Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web
The domestic economic outlook is deteriorating so quickly that calls for a Bank of Canada rate cut next week – which were viewed as a laughably bearish outlying view – have become consensus.
According to Bloomberg data, the probability of an other cut on January 20th has gone from zero at the beginning of December 2015 to almost 60 per cent now. The loonie was in freefall overnight –likely, in part, due to anticipation of another interest rate reduction – falling below 69 cents.
I would argue that the biggest risk for the Canadian economy is a drop in consumer spending. Consumption has held up well despite the commodity carnage, but it's difficult to see how this continues, particularly when non-discretionary grocery costs are rising quickly because of currency.
We'll get through this, even if the new government's apparent willingness to provide a billion taxpayer dollars in financial support for the Beaudoin fam … I mean Bombardier ... is reminiscent of some of the more disastrous policies during the reign of Trudeau the First. Export growth will eventually be the economic saviour – as UWO economist Michael Moffatt noted to me by email, profit margins for Canadian companies exporting to the United States are already exploding higher, and new investment is likely to follow quickly.
"Is It Lights Out for Trudeau's `Sunny' Economic Ways in Canada?" – Bloomberg
"Infrastructure spending isn't a quick fix for Canada's sluggish economy" – Report on Business
"@stephenfgordon Am frankly astonished at consensus among Bay Street econos that supply shocks can be offset by fiscal policy. " – Twitter
"Loonie's Longest Losing Streak Since 1971 Portends More Losses" – Bloomberg
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A late sell-off in Chinese equities – the Shanghai Composite entered its third bear market in less than a year overnight - is the more direct cause of weakness in U.S. equity futures Friday morning. As I've mentioned previously, Chinese equities are only relevant to domestic investors to the extent they reflect economic weakness and this makes it difficult to put the bear market in context.
A must-read report on China by (the very bearish) University of Peking economist Christopher Balding contends that fear is becoming rampant among Chinese citizens,
"Whatever your thoughts about economic data, hard vs. soft landing, or prospects heading into 2016, fear trumps all. If people fear the economic future, it frequently becomes a self fulfilling prophesy. I am not saying yet fear is pervasive throughout the Chinese economy, but it is gaining a foothold fast. If Beijing does not get its act together fast, they will lose control of the story."
Mr. Balding's full report is definitely worth reading.
"Random Thoughts About the Chinese Economy and Research" – Baldings World
"Layoffs Loom in China as Growth Slows: number of protests doubles" – Bloomberg
"China just entered its third bear market in less than a year" – Quartz
"@RBS_Economics #China - corporate bonds booming, loan growth steady. Dealing with the debt addiction is going great so far. pic.twitter.com/T0X9sPdUCS " – (includes chart) Twitter
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A Goldman Sachs research report provided what I think is a terrific summary of the hurdles faced by commodities and someone was nice enough to post a big excerpt on twitter,
"fundamental [supply] adjustments in the commodity complex have been relatively small. In oil, non-U.S. supply reductions have been extremely modest while in the U.S. supply is only down about 150,000 barrels per day…in metals, supply has yet to materially come off as it is simply too easy to store excess output"
"@humenm Commodities have marginalized themselves according to Goldman Sachs. pic.twitter.com/fK7k0drI0t - (including research excerpt) Twitter
"Oil plunges into the $20s a barrel on Iran supply woes" – Marketwatch
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Tweet of the Day Re (China): "@RMGInvestment Simply not sustainable long term. Minsky moment comes closer after every month of debt build up. " – Twitter
Diversion: An important U.S. Supreme Court case regarding public service unions will likely not have a direct effect on Canada, but will, I think, be part of the discussion as pensions – and more specifically the financial health of pension funds - become a steadily more pressing issue domestically. - "You Can't Be Neutral in a Public-Sector Union" – The Atlantic
Scott Barlow