CA-EN Institutional
CA-EN Institutional
This week with Sadiq

Oil Price Surge, U.S. Trade Deficit, Bonds Upside

October 10 to 14, 2022
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Market Recap

  • Equity markets endured a volatile week, flying out of the gate early, but eventually succumbing to the reality of a still-hawkish Fed and higher oil prices.
  • The S&P 500 added 1.5% when it was all done, while the TSX gained 0.8%. Energy led on both sides of the border.
  • Energy stocks rallied sharply on the week, with the sector up 9% in Canada and 14% in the U.S, but the move was a big negative for almost all others as the inflation battle rages.

Oil Price Surge

Last week OPEC+, a consortium of oil producing countries including Russia, agreed to cut production by two million barrels per day. From a portfolio standpoint, the reduction was encouraging, as we expected supply-demand dynamics to remain supportive of higher energy prices. Prior to the announcement, our team conservatively estimated a production cut of half a million to one million barrels—less than was eventually announced, but in the correct direction nonetheless. In short, the news was perfectly aligned with our thesis of OPEC’s desire to keep oil prices elevated. Markets were less prepared, however, having priced in geopolitical risk when Russia invaded Ukraine in March—only to later price out those risks over the summer. What some investors failed to recognize is that although OPEC can easily increase capacity, they have no interest in raising output at this time. Energy producers also benefitted, with higher oil prices offering greater confidence for their plans to invest in new projects that require upfront investment.

Bottom Line: With inflation dominating headlines through the summer, markets underweighted the geopolitical risks in energy prices.

U.S. Trade Deficit

Reports that the U.S. trade deficit shrank in August was met with optimism last week. But unfortunately, the news does not impact our perspective of where to invest. Logic dictates that the U.S. market is still sound, though valuations remain concerning amid a slowdown on the consumer side. Companies will likely see earnings weakness in territories outside the U.S., which represent their primary growth opportunities. But the core stability of multinationals does not appear to be materially impacted. All that happened was imports fell less than exports—an unsurprising trend given the impact of China’s zero-Covid policy on manufacturing output. Looking ahead, a permanent re-opening in China would counterbalance those numbers.

Bottom Line: The shrinking U.S. trade deficit does not make us any more—or less—bullish on U.S. equities.

Bonds Upside

One of the big themes this year has been the re-rating of asset classes. Equity valuations reset once it became clear that zero percent interest rates were no more; the price multiples came down significantly. Bonds went through a similar process, with yields resetting higher after each central bank decision. However, at this stage, the impact of rising interest rates will likely be minimal. Markets have priced in monetary policy actions. And while investors will occasionally underestimate the size and pace of rate hikes, expectations are unlikely to be off by a wide margin. The downside risk appears to be significantly lower moving forward, and higher yields make the asset class much more attractive overall. More importantly, bonds are starting to act like bonds again. If we see a big down day in equities, fixed income assets are no longer matching them step for step. Instead, they behave closer to what you would expect—a stabilizer to offset risk assets.

Bottom Line: Our stance on fixed income can be upgraded from underweight to neutral now that the worst of interest rate hikes are behind us.


We recently finalized our asset mix decisions for October, choosing to remain bearish on equities and bullish on cash. Interestingly, the month began on a positive note with two straight sessions in the green. But those rallies have been short-lived. Regionally, we’re still bullish on Canada, neutral on the U.S., and heavily bearish on Europe. Within fixed income, we’ve lowered our exposure to high yield, emerging market debt and investment grade credit in favour of more conservative corporate and government bonds. Our primary focus is to position defensively. And while we feel rising rates will have less impact moving forward, a recession is still likely as earnings come off and the employment picture starts to weaken. In an economic slow down, high yield is where spreads widen the most. As such, we want to limit our exposure on that side and bring fixed back into its role as an equity stabilizer. In terms of factors, we believe Growth still has some room to the downside—however, our team is in agreement that compelling opportunities are popping up here and there. On the other hand, we think value stocks may have less room for disappointment on the earnings front, as many did not benefit from the COVID lockdowns, so we have a slight tilt for value over growth but our focus currently remains on Quality. 


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