As historic policy decisions loom, Canadian insiders still bet on reflation

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The margin of error for policymakers around the globe has not been this narrow since September 15, 2008, the first trading day after the Lehman collapse. However, there is one big difference: the stakes have never been personally higher for individual policymakers.

In particular, German Chancellor Angela Merkel must balance the demands of her conservative political base against the possibility that over-pandering to her supporters could lead to an unwinding of the euro via a Greece exit. In contrast, for Greek Prime Minister Alexis Tsipras a post-euro Greece would no doubt stumble badly; its pain would not be made up for by the fact that Germany would be on the hook for billions of euros in debt.

Alexis Tsipras
Alexis Tsipras

We would suggest that a fracture of the euro is not on. Instead, a compromise will likely be cut that involves Greece agreeing to the Eurogroup's terms in exchange for billions of dollars in humanitarian aid. Such aid will likely be slightly inflationary as it will allow Greece to avoid paying for goods in euros which at the time of writing it does not have.

Back in China there is more than one policymaker with skin in the game trying to stabilize the market. Indeed, the bulk of the Communist Party of China leadership involved in central banking, securities, and insurance is likely working overtime to bring stability to their stock market. A key political tool involves looser monetary conditions.

Finally, the Fed will want to tread very carefully in raising rates. Policy makers on the FOMC will not want to be accused of making a policy error by tightening conditions before the economy can handle it.

Overall, this global monetary backdrop remains dovish and seems to be more or less keeping our key Canadian insider relation theme intact. Basic Materials and Industrials are showing particular strength with respect to insider sentiment.


S&P/TSX Capped Industrials Index vs. INK Industrials Sentiment Indicator

INK industrial indicator 20150709


However, like in the US, Canadian Energy insiders are not as enthusiastic now compared to the winter when our Energy Indicator moved above 700% (at which point there were 7 stocks with key insider buying for every stock with selling). The indicator is currently just above 200%.

Technically, the market looks like it could be in for a period of consolidation with the INK Canadian Insider Index now trading below 1,070. That level was once a key support point and over the next few weeks may well serve as resistance. Markets could rally next week if better news materializes out of Europe. Even if a Greek deal is not done and the country effectively exits the euro, markets may well breathe a sigh of relief. That said, a proper pro-growth deal would clearly be the better outcome and may have a more lasting impact on global equity markets.

Of course, should the turmoil in Chinese markets resume, our insider reflation theme would be put to the test once again. 



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