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Briefing highlights

  • Stocks face turmoil over trade
  • A Trudeau scene I’d love to see
  • Markets, loonie at a glance
  • Corus cuts dividend, posts loss
  • Canopy Growth posts loss
  • Conagra to buy Pinnacle Foods
  • U.S. durable goods orders fall

The next couple of weeks

Brace for what could be a riotous two weeks across financial markets.

There’s more than just the Trump administration’s trade-related war of the worlds, but that’s certainly the biggest worry for investors, having already roiled markets.

Watch, too, for any signals that could lead to further speculation about what the Bank of Canada might, or might not, do.

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“The next two weeks will be tumultuous for financial markets as we remain mired in the fog of trade war,” Stéfane Marion, National Bank of Canada’s chief economist and strategist, warned in a report.

Other observers are also on the lookout for flash points.

President Donald Trump’s tariff attacks have been roiling stocks and currencies such as the Canadian dollar, which is now down to about 75 U.S. cents, with forecasts of another steep decline depending on trade developments.

His administration has hit several regions with tariffs, including Canada, and has threatened more.

Which reportedly prompted Chinese President Xi Jinping to warn global business leaders at a meeting last week: “In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek. In our culture, we punch back.”

China's President Xi Jinping

FRED DUFOUR/AFP/Getty Images

For stocks, a big part of the issue is what an all-out tariff war could mean for corporate profits, Mr. Marion added in an interview.

Markets have been trading on strong second-quarter results, but the issue now is whether that carries into the second half of the year amid widespread trade spats.

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“How do you get profit margin expansion if there’s a trade war that gets wider,” Mr. Marion said.

Of course, the status quo could hold if trade fights don’t escalate, “but the wording certainly has escalated.”

Ingvild Borgen Gjerde, global markets economist at Capital Economics, also warned of a hit to stocks.

“Despite the small rebound in equity markets [Monday], fears of a global trade war have increased further this week,” she said. “This, together with a likely slowdown in the U.S. economy next year, will probably continue to weigh on equities.”

Ms. Borgen Gjerde doesn’t expect all-out war, or, for that matter, an end to the economic expansion because of trade measures to date.

“However, as equity markets usually lead the economy rather than the other way around, the current escalation of trade tensions is adding to the pressure on global equity markets,” she said.

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“What’s more, cyclical sectors remain particularly vulnerable in this environment.”

Markets slumped Monday, then perked up Tuesday, a sign of the gyrations that could play out as trade tensions heighten.

Beyond the war of words that will no doubt play out until then, a key date is July 6, when tariffs kick in against China.

Beijing has already drawn up battle plans to hit back, already identifying the tariffs it will impose. The question then becomes whether the U.S. retaliates against those, which is why they call it a war.

Even before then, another big day looms, with the Trump administration originally expected to unveil restrictions on certain Chinese investment. Mr. Trump helped ease concerns on that issue, though, suggesting a different avenue.

“Washington’s aggressive moves on trade appear to be driven by politics rather than economics,” Mr. Marion said.

“In the 1930s, a global trade war broke out when the U.S. jobless rate had zoomed into double digits,” he added.

“Today employment is full, wages are rising and labour shortages are reported in a number of industries. Globalization still seems to be serving the U.S. economy well. There is, of course, still time between now and July 6 to avoid a tariff war, but the window is getting pretty small.”

Markets could also be spooked by heightening tensions with the U.S. Consider, for example, Harley-Davidson’s announcement that it would move some production out of the U.S. because of Europe’s retaliatory measures against the Trump administration.

Mr. Trump responded to that by warning the motorcycle manufacturer he would punish the company if it follows through.

“No one is showing any signs of backing down in the escalating and dangerous trade war that was started by the U.S.,” said IG market analyst Joshua Mahony.

“[Yesterday], the focus of U.S. President Donald Trump’s ire is iconic motorcycle manufacturer Harley-Davidson, which is threatening to get round the EU’s retaliatory import tariffs by increasing production outside the U.S.,” he added.

“Trump is warning the company of a big tax being levied should it move production to Thailand, and we are seeing an important proxy play out for future cases given the growing impact this trade war is having on U.S-based firms.”

Canada’s countermeasure tariffs come into effect July 1, further upsetting the strong trade relationship with the U.S.

On that score, the S&P/TSX Composite Index could also face a “reality test,” as Mr. Marion put it, even as it reaches new heights.

“Though a weaker Canadian dollar will buoy earnings in a number of sectors, there is a limit to what the exchange rate alone can achieve if U.S. trade policy turns more aggressive and retaliation ensues,” Mr. Dion said.

What to do?

“We believe that the timing is still right to find refuge in the more defensive sectors (telcos, utilities and real estate) until we get more visibility on the geopolitical front,” Mr. Dion said.

Indeed, the Canadian dollar has not reacted well to the U.S. trade measures, along with administration threats to hit auto imports and, to boot, the stalled nature of talks to remake the North American free-trade agreement.

While auto tariffs are seen by some observers as a bargaining tactic, analysts also warn the loonie could be hit even harder should those levies come to pass and NAFTA fall apart.

The currency is also suffering because of the divergent policies of the Bank of Canada, which is waiting to raise its key rate again, and the Federal Reserve, which has raised its benchmark and is poised to do so again this year.

The loonie faltered last Friday when reports on inflation and retail sales fueled speculation the Canadian central bank, which had been expected to boost rates on July 11, may choose to sit that one out as well.

Which makes the next few days worth watching.

Today, Bank of Canada governor Stephen Poloz speaks to the Greater Victoria Chamber of Commerce, and markets will be watching for hints on where he might be headed.

“The tone of his prepared remarks and responses to questions during the subsequent press conference will be watched closely as he will have the results of the Q2 business survey (out on Friday) in hand,” said Elsa Lignos, Royal Bank of Canada’s global head of foreign exchange strategy in London.

Then, on Friday, Statistics Canada releases a report on how the economy fared in April, which is expected to show either no growth or a mild contraction.

More importantly on the rate front, the Bank of Canada releases its business outlook survey shortly after that, a reading of corporate optimism and planning that will feed into its July decision.

Read more

A scene I’d love to see

In our culture, we punch back, too.

Justin Trudeau shadow boxes following his workout at Ness Martial Arts Academy in Montreal, March 21, 2012

Christinne Muschi/The Globe and Mail

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