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business briefing

Briefing highlights

  • Questions dog the TSX
  • Stocks, loonie, oil at a glance
  • Canada’s inflation rate tame
  • Netflix results in spotlight
  • Bank of America tops estimates
  • Huawei revenue surges in quarter
  • Bread prices soar 60% in Zimbabwe
  • Brexit, Netflix: What analysts are saying today
  • Required Reading

Q&A

Four questions dog the Toronto stock market in the fourth quarter, Bank of Montreal says.

These come as the benchmark Toronto composite index caps its best showing for the first three quarters of a calendar year since 2009.

Now, said BMO chief investment strategist Brian Belski and his colleague Ryan Bohren, the big question is how Canadian stocks will fare amid “looming earnings headwinds.”

But, they added in their study, they’re confident as the final three-month period kicks off, and they’re sticking to their year-end target of 17,000 for the S&P/TSX Composite Index.

Here, then, are those four questions, along with answers from Mr. Belski and Mr. Bohren:

Q. Can the TSX continue its winning ways?

A. “Our work shows that even after a strong first three quarters (greater than 10 per cent), the probability still favours a positive 4Q. In fact, since 1956, when the price performance during first three quarters of the year has been greater than 10 per cent, 4Q has been positive 75 per cent of the time. The average fourth quarter performance when the first three quarters price return is greater than 10 per cent has been 1 per cent since 1956, and 2.7 per cent since 1990. … As such, we believe the strong performance to start the year does not preclude continued outperformance in the fourth quarter.”

Q. Will the earnings “headwinds” continue?

A. “Currently, much of these headwinds remain largely localized, with industrials and the auto component of consumer discretionary seeing the bulk of the trade impact. Furthermore, while the drop in [the Institute for Supply Management’s recent measure of the U.S. manufacturing sector] is not encouraging, other important economic indicators that we track are not confirming the recession risk that manufacturing data are seemingly signaling.”

Q. Are these headwinds already priced into “negative revisions?”

A. “We believe much of the earnings headwinds have likely already been priced into earnings, as S&P/TSX [2020] EPS revisions have plummeted in recent months and are now at the lowest level since 2016. … Interestingly, most of the revision weakness over the last three months has been concentrated in health care and industrials, as cannabis industry expectations experience some reality, while the trade impact pinches industrials. Ultimately, our work shows that a sharp drop in revisions traditionally represents a strong contrarian indicator. In fact, when we see this level of pessimism by analysts, markets tend to rebound over the next three-, six- and 12-month periods.”

Q. Is the value outperformance of late a longer-term trend shift or short-term rebalancing?

A. “While we believe the market was broadly rebalanced in September as investors took profits from the outperforming momentum names and shifted into the more value-oriented areas, our work shows spikes in factor return dispersion often mark broader shifts in factor performance trends. … We believe the market may be on the cusp of a shift back to more value-based strategies, which is favourable to Canadian equities.”

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Markets at a glance

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Inflation tame

Consumer prices fell 0.4 per cent in September, holding the annual inflation rate at 1.9 per cent.

A decline had been expected largely because of lower air fares that have to do with a change in methodology.

If you strip out gasoline, annual inflation was 2.4 per cent, Statistics Canada said today.

These numbers aren’t expected to move the Bank of Canada, whose target for inflation is 2 per cent.

“The Bank of Canada's three core measures are still averaging a hair above 2 per cent,” said CIBC World Markets senior economist Royce Mendes.

“Over all, no significant implications for the Bank of Canada, which we expect to remain on hold later this month,” he added.

“The strength of the last two employment reports also suggests that we’ll be waiting until January for enough signs that a slowing global economy is impacting Canada enough to warrant the lone 25-basis-point rate cut we are projecting.”

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What to watch for today

Netflix Inc.'s quarterly results are always a focus for markets.

“When Netflix last reported in July the shares dropped sharply after management reported a sharp slowdown in user growth across the board,” said CMC Markets chief analyst Michael Hewson.

And “with Disney and Apple set to launch cheaper packages later this year, Netflix shares could be vulnerable to further declines if subscriber growth slows further, or management revise their outlook down,” he added.

Ticker

Bank of America tops estimates

From Reuters: Bank of America Corp., the second-largest U.S. bank by assets, beat analysts’ estimates for quarterly profit as gains from trading in stocks and robust loan growth helped cushion it from lower interest rates. Net income applicable to common shareholders fell to US$5.27-billion, or 56 US cents a share, in the third quarter ended Sept. 30, from US$6.70-billion, or 66 US cents a share, a year earlier. The latest quarter includes US$2-billion in pre-tax impairment charge. Excluding the charge, the bank earned 75 US cents a share.

Bank of New York Mellon profit slips

From Reuters: Bank of New York Mellon Corp. reported a 7-per-cent fall in quarterly profit, as the world’s largest custodian bank earned lower fees and took a hit from a drop in interest rates. Profit applicable to common shareholders fell to US$1-billion in the third quarter ended Sept.30, from US$1.08-billion a year earlier. On a per share basis, net income rose to US$1.07 from US$1.06, reflecting buybacks that have lowered the number of shares.

Huawei revenue surges

From Reuters: Huawei Technologies Co.’s third-quarter revenue jumped 27 per cent, driven by a surge in shipments of smartphones launched before a trade blacklisting by the United States expected to hammer its business. Huawei, the world’s biggest maker of telecom network equipment and the No. 2 manufacturer of smartphones, was all but banned by the United States in May from doing business with American companies, significantly disrupting its ability to source key parts. The company has been granted a reprieve until November, meaning it will lose access to some technology next month. Huawei has so far mainly sold smartphones that were launched before the ban. Revenue in the quarter ended Sept. 30 rose to US$23.28-billion, according to Reuters calculations based on previous statements from Huawei.

Bread prices surge 60 per cent in Zimbabwe

From Reuters: The price of bread, Zimbabwe’s second most-consumed staple, jumped 60 per cent overnight due to escalating costs of production, the national bakers’ association said, adding more woes to consumers grappling with triple-digit inflation. Zimbabweans are experiencing severe economic hardship that has evoked memories of the hyperinflation horrors during late President Robert Mugabe’s rule, when citizens lost pensions and savings and businesses were forced to shut down. President Emmerson Mnangagwa, who took over after an army coup in 2017, has called for patience as his government struggles to convince Zimbabweans that its policies will revive an economy stricken by shortages of electricity, fuel and medicines and a drought that hit farm output.

Euro zone inflation slows

From Reuters: Euro zone inflation dropped to its slowest pace in more than three years in September, more than previously estimated, the European Union statistics agency said. The drop is likely to raise new concerns on the state of the euro zone economy and may reignite a debate within the European Central Bank on how to pursue its goal of keeping inflation close to but below 2 per cent over the medium term. Eurostat said prices in the 19-country euro zone rose 0.8 per cent on the year, down from its earlier estimate of 0.9 per cent.

British inflation tame

From Reuters: Britain’s inflation rate failed to rise as expected last month as gasoline prices fell at the fastest rate in more than three years, a boost to consumers ahead of Brexit. Consumer prices rose at an annual rate of 1.7 per cent in September, matching August’s rate that was the lowest since December 2016, the Office for National Statistics said. The figures suggest the Bank of England’s forecast in August that inflation would average 1.6 per cent in the final quarter of this year looks on track.

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What analysts are saying today

“Optimism that a Brexit deal is in the grasp of UK and EU negotiators was called premature by EU diplomats overnight so it will be tense finale with more twists and turns no doubt on what should be the final day of negotiations in Brussels before the summit tomorrow.” Société Générale

“With all the problems facing the German economy at the moment, fears over a technical recession, as it reels from the fallout from the trade war between the U.S. and China, the worst thing that could happen is for there to be a disruptive Brexit on top of all its other problems as well …For now, while it would appear that financial markets are pricing in the prospect that a deal is in the offing, a lot can still go wrong in the coming days, and there are still a significant number of MPs in Parliament who have little interest in trying to push a deal across the line, and would rather Brexit not happen at all.” Michael Hewson, chief analyst, CMC Markets

“There’s some fear out there that China will retaliate to a U.S. bill defending the rights of Hong Kong protesters. The timing is certainly awkward, just as the U.S. and China struck a ‘phase one’ trade deal. The bill has still not completely passed so we don’t expect anything more than warnings from China at this stage. We don’t think it’s in China’s interest to take any retribution against the U.S. bill via the recent trade pact. We think it’s possible this bill will push China into a public show of defiance against U.S. ‘interference.’ That would mean cracking down on the HK protesters. Under that scenario, markets would be relieved if China’s retaliation kept the trade pact intact. However, higher political uncertainty in Hong Kong would be a sizable downside risk.” Jasper Lawler, head of research, London Capital Group

“Netflix had a rough quarter as its share price slumped more than 33 per cent since July on doubts regarding its business model and the intensifying competition in the sector with a major competitor, Apple TV, stepping in with a very competitive pricing to onboard viewers. Hence, investors need Netflix to exceed its seven-million-subscriber additions target and reveal a good-looking fourth-quarter guidance. We believe that the Netflix original series, documentaries and movies remain a major attraction to viewers, but it is unsure how the company will manage to reduce its US$3.5-billion free cash flow deficit in an increasingly heated competitive environment.” Ipek Ozkardeskaya, senior market analyst, London Capital Group

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Required Reading

Tories target payouts

The Conservative Party says it would restrict large payouts to executives at bankrupt companies with underfunded pension plans, a move aimed at curbing the unpopular practice of paying management retention bonuses, even as employees lose their jobs and benefits. Christine Dobby reports.

Morguard chief signals what he’ll acquire

Most investors dread the prospect of a recession. Morguard Corp. chief executive Rai Sahi, on the other hand, is setting up his company to take advantage of an inevitable downturn in real estate markets, Andrew Willis writes.

Avoid this trap

Personal finance columnist Rob Carrick says you should avoid this trap when transferring TFSAs from one financial firm to another.

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