Short bets against Canadian banks increasing

The TSX rallied as of the end of last week, but bearishness is still in the cards for markets, says Prab Sagoo, associate director at Nasdaq Advisory Services, in his weekly market commentary.

In particular, energy and financial names are feeling the pressure of domestic economic weakness. The main highlights of Sagoo’s commentary are:

• The TSX rallied in the latter half of last week, as investors were emboldened by Mario Draghi’s dovish comments. However, markets are not entirely convinced by this rebound and many think that there may be further pain ahead.
• In particular, the headwinds against the Canadian economy have not abated, the most pressing issue at the moment being the low price of oil. The commodity dove into the high $20 range at one point and excess is supply still an issue. As such, any notable upward movements in price may be limited. Read: 4 things to know about the market correction
• Further, bearishness in Canada still remains. During the height of the troubles in mid-January short bets against the iShares S&P/TSX 60 Index ETF jumped higher, closing in on the highs last seen in August 2015 (when we last had a sharp sell-off related to Chinese economic fears). Recently, short bets against TSX constituents rose by 10% on average. Canadian banks, in particular, have been seeing ever increasing amounts of short bets placed against them, with early January marking a continuation of this trend.
• Still, the Bank of Canada decided not to cut a third time, in a closely watched decision, leading the Canadian dollar to strengthen against the U.S. dollar. Poloz very interestingly made a direct mention about the benefits of a potential fiscal stimulus package, effectively asking the Trudeau government to do their part and fulfil on their campaign pledge. Read: Poloz makes right call for fixed-income markets
• As such, energy and financial names are likely to continue to feel some of the pressure. However, due to the sharp equity pull back coupled with the very weak Canadian dollar, the strongest within these beaten up sectors may attract international capital flows into them. A weak Canadian dollar would increase the cheapness of these stocks for international investors due to favourable exchange rates. Read: How to keep ahead of our plunging dollar

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.