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business briefing

Briefing highlights

- Oil prices ease

- How Syria is affecting markets

- Spartan buys Vermilion

- Bank of America profit rises

- What to expect from Bank of Canada

- What else to watch for this week

They’ve tended to buy the mobilization and sell the bombs

Rory Johnston, Bank of Nova Scotia

Oil prices ease, stocks take raids in stride

Global markets are taking the allied attack on Syria in stride, and oil prices have slipped as fears of escalation ease.

“Focused military actions, such as the co-ordinated strike on Syria by the U.S., U.K., and France, typically have limited and transitory impact on markets and major economies, said Bank of Nova Scotia deputy chief economist Brett House.

“But it’s worth bearing in mind that markets are broadly priced for a combination of solid growth, moderate inflation, and gradual interest-rate increases in North America. Even small deviations from this scenario have the potential to cause disproportionate reactions in markets in the current context.”

Stocks are mixed so far today in the wake of the attack on Syria and other developments in the U.S., notably with Trump lawyer Michael Cohen.

“As it currently stands, the air strikes were characterized as one-time, in order to send a message/deterrence,” said Toronto-Dominion Bank chief economist Beata Caranci, referring to the U.S. British and French attack amid allegations Syria used chemical weapons on its own people.

For markets, it should be “net neutral” if the conflict doesn’t escalate, she said.

“Typically, rising geopolitical events will put a risk bid on oil, particularly should it worsen (albeit from an already bad starting point) in the near-term,” Ms. Caranci said.

“But, in terms of actual oil production, it has surged in the U.S. this year, with increases also recorded in Canada, Brazil, and the North Sea. One would expect an easing in oil prices if geopolitical fades.”

There may well be pressure on crude prices now, added Scotiabank commodity economist Rory Johnston.

And, indeed, prices are lower today.

“While oil prices rose to their highest levels since 2014 last week, at least partially on fears that the conflict could widen and bring in other actors in the Middle East, energy markets have typically rallied prior to this sort of military incursion only to fall back after action has been taken,” Mr. Johnston said.

“In short, they’ve tended to buy the mobilization and sell the bombs,” he added.

“Given overextended bullish positioning prior to the pre-attack price run-up, we expect downside pressure for oil prices in the coming week barring any significant rhetorical ramp-up from interested regional powers, most notably Iran or Saudi Arabia, or their supporters in Moscow and Washington.”

Bank of Montreal chief economist Douglas Porter agreed the Syria attacks should’t roil markets at this point.

“Because the U.S. strikes seemed designed not to escalate the situation, and because we have seen a similar action within the past year, I suspect the markets will take it in stride,” he said.

“The issue would be if there is some kind of provocative response from either Syria or Russia (which doesn’t yet seem to be the case).”

Indeed, Scotiabank’s Mr. House cited what has happened to date.

“Equity markets reacted negatively last week to the U.S. president’s Twitter-based threat to launch an attack on Syria; they bounced back the next day when the president sounded more equivocal on military action,” Mr. House said.

“In the hours so far following the attack by the U.S., U.K., and France, an escalation of the conflict doesn’t look likely — and as a result, the attack may have little direct further impact on equity and rates markets in the coming days.

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Markets at a glance

Barometer rising

To borrow from Hugh MacLennan’s wonderful novel circa the 1917 Halifax explosion, the barometer is rising for markets.

Indeed, Société Générale advises, expect a hot summer in the stock and oil markets in a new era of volatility.

“Multiple signals points to the low vol regime being a thing of the past,” said Société Générale’s Vincent Cassot and Jitesh Kumar, referring to equities.

“Like a diver hitherto stuck under the surface of a frozen river, volatility has finally found a way out, and there is no going back under the surface again,” they added.

“We think it is a disruptive change, as most of the trades that have been doing well over the past few years are unlikely to be profitable in this new environment.”

Société Générale has launched a new publication, Vol Themes, that “uses a multi-month outlook” to study cross-asset volatility.

And its timing couldn’t be better, given the mounting geopolitical fears and trade concerns of our times.

Noting the recent surge in the so-called fear gauge known as the VIX, these are among the findings of Société Générale’s first volatility outlook:

  • “Since the recent VIX surge, the cross-asset volatility barometer is pointing to change, and we expect this to bring stormy spells.
  • ”The summer should be hot for U.S. equity and oil volatilities, as vulnerable positioning and geopolitical risks are major looming threats.”
  • Rates volatility “is gradually heading into spring.” The European Central Bank getting back to normal will probably drive European rates volatility while U.S. short-term rates volatility “could also outperform if the market ultimately converges on the Fed’s dot plot,” or the individual rate outlook of Federal Reserve policy makers.
  • “[Foreign exchange volatility] is the main exception, as it should remain immersed in a longer winter.”

Stocks and oil are a particular focus, said foreign exchange derivatives strategist Olivier Korber.

“The old adage advising stock investors to ‘sell in May and go away’ could prove even more critical for volatility investors, given their structurally convex profile,” Mr. Korber said.

“Except for core [foreign exchange] and U.S. long rates, our volatility views suggest that a set of fundamental risks are likely to produce some stress in the months ahead,” he added.

Though history may not repeat, Mr. Korber said, there are suggestions in what “seasonal patterns” tell us.

“There is limited evidence for seasonal regularities in [foreign exchange] and rates markets, but since 2010 the VIX increased seven times in eight years only in June ... and oil volatility presented a similar pattern in July,” he said.

“Importantly, these two markets have not fully normalized yet since the early February jitters.”

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Some bet on rate hike (but I wouldn’t): The week ahead

Some analysts expect the Bank of Canada to raise its benchmark interest rate again this week, but it’s more likely that governor Stephen Poloz and his colleagues will sit this one out.

From the state of Canada’s housing market to the still-uncertain fate of the North American free-trade agreement, enough uncertainty remains.

Which is why several other observers believe the central bank will hold its overnight rate at 1.25 per cent when it announces its decision and releases its monetary policy report Wednesday.

“There are still a number of uncertainties clouding the outlook for the Canadian economy,” said Toronto-Dominion Bank economist Dina Ignjatovic.

“NAFTA renegotiations and the threat of a global trade war top the list of external threats, while the impact of higher interest rates and policy changes on the housing market and minimum wage hikes loom on the domestic front,” she added in a lookahead to the decision.

“All told, the Bank of Canada will have to balance the positive data points against these downside risks. We suspect that the bank will remain on hold [this] week, with the next hike unlikely to come before the summer.”

A couple of others don’t agree.

“We expect the Bank of Canada (BoC) to raise interest rates at its April meeting by 25 basis points, to 1.5 per cent,” said Morgan Stanley economist Robert Rosener.

“Data on economic activity have thus far come broadly in line with the BoC’s expectations, opening a window for the governing council to deliver a second rate hike this year,” he added.

“We expect the data will soon begin to disappoint relative the BoC’s expectations and, as such, we look for the BoC to pause on hikes thereafter in order to assess the effects of policy tightening, and we continue to expect no further rate hikes until next year.”

It’s really a question of when, not if.

Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen PolozThe Canadian Press

The case for a Wednesday rate hike includes the most recent Bank of Canada business outlook survey, which found notable optimism and which the central bank watches closely.

Also, “unemployment is historically low, inflation is rising, and the Fed hiked rates in March,” noted Moody’s Analytics economist Paul Matsiras, who, like Mr. Rosener, expects a Wednesday increase.

But arguing against a hike are slower economic growth, the impact of earlier increases and new mortgage-qualification rules, and the central bank’s monitoring of how debt-burdened households are adjusting.

Add to that the fact that, while Canada, the U.S. and Mexico are making nice at the NAFTA bargaining table, we all know it ain’t over till it’s over.

As for the monetary policy report and statement, the central bank has to make some changes to its outlook given the economic climate.

“Although Q1 real GDP growth is tracking around 1.4 per cent, meaningfully below the BoC’s estimate of 2.5 per cent in January, we see only minor cosmetic changes to the BoC’s overall projections in the monetary policy report,” said Brett Ryan, Deutsche Bank’s senior U.S. economist.

“At the same time, further deterioration in the housing sector and the potential spillover effects on consumer spending likely keep the BoC ‘cautious’ with respect to the forward guidance language.”

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Here’s the rest of the calendar, best read with your morning coffee. Or tea.


All eyes will be on Netflix Inc.’s first-quarter results given the recent hit to tech stocks.

Bloomberg numbers put the average estimate for revenue at almost US$3.7-billion and for subscriber growth of 1.4 million in the U.S. and 5 million globally.

Investors will also be watching for a report on March U.S. retail sales, which economists expect to show an increase of about 0.3 to 0.5 per cent from February.

Watch, too, as the major U.S. banks continue to roll out quarterly results, including, today, Bank of America Corp, after earnings last week showed strong gains from its peers.

Earnings reports, in general, pick up this week.

“Importantly in the U.S., earnings expectations have held up well during the correction, with Q1 profit growth expected to come in around 18 per cent year over year for the S&P 500, and a still-strong 16 per cent excluding the rebound in the energy sector based on Thomson Reuters’ bottom-up tally,” said Bank of Montreal senior economist Robert Kavcic.

Aphria Inc, the Canadian marijuana company, also reports results. If that’s your morning thing.

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United Continental Holdings Inc. releases quarterly results, as do Goldman Sachs Group Inc., IBM, CSX Corp. and Johnson and Johnson.

And, of course, we’ll want to see what Kinder Morgan Inc. has to say when it reports earnings, given its threat to kill the expansion of the Trans Mountain pipeline.

Statistics Canada, meanwhile, releases its monthly look at manufacturing sales, which economists expect will show an increase of about 0.6 per cent in February from January.

Markets will also be watching for several Chinese indicators, including first-quarter economic growth.

“Our own measure ... suggests that economic growth weakened from around 5.2 per cent year over year in Q4 to a preliminary estimate of 4.9 per cent in Q1, with slower trade and property construction offsetting a rebound in industry,” said Chang Liu of Capital Economics.

“However, we expect the official figures to show only a very small slowdown in Q1, from 6.8 per cent year over year to 6.7 per cent year over year, with the breakdown linking it to weaker activity in services.”

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Besides the Bank of Canada, today brings the second of three British indicators. The first, on Tuesday, is expected to show unemployment holding steady at 4.3 per cent.

Today’s reading on annual inflation in March is expected to mark a slower pace of 2.6 per cent, but “the earlier timing of the Easter holiday probably distorted the figures,” said Liam Peach of Capital Economics, adding that Thursday’s look at retail sales “should reveal that the heavy snowfall in March hit the sector hard, with sales volumes contracting sharply on the month.”

Today also brings the latest trade numbers from Japan, the Federal Reserve’s Beige Book of regional economic conditions and quarterly results from Alcoa Inc., American Express Co., Canadian Pacific Railway Ltd., Celestica Inc., Morgan Stanley, Roots Corp. and U.S. Bancorp.


The tea’s for you. The sympathy is for shareholders of DavidsTea Inc., which releases its results today.

Some other earnings, too: Bank of New York Mellon, Phillip Morris International Inc., Rogers Communications Inc. and The Blackstone Group LP.

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BMO expects today’s Statistics Canada report to show consumer prices climbed 0.4 per cent in March from February, with the annual inflation rate rising to a six-year high of 2.4 per cent.

“Unlike in February, energy prices were mostly higher in the month, with gasoline climbing about 3 per cent, which will contribute to the anticipated solid headline,” said Benjamin Reitzes, BMO’s Canadian rates and macro strategist.

“Clothing and recreation are the other sectors that look to see chunky increases, while a drop in new home prices will restrain the shelter component.”

Statistics Canada also reports on March retail sales, expected to show a gain of 0.5 per cent.

We’ll get quarterly results from Baker Hughes, Honeywell International Inc. and Procter & Gamble Inc., among others.

And finance ministers and central bankers from the G20 group of countries meet in Washington, where, presumably, they’ll get a better cup of coffee.

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