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business week ahead

We believe we are now past the point of maximum discomfort for FB shares

Credit Suisse

The question on everyone’s mind is how the Cambridge Analytica controversy may have affected Facebook Inc. advertisers.

Expect some answers when the beleaguered social network reports first-quarter earnings midweek.

Facebook’s results come on Wednesday, Hump Day in a week chock full of corporate earnings, economic indicators and central-bank events.

“Facebook shares have been in the news for all the wrong reasons so far this year with all the negative headlines around Cambridge Analytica and data leaks,” CMC Markets chief analyst Michael Hewson said.

The quarterly report “may well give us an indication as to how much damage this has done to the company’s advertising revenues in the wake of the #DeleteFacebook campaign on social media,” he added in a lookahead to its results.

“The damage could well be fairly limited in the short term, however longer-term risks to the valuation could come from increased regulation around the management of user data.”

Credit Suisse, for one, doesn’t think advertisers have bolted from Facebook, although analysts Stephen Ju, Philip Wang and Yash Tulsani nonetheless trimmed their price target on its stock to US$230 from US$240, still rating it as “outperform.”

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Facebook CEO Mark Zuckerberg arrives to testify before a Senate Judiciary and Commerce Committees joint hearing regarding the company’s use and protection of user data, on Capitol Hill in Washington, April 10, 2018Aaron Bernstein/Reuters

“If there is any good news to come out of all of the events of the last month or so, it is that all of the conversations we have had with advertisers suggested none of the user data issues had really changed their willingness to allocate budgets to Facebook,” the Credit Suisse analysts said, also raising their estimate of earnings per share for the year to US$7.87 from US$7.83.

Notably, “we believe we are now past the point of maximum discomfort for FB shares as CEO Mark Zuckerberg has already testified at hearings in Washington, D.C., and the pace of incremental negative headlines have died down,” they said, referring to Facebook by its stock symbol.

“While ad checks for [the first quarter] have taken a back seat given the recent controversy, advertiser feedback continued to suggest ongoing budget share gains for Facebook — Instagram, in particular, now seems to be 20 per cent of total ad budgets versus 5 per cent [a year earlier] and 15 per cent by [the fourth quarter of 2017].”

Credit Suisse said it still expects Facebook will be punished by the U.S. Federal Trade Commission, but that will actually be “a positive catalyst” when it’s finally over.

Those that missed expectations faced a harsh lashing

Priscilla Thiagamoorthy, Bank of Montreal

We’ll see where Facebook and others take the market. By any measure, the last several weeks have been rocky.

“The S&P 500 snapped a three-day winning streak to end the week on a whimper as disappointing earnings by some of the world’s largest tech companies and consumer-staple firms jarred investors,” Bank of Montreal economic analyst Priscilla Thiagamoorthy said.

“That sent shares in those sectors markedly lower and thwarted what could have been the S&P 500’s first five-day stretch of gains since mid-February,” she added, citing, too, the 1.4-per-cent gain for the S&P/TSX Composite Index.

“The late-week downturn in equities weighed on sentiment as investors hoped the earnings season would dig stocks out of a two-month rut.”

More than 85 S&P-listed companies have reported first-quarter results so far, almost 80 per cent of them topping the estimates of analysts, based on Thomson Reuters numbers, Ms. Thiagamoorthy noted.

“Yet, while firms reporting stronger-than-expected profits edged higher, those that missed expectations faced a harsh lashing.”

But, as they say, you ain’t seen nothing yet.

More than 35 TSX-listed companies report this week, including several biggies.

“Canada’s pre-tax profit cycle, scaled to the economy, is on somewhat stronger foundations than stateside but the U.S. market is more richly priced,” said Derek Holt, Bank of Nova Scotia’s head of capital markets economics.

“The TSX dividend yield is approaching 3 per cent — a full point above the S&P 500 and nearly triple that of the Nasdaq — and TSX multiples remain considerably lower.”

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A busy week starts with a busy day: There are manufacturing purchasing managers index readings from around the world, a measure of the U.S. home resale market and quarterly earnings from the likes of Google parent Alphabet Inc., Barrick Gold Corp, Canadian National Railway Co, PrairieSky Royalty Ltd. and UBS Group AG.

Plus, an appearance by Bank of Canada governor Stephen Poloz and senior deputy Carolyn Wilkins at a parliamentary committee in the afternoon.

Don’t expect to learn too much more, given that last week they made no change to rates as they also released their monetary policy report and held a news conference.

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Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen PolozJustin Tang/The Canadian Press

“One question I’d ask would be: What are the criteria that the BoC is searching for in deciding when to hike next?” Scotiabank’s Mr. Holt said.

“Of course, they wouldn’t answer by way of what specific readings they are looking for, but broadly speaking, is there an overall combination of data-dependent outcomes for growth, inflation and wages that would skew the possible decision toward hiking next month, or at the next meeting on July 11 or later?” he added.

“It’s at least worth a shot, though central bankers are schooled in the art of dodging such questions, except when they don’t ... The issue is of particular relevance on the path to the May 30 BoC meeting given that recent communications stated that ‘we will be monitoring the data for the second quarter very closely in the weeks ahead’ as it anticipates a ‘strong’ Q2 rebound.”

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Big earnings, including those from Caterpillar Inc., Lockheed Martin Corp., Metro Inc., Sherritt International Inc., Teck Resources Inc. and Restaurant Brands International Inc., parent of Tim Hortons.

We’ll see if the RBI folks want to talk about their relationship with Tim Hortons franchisees, or the minimum-wage hike in Ontario.

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Mr. Poloz and Ms. Wilkins make a return appearance, this time to a Senate committee.

Earnings galore. Besides Facebook, we get Aecon Group Inc., Baidu Inc., Boeing Co., Canfor Corp., Cenovus Energy Inc., Fairfax Financial Holdings Ltd., Ford Motor Co., Twitter Inc., Viacom Inc. and West Fraser Timber Co.

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The European Central Bank is expected to hold the line, with “zero expectation for any surprises,” BMO senior economist Jennifer Lee said.

“We continue to look for the ECB to trim its monthly purchases come September, then end them around the turn of the year,” Ms. Lee said. “But, no rate hikes yet.”

There’s also the March measure of U.S. durable goods orders, and more earnings than you can count on two hands, including results from, Inc., American Airlines Group, ConocoPhillips, Husky Energy Inc., Intel Corp., Microsoft Corp., Precision Drilling Corp. and Starbucks Corp.

“Cloud services have been a significant growth area for Microsoft in recent months, with its Office 365 being one of its major earners, helping offset a slowdown in its personal computing division,” CMC’s Mr. Hewson said.

“The recent U.S. tax changes should also benefit the company, given that Microsoft was one of the companies that had significant amounts of U.S. dollars held in overseas accounts.”

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Oh, I can just imagine the tweet now: US economic growth slows to 2 per cent? FAKE NEWS!

Well, no. Economists expect a government report to show a usual first-quarter slowdown, from the fourth quarter’s annual pace of 2.9 per cent.

“With Q1 disappointments becoming the norm since the financial crisis, there would probably be greater market reaction to an upside rather than downside surprise,” Andrew Grantham of CIBC World Markets said.

Theresa May hasn’t taken to Twitter like President Donald Trump, but she, too, should see a slowdown in growth to about 0.3 per cent, not annualized.

Markets will be watching for what this could signal for the Bank of England and its governor, Mark Carney.

Everyone’s making a big deal about how the weather has affected Britain’s economy. To which I say, try living in Canada. Actually, Mr. Carney can tell you all about it.

There are other central banks to watch, too.

Capital Economics expects Russia’s central bank to cut its benchmark rate again, by one-quarter of a percentage point to 7 per cent, though Scotiabank’s Mr. Holt said “an easing bias may be interrupted next Friday given the biting impact of western sanctions on Russia that have driven the ruble lower and raised exchange rate pass-through inflation risk.”

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