These are stories Report on Business is following Wednesday, Oct. 15, 2014.
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Markets tumble
North American stocks plunged today as the Canadian dollar plumbed depths not seen in about five years.
The S&P 500, Dow Jones industrial average and Toronto's S&P/TSX composite all tumbled, following European markets down as investors fret over the state of the global economy. Toronto stocks were already in correction territory yesterday, having marked a 10-per-cent drop from their September peak.
In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 sank by more than 2.5 per cent.
The S&P/TSX, in turn, slipped 1.2 per cent, or almost 167 points, while the S&P 500 and Dow were down by between 0.8 per cent and 1.1 per cent, or almost 175 points for the latter.
Helping to drive global markets lower was a weak U.S. reading on retail sales.
"The double whammy of dreadful retail sales and empire state manufacturing from the U.S. triggered a wave of panic selling," said market analyst David Madden of IG in London.
"There has been a swift exodus out of the equity market and into government bonds, with the US 10-year yield dropping below 2 per cent. Trade retractions on Russia, a stagnating euro zone and political uncertainty in the Far East have all played their role in weakening the U.S. economy."
Where Canada is concerned, the slump in oil prices is playing into both stocks and the fortunes of the Canadian dollar.
The loonie, as Canada's dollar coin is known, moved in a wide range today, as low as 87.83 cents U.S. and as high as 89.06 cents.
By late in the day, it sat at 88.79 cents.
This came as West Texas Intermediate, the U.S. oil benchmark, hit a low of just over $80 a barrel, though later rose. And the U.S. dollar, which has been on a roll, softened up somewhat after that retail sales report.
"We've seen a collapse in oil prices on the demand and supply outlook," said chief currency strategist Camilla Sutton of Bank of Nova Scotia, noting the slump helped drive the loonie to a five-year low and Norway's krone to its lowest in about four and one-half years.
The collapse in oil prices is, of course, a two-sided story. While it plays itself out in the oil market, it's also driving down pump prices, which is good news for American consumers, and thus the broader economy, by "putting more money in people's pockets," Ms. Sutton said.
A decline of $20-a-barrel in the price of oil means a rise of about 8 per cent in the U.S. greenback against the Canadian dollar, JPMorgan Chase foreign exchange strategist Kevin Hebner noted in a study of the loonie.
Thus, he added, the loonie "deserves its 'commodity currency' moniker."
Having said that, the "key driver" going forward will probably be related to how the Bank of Canada lags the Fed in hiking interest rates, when that comes.
"We expect Canadian growth to lag that in the U.S. for several reasons: Slowing housing activity (recent data has been surprisingly strong, and inconsistent with the BoC's soft-landing thesis, but we expect it to soften from this autumn); stretched household balance sheets; and fiscal tightening," Mr. Hebner said.
(Note their comments on the housing market.)
"Of particular note, the underlying trends in Canadian [capital spending] and employment growth are very weak … Consequently, the key driver of our bearish [Canadian dollar] view is our expectation of BoC vs. Fed policy divergence. This should result from the U.S. continuing to exhibit signs of lift while Canadian growth struggles and lags."
Investors had hoped that a strong round of corporate earnings – third-quarter results are beginning to flood in, with Intel late yesterday and major U.S. banks earlier in the day – would help ease the market angst.
"Yesterday's rebound in U.S. markets managed to generate a positive finish for the first time in three days but markets finished well off their highs, suggesting a wider concern perhaps that while yesterday's bank earnings numbers were better than expected, they weren't strong enough to suggest that the U.S. economy was anything other than the best of a pretty poor bunch," said chief analyst Michael Hewson of CMC Markets.
"The slowdown in mortgage lending from both Wells Fargo and JPMorgan appears to suggest that the U.S. consumer remains very much in a cautious mood when it comes to big ticket items."
Market analyst Chris Beauchamp of IG in London went so far as to cite speculation that the Federal Reserve could at some point launch another round of quantitative easing, an asset-buying stimulus program known as QE, the third round of which has wound down.
"Unguarded talk about QE4 is now doing the rounds, which is an indication of how nervous investors are rather than any actual indication that the Fed is moving in that direction," Mr. Beauchamp said.
"After five years, the economic recovery is still not self-sustaining, a fact that should be more worrying than any drop in oil prices or the fresh woes in the euro zone."
Where Canadian stocks are concerned, the chief economist at CIBC World Markets suggested today that investors may well want to look at buying cheap at some point.
"The TSX is currently trading a very reasonable 14 times forward earnings, which one could argue is in fact cheap given we're in an era of lower bond yields," Avery Shenfeld said.
"True, earnings expectations may still be in the process of adjusting to economic events of recent weeks, but the softening of the Canadian dollar has also not likely been fully factored in on the plus side. Perhaps moving gingerly at first, investors would do well to begin to lean back into equities, including cyclically levered energy stocks, in the weeks ahead."
(Market timing, he added, is "not for the faint of heart.")
- Follow our Inside the Market blog (for subscribers)
- Eric Reguly: 'Fear index' spikes as investors unload European stocks
- Fed says U.S. economy growing at modest to moderate pace
- David Berman and Brian Milner: A market fall - and Canada's suddenly vulnerable energy sector
- Shawn McCarthy and Jeff Lewis: Oil producers face price war over slowing global demand
- Jeffrey Jones in ROB Insight (for subscribers): Natural gas may be energy bears' next target
- Tavia Grant: The big question: Can the U.S. carry the global economy?
Netflix sinks
Shares of Netflix Inc. plunged in after-hours trading today after the online entertainment sensation added fewer-than-expected new subscribers.
The stock was down by more than 25 per cent within about a half an hour of the Nasdaq close.
Netflix said it brought in more than 3 million new customers around the world in the third quarter of the year, shy of the almost 3.7 million anticipated.
At the same time, Netflix posted a stronger profit of $59-million (U.S.), or 96 cents a share, compared to $32-million or 52 cents a year earlier.
Revenue surged to $1.4-billion.
Netflix projected adding 4 million subscribers in the final quarter of the year, and earnings per share of 44 cents.
Home sales, prices rise
High-priced housing appears to be biting into sales.
Not by all that much, according to the Canadian Real Estate Association, but it's noteworthy.
Home sales in Canada climbed 10.6 per cent in September from a year earlier, though dipped 1.4 per cent from August, The Globe and Mail's Tara Perkins reports.
The average price of a home was up 5.9 per cent from a year ago, according to CREA today, while the MLS home price index, deemed a better measure, rose 5.3 per cent.
Notably, new listings slipped 1.6 per cent month to month.
"Affordably priced single family homes are in short supply in some of Canada's hottest housing markets, which contributed to the monthly decline in national sales activity in September," Beth Crosbie, chief of the real estate group, said in reporting the numbers.
AbbVie reconsiders
AbbVie Inc. put the boot to shares of pharmaceutical companies with its announcement last night that it's rethinking its multibillion-dollar merger with Shire PLC.
AbbVie noted the U.S. crackdown on so-called tax inversion deals as it said its board is reconsidering the deal, citing "the impact to the fundamental financial benefits of the transaction."
Shire, in turn, said today that its board will meet but that it "believes that AbbVie should proceed with the recommended offer."
It also noted that AbbVie would be on the hook for a break fee of some $1.6-billion.
Quebec set for deal?
Quebec's giant pension fund manager is poised for a big expansion into Mexico, Reuters reports today.
The Caisse de dépôt et placement du Québec has already pumped $100-million (U.S.) into a Mexican real estate venture.
But, the news agency said, quoting sources, that may well have been just a baby step.
According to the report, the Caisse will join hands with an institutional investor in Mexico in a fund that would put "up to several billion dollars" into Mexican infrastructure projects.
A deal could be done soon, it added.
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