update.
All year, we've been hearing about tight supply for many commodities,but with concerns about a recession on the horizon, will demand be the real concern for 2023?
It joining us now to discuss is Hussein Allidina, had commodities at TD Asset Management.
Always great to have you on the show.
Welcome back.
>> Thanks for having me.
>> We are going to close the books on 122 pretty soon.
But you and I have had a number of discussions this year about the supply situation, the demand situation.
These recession fears.
How to supplant the commodities trade next year?
>> Absolutely,if we look at the course of the last couple of weeks, maybe the last couple of months, the market has been very focused onglobal growth is slowing and the impact that is going to have on commodity demand.
When I look at the oil balance in particular for next year, you know the IA this morning revised up actually there demand for cash, looking for growth of 1.7-ish million barrels a day. We talked about this before. The supply side, your inventory picture, your incremental supply growth picture, it's relatively constrained in 23, 24, 25, a symptom of the lack of investment over the course the last 10 years.
So that's relatively, I would say, well defined. The question is now how challenged, if at all, will demand be and 23.
If demand grows by the 1.
7 million barrels a day that the IA is forecasting next year, you have a picturethat will be lower at the end of next year than we are now.
We talked as well before, if we look at global oil demand going back to 1970, there's really only three or four occasions where demand contracted in absolute terms. You need to have a material contraction in economic growth comparable to what we saw at the height of the pandemic in March 2020 or during the financial crisis, and even in those episodes, we had demand contract but it was a relatively short term contraction and it bounced back.
We are looking at demand today reaching 100 million barrels a day. Notwithstanding the fact that the weather has been materially warmer than normal, which has tempered demand.
I do think that the focus next year is very much on the demand side.
My base case right now is that economic growth is probably going to be robust enough to continue to point to tighter balances throughout the course of 23.
>> It sounds like we have some wildcards at play. I mean, the weather in the northern hemisphere, the winter always plays in, the consumption needs. Even economic one.
You said, we think we are going to see demand go up and perhaps some economic softening. What could go in the other direction in terms of demand?
If China reopening… There a few wildcards are there, aren't there?
>> I think one thing we got remember this year has been an incredible year for volatility and for commodity price action broadly speaking, this is also your when China has largely been closed. Chinese demand has not been this week since I think 1994, 95, on a growth basis.
Now there are overtures and signs that China is opening up.
I don't think it's going to be a straight line but I'm pretty comfortable with the view that Chinese demand and 23 is going to be higher. Their impact on the oil market, on the commodity market, from a consumption point of view, should be higher and 23 relative to 22 and there are early signs again that we look at flight data or congestion data in China, it's picking up. And people, like in the rest the world when things open up, they want to get out.
>> One of the concerns obviously this year has been inflation.
Energy costs has been part of that inflationary story.
If we had into a situation next year where we have obviously a lot of reasons in the system why supplies pretty tight and if demand does pick up or hold steady, could be pushing ourselves back into an environment that the central banks won't like all that much? A higher price for crude, for instance.
>> I think absolutely.
Some of the softness we've seen in inflation of late has been because commodity prices have been lower.
Until you address that supply side, if you have positive economic growth and by extension positive commodity demand, I think it is going to push these prices higher again.
One of the reasons why demand is not as weak today as it would have been if prices were at the levels we saw in the summers because that price relief has encouraged consumption. When I look at 2023, if my view on demand is correct, if my view on supplies correct, I do think we see oil prices moving back towards the highs that we see in this year.
Potentially higher, depending on how the situation plays out and I think it will be a focus again. I think the inflation story is not done. It does appear that inflation is weakening but the underlying commodity inflation, I think you're probably in the early innings of it because again, I am a broken record but we have not addressed the supply side. CAPEX is not taking place, notwithstanding the increase in commodity prices.
And for that reason, Greg, I think that inflation will remain a concern.
Maybe not eight, 9% inflation but the idea of 2% inflation on a sustained basis is a bit of a stretch.
>> What will it take to see that kind of investment in the oil, gas or mining industry?
you have the need for several minerals for elective vacation, we haven't been extracting the oil.
Is that era behind us, of expiration?
>> I think after break down almost by commodity or some commodity category. I think there is a.
.
.
Not a strong desire on the part of oil and gas, oil in particular, to invest and that is because of energy transition.
Are we going to be using the stuff five, 10, 15 years now?
We know that if we go any make an investment today, it's not going to lead to incremental production for five, seven, eight years. You gotta think longer term when you are making these investment decisions. I also think that there is a big ESG sort of focus and I think many of these oil companies are being challenged by shareholders when they go to make the conventional investments that they have made.
I think we need to have a Cycle because we don't have, frankly, the substitution on the demand side to say, hey, we don't need these commodities. We still need the commodities. I think we're gonna have to see material increases, frankly, in the return on capital deployed to see these companies go on and make the investment.
And look, the data this year, notwithstanding increases of pricing, you haven't seen that commensurate increase in investment.
Using some of it from the private side.
If you look at the US right now, probably half of the increase in the rate count this year had come from the private space. That's becoming challenged now because credit, the cost of money is increasing. A phenomenon that hasn't been an issue for the longest period of time.
When the metals and mining side, I think you will see more investment to the extent that prices remain elevated and encourage that investment because you have less of that sort of negative ESG story there. But again, the volatility that we have seen in price, Greg, makes these investment decisions all the more challenging. You know, if you are talking to your board about making an investment in oil, three months ago, you are using a price tag of $90 a barrel. If you're doing it today, you are using as a price tag of $70 a barrel. When over the price is going to be three months from now, but that volatility increases effectively the return that I gotta make to justify the cost of.
>> It does sound like several years down the road that we are not going to have some of the things that we need, unless there is some sort of magical transformation in energy sources or other sources of minerals that provide us with electric vehicles and electrification.
It'll be a tight space further down the road.
>> I believe strongly that if we have economic growth that commodity balances and commodity prices will act as a tax on that growth because, to your point, we don't have sufficient supply.
We are not making the investment that we need to make today.
To the extent that we are not able to substitute away from conventional energy fast enough, which I don't believe the data is showing we are doing, you are going to end up in a position where inventories are tight.
You have sustained back gradation in the commodity markets and on any sort of supply disruption or demand surprise to the upside, prices have two move materially higher to find equilibrium. I will have to ration it demand in that tighter environment.
>> Reminder that you can get in touch with us at any time.
Just email moneytalklive@td.com or fill out the response box on under the web layer here on my broker.now we will get you some of the top stories in the world of business and look at how the markets are hitting.
Delta Air Lines says thatrobust demand for travel seizes profits nearly double next year. The air carrier also expects free cash flow to grow substantially through 2024.
And it is laying out plans to pay down debt.
The industry has been optimistic about continued demand for air travel despite broader concerns about a possible recession. Canada's manufacturing sector turned in a storm with an inspector performance in October. Statistics Canada says factory sales were up 2.8% for the month, beating estimates of a 2% gain.
The strength was widespread. The petroleum and coal industries lead the way.
Closing arguments in the 26 billion dollar Rogers-Shaw merger are being laid up for the competition Tribunal today. The hearing is perceivably the final step before the matter goes before a federal court of justice for decision. A quick check in on the markets, let's start here at home on Bay Street with the TSX Composite Index.
Of course, the big event of the day it would be the US Federal Reserve at 2 PMEastern time with the rate decision. He got green on the screen. Modest year in Toronto. 20,054, 31 points. South of the border, let's check in on the S&P 500.
It's a little more than half percent. Of course, inflation in the United States came in later than expected with the latest read that we got yesterday.
What is the fed make of it?
We are going to know and listen to our time.
We are back now with Hussein Allidina. We are taking your questions about commodities, let's get to them.
The first one here: it what's the outlook for natural gas through this winter?
>>That's a tough one. Let's talk about European natural gas and several talk about US natural gas.
European gas prices have been moving higher after coming off over the course of the last couple of weeks on this lack of the winter demand.
We build stockpiles over the course of the summer, knowing that there is going to be supply issues because of the situation as it relates to Russia Ukraine.
The lack of weather has contributed to bringing these prices lower but now, the winter is coming and you are seeing prices move higher.
I think the near term, as it relates to Europe, is going to be very volatile and very dependent on weather.
When I think about the European balance in 2023, 2024, 2025, unless you see supplies somehow restarting from Russia, which doesn't seem likely, there is still going to be a deficit that is going to have to be met with LNG and Asia has been largely absent from the LNG market this year because of the shutdowns in China and because they have been burning more coal. I think that 2023, 2024, you see European gas prices trading higher than they have historically in order to attract those cargoes. We see quite a bit of elegy coming to market in late 25 to 26. Until then, I don't see a tremendous amount of relief so you have to have higher prices to limit industrial demand while attracting inflows. In the US, the situation is a little bit better because we have domestic production and domestic production is growing.
You've seen a lot of volatility in price again, which is consistent with the time of the year.
The weather forecasts are changing meaningfully day over day in the US and North America we haven't had a ton of weather, set provided a bit of relief.
But now the 14 day forecast is looking quite cold and you are seeing gas prices move higher on that.
When I look at estimates in 2023, there is a sense of optimism, i.
e. that production in the US is going to continue to increase meaningfully.
I think some of those production forecast might be too optimistic. The US will trade less than Europe and will continue to do that, but I'm not sure that we are going to get there production growth that the markets are expecting.
They are looking at a couple of plays and extrapolating that for the rest of the play as a whole and I'm not sure that that's warranted.
Ultimately, US balance is still a closed market with the exception of the LNG and the exports to Mexico. We don't have the ability to export a ton more LNG with the exception of the Freeport restart which happens early next year. I do see more flows and 25, 26, which helps bring the European prices down but also helps lift US prices in that window.
> You talk about LNG and exporting.
Here at home in Canada, a lot of people talk about the opportunity for that, whether the opportunity would have been aiding Europe and its tough times considering debt crisis in Ukraine or you said of Asia shows up back at the table with demand for LNG. Where's Canada position right now?
can Canada be a part of this in the coming years?
>> We need to build liquefaction capacity so we can export the gas. This country has a phenomenal resource.
Gas is not as clean as solar, but materially cleaner than coal.
I think we have a missed opportunity and that we could have been, to your point, supplying Europe, supplying Asia, but I don't think that opportunity is entirely behind us.
I think there's a lot of potential and if you believe my view here that we are not going to be able to pull away from the conventional forms of energy fast enough, there is still room for us to increase gas exports out of this country to displace coal that is being burned in China. We talked about, I'm gonna go on a bit of attention, but we look at ZEV sales in China. China has been leading the world in EV sales. 20, 25% of sales are EV. That electricity generation is coming from coal.
That is not a net positive for climate. Instead, what we should be doing is, again, increasing our gas production, sharing it with the rest of the world so they can mitigate the burning of less clean fuels like coal, like oil, like diesel, etc.
>> Let's get another question no. You mentioned EVs there. We have someone in the audience wondering about their demand for electric vehicles that's on rise. What benefits will benefit the most?
> The metals, broadly speaking, have performed better of late on the heels of the China reopening story and I think if that reopening continues, you will see old metals do will but there are certain metals that will do better and case metals are largely copper and aluminum because of where we are in the property cycle in China. There are a bunch of buildings that need to get finished. When he finished those buildings, it's copper and aluminum. Those two metals are also very important ingredients in the electrification story.
So whether we are talking about the car battery or the power grid that needs to be built out to support these higher powered loads or even the power generation itself, there is a lot of copper and aluminum there. So those are our two more favoured base metals on a multiyear view largely because of the demand side but also, I'm going to repeat myself, the supply story needs to be addressed. Copper mining is not easy. We have to go further from the consumption centres to find the copper. The governments, obviously, are very focused on the environmental impact of mining.
So there's a bit of a giveback that has to be had with those countries that are operating in.
Copper is one that we like.
And aluminum to a lesser extent.
>> When it comes to the copper you're going to need, we are moving further away from the consumption side, it's a bit difficult, the money that's needed to invest.
It is the copper there waiting for us? If everything else, if all the other stars align, we can mind the copper, is it there waiting for us in the ground?
>> At a price.
At a price. Everything happens at a price.
When oil move to 80, $90 a barrel for the first time, we said, hey, hold on a second.
We can do oil sands, we can do the belt in Venezuela, we can do shale production. I would argue the copper 10,000, 12,000, 50,000, is going to open up the available supply. The question is timing.
>> Fascinating stuff.
Let's get another question here.
Someone once your thoughts on uranium.
>> So we've talked about this I think before. I like uranium largely, again, going back to the sort of electrification, the power grid story, people are starting to realize and appreciate now that wind, solar, super clean but cannot act as baseload. We've seen in Europe to serve the course of the past couple of days, it's been colder,, how do I get a base demand?
Today, baseload demand or baseload power comes from natural gas, from coal and to a lesser extent it comes from Hydro and then you brought some residual fuel oil or distillate that is providing baseload.
And you have the sort of solar, the renewable that is doing the peak.
We are saying that a lot of this baseload stuff is dirty and we don't want to deal with it. Coal, oil, and certain places of the world, there are even reservations about natural gas.
You have to replace that was something. You cannot replace it with wind. You cannot replace it was solar because the sun doesn't shine all the time. That is for nuclear plays a role and I think like some of the other commodities, no one has invested in the supply side of uranium and the loss of Russia is also material. So I like uranium on a multiyear view.
Again, none of these things are a straight shot higher, but I think if you are looking at uranium today and we look at it five years now, uranium it will be trading higher than we are today.
>> Does it depend on what happens on the journey?
>> Yes.
The broad risks are what happens to global demand, what happens to the US dollar, does appetite towards uranium or nuclear change in the near term? You know, if we were to have a Fukushima type incident, I bet you people would back away from it just because of the blowback. But ultimately, you can't find equilibrium if you believe that there's going to be growth and we are not going to be consuming coal and we don't want to be consuming coal, gas, etc., nuclear has to have a home.
>> As always at home, make sure you do your own research before you make any investment decisions.
We'll get back to your question for Hussein Allidina on commodities in a moment. You can get in touch with us anytime. Just email moneytalklive@td.com. Delegate to our educational segment.
On today's education segment, we are taking a look at how to make in-kind contributions using the WebBroker platform.
Joining us now with more on that, Caitlin Cormier, client education instructor at TD Direct Investing.
Caitlin, great to have you back with us.
Maybe we'll start this conversation by reminding her audience, we don't do this often, what in-kind contributions are and how they work.
>> Absolutely, yeah. So it's going to be the time of year where people are may be planning, it's unbelievably close to 2023.
so we might start thinking, after all the holiday rush is done, about contributions to tax-free savings and RRSPs when you're thinking about next year.
So one way that a customer can actually move forward and make a contribution is by doing what is called an in-kind contribution.
So what this is is you're taking essentially a security that you own and a nonregistered account, like a cash or a merchant account, and you are taking that security and popping into into your registered account. So that allows you to make your contribution… Reese purchase something in the other.
Instead, you are to sort of moving the security over.
Now again, basically you are saving the fact of having to sell and repurchase.
Keeping in mind there are also tax implications for a transaction like this.
So same as when you make a contribution to an RRSP and tax-free savings, there's always a bit of a consideration. So do make sure you speak to a tax professional about something like this, what implications it might have before you actually go to the process of transfer because you want to make sure you're fully aware of that before clicking enter and putting it there but it is one way that these types of contributions can be made.
>> You gotta get your professional advice.
You've got all your ducks in a row and want to proceed, how do you do that?
>> Yeah, so it's actually relatively straightforward process.
It can be a process by yourself. Let's hop in.
Will go under the accounts tab. We'll start here. We are going to go down to this third one here, transfer securities within TD Direct Investing, including contributions.
Now this is the same place that you would go if you want to, for example, transfer a US security from the Canadian side of your account to the US side of your account or something like that.
There are those sorts of transfer that can be done.
No keeping in mind, there are some transfers that cannot be done online. It you canlook into that, like transfer of ownership. The simple ones you can.
we would choose one side being the margin, the other side being either tax-free savings RRSP, whichever we would like to do.
Or if we were transferring between currencies, we would do that.
To continue, we would choose the individual security on the next screen to say we want to choose this particular security or ETF, and then go ahead and process the transfer from there.
It takes place pretty quickly.
It's all done online.
If there are any issues, you will hear back. But again, make sure to do your homework first. But it is pretty straightforward once you've made the decision, done your homework and you want to move forward.
It's as simple as going through this screen, selecting a few different things and you are off to the races.
>> Good stuff as always, Caitlin. Things that.
>> Thank you so much.
>> Caitlin Cormier, client education instructor at TD Direct Investing. Make sure to check out the learning centre on WebBroker for more educational videos, live interactive master classes and upcoming webinars.
now before I go back to your questions about commodities for Hussein Allidina, a reminder of how you get in touch with us.
Do you have a question about investing or what's driving the market?
Our guests are eager to hear what's on your mind, so send us your questions. There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just writing your question and hit send.
We will see if one of our guest can get you your answer right here at MoneyTalk Live.
we are back now with Hussein Allidina taking your questions about commodities.
Let's get back to them. If you are wanting to know do higher interest rates have an impact on the commodity sector? We've definitely seen higher interest rates this year.
>> That's a great question.
They definitely do. Typically when people think about higher interest rates or when I think about higher interest rates, the first thing I think about is okay, higher rates are going to mean less activity and that means less demand for the commodity and a bearish price.
the other side of the client, higher interest rates means higher cost of capital means it's harder for me to go and invest.
whether I need a tractor to plow the field or I am a shell producer trying to raise capital and drill new wells.
I think one of the things you have to keep in mind in particular for oil, that is true of all commodities, thelow rate environment that would come through in the last 10, 12, 13 years it really facilitated the evolution of shale production.
And now that there is a cost of capital associated with that shale production, I think we are seeing, and I mentioned this earlier, the private rate count is starting to come into question.
Higher rates equal bad for growth but also bad for the supply side in that you had to have a higher price to make your return.
So I think that we will likely see a negative impact on the supply side from the higher rate environment that we are moving into.
>> The US dollar strength as well, how does that play into it?
Is there a correlation between the price of a barrel of crude at the price of the US dollar and the rising rate environment?
>>I think 2022 has been a remarkable market for commodities. It's been a 15 to 16% year to date. Not with standing the weakness be seen in the last couple of months.
And this is in a time when the US dollar has been low.
When I look forward to 2023, could the dollar increase?
Of course it could, but if I'm betting, I'm betting it probably had lower, particularly as the said steps back from the rate increases and we see the rest of the world growth improve a little bit. If I am right and the dollar has peaked or is close to its peak and it goes lower, that is a boon for commodity prices.
Higher dollar means that the price of oil for my cousin in India is higher in rupee terms, higher dollar means the price of soybeans at the Brazilian farmer gets for selling his beans is higher in reactors.
A weaker dollar is bullish for demand for the rest the world and is also bearish for supply in the rest of the world because the same Brazilian farmer is not granting the same amount of money per bushel.
>> Fascinating stuff. Let's get on to another question, this 1 Holds Pl.
in all of this. Does anyone still think that gold is a good inflation hedge?
I think gold has a, I think I said this last time on the show, I think gold has an important part in portfolio because of the risk characteristics it hedges.
Gold, I believe, is a good inflation hedge.
Particularly the details, particularly when uncertainty is really high. The school perform remarkably well in inflation is three, 4%? Maybe? The gold really performs when inflation is north of 5%.
You'll say, well, inflation has been well north of 5% this year.
How can gold has not done better? Golden euros, gold in rupees, gold and any other currency other than the dollar has done remarkably well and Golden dollars is also doing reasonably well. We had a really big and real rate move this year. As the market I think is starting to digest and appreciate that the Fed might be nearing the end, your single chart to perform.
If the Fed and central bankers move away from tightening because they are concerned about the impact on growth, not with standing the fact that inflation is elevated, that's very good for gold.
Another data point that I would share with you is you have not seen a tremendous amount of interest in gold on the part of retail investors.
If you look at ETF open interest, it has been relatively depressed because we've been able to find returns in other areas.
the one thing that I think has changed and is very important to keep in mind is that EM central banks, those that are worried about the value of their currency or worried about the value of their holdings, have continued to buy and are buying record amounts of gold.
And that EM central banks that have a higher percentage of gold as a percentage of their total holdings, those currencies have done better than those that don't.
So I think that tells you or corroborates the gold does have a place in the portfolio, and I still very much like an allocation in gold for a medium-term perspective.
>> Have to ask about the risk.
>> The risk is the dollar continues to move higher. The risk is that equities do phenomenally well.
If the opportunity cost of holding gold is high, i.e.
if I can put that money in the S&P and S&P is going to go up 10 or 15% or if I can put that money in US dollars, that is where gold gets challenged. The opportunity cost of holding gold when you are worried about everything else is material.
>> Let me ask another question, this one about food security.
This is a big concern for many people. Is the agriculture sector at risk in 2023?
>> I think, thankfully, the fear disruptions from the Russia Ukraine war did not materialize. Or at least have not materialized in a meaningful way.
If you look at the egg balances, and the way like looking at it is if you look at inventory, adjusted to demand. Inventories adjusted for demand are tight but not as tight as they are for certain commodities and not as tight as they were in a Jesus in 2006, 2007. So I think we are okay on the AG front but we are one crop failure away from very tight balances because we don't have an abundance of corn, beans, wheat, etc.
The other piece that might present some upside for foreign beans and weed is higher energy prices.
Higher energy prices are not only an input into your cost of production.
A higher diesel price means that it costs more to run the tractor and it costs, a higher gas price means it costs more to drive more.
Also impact substitution on the demand side. As oil prices go up, the incentive to use biodiesel, the incentive to use corn-based ethanol increases.
So to answer the question directly, I'm a little less concerned about food inflation today then six months ago and I was worried about what was going to happen in the breadbasket in Europe. But I don't think we are out of the woods because balances are still quite tight.
>> We are going to get back to your questions for Hussein Allidina on commodities in a moment's time. As always, make sure you do your own research before you make any investment decisions.
A reminder, you can get in touch with us anytime.
do you have a question about investing or what's driving the markets? Our guests are eager to hear what's on your mind, so send us your questions. There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com, or you can use the question box right below the screen here on WebBroker.
Just write in your question and hit send. We will see if one of our guests can get you the answer right here at MoneyTalk Live.
With less than 90 minutes until the next US federal rate decision from the US Federal Reserve, joining us now with more is MoneyTalk's Anthony Okolie.
>> Thanks, Greg. TD Securities is expecting the Fed to hike interest rates 50 basis points, which is pretty much in lien note with market expectation. That would lift the target rate for Fed funds to a range of four and 3:45 and 1/2%.
The rate hike, according to TD Securities, would move Fed policy into restrictive territory.
This is where interest rates are believed to slow economic growth. Generally, the key rates between 2 to 3% is believed to more neutral, have a more neutral effect on economic growth where it's no longer simulating or restricting growth. No TD Securities is also looking for the federal operating market committee to signal a desire to shift to a higher terminal rate than forecasted back in September.
And this is all aimed at making claims that the Fed has a way to go before they halt the tightening cycle. TD Securities also notes that the said chair Powell signals in a November speech that they need to keep it just rates at a restrictive level for longer in order to bring inflation back to their target range.
As a result, TD Securities means bias towards the higher front end rates and a flatter curve.
With core inflation still stubbornly high, TD Securities is also forecasting were tightening ahead in the second quarter of 2023.
They expect to see another 50 Basis Point Hike in February, that will be followed by another 25 Basis Point Rate Hike in March and in May.
That will leave the total Fed funds rate target between the range of five and 4:45 and 1/2%. Greg?
>> So the cost of borrowing at those levels, what does the US economy look like in the view of TD Securities next year?
>> TD Securities is expecting the economy to lose a bit of momentum heading into this quarter as domestic demand continues to slow down now.
A sharp slowdown in growth combined with a loss of momentum in the labour market should translate into a gradual but steady increase in the unemployment rate in the United States.
TD Securities is forecasting that GDP growth will slow down more markedly in 2023 with a recession likely in the third quarter of next year.
No TD Securities believes this will force the Fed's hand by year end, resulting in a potential 25 basis point rate cut in the December 2023.
>> Thanks.
>> My pleasure.
>> That rate announcement is 90 minutes away. That was MoneyTalk's Anthony Okolie.
Let's check in on the markets as we await the decision.
it's modest you're on base rate, the TSX up 20 points, about 1/10 of a percent. Air Canada getting a bit of a boost today.
Last time I checked, there's been a lot of positive signals coming out of the airline industry, particularly Delta Air Lines. Do we think demand will hold into next year.
19 bucks and $0.30 for Air Canada, up 1.7% Kinross, some weight on the mining stocks today. It's a lot on the session, five bucks and $0.85, down about half a percent.
South of the border, the S&P 500, the NASDAQ as we wait for the Fed. The real action will be lately at 2 PM Eastern time. In the aftermath of that, the S&P 500 of almost half a percent, the NASDAQ, let's check in on the tech heavy index and see how it's faring. It's up to the tune of about the same amount. And delta, we said earlier they are pretty optimistic about travel demand into next year, 2 1/2% rise in that stock to 34 bucks and $0.23.
We are back now with Hussein Allidina from TD Asset Management. You are taking your questions about quantities. Let's get to them.
Is there enough of supply of rare earth metals going forward?
>>depending on the forecast that you look at for the amount of these that are going to be on the road, there are definitely concerns about availability.
Rare earth mineral as well as some of your base metals that we talked about.
I think another concern, right, with investment will come incremental supply and we talked about earlier, depending on where the prices, you open up the amount to the potential supply you have. What we know today, however, is that a lot of these rare earth minerals are not necessarily being produced or exploited in North America.
A lot of these minerals are in places that are maybe not the most friendly to North America, whether it's China, Russia, etc.
So look at the world and you say it, is there enough?
There might be. Probably not, given the amount of investment taking place today.
Even if it is, is it in places that are willing to share with us?
I think that's part of the reason we are seeing some of these policy decisions of the US where there is a focus on finding and extracting minerals as opposed to being dependent on othersfor them.
I think there's been a lot more time spent on the copper, lithium and cobalt balances and I have some of the rare earth minerals.
It's not going to be easy sailing.
Copper is not waiting there to be used. We have to go and find it, explore for it to be able to meet some of the targets that are being thrown out.
>> Lots of questions coming in for Hussein on the show, solicits more of them. Here's one. Do you see windfall taxes moving into the commodity space and if so, is that inflationary or deflationary?
>> Anytime commodity prices increase, you see two things which are quite negative for the commodity price moving forward, negative for the economy from a commodity price point of view. Let me unpack that, it didn't make any sense. As prices increase, you see governments trying to first provide consumers with relief by lowering taxes or reducing the cost at the pump in one way shape or form.
That is actually counter to what you want happening.
When the market is trying to find balance, the price was higher.
That higher price should discourage Greg from taking the next trip.
But if I know make it cheaper for Greg, that price signal is gone and demanded stronger.
So that is one negative and that always happens and we seen it globally this year.
The second thing that happens is when commodity company start making money, the government says, well, we are going to take some of that, we are going to tax you so that we can redistribute it. What's that due to Greg, the supplier?
He says that oil is $80 a barrel, I can keep it all, my economics get worse and my desire to produce decreases and ultimately what that pretends is a higher negative balance in the future.
It is the risk of windfall taxes there? It always is.
We see it happening, maybe it's not called a windfall tax, when we look at higher commodity prices, the host government of the country, whether it's West Africa, whether it's Brazil, they want more because they know they can take more.
That ultimately means less supply.
Like the tax holiday on your gas consumption meeting demand. I think the threat is real and ultimately that's one of the reasons why some investors preferred to traffic in the commodity as opposed to the equity because that windfall tax hurts the producer but actually helps the commodity.
>> Fascinating stuff. Here's a question asking what role should commodities play in a portfolio?
>> So a couple of things.
Commodities-- the commodity return stream is typically uncorrelated with returns of equities and fixed income.
It is because those are more anticipatory assets were those commodities are more reflective of the here and now.
That low correlation improves the portfolio construction or portfolio sharp.
Commodities in particular in inflationary environments are of even greater value because the correlation between equities and fixed income and inflationary environments is no longer negative.
We've seen that this year, right? Your 6040 portfolio down maybe 15, 17% this year, commodities, notwithstanding the pullback, it's still at 15%.
When I look forward into 23 and 24 I like commodities because of the micro-commodity story which I have bored you and your viewers with over the course of the last 30 minutes, but I also like it from a macro point of view because asset allocators are looking at their asset allocation, typically are still very 6040.
Howling a headshot portfolio from inflation?
Commodities plays a role there. Other assets also play a role, but the most sort of significant beta to inflation comes from energy, comes from commodities.
And I think that flow will continue to grow to 2023.
>> I think the audience agrees with me, I am always fascinated by the conversation.
>> Thank you for having me.
>> It is great to have you here.
Our thanks to Hussein Allidina, had a commodity said TD Asset Management.
Stay tuned. When tomorrow show, Chris Whelan, Senior Canada rate strategist at TD Securities is going to be our guest, giving us his reaction to that Fed rate decision, where our central bank might be headed and the economy overall in 2023. A reminder of course, you can get your questions in it.
Email moneytalklive@td.com.
that's all the time we have the show today. Thanks for watching.
We'll see you tomorrow.
[music]
Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Every day, I'll be joined by guests from across TD, many of whom you'll only see here. We are going to take you there with moving the markets and answer your questions about investing. Coming up on today show: with fears of a recession on the horizon, we'll hear from TD Asset Management's Hussein Allidina on the outlook for commodities heading into next year.
And in today's WebBroker education segment, Caitlin Cormier will show us how you can make in-kind transfers using the platform.
So here's how you can get in touch with us. Just email moneytalklive@td.com or fellow that viewer response box right under the video player your own WebBroker.
before we get our guest of the day, let's get you an update on the markets. We're about two hours away from a fairly significant market event, that would be the US Federal Reserve expected at 2 PM Eastern time with its latest rate decision. We do have some greed on the screen south of the border. The 20,063, 40 points to the upside on the TSX. We have West Texas intermediate crude, the American benchmark, up to 1/2% today.
let's check in on some of those energy names.
Earlier, I see a lot of the oil companies writing that way. Indeed, Suncor right now is $0.32, three quarters of a percent.
First Quantum is at 32 bucks and change, a little bit more than 3%. South of the border, we do have some positive momentum heading into the 2 PM Eastern time rate decision.
With the S&P 500, the broader read of the American market, up about half a percent.
And the NASDAQ, let's see how it's pacing against the broader market. About three quarters of a percent. Of course, we saw big jump in the equity trade yesterday morning after the softer than expected inflation print which were off growth today and now today of course it is the Fed.
Let's check in on Microsoft, they were making some gains earlier along with other mega-cap tech names.
At 261 box per share, it's up almost 2%.
And that's your market update.
All year, we've been hearing about tight supply for many commodities,but with concerns about a recession on the horizon, will demand be the real concern for 2023?
It joining us now to discuss is Hussein Allidina, had commodities at TD Asset Management.
Always great to have you on the show.
Welcome back.
>> Thanks for having me.
>> We are going to close the books on 122 pretty soon.
But you and I have had a number of discussions this year about the supply situation, the demand situation.
These recession fears.
How to supplant the commodities trade next year?
>> Absolutely,if we look at the course of the last couple of weeks, maybe the last couple of months, the market has been very focused onglobal growth is slowing and the impact that is going to have on commodity demand.
When I look at the oil balance in particular for next year, you know the IA this morning revised up actually there demand for cash, looking for growth of 1.7-ish million barrels a day. We talked about this before. The supply side, your inventory picture, your incremental supply growth picture, it's relatively constrained in 23, 24, 25, a symptom of the lack of investment over the course the last 10 years.
So that's relatively, I would say, well defined. The question is now how challenged, if at all, will demand be and 23.
If demand grows by the 1.
7 million barrels a day that the IA is forecasting next year, you have a picturethat will be lower at the end of next year than we are now.
We talked as well before, if we look at global oil demand going back to 1970, there's really only three or four occasions where demand contracted in absolute terms. You need to have a material contraction in economic growth comparable to what we saw at the height of the pandemic in March 2020 or during the financial crisis, and even in those episodes, we had demand contract but it was a relatively short term contraction and it bounced back.
We are looking at demand today reaching 100 million barrels a day. Notwithstanding the fact that the weather has been materially warmer than normal, which has tempered demand.
I do think that the focus next year is very much on the demand side.
My base case right now is that economic growth is probably going to be robust enough to continue to point to tighter balances throughout the course of 23.
>> It sounds like we have some wildcards at play. I mean, the weather in the northern hemisphere, the winter always plays in, the consumption needs. Even economic one.
You said, we think we are going to see demand go up and perhaps some economic softening. What could go in the other direction in terms of demand?
If China reopening… There a few wildcards are there, aren't there?
>> I think one thing we got remember this year has been an incredible year for volatility and for commodity price action broadly speaking, this is also your when China has largely been closed. Chinese demand has not been this week since I think 1994, 95, on a growth basis.
Now there are overtures and signs that China is opening up.
I don't think it's going to be a straight line but I'm pretty comfortable with the view that Chinese demand and 23 is going to be higher. Their impact on the oil market, on the commodity market, from a consumption point of view, should be higher and 23 relative to 22 and there are early signs again that we look at flight data or congestion data in China, it's picking up. And people, like in the rest the world when things open up, they want to get out.
>> One of the concerns obviously this year has been inflation.
Energy costs has been part of that inflationary story.
If we had into a situation next year where we have obviously a lot of reasons in the system why supplies pretty tight and if demand does pick up or hold steady, could be pushing ourselves back into an environment that the central banks won't like all that much? A higher price for crude, for instance.
>> I think absolutely.
Some of the softness we've seen in inflation of late has been because commodity prices have been lower.
Until you address that supply side, if you have positive economic growth and by extension positive commodity demand, I think it is going to push these prices higher again.
One of the reasons why demand is not as weak today as it would have been if prices were at the levels we saw in the summers because that price relief has encouraged consumption. When I look at 2023, if my view on demand is correct, if my view on supplies correct, I do think we see oil prices moving back towards the highs that we see in this year.
Potentially higher, depending on how the situation plays out and I think it will be a focus again. I think the inflation story is not done. It does appear that inflation is weakening but the underlying commodity inflation, I think you're probably in the early innings of it because again, I am a broken record but we have not addressed the supply side. CAPEX is not taking place, notwithstanding the increase in commodity prices.
And for that reason, Greg, I think that inflation will remain a concern.
Maybe not eight, 9% inflation but the idea of 2% inflation on a sustained basis is a bit of a stretch.
>> What will it take to see that kind of investment in the oil, gas or mining industry?
you have the need for several minerals for elective vacation, we haven't been extracting the oil.
Is that era behind us, of expiration?
>> I think after break down almost by commodity or some commodity category. I think there is a.
.
.
Not a strong desire on the part of oil and gas, oil in particular, to invest and that is because of energy transition.
Are we going to be using the stuff five, 10, 15 years now?
We know that if we go any make an investment today, it's not going to lead to incremental production for five, seven, eight years. You gotta think longer term when you are making these investment decisions. I also think that there is a big ESG sort of focus and I think many of these oil companies are being challenged by shareholders when they go to make the conventional investments that they have made.
I think we need to have a Cycle because we don't have, frankly, the substitution on the demand side to say, hey, we don't need these commodities. We still need the commodities. I think we're gonna have to see material increases, frankly, in the return on capital deployed to see these companies go on and make the investment.
And look, the data this year, notwithstanding increases of pricing, you haven't seen that commensurate increase in investment.
Using some of it from the private side.
If you look at the US right now, probably half of the increase in the rate count this year had come from the private space. That's becoming challenged now because credit, the cost of money is increasing. A phenomenon that hasn't been an issue for the longest period of time.
When the metals and mining side, I think you will see more investment to the extent that prices remain elevated and encourage that investment because you have less of that sort of negative ESG story there. But again, the volatility that we have seen in price, Greg, makes these investment decisions all the more challenging. You know, if you are talking to your board about making an investment in oil, three months ago, you are using a price tag of $90 a barrel. If you're doing it today, you are using as a price tag of $70 a barrel. When over the price is going to be three months from now, but that volatility increases effectively the return that I gotta make to justify the cost of.
>> It does sound like several years down the road that we are not going to have some of the things that we need, unless there is some sort of magical transformation in energy sources or other sources of minerals that provide us with electric vehicles and electrification.
It'll be a tight space further down the road.
>> I believe strongly that if we have economic growth that commodity balances and commodity prices will act as a tax on that growth because, to your point, we don't have sufficient supply.
We are not making the investment that we need to make today.
To the extent that we are not able to substitute away from conventional energy fast enough, which I don't believe the data is showing we are doing, you are going to end up in a position where inventories are tight.
You have sustained back gradation in the commodity markets and on any sort of supply disruption or demand surprise to the upside, prices have two move materially higher to find equilibrium. I will have to ration it demand in that tighter environment.
>> Reminder that you can get in touch with us at any time.
Just email moneytalklive@td.com or fill out the response box on under the web layer here on my broker.now we will get you some of the top stories in the world of business and look at how the markets are hitting.
Delta Air Lines says thatrobust demand for travel seizes profits nearly double next year. The air carrier also expects free cash flow to grow substantially through 2024.
And it is laying out plans to pay down debt.
The industry has been optimistic about continued demand for air travel despite broader concerns about a possible recession. Canada's manufacturing sector turned in a storm with an inspector performance in October. Statistics Canada says factory sales were up 2.8% for the month, beating estimates of a 2% gain.
The strength was widespread. The petroleum and coal industries lead the way.
Closing arguments in the 26 billion dollar Rogers-Shaw merger are being laid up for the competition Tribunal today. The hearing is perceivably the final step before the matter goes before a federal court of justice for decision. A quick check in on the markets, let's start here at home on Bay Street with the TSX Composite Index.
Of course, the big event of the day it would be the US Federal Reserve at 2 PMEastern time with the rate decision. He got green on the screen. Modest year in Toronto. 20,054, 31 points. South of the border, let's check in on the S&P 500.
It's a little more than half percent. Of course, inflation in the United States came in later than expected with the latest read that we got yesterday.
What is the fed make of it?
We are going to know and listen to our time.
We are back now with Hussein Allidina. We are taking your questions about commodities, let's get to them.
The first one here: it what's the outlook for natural gas through this winter?
>>That's a tough one. Let's talk about European natural gas and several talk about US natural gas.
European gas prices have been moving higher after coming off over the course of the last couple of weeks on this lack of the winter demand.
We build stockpiles over the course of the summer, knowing that there is going to be supply issues because of the situation as it relates to Russia Ukraine.
The lack of weather has contributed to bringing these prices lower but now, the winter is coming and you are seeing prices move higher.
I think the near term, as it relates to Europe, is going to be very volatile and very dependent on weather.
When I think about the European balance in 2023, 2024, 2025, unless you see supplies somehow restarting from Russia, which doesn't seem likely, there is still going to be a deficit that is going to have to be met with LNG and Asia has been largely absent from the LNG market this year because of the shutdowns in China and because they have been burning more coal. I think that 2023, 2024, you see European gas prices trading higher than they have historically in order to attract those cargoes. We see quite a bit of elegy coming to market in late 25 to 26. Until then, I don't see a tremendous amount of relief so you have to have higher prices to limit industrial demand while attracting inflows. In the US, the situation is a little bit better because we have domestic production and domestic production is growing.
You've seen a lot of volatility in price again, which is consistent with the time of the year.
The weather forecasts are changing meaningfully day over day in the US and North America we haven't had a ton of weather, set provided a bit of relief.
But now the 14 day forecast is looking quite cold and you are seeing gas prices move higher on that.
When I look at estimates in 2023, there is a sense of optimism, i.
e. that production in the US is going to continue to increase meaningfully.
I think some of those production forecast might be too optimistic. The US will trade less than Europe and will continue to do that, but I'm not sure that we are going to get there production growth that the markets are expecting.
They are looking at a couple of plays and extrapolating that for the rest of the play as a whole and I'm not sure that that's warranted.
Ultimately, US balance is still a closed market with the exception of the LNG and the exports to Mexico. We don't have the ability to export a ton more LNG with the exception of the Freeport restart which happens early next year. I do see more flows and 25, 26, which helps bring the European prices down but also helps lift US prices in that window.
> You talk about LNG and exporting.
Here at home in Canada, a lot of people talk about the opportunity for that, whether the opportunity would have been aiding Europe and its tough times considering debt crisis in Ukraine or you said of Asia shows up back at the table with demand for LNG. Where's Canada position right now?
can Canada be a part of this in the coming years?
>> We need to build liquefaction capacity so we can export the gas. This country has a phenomenal resource.
Gas is not as clean as solar, but materially cleaner than coal.
I think we have a missed opportunity and that we could have been, to your point, supplying Europe, supplying Asia, but I don't think that opportunity is entirely behind us.
I think there's a lot of potential and if you believe my view here that we are not going to be able to pull away from the conventional forms of energy fast enough, there is still room for us to increase gas exports out of this country to displace coal that is being burned in China. We talked about, I'm gonna go on a bit of attention, but we look at ZEV sales in China. China has been leading the world in EV sales. 20, 25% of sales are EV. That electricity generation is coming from coal.
That is not a net positive for climate. Instead, what we should be doing is, again, increasing our gas production, sharing it with the rest of the world so they can mitigate the burning of less clean fuels like coal, like oil, like diesel, etc.
>> Let's get another question no. You mentioned EVs there. We have someone in the audience wondering about their demand for electric vehicles that's on rise. What benefits will benefit the most?
> The metals, broadly speaking, have performed better of late on the heels of the China reopening story and I think if that reopening continues, you will see old metals do will but there are certain metals that will do better and case metals are largely copper and aluminum because of where we are in the property cycle in China. There are a bunch of buildings that need to get finished. When he finished those buildings, it's copper and aluminum. Those two metals are also very important ingredients in the electrification story.
So whether we are talking about the car battery or the power grid that needs to be built out to support these higher powered loads or even the power generation itself, there is a lot of copper and aluminum there. So those are our two more favoured base metals on a multiyear view largely because of the demand side but also, I'm going to repeat myself, the supply story needs to be addressed. Copper mining is not easy. We have to go further from the consumption centres to find the copper. The governments, obviously, are very focused on the environmental impact of mining.
So there's a bit of a giveback that has to be had with those countries that are operating in.
Copper is one that we like.
And aluminum to a lesser extent.
>> When it comes to the copper you're going to need, we are moving further away from the consumption side, it's a bit difficult, the money that's needed to invest.
It is the copper there waiting for us? If everything else, if all the other stars align, we can mind the copper, is it there waiting for us in the ground?
>> At a price.
At a price. Everything happens at a price.
When oil move to 80, $90 a barrel for the first time, we said, hey, hold on a second.
We can do oil sands, we can do the belt in Venezuela, we can do shale production. I would argue the copper 10,000, 12,000, 50,000, is going to open up the available supply. The question is timing.
>> Fascinating stuff.
Let's get another question here.
Someone once your thoughts on uranium.
>> So we've talked about this I think before. I like uranium largely, again, going back to the sort of electrification, the power grid story, people are starting to realize and appreciate now that wind, solar, super clean but cannot act as baseload. We've seen in Europe to serve the course of the past couple of days, it's been colder,, how do I get a base demand?
Today, baseload demand or baseload power comes from natural gas, from coal and to a lesser extent it comes from Hydro and then you brought some residual fuel oil or distillate that is providing baseload.
And you have the sort of solar, the renewable that is doing the peak.
We are saying that a lot of this baseload stuff is dirty and we don't want to deal with it. Coal, oil, and certain places of the world, there are even reservations about natural gas.
You have to replace that was something. You cannot replace it with wind. You cannot replace it was solar because the sun doesn't shine all the time. That is for nuclear plays a role and I think like some of the other commodities, no one has invested in the supply side of uranium and the loss of Russia is also material. So I like uranium on a multiyear view.
Again, none of these things are a straight shot higher, but I think if you are looking at uranium today and we look at it five years now, uranium it will be trading higher than we are today.
>> Does it depend on what happens on the journey?
>> Yes.
The broad risks are what happens to global demand, what happens to the US dollar, does appetite towards uranium or nuclear change in the near term? You know, if we were to have a Fukushima type incident, I bet you people would back away from it just because of the blowback. But ultimately, you can't find equilibrium if you believe that there's going to be growth and we are not going to be consuming coal and we don't want to be consuming coal, gas, etc., nuclear has to have a home.
>> As always at home, make sure you do your own research before you make any investment decisions.
We'll get back to your question for Hussein Allidina on commodities in a moment. You can get in touch with us anytime. Just email moneytalklive@td.com. Delegate to our educational segment.
On today's education segment, we are taking a look at how to make in-kind contributions using the WebBroker platform.
Joining us now with more on that, Caitlin Cormier, client education instructor at TD Direct Investing.
Caitlin, great to have you back with us.
Maybe we'll start this conversation by reminding her audience, we don't do this often, what in-kind contributions are and how they work.
>> Absolutely, yeah. So it's going to be the time of year where people are may be planning, it's unbelievably close to 2023.
so we might start thinking, after all the holiday rush is done, about contributions to tax-free savings and RRSPs when you're thinking about next year.
So one way that a customer can actually move forward and make a contribution is by doing what is called an in-kind contribution.
So what this is is you're taking essentially a security that you own and a nonregistered account, like a cash or a merchant account, and you are taking that security and popping into into your registered account. So that allows you to make your contribution… Reese purchase something in the other.
Instead, you are to sort of moving the security over.
Now again, basically you are saving the fact of having to sell and repurchase.
Keeping in mind there are also tax implications for a transaction like this.
So same as when you make a contribution to an RRSP and tax-free savings, there's always a bit of a consideration. So do make sure you speak to a tax professional about something like this, what implications it might have before you actually go to the process of transfer because you want to make sure you're fully aware of that before clicking enter and putting it there but it is one way that these types of contributions can be made.
>> You gotta get your professional advice.
You've got all your ducks in a row and want to proceed, how do you do that?
>> Yeah, so it's actually relatively straightforward process.
It can be a process by yourself. Let's hop in.
Will go under the accounts tab. We'll start here. We are going to go down to this third one here, transfer securities within TD Direct Investing, including contributions.
Now this is the same place that you would go if you want to, for example, transfer a US security from the Canadian side of your account to the US side of your account or something like that.
There are those sorts of transfer that can be done.
No keeping in mind, there are some transfers that cannot be done online. It you canlook into that, like transfer of ownership. The simple ones you can.
we would choose one side being the margin, the other side being either tax-free savings RRSP, whichever we would like to do.
Or if we were transferring between currencies, we would do that.
To continue, we would choose the individual security on the next screen to say we want to choose this particular security or ETF, and then go ahead and process the transfer from there.
It takes place pretty quickly.
It's all done online.
If there are any issues, you will hear back. But again, make sure to do your homework first. But it is pretty straightforward once you've made the decision, done your homework and you want to move forward.
It's as simple as going through this screen, selecting a few different things and you are off to the races.
>> Good stuff as always, Caitlin. Things that.
>> Thank you so much.
>> Caitlin Cormier, client education instructor at TD Direct Investing. Make sure to check out the learning centre on WebBroker for more educational videos, live interactive master classes and upcoming webinars.
now before I go back to your questions about commodities for Hussein Allidina, a reminder of how you get in touch with us.
Do you have a question about investing or what's driving the market?
Our guests are eager to hear what's on your mind, so send us your questions. There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just writing your question and hit send.
We will see if one of our guest can get you your answer right here at MoneyTalk Live.
we are back now with Hussein Allidina taking your questions about commodities.
Let's get back to them. If you are wanting to know do higher interest rates have an impact on the commodity sector? We've definitely seen higher interest rates this year.
>> That's a great question.
They definitely do. Typically when people think about higher interest rates or when I think about higher interest rates, the first thing I think about is okay, higher rates are going to mean less activity and that means less demand for the commodity and a bearish price.
the other side of the client, higher interest rates means higher cost of capital means it's harder for me to go and invest.
whether I need a tractor to plow the field or I am a shell producer trying to raise capital and drill new wells.
I think one of the things you have to keep in mind in particular for oil, that is true of all commodities, thelow rate environment that would come through in the last 10, 12, 13 years it really facilitated the evolution of shale production.
And now that there is a cost of capital associated with that shale production, I think we are seeing, and I mentioned this earlier, the private rate count is starting to come into question.
Higher rates equal bad for growth but also bad for the supply side in that you had to have a higher price to make your return.
So I think that we will likely see a negative impact on the supply side from the higher rate environment that we are moving into.
>> The US dollar strength as well, how does that play into it?
Is there a correlation between the price of a barrel of crude at the price of the US dollar and the rising rate environment?
>>I think 2022 has been a remarkable market for commodities. It's been a 15 to 16% year to date. Not with standing the weakness be seen in the last couple of months.
And this is in a time when the US dollar has been low.
When I look forward to 2023, could the dollar increase?
Of course it could, but if I'm betting, I'm betting it probably had lower, particularly as the said steps back from the rate increases and we see the rest of the world growth improve a little bit. If I am right and the dollar has peaked or is close to its peak and it goes lower, that is a boon for commodity prices.
Higher dollar means that the price of oil for my cousin in India is higher in rupee terms, higher dollar means the price of soybeans at the Brazilian farmer gets for selling his beans is higher in reactors.
A weaker dollar is bullish for demand for the rest the world and is also bearish for supply in the rest of the world because the same Brazilian farmer is not granting the same amount of money per bushel.
>> Fascinating stuff. Let's get on to another question, this 1 Holds Pl.
in all of this. Does anyone still think that gold is a good inflation hedge?
I think gold has a, I think I said this last time on the show, I think gold has an important part in portfolio because of the risk characteristics it hedges.
Gold, I believe, is a good inflation hedge.
Particularly the details, particularly when uncertainty is really high. The school perform remarkably well in inflation is three, 4%? Maybe? The gold really performs when inflation is north of 5%.
You'll say, well, inflation has been well north of 5% this year.
How can gold has not done better? Golden euros, gold in rupees, gold and any other currency other than the dollar has done remarkably well and Golden dollars is also doing reasonably well. We had a really big and real rate move this year. As the market I think is starting to digest and appreciate that the Fed might be nearing the end, your single chart to perform.
If the Fed and central bankers move away from tightening because they are concerned about the impact on growth, not with standing the fact that inflation is elevated, that's very good for gold.
Another data point that I would share with you is you have not seen a tremendous amount of interest in gold on the part of retail investors.
If you look at ETF open interest, it has been relatively depressed because we've been able to find returns in other areas.
the one thing that I think has changed and is very important to keep in mind is that EM central banks, those that are worried about the value of their currency or worried about the value of their holdings, have continued to buy and are buying record amounts of gold.
And that EM central banks that have a higher percentage of gold as a percentage of their total holdings, those currencies have done better than those that don't.
So I think that tells you or corroborates the gold does have a place in the portfolio, and I still very much like an allocation in gold for a medium-term perspective.
>> Have to ask about the risk.
>> The risk is the dollar continues to move higher. The risk is that equities do phenomenally well.
If the opportunity cost of holding gold is high, i.e.
if I can put that money in the S&P and S&P is going to go up 10 or 15% or if I can put that money in US dollars, that is where gold gets challenged. The opportunity cost of holding gold when you are worried about everything else is material.
>> Let me ask another question, this one about food security.
This is a big concern for many people. Is the agriculture sector at risk in 2023?
>> I think, thankfully, the fear disruptions from the Russia Ukraine war did not materialize. Or at least have not materialized in a meaningful way.
If you look at the egg balances, and the way like looking at it is if you look at inventory, adjusted to demand. Inventories adjusted for demand are tight but not as tight as they are for certain commodities and not as tight as they were in a Jesus in 2006, 2007. So I think we are okay on the AG front but we are one crop failure away from very tight balances because we don't have an abundance of corn, beans, wheat, etc.
The other piece that might present some upside for foreign beans and weed is higher energy prices.
Higher energy prices are not only an input into your cost of production.
A higher diesel price means that it costs more to run the tractor and it costs, a higher gas price means it costs more to drive more.
Also impact substitution on the demand side. As oil prices go up, the incentive to use biodiesel, the incentive to use corn-based ethanol increases.
So to answer the question directly, I'm a little less concerned about food inflation today then six months ago and I was worried about what was going to happen in the breadbasket in Europe. But I don't think we are out of the woods because balances are still quite tight.
>> We are going to get back to your questions for Hussein Allidina on commodities in a moment's time. As always, make sure you do your own research before you make any investment decisions.
A reminder, you can get in touch with us anytime.
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With less than 90 minutes until the next US federal rate decision from the US Federal Reserve, joining us now with more is MoneyTalk's Anthony Okolie.
>> Thanks, Greg. TD Securities is expecting the Fed to hike interest rates 50 basis points, which is pretty much in lien note with market expectation. That would lift the target rate for Fed funds to a range of four and 3:45 and 1/2%.
The rate hike, according to TD Securities, would move Fed policy into restrictive territory.
This is where interest rates are believed to slow economic growth. Generally, the key rates between 2 to 3% is believed to more neutral, have a more neutral effect on economic growth where it's no longer simulating or restricting growth. No TD Securities is also looking for the federal operating market committee to signal a desire to shift to a higher terminal rate than forecasted back in September.
And this is all aimed at making claims that the Fed has a way to go before they halt the tightening cycle. TD Securities also notes that the said chair Powell signals in a November speech that they need to keep it just rates at a restrictive level for longer in order to bring inflation back to their target range.
As a result, TD Securities means bias towards the higher front end rates and a flatter curve.
With core inflation still stubbornly high, TD Securities is also forecasting were tightening ahead in the second quarter of 2023.
They expect to see another 50 Basis Point Hike in February, that will be followed by another 25 Basis Point Rate Hike in March and in May.
That will leave the total Fed funds rate target between the range of five and 4:45 and 1/2%. Greg?
>> So the cost of borrowing at those levels, what does the US economy look like in the view of TD Securities next year?
>> TD Securities is expecting the economy to lose a bit of momentum heading into this quarter as domestic demand continues to slow down now.
A sharp slowdown in growth combined with a loss of momentum in the labour market should translate into a gradual but steady increase in the unemployment rate in the United States.
TD Securities is forecasting that GDP growth will slow down more markedly in 2023 with a recession likely in the third quarter of next year.
No TD Securities believes this will force the Fed's hand by year end, resulting in a potential 25 basis point rate cut in the December 2023.
>> Thanks.
>> My pleasure.
>> That rate announcement is 90 minutes away. That was MoneyTalk's Anthony Okolie.
Let's check in on the markets as we await the decision.
it's modest you're on base rate, the TSX up 20 points, about 1/10 of a percent. Air Canada getting a bit of a boost today.
Last time I checked, there's been a lot of positive signals coming out of the airline industry, particularly Delta Air Lines. Do we think demand will hold into next year.
19 bucks and $0.30 for Air Canada, up 1.7% Kinross, some weight on the mining stocks today. It's a lot on the session, five bucks and $0.85, down about half a percent.
South of the border, the S&P 500, the NASDAQ as we wait for the Fed. The real action will be lately at 2 PM Eastern time. In the aftermath of that, the S&P 500 of almost half a percent, the NASDAQ, let's check in on the tech heavy index and see how it's faring. It's up to the tune of about the same amount. And delta, we said earlier they are pretty optimistic about travel demand into next year, 2 1/2% rise in that stock to 34 bucks and $0.23.
We are back now with Hussein Allidina from TD Asset Management. You are taking your questions about quantities. Let's get to them.
Is there enough of supply of rare earth metals going forward?
>>depending on the forecast that you look at for the amount of these that are going to be on the road, there are definitely concerns about availability.
Rare earth mineral as well as some of your base metals that we talked about.
I think another concern, right, with investment will come incremental supply and we talked about earlier, depending on where the prices, you open up the amount to the potential supply you have. What we know today, however, is that a lot of these rare earth minerals are not necessarily being produced or exploited in North America.
A lot of these minerals are in places that are maybe not the most friendly to North America, whether it's China, Russia, etc.
So look at the world and you say it, is there enough?
There might be. Probably not, given the amount of investment taking place today.
Even if it is, is it in places that are willing to share with us?
I think that's part of the reason we are seeing some of these policy decisions of the US where there is a focus on finding and extracting minerals as opposed to being dependent on othersfor them.
I think there's been a lot more time spent on the copper, lithium and cobalt balances and I have some of the rare earth minerals.
It's not going to be easy sailing.
Copper is not waiting there to be used. We have to go and find it, explore for it to be able to meet some of the targets that are being thrown out.
>> Lots of questions coming in for Hussein on the show, solicits more of them. Here's one. Do you see windfall taxes moving into the commodity space and if so, is that inflationary or deflationary?
>> Anytime commodity prices increase, you see two things which are quite negative for the commodity price moving forward, negative for the economy from a commodity price point of view. Let me unpack that, it didn't make any sense. As prices increase, you see governments trying to first provide consumers with relief by lowering taxes or reducing the cost at the pump in one way shape or form.
That is actually counter to what you want happening.
When the market is trying to find balance, the price was higher.
That higher price should discourage Greg from taking the next trip.
But if I know make it cheaper for Greg, that price signal is gone and demanded stronger.
So that is one negative and that always happens and we seen it globally this year.
The second thing that happens is when commodity company start making money, the government says, well, we are going to take some of that, we are going to tax you so that we can redistribute it. What's that due to Greg, the supplier?
He says that oil is $80 a barrel, I can keep it all, my economics get worse and my desire to produce decreases and ultimately what that pretends is a higher negative balance in the future.
It is the risk of windfall taxes there? It always is.
We see it happening, maybe it's not called a windfall tax, when we look at higher commodity prices, the host government of the country, whether it's West Africa, whether it's Brazil, they want more because they know they can take more.
That ultimately means less supply.
Like the tax holiday on your gas consumption meeting demand. I think the threat is real and ultimately that's one of the reasons why some investors preferred to traffic in the commodity as opposed to the equity because that windfall tax hurts the producer but actually helps the commodity.
>> Fascinating stuff. Here's a question asking what role should commodities play in a portfolio?
>> So a couple of things.
Commodities-- the commodity return stream is typically uncorrelated with returns of equities and fixed income.
It is because those are more anticipatory assets were those commodities are more reflective of the here and now.
That low correlation improves the portfolio construction or portfolio sharp.
Commodities in particular in inflationary environments are of even greater value because the correlation between equities and fixed income and inflationary environments is no longer negative.
We've seen that this year, right? Your 6040 portfolio down maybe 15, 17% this year, commodities, notwithstanding the pullback, it's still at 15%.
When I look forward into 23 and 24 I like commodities because of the micro-commodity story which I have bored you and your viewers with over the course of the last 30 minutes, but I also like it from a macro point of view because asset allocators are looking at their asset allocation, typically are still very 6040.
Howling a headshot portfolio from inflation?
Commodities plays a role there. Other assets also play a role, but the most sort of significant beta to inflation comes from energy, comes from commodities.
And I think that flow will continue to grow to 2023.
>> I think the audience agrees with me, I am always fascinated by the conversation.
>> Thank you for having me.
>> It is great to have you here.
Our thanks to Hussein Allidina, had a commodity said TD Asset Management.
Stay tuned. When tomorrow show, Chris Whelan, Senior Canada rate strategist at TD Securities is going to be our guest, giving us his reaction to that Fed rate decision, where our central bank might be headed and the economy overall in 2023. A reminder of course, you can get your questions in it.
Email moneytalklive@td.com.
that's all the time we have the show today. Thanks for watching.
We'll see you tomorrow.
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