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morning business briefing

Briefing highlights

  • The election and the Canadian dollar
  • China’s growth slows in third quarter
  • Gildan shares plunge on profit warning
  • Markets at a glance
  • Coke, Amex results in spotlight
  • Brexit, China, gold: What analysts are saying
  • Required Reading

The election and the loonie

Mark McCormick believes the currency market is “underpricing” the possibility of a minority Liberal government propped up by the New Democratic Party.

While observers generally expect little impact on the Canadian dollar from the results of Monday’s election, that’s one scenario that could hit the loonie.

Mr. McCormick, global head of foreign exchange strategy at TD Securities, noted that the status of the Canadian dollar has lost ground in a currency-ranking index launched recently by the bank.

“This shift comes ahead of the Canadian elections, where we think markets are underpricing the risks of a possible Liberal/NDP minority government,” Mr. McCormick said in a report.

“That outcome is likely to generate a sharper selloff in CAD relative to the upside of a Conservative majority,” he added, referring to the Canadian dollar by its symbol.

“The other combinations probably aren’t market moving. And yet CAD’s losing some of its luster ahead of a notable market event, leaving it exposed to a pullback on some key crosses where [the Australian and New Zealand dollars, the Norwegian krone and the Swedish krona] trade with significant discounts.”

In referring to a “possible Liberal/NDP minority government,” Mr. McCormick meant the former being propped up by the latter, rather than a formal coalition, he added in an interview.

Royal Bank of Canada considered the same scenario in a research note to clients this morning.

“With three days to go until Canada’s general election (Monday 21 Oct.), polls still point to a minority government as the most likely outcome,” said Elsa Lignos, RBC’s global head of foreign exchange strategy.

“Canada is used to those (~25 per cent of the time for the last 50 years),” she added.

“It will make a difference to policy at the margin - as incumbent, Trudeau would have the first shot at forming a government (with the NDP as natural partners). But we expect the impact on CAD to be short-lived (and not until late on Monday).“

TD’s Mr. McCormick did not say this in his report, but that scenario, of course, would not appear to markets as business-friendly as others would. That’s why other outcomes are seen as having less of an impact.

In the interview, Mr. McCormick cited NDP policies linked to capital inflows, such as how foreign investment is taxed, and the fact that a currency can be affected by how outside forces do or don’t invest in a country.

The NDP has, among other things, proposed a 15-per-cent tax on foreign purchases of Canadian residential real estate, and boosting the corporate tax rate to 18 per cent from the current 15 per cent, while also increasing taxes on the rich.

Remember, Canada has a current account deficit that stood at $6.4-billion in the second quarter although that was the lowest level since 2008.

Mr. McCormick believes Monday’s election is not on the radar of foreign investors, and thus the potential reaction were they to wake up Tuesday to the Liberal-NDP scenario.

It’s not that NDP policies would become law under that scenario, it’s the “risk” from a foreign viewpoint, he added.

Noting the loonie has now just cracked 76 US cents, Bank of Montreal chief economist Douglas Porter said the recent rise in oil prices alone, while buoying the currency, can’t account for its “incredibly stable” showing during the campaign.

“By almost all accounts, we are headed for a very tight result on Monday, with a minority government of some stripe by far the most likely outcome,” Mr. Porter said.

“Indeed, there is the very real chance that it may require three parties to tally above 170 seats,” he added.

“And, it could take quite some time for any such arrangement to be reached - i.e., more uncertainty. This seems to be of no concern to the loonie, which has been driven more by generalized softness in the U.S. dollar amid a broader increased appetite for risk assets. And, of course, it hasn’t hurt that Canadian economic data (notably jobs and housing) have been firm, likely keeping the [Bank of Canada] on hold.”

Observers outside Canada tend to look at the policies of just the Liberals and Tories, because they could impact markets, with little attention given to other political parties.

Here’s how JPMorgan Chase strategists put it in a note to clients this week:

“While elections have proven to be a dominant driver of global markets in the last few years, in some cases challenging global economic and political paradigms, the scope of policy differentiation in Canada between the Liberal and Conservative parties is comparatively modest,” JPMorgan foreign exchange strategists Patrick Locke and Daniel Hui said.

That’s not the first time I’ve heard that from observers outside Canada, despite what the Liberals and Tories might think.

“Thus, the stakes are low for the currency and do not warrant pricing bimodal outcomes in [foreign exchange], as has been increasingly the case elsewhere in the world,” Mr. Locke and Mr. Hui said.

“Any impacts on the Canadian dollar are instead more likely to be modest and manifest over time, leaving the current CAD focus firmly concentrated on domestic data and [Bank of Canada] divergence from the [U.S. Federal Reserve], as well as the overall risk environment for small open economies in general.”

The size of Ottawa’s annual budget deficit may be “the most relevant” issue in the medium term, particularly given that the global economic expansion has been running for so long now, but “there are few policies that should materially impact macro forecasts.”

While Mr. McCormick was referring to how the loonie has fared in TD’s ranking, the currency has been a winner of late, gaining, among other reasons, as the U.S. dollar slipped.

“Year-to-date spot performance of a selection of currencies against the [U.S.] dollar highlights one thing more than any other: It's all been about trade,” said Kit Juckes, global fixed income strategist at Société Générale.

“The year’s top currencies, the CAD and [Mexican peso], do most of their trade with the U.S., and to the extent that NAFTA is in better shape than other trade deals, they are winners,” Mr. Juckes said, referring to the new United States-Mexico-Canada Agreement that will take the place of the North American free-trade agreement once it is passed by all three countries.

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China’s growth slows

Economic growth in China is slowing. Indeed, to its slowest in almost 30 years.

Gross domestic product expanded 6 per cent in the third quarter, according to official numbers released today, down from 6.2 per cent in the second quarter.

“The preliminary breakdown shows that an acceleration in services activity was more than offset by a slowdown in industry,” Julian Evans-Pritchard, senior China economist at Capital Economics, and his colleague, China economist Martin Rasmussen, said in a report.

This comes, of course, amid the trade war between China and the U.S.

And “pressure on economic activity should intensify in the coming months,” said Mr. Evans-Prichard and Mr. Rasmussen.

“Cooling global demand will continue to weigh on exports, fiscal constraints mean that infrastructure spending will wane in the near term, and the recent boom in property construction looks set to unwind,” they added.

“We expect monetary policy to be loosened before long in response, but it will take time for this to put a floor beneath economic growth.”

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Gildan plunges on profit warning

Shares of Gildan Activewear Inc. plunged today after the apparel maker’s profit warning late Thursday.

Montreal-based Gildan warned in a statement that it now expects third-quarter earnings per share, diluted, of about 51 cents, which would mark a drop of 7 per cent from a year earlier.

It also projects sales of about $740-million, down 2 per cent.

“During the third quarter of 2019, we experienced significantly weaker than expected demand for imprintables in North America and ongoing softness in international imprintable markets,”” Gildan said.

“While overall imprintable sales were weaker than expected, overall retail sales were essentially in line with our expectations,” it added.

Gildan, which reports results Oct. 31, warned, too, that it assumes “the current demand weakness for imprintables, both in North America and internationally. Will persist through the fourth quarter.”

It added that “given the current downturn in demand, the company is now projecting significantly lower year-end distributor inventory levels than previously projected. The company estimates that lower demand expectations than previously projected will reduce the company’s sales projection for the fourth quarter by approximately $70-million and anticipates distributor inventory destocking will negatively impact sales by approximately $100-million.”

Based on all of this, Gildan projected that 2019 earnings per share would now be between $1.50 and $1.55, down from its earlier forecast of $1.80 to $1.85.

Citigroup analyst Paul Lejuez wonders whether Gildan’s issues might be a “negative sign” for the economy.

“Management believes that the slowdown in trends for its distributors may be an early sign of a slowing economy,” he said in a research report, lowering his price target on the shares to US$24 from $US40.

“This is a company that had been seeing strong trends and now suddenly is not, which makes us wonder if it could be a proverbial canary in the coal mine for something broader happening on the macro,” he added.

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Markets at a glance

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Corus profit slips

From The Canadian Press: Corus Entertainment Inc. says it earned $22.9-million in its latest quarter, down from nearly $33.7-million a year earlier, as its revenue edged lower. The parent company of Global Television, specialty TV channels and radio stations says the profit amounted to 11 cents a share, diluted, for the quarter ended Aug. 31, down from 16 cents. On an adjusted basis, Corus says it earned $27.9-million or 13 cents a share, down from an adjusted profit of $39.5-million or 19 cents.

Coke tops revenue estimates

From Reuters: Coca-Cola Co. reported better-than-expected quarterly revenue, boosted by strong demand for its zero-sugar sodas and Coca-Cola Plus Coffee, a blend of its traditional soda and coffee.

Amex beats estimates

From Reuters: American Express Co. reported a higher-than-expected rise in third-quarter profit, as more people used cards to shop, pay bills and make big-ticket purchases.

Vivendi rises

From Reuters: Shares in French media group Vivendi jumped after it posted higher third-quarter revenue and said a potential sale of a stake in its Universal Music Group was attracting buyer interest. Investors in addition to China’s Tencent Holdings have shown interest in buying a minority stake in Universal, Vivendi said late Thursday. Universal, the music label of Lady Gaga, Ariana Grande and the Beatles, was the main sales growth driver for Vivendi in the third quarter. The company said it was still in talks with Tencent for a sale of up to 20% of Universal, which could value the division at about EURO 30-billion euros.

Renault slumps

From Reuters: Renault shares slumped after the French auto maker cut its revenue guidance for 2019 and lowered its profitability forecast. After the market closed Thursday, Renault said sales were likely to drop between 3 and 4 per cent this year. The company also said its operating margin was set to come in at 5 per cent, versus a previous 6-per-cent goal.

Japan’s inflation slows

From Reuters: Japan’s core consumer inflation slowed to near 2 1/2-year lows in September, dragged down by sliding energy prices and raising the chance the central bank will top up its already massive monetary stimulus at its review this month.

Also ...

What analysts are saying today

Who feels that this has been a whirlwind of a week? Raise your hands.

Jennifer Lee, senior economist, BMO

“This is a very difficult one to call. So if the deal is voted down, is that it? The DUP feel it is not. But the EU is so ready to move on ... It has been ready for a long time. Once again, let us be reminded that it takes two to tango ... You can ask for an extension, but you may be told no. You can make a deal, but it needs to be supported. You get the drill.” BMO’s Ms. Lee

“If MPs do vote [the Brexit deal] down, there may well be attempts to amend it, or attach referendum conditions to it. If the bill is rejected then there is likely to be a gap of several days where an extension is applied for before being considered and/or granted. While President Juncker has stated that no prolongation is necessary, other EU leaders might well have other ideas, with some already breaking ranks, saying that they wouldn’t oppose a request for an extension. This might suggest that the pound and euro could move quite sharply in the days leading up the end of next week.” Michael Hewson, chief analyst, CMC Markets

“The dust has settled after the announcement of the Brexit deal yesterday, so the mood is a little less optimistic this morning. Traders’ attention is now squarely focused on whether Prime Minister Johnson can get the backing for the deal tomorrow. Mrs. May had her proposal voted down three times, and that was with a working majority so Boris has an even slimmer chance. If politics in the past three years has taught us anything, it is that anything is possible so there are some murmurs of hope circulating.” David Madden, analyst, CMC Markets

“Weak growth data confirmed that the trade disruptions with the U.S. have continued taking a toll on China’s economy during the third quarter and a trade truce is the only way to put the [emerging market] giant back on its feet. In this respect, and despite the rising tensions with the U,S., Chinese leaders are working hard to find an agreement with their U.S. counterparts. With economic growth poised on the brick of the critical 6-per-cent level, Xi needs a deal more than ever.” Ipek Ozkardeskaya, senior market analyst, London Capital Group

“Gold appears to be in ‘No man’s land.’ The trade war is the gift that keeps on giving, but uncertainty on how much the Fed will fill the punchbowl has gold stuck in a range. Gold could remain stuck between US$1,470 and US$1,530 until the Oct. 30 Fed meeting. The outlook should remain bullish for gold as the Fed will likely seek to deliver a market disruption and continue to support the Treasury yield curve.” Edward Moya, senior market analyst Oanda

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Required Reading

Zuckerberg rebuffs regulation

Facebook Inc. chief executive Mark Zuckerberg signaled Thursday he intends to push back more aggressively against lawmakers’ efforts to regulate the social media giant, arguing in a rare public speech in Washington that U.S. tech companies play a critical role in safeguarding democratic values online. Tamsin McMahon reports.

Wilson on the oil sands

Ex-Dragon Brett Wilson is cranking up the heat on Alberta oil sands critics, Kelly Cryderman writes.

Stocks vs. fixed income

Are equities the better choice over fixed income in Canada? Scott Barlow examines the question.

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