A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web.
I don't think I've ever been as interested in a set of quarterly domestic bank earnings as I am this week. Even during the financial crisis, investors knew to expect bad numbers, but, at the same time, the Bank of Canada was publicly standing by with financial support and the Canadian banking system was building its reputation as the world's most stable.
It's much harder to know what will be reported when Bank of Montreal kicks off sector earnings reports on Tuesday. Net income margins – the difference between the cost of bank borrowing and the profits from lending – remain very low. The capital markets revenue that drove profit growth in the first half of the year, investment banking and trading commission, has slowly evaporated. Most of the major banks are laying off staff as a sign of tougher times ahead. CIBC CEO Victor Dodig has noted concerns about the domestic economy that could – and I emphasize "could" – be part of a communications strategy to prepare investors for weaker than expected profits for the most domestically-focused of the big five banks.
Canadian banks have always been able to pull rabbits out of their hats where quarterly profits are concerned. The tension this time is that, for the first time since the early 1990s, they might not.
"Big banks' resistance to slow economy put to the test" - Berman, Report on Business
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Markets are again showing no mercy for resource stocks this morning. November is on track to be the worst month for oil prices since July and Iron ore prices in Asia are plumbing never-before-seen depths below $40 per tonne. I am not a big fan of the "Dr Copper" meme – the ability of the copper price to predict the global economy has been very hit and miss historically - but it's still alarming that copper is testing 11 year lows.
" @pwaldieGLOBE Oil headed for its largest monthly drop since July as Iran says OPEC won't reduce its production target at a meeting this week. " – Twitter
"Iron Ore Breaches $40 in Singapore as Rising Supply to Feed Glut" – Bloomberg
"China Demise Threatens Copper's 11-Year Support Level: Analysis" – Bloomberg
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Writing for the Financial Times, ex-Pimco head Mohamed El-Erian predicts that 2016 will be a year of divergences for investors:
"[These divergences] make correlations among asset classes less stable and more unpredictable, thus reducing the risk mitigation power of diversified portfolios. Second, they expose portfolios to volatility spikes that can trigger pro-cyclical investor reactions that often deepen losses. Third, they limit the return potential of most asset classes. Indeed, all three factors have already been visible at times in 2015."
Mr. el-Erian's article is well worth reading in full for investors looking for high level strategic guidance for 2016.
"Divergence is key for investors for 2016" – El-Erian, Financial Times
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University of Peking finance professor Michael Pettis has risen to justified fame for his correct predictions regarding China and, by extension, global commodity markets. Mr. Pettis' most recent blog post argues that while China's economic restructuring towards consumers over infrastructure investment is proceeding, it's happening far too slowly to avoid a significant slowdown in overall growth:
"If we assume that disposable household income is currently half of GDP, eight years of real GDP growth of 6.9% and real disposable household income growth of 7.7% will only raise the household income share of GDP to 53.1% in 2023, a little more than 3 percentage points higher and still below its 21st Century average and leaving China as dependent as ever on investment and the current account surplus. At this rate it would take 25 years for disposable household income to raise by 10 percentage points of GDP, which I would argue is the absolute minimum consistent with real rebalancing."
"China's rebalancing timetable" – Michael Pettis
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Tweet of the Day: "@JavaheriCNN #Beijing's air quality today has now reached "beyond index." 10X dirtier than air considered fit to breath.@cnni pic.twitter.com/fnem3tkm7c " – Twitter
Diversion: "This Map Shows Just How Long Travel Took 100 Years Ago" – Gizmodo
Scott Barlow