Market Insights

[music] >> Hello, I'm Anthony Okolie in for Greg Bonnell and welcome to MoneyTalk Live, which is brought to you by TD Direct Investing.

Coming up on today show, Moneytalk's Susan Prince will take us through today's big US jobs report and what it might mean for the Fed.

We will also hear from TD Asset Management Andriy Yastreb on what impact the opening of the Trans Mountain Pipeline expansion could have on the Canadian energy sector.

And James Hunter from TD Asset Management will give us his view on whether the recent rally and preferred shares can continue.

Plus, in today's WebBroker education segment, Hiren Amin will show is about where we can find more information about preferred shares on the platform.

Before we get all that, let's get you an update on the markets. We will start here in Canada, where the market is trading solidly in the Black led by gains in technology stocks after slowing US jobs growth in April raised hopes of early interest rate cuts by the Federal Reserve.

It's up .5%. Some of the big movers now, TC Energy Corporation. It's buying an early trade. The pipeline operator posted a first-quarter profit of $1.2 billion, down modestly from the same quarter one year ago. The company also announced a deal to offload its Portland natural business and its Prince Rupert gas transmission project. The stock is up just over 3%.

Some other big movers today, Magna Corporation, Magna has reported a drop in its first-quarter profit as it takes a charge related to troubled electric vehicle maker Fisker. It's down just over 3%. Let's go south of the border were Wall Street also open higher on weaker US jobs numbers and Fed rate cut optimism.

This comes after the Federal Reserve held its key rate steady at on Wednesday and ease some concerns about potential rate hikes. It's not just the equity market reacting today's jobs numbers. We've seen bond yields pulling back, with the 10 year yield falling below 4.5%.

Currently the S&P 500 is up nearly 59 points or 1.1%.

We will take a look at the tech heavy NASDAQ composite index which is trading in positive territory, reacting to that jobs news as well. Some positive earnings from the tax base. We will talk about that in just a moment. But the index right now is up about 163 points, I'm sorry, this is Booking Holdings we are looking at.

But the NASDAQ index is up nearly 2%. We will take a look at some of the big movers, Booking Holdings, of course, is also trading higher. The online travelling company posted better-than-expected first-quarter sales and profit a big strong travel demand growth, they are up 4.7%. Other names moving higher, Amgen, the biotech company just reported that it's actually showing confidence in its early obesity drug trial results. That has some of the shareholders bidding up the stock. The stock is trading up a whopping 13%.

And that's your market update.

Well, markets are reacting to the US jobs report this morning and for more, we are joined now by MoneyTalk DIY editor, Susan Prince.

Tell us a little bit about what you are seeing in the jobs report.

>> It's an interesting number because it missed what analysts were looking for. It came in at about 175,000 new jobs, analysts were expecting about 200, analysts and Congress were expecting that.

Where it becomes interesting is we are all looking at all the minutia that would give the Federal Reserve chairman the go-ahead to start lowering rates and this number plays into that.

Financial activities, professional and business services, hospitality, services is where we are seeing some of the growth.

On the plus side, there is very little growth in government jobs and sometimes, certainly in Canada, what we saw was a lot of job growth in the past two years was, it was, for some periods of time, predominantly government jobs.

So we are not seeing a lot of job growth in the US and the government side of things.

So this is a number that people are optimistic about and we saw in the market where it was like, wow, that was better than we expected!

And then people do this sort of, okay, if that's true, then Powell is closer to lowering rates, that's better for the stock market. And you saw people jump right back in and see the broader markets up really strongly because of it.

>> Now, we also got lots of corporate earnings this week.

What have you been focused on?

>> Market sentiment. There was the reaction to the job numbers and the Federal Reserve. Apple is a company that people pay a lot of attention to.

And this year, Apple has traded sort of pretty flat down on the year.

At the end of April, it was down 20 bucks from where it is now. It is now trading at about $185 per share, which brings us back to where it was trading at the beginning of the year. So we have had this sideways to down movement. Now that is up 7% because people got really excited about the fact that earnings were better than anticipated, and this was largely because their Mac sales were good and kind of offsets some concerns about the iPhone.

The iPhone sales continued to decline but then a couple of other things happened.

So they increased their dividend.

>> That was a big program they announced.

>> That was a big program that they announced, and they are also doing a share buyback.

But to me, when I look at this, I kind of feel like people who are participants in the market are reacting the same way, short attention span, new shiny thing, better than anticipated, sort of like the kids in classrooms who are being easily distracted by their phones, and I would like to argue for put your phone away.

When you are looking at the market, this big move in Apple, here's the example I will give. To the headline, as you pointed out, was the dividends and the increase to dividends. The headline was, Apple increases its dividends by 4%.

Their quarterly dividend is $0.25 per share on $185 stock. That means the dividend yield is barely half of 1%.

>> That's not a lot.

>> It's not a lot!

And so there's nothing wrong with that, it has always positioned itself as a growth company and very often growth companies don't pay dividends so the fact that it's paying dividends, okay, that's a plus.

Here's the thing.

People got really, really excited about a 4% increase in dividend.

It is not going to be beneficial to you? Maybe.

It depends on what your investment strategy is and what you are looking for in your overall portfolio.

But for the reaction to be a 7% jump in the stock on market opening today has me want to say, to anyone who will listen, could we just take a breath and figure out whether or not this is appropriate for the kinds of goals that I want to achieve for my portfolio?

>> Great point.

Thank you very much, Susan.

All right, our thanks to Moneytalk's Susan Prince.

Now, staying with the Fed earlier this week, we were joined by Scott Colbourne, managing Dir. and head of active fixed income at TD Asset Management to get his reaction to Wednesday's decision.

>> On rates, no surprise.

The Fed left the rates unchanged. But there were two changes. The first one was in the first paragraph and Fed chair Powell and other governors in recent weeks acknowledged that the of progress on inflation has stalled out. It has not gone the way they had expected.

So that was an acknowledgement right up front.

And it's going to be an important part of the statement to look forward to in coming months. And the big surprise actually was on the balance sheet runoff, quantitative tightening. It had been at $60 billion per month and the said gave us a heads up that they were going to reduce the amount of quantitative tightening. But they surprise the market modestly this month by moving it from $60 billion-$25 billion per month, but that is more of a focus on how to manage the reserve so it's less of a focus on monetary policy in the current implications. The most important thing for me was acknowledging that it inflation progress has stalled.

>> Let's talk a little bit about the labour market. Recent data has shown that wage growth remains a concern. How does this place the Fed strategy?

>> It sort of an accumulation of recent issues, the slowdown on inflation progress. Essentially, this week, we had the employment cost Index and that was a surprise to the upside, including on the wage side.

So really, the main focus of the Fed rate here is on the labour market. I mean, they are comfortable with letting growth be good and Gov. Powell in his question-and-answer period after this statement, he both acknowledge that they were prepared to cut rates and if there is a significant deterioration in the labour market, and they will be mindful of any signals coming on the other side, especially through the mechanism of wages.

Their focus was labour market.

>> Big focus there. What is the bond market telling us right now about the path forward, as well as the typing on rates?

>> We are a long way from the end of the last year where we had seven codes. This morning, it was about one cut, maybe just a little bit more than one cut for the balance of this year and then moving towards perhaps an end of cycle target of about 4% from 5 1/2 right now.

The bond market is saying, look, we are expecting to be on hold for a while, higher for longer. They are just definitely in the state or dependent mode, waiting for the data to give them confidence that they can start moving, confidence on inflation. So steady as she goes. Unlikely they are going to see a big selloff on the bond market given the status quo going forward mentality.

>> There has also been a lot of talk about stagflation. How really concern is this?

>> Going way back, stagflation is based to know it is not the current dynamic. When you strip away the trade side and some inventory movement, real domestic demand is still pretty robust in the last GDP numbers. For me, it's pretty good growth.

Growth is projected around 2.2%. I don't see it as stagflationary as low or negative growth but we definitely have sticky inflation cycle so this means the Fed will be very patient until they get much more confidence which they just haven't had.

>> Given your outlook on rates and growth, what does this potentially mean for the US dollar going forward?

>> It is supportive from this fact of reeds and the US economy dynamic is more exceptional than the rest of the world.

There is greater confidence that we are going to see cuts in Europe. China is slow.

It has been trying to reinflate.

There been some bumps there. It's a strong part of the world but for the time being is going to be resilient and positive.

Ultimately, we are towards the end of the cycle but it's been a tough one to call, so steady as she goes.

>> Looking ahead, what will you be watching for the next few months that could potentially change your view on this?

>> I'm just going to flip it back to what I said earlier, the labour market.

I really want to see some softening there.

I want to see further confidence that wages are coming down that is consistent with the productivity and growth of the economy. And that will give the Fed the confidence to start the sort of not a cutting cycle but a reduction in the tightness of monetary policy consistent with a disinflationary impulse.

>> That was Scott Colbourne, managing Dir.

and head of active fixed income at TD Asset Management.

Now, here's an update on the top stories in the business world today in a look at how the markets are trading.

The Toronto Regional Real Estate Board says greater Toronto home sales in April were down 5% from last year, but that new listings were up strongly year-over-year, which meant more choice for buyers and kept prices steady.

The average selling price was up 0.3% year-over-year to just over $1.1 million.

New listings jumped more than 47% over the same period, which the board attributed to many homeowners anticipating more demand for spring.

Meanwhile, Apple shares are in the spotlight today after the iPhone maker and build a record $110 billion share buyback program, the most ever for a public company. The share buyback news comes as the company reported a modest beat on second-quarter earnings will iPhone sales dropped 10% amid weakness in China, its third largest market. IPhone sales, which account for half of Apple's revenue, suffered the steepest quarterly drop in sales since the pandemic's outset.

In more earnings news, biotech giant Amgen posted better-than-expected earnings and offered a positive update on their experimental obesity drug. The biotech firm said they were very encouraged with the interim results of its obesity treatment, Maritide, and it didn't provide any numbers from its drug study in adults with obesity but it said it's actively planning phase 3 studies. This puts Amgen on track to potentially rival Blockbuster weight loss drugs from Eli Lilly and Novo Nordisk.

Currently, the stock is up nearly 13%.

And here's the main benchmark index in Canada, see how it's trading. Currently, the TSX is up about 100 points or we will call it .5%, half a percent.

Taking a look at the US, the S&P 500 is up a modest 59.41.18 percent.

Well, the price of oil is down from the Hyatt hit earlier in the year as concerns about a wider conflict in the Middle East have subsided. But with risks on both the supply and demand side, where does the price of oil go from here and what does it mean for the energy sector?

Andriy Yastreb, VP for portfolio research at TD Asset Management jointly earlier to discuss.

>> To answer directly, I think, yes, it's probably what we will continue to see in the future. We have seen it for about a year and have already. I think it's also in a range that is sustainable because it satisfies both suppliers and customers. So we have seen in the last year and so far this year pretty robust demand grows so obviously $90 oil is not resulting in some declines in demand. From the supplier perspective, it's pretty much all about OPEC. If you think about OPEC, I don't think OPEC wants $100 plus oil.

Their reaction functions not to maximize the price of oil but to have it high enough to satisfy their own internal needs like balancing their budgets for the producers but at the same time they don't want to incentivize adoption of EVs and people switching away from gasoline cars and they don't want to incentivize increasing capex production growth in the US and other countries that they compete with.

So the 70, 80, $90 price range satisfies all of those, and I think, as we think over the next several months, it will be interesting to see how OPEC and the Saudi's in particular think about bringing back the million barrels that they cut last summer. If we see oil being in the lower end of that range, maybe they extended if it's positive, but if we see oil going to 90 it's probable that the million barrels will come back to the market and from that perspective I don't think there's too much upside in the oil price.

>> From your perspective, that is not necessarily a bad thing for oil companies.

How does this pricing environment set things up for oil companies generally?

>> That's an interesting point because usually when investors think about investing in oil companies when oil prices go 20, 30, 50% higher, I think it has changed since COVID. There have been a couple of strong years of returns but from here, it's not as much about oil going higher significantly, it's more about the fact that all of these energy companies have clean balance sheets, they have high free cash flow yields and because they don't grow, they don't need to invest in capex is much as they used to. They can return more of that cash. When we talk about those free cash flow yields for large integrative producers, those at seven and 8%, for smaller producers acts 10% and above, so that perspective, having that confidence that they will be returning that cash back, if they stay within that range that sustainable over time, it's a really good return through dividends and buybacks, and you don't have that much risk of them going out and investing in capex. Historically, oil prices were higher, let's go and drill and invest more, the price crashes, let's pull some of it back. I think they're a lot more disciplined now.

>> Let's talk a little bit about the Canadian market. When you look at the Canadian energy sector versus the US, how do they differ right now?

>> That's another very good question. One key catalyst that happened literally today, May 1, TMX inspection is officially operational as of this morning and it's taking commercial crude and shipping it and soon it will be selling tankers. We've been waiting for this for you. That this is a big deal for the Canadian energy sector.

>> What that means is we will have over half a million barrels of extra capacity to ship more products out of Canada which is great. The Canadian producers can grow their pipeline capacity.

It's easier now to invest in growth over time. Secondly, it means that the pricing that the Canadian producers will be getting will be more sustainable over time.

We've seen periods in the past where production was way above capacity to ship and those times, Canadian oil was trading at a significant discount because it was hard to get the oil out of the basin. So now, there is a new regime for the next few years that will likely lead to better prices.

>> How long do you think it will take that capacity to come online?

>> The estimate is anywhere from 2 to 5 years. I think two years is too aggressive given where capital discipline is right now with these companies.

I don't think it will necessarily be two years. Five years is probably too long. I think three or four years is more prudent to estimate.

The second factor to keep in mind for Canadian energy versus US energy is that Canadian energy actually benefits from the Canadian dollar and we see in the US dollar going up here today to cross pretty much all major currencies and then there's weakness in the Canadian dollar, we've seen what's happened with the Canadian budget. So if this weakness continues, that will be actually a big tailwind for Canadian producers. If you look at Canadian oil being priced today in Canadian dollars, who were Western Canadian select, it's made $90, and for synthetic crude oil, it's over $100 per barrel. Pretty good pricing for Canadian oil right now.

>> I want to pivot from oil to natural gas. How is this environment looking for this commodity?

>> Natural gas is an interesting story because obviously OPEC does not control this market and what was seen in this market recently or over the last 6 to 9 months, natural gas pretty much got destroyed.

Natural gas prices were just under two dollars per cubic foot. What this means is that we've just seen really weak demand and a lot of the driver behind that was we have seen to really warm winters in a row.

Temperatures have been elevated. On top of that, this winter we saw a warm winter not only in North America but in Europe.

There is a situation where temperatures are elevated at the end of heating season, production is still quite robust and there is a risk that we will get to tank tops in terms of inventories before October at which point you can't produce more because there's no way to store it.

>> Let's bring the chart up once more.

>> What this is showing is two things. One is the green line shows today's forward curve for natural gas. Forward curve is basically the price of natural gas in the futures market. You can trade natural gas for delivery next month or six months now or 26 or 28.

The weakness I'm talking about is the green line is below the orange and grey line which is where the curve was 6 to 12 months ago but what I think is really interesting is the later part of the lion in 2026 through 2028, those prices haven't really changed.

What I think is really interesting for natural gas is the next 2 to 4 year period.

In response to prices right now, production has been reduced especially in the US. We had production earlier this year quite high and now it's lower.

The other part of that is we know that there is more LNG capacity coming online in the next several years. Ellen G Canada is ramping up later this year and we have several facilities coming online in the US. What that means is that there is going to be more demand at the time and those elevated inventories will not last forever. What the market is telling you right now is that gas prices under two dollars, the marginal producers don't make money in that environment, but 20 2060 2028 prices still four dollars and that expectation was there pretty much the same level about a year ago.

So if the market is correct and we go from under two dollars to four dollars, I think that would be beneficial to natural gas prices.

>> That was Andriy Yastreb, VP for portfolio research at TD Asset Management.

Now, let's get to today's educational segment.

Preferred shares are one asset class available to Canadian investors.

If you're looking to do research on the space, web broker has the tools which can help.

Joining us now or more is Hiren Amin, senior client education instructor with TD Direct Investing.

Thanks for joining us.

>> It's my pleasure, Anthony.

>> So Hiren, for our viewers who may be unfamiliar with the space, remind us of how preferred shares work.

>> Absolutely, yeah.

When you think about equity issues, especially when it comes to stocks, there are usually two classes issued, the common stock that we know about and maybe the lesser-known is preferred. So what are they? Preferred, think of this as a hybrid security that offers both stock and bond -like features and provides you fixed payments like a bond does in the form of dividends and it has a share price like a stock that has the opportunity to rise and fall with the markets.

Preferred shares are often referred to as a bond without a maturity date. They're called preferred not because they have an air about them.

It's in fact due to the fact that shareholders receive these dividends before common shareholders. In regards to taking up a superior position in the capital structure of the company, there are a few trade-offs that preferred shares don't get and one is they don't have any voting rights and second, they don't participate in the growth of the company in the same way that common shares do as well.

For our viewers, when you go into the preferred world, we want to cover the three common types of preferred shares you will come across.

The first umbrella is going to be your fixed rate ones. There are two types under that. There are fixed rate resets and fixed-rate presets, what you have is a fixed dividend which is fixed for a period of five years, and then at the end of the five-year period, a gets reset based on a predetermined spread typically based on the five-year Canada bond yield. The resets in fact of the most, they hold the lion share of the preferred share market and it almost accounts for 60% or more in our Canadian listings.

The other part of that, the counter to that is fixed-rate perpetuals. In the right tools, it's the opposite. These ones are going to have perpetual dividends.

They don't get reset, they get set in place and that's what you have for the life of them.

But they have a callable feature of the company has a choice to redeem them at certain times and at certain prices.

And then we have our floaters, and you can think of these as your variable interest rate version.

The rate gets change more often.

In web broker, search and bridge. The utility company. When you bring up the listing, you will notice the common shares that are listed at the top but then you will see additional ones that have a.pdf.

You can see I hold loaded up.

Because they pay dividends, you can pay special attention to this detail over here we see the dividend information as well is the dividend on an annualized basis.

>> Is a great breakdown. You mentioned seeing a list of preferred shares. How can investors see a list of all the preferred shares that companies have available and what broker?

>> Absolutely, yeah. If you want to find out what's going on in the market or which ones are available, the best place to start is to get your research have appear, go to the tools section and then head over to the screener section.

We are going to pull up his screener and break down exactly which one we want to look at here.

See want to land on the stocks tab here and bring up the screener's function. You want to clear all.

I will show you a broad-based way that you can search these. We are going to localize it to the domestic market here in Canada and under the criteria, the first thing you want to do is go under the share type.

Under the share type, this is where you can sort of choose which ones you want to look at in particular.

We want to focus our attention on the preferreds today. Once you have that, I'm just going to throw in the criteria. One is going to be the dividend yield to get a sense of what that will be and we will do one more over here, and that's going to be a price-performance over a 52-week period.

I'm not going to do any adjustments. We just want to keep our discussion broad-based today.

Once we have this, you will notice that when we pull up the list, it has these rankings and an exhaustive list that you will see here.

You can further narrowed this list down with more criteria. If you want to find out more details, you can always head over here and click on this, go to the overview section and you will get some more details on the share that we have. Anthony, that's a way to look at how to research preferred shares. I will also mention that if you want to learn more about these, we have some great content in the learning centre as well as please join our social channels on YouTube and Instagram where you will find more of this content and others.

>> Great information as always.

Thanks for joining us.

>> My pleasure.

>> Our thanks to Hiren Amin, senior client education instructor at TD Direct Investing. For more educational resources, you can check out the learning centre on what broker or use this QR code to navigate to TD Direct Investing's Instagram page where there are more informative videos.

Staying with preferred share market, the spaces had quite a run since the lows of last fall. James Hunter, VP, Dir. and portfolio manager with TD Asset Management join me earlier this week to discuss what's driving that really and whether the run can continue.

>> Yeah, so, preferred shares are up about 20% off the bottom that we saw back in October and I would say that's a welcome relief for investors. It has been a painful couple of years and we have seen three, 30% drawdowns in the last 10 years.

You can really see that in the first chart that I brought along. It takes the preferred share index and converted to a weighted average price per share. In 2015, you can see the prices came down a lot as oil prices and interest rates collapsed.

In 2020, we have the pandemic and then in 2022, 2023, this inflationary environment and fears of a recession. So preferred shares have been doing much better in the last couple of months and I think it's for two reasons. Number one, we have clarity with the tax status.

We got that in November. That invited institutional investors back to the market. Number two, the banks have started to resume calling some of their preferred shares, and that is a theme that we have seen before, but it's a good catalyst for the market.

When sentiment was so negative like it was in the fall, if you get any catalyst, prices can increase.

>> You have also been focused on some of the trends within bank preferred shares.

What's happening there?

>> Right, so when the banks, you have to remember that they make up about 30% of the market for Canadian preferreds so they are important. The last time we saw a new issuance was in 2019, so it's been a number of years. What the bank has actually started doing a number of years ago was calling them and and they've been replacing them with other types of securities really to diversify their sources of funding and because they can be a cheaper cost of capital so that sort of what we've been seeing and I think one thing to keep in mind is that there was a pause on that activity, that calling and redemptions, that pause was last year and the year before and it happen for a couple of reasons. One was that the banks had to increase their capital ratios. The regulator was increasing that so they had to catch up.

The other factor was acquisitions. If you remember, Royal Bank was acquiring HSBC Canada, BMO was acquiring the Bank of the West and those acquisitions, they needed a digestion. Because there is legal risks, operational risks, so it takes a little time to get through, but those acquisitions have now closed so that's why that has helped the bank start redeeming preferreds again.

>> What are some other types?

>> Pipeline, utilities, diversified financials. It's not just financial although that's about 60% of the market.

I would say you are not seeing the same types of trends in those other parts of the market.

>> Why is that?

>> Well, a lot of the issuers, they don't have the option to issue many other types of securities. The banks are really well-known companies, they are really big, so they have different verticals in the capital markets they can hit which is not to say that the utilities were pipeline companies don't have market support. They absolutely do, but it's just not as common to see them going into other types of capital.

So most of those issuers had been resetting their preferred shares.

>> Given that backdrop, where do you see things going from here for preferreds?

>> Right, the like we talked about, it's been a really good six months for preferred shares and I would say that the Outlook that we have today is still positive.

If you think about it, you got a yield of over 5% and you probably got 5% upside or more or to get prices back towards those longer-term averages so 10% total return, it's still pretty attractive. The things that I would keep in mind are that you've got that, as I mentioned, clarity around the tax status. That's not going to change. And the other thing is that banks have been redeeming their preferred shares, that's a trend we have been seeing and that could go on for a number of years and I think those two factors are going to help lift the market a little bit more.

>> you talked about some positives and that nice, juicy yield. What are some of the risks?

>> That's a good question. I think the number one risk to keep in mind is recession. It would hurt corporate profitability, credit spreads would probably widen, interest rate could come down and if they came down a lot, I think that would be an important negative for the preferred share market.

I think it's not something nursing today.

We have growing population in Canada, higher deficits and higher commodity prices. That should all support the economy and I think the recession fears are a bit overblown.

>> That was James Hunter, Dir. a portfolio manager with TD Asset Management.

Now, for an update on the markets.

We are having a look at TD's Advanced Dashboard, a platform designed for active traders available through TD Direct Investing.

We are looking at the heat map function here which gives you a view of the market movers on the TSX 60 by Price and volume.

We will start by taking a look under the energy sector. TC Energy Corporation is seeing some mining activities up just over 3%. The pipeline operator posted solid first-quarter profits. It also announced it is divesting some of its assets as well.

If we scroll over to the technology sector, seeing a lot of red on the board there.

This is the Waterloo based software company that just posted its second-quarter earnings, the projections are not strong so they are down today.

Shopify is up nearly 3% today.

Shopify will be posting its earnings next week.

Let's take a look at what's happening in the US on the S&P 100.

We will start here on the left side of the screen.

Apple is in the news today. It posted modest earnings, it did beat expectations and announced a big share buyback. It is seeing a lot of bidding today.

Also seeing a bit of strength in AMD. Just the left at the bottom, you can see Amgen is getting some bids today. It's up more than 12%. The biotech giant did show confidence in its new obesity drugs.

As always, make sure you do your own research before making any investment decisions.

stay tuned for Monday show. James Marple, Senior economist with TD will be our Guest taking your questions about the economy and interest rates.

And a reminder that you can get a head start.

Just email MoneyTalkLive@TD.com.

That's all for our show today. Take care and have a great weekend.

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