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Briefing highlights

  • What could go right
  • Canada’s economy stalls in July
  • Stocks, loonie, oil at a glance
  • Dorel suspends dividend amid trade war
  • Telus buying ADT Canada
  • Europe in manufacturing slump
  • Australia’s central bank cuts rates
  • What analysts are saying today
  • Required Reading

Yes, it’s October

Here’s something different: Some things that could go right as this traditionally chilling month for markets kicks off today.

First, though, Bank of Montreal senior economist Robert Kavcic notes that there’s obviously “plenty that could go wrong” in October, including “the yield curve proving prescient and the trade war going unresolved.”

He was referring to the recent inversion of the U.S. yield curve, which occurs when longer-term rates fall below those of shorter terms and which is seen as a warning sign of a looming recession, and the heated U.S.-China trade spat.

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And “it’s pretty clear that the equity market is already discounting slowdowns in the U.S. and global economies,” Mr. Kavcic added in his report.

But, after all that, here are some things that “could go right,” as compiled by Mr. Kavcic:

The October scare

October is seen as chilling because of the “infamous sell-offs” that have occurred during that month historically.

But, for those who are up on their lore but not their statistics, Mr. Kavcic pointed out September has actually been the worst month for equities since 1950, based on the average monthly return, which is a loss of 0.5 per cent, for the S&P 500.

“Looking at this cycle alone, the August-September period has similarly been the worst,” he said.

“October through December has actually been the strongest part of the year historically.”

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Economic indicators

“As we head deeper into the fall, the lagged impact of plunging interest rates could show up more positively in the economic data,” Mr. Kavcic said, citing the “gathering momentum” of U.S. housing starts, building permits and home sales in the summer.

Canadian housing markets are also perking up after slumping amid government measures aimed at cooling things down. Indeed, Toronto “is starting to smoke again,” Mr. Kavcic said.

Add to all this the fact that “Bloomberg’s U.S. economic surprise index has recently turned positive again after flagging persistent downside misses since late 2018 – and there might be room to run here.”

Corporate earnings

“The Q3 reporting period is a few weeks away, and expectations are for a sluggish quarter, but maybe that’s a good thing," Mr. Kavcic said.

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Indeed, analysts have sent up warning flags for what the third-quarter corporate earnings season may hold. As Mr. Kavcic noted, earnings among S&P 500 companies are expected to be 2.2 per cent shy of the levels of a year earlier, which would mark the first “negative print,” or showing, since 2016.

“We’ll see if the forward guidance confirms current expectations that this earnings contraction will be shallow and brief, improving beyond Q3,” he said.

“For what it’s worth, during the last earnings recession in 2015/16, the market bottomed and then broke out right about when the results on the ground were at their worst.”

The Federal Reserve

The Federal Reserve has already trimmed interest rates, and could well do so again before the year is out, possibly this month.

“Even if they don’t go, one could still argue that we are coming out of this mid-cycle adjustment in good shape,” Mr. Kavcic said.

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“This is, policy rates are back below neutral levels and slightly negative in real terms; inflation is stable and subdued, applying no pressure on the Fed to take back those rate cuts; there’s a strong and fully employed labour market; and compelling growth is ongoing in the technology/communications services spaces,” he added, noting, too, that “valuations don’t look too stretched.”

There have, of course, been questions surrounding the fact that we’re now into the longest economic expansion ever, and Mr. Kavcic said he wasn’t trying to downplay the fact that it’s late in the day.

“But sometimes, if the mood is just right, the party goes on past midnight.”

Also hanging out is that whole impeachment thing in the U.S., which some observers, including Mr. Kavcic, don’t see as factoring into market outcomes.

“We kind of don’t see it as having big impact over all,” he added in an interview.

While that’s the view among some observers so far, that doesn’t mean it couldn’t complicate matters.

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“Complications for trade and fiscal policy are likely,” said Citigroup economist Dana M. Peterson. “Investors should watch developments closely, and avoid reaching early conclusions.”

U.S. President Donald Trump will probably continue with his “unilateral, deregulatory and trade policy agendas,” Ms. Peterson said, adding that “the administration may attempt to expedite progress on these fronts to formulate ‘wins’ for President Trump amid the political turmoil.”

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Economy stalls

Canada’s economy stalled in July, kicking off a third quarter that’s expected to be nothing like the roaring second quarter.

“Following four months of growth, real gross domestic product was essentially unchanged in July as a decline in goods-producing industries was offset by an increase in services-producing industries,” Statistics Canada said today.

Output among goods producers slipped 0.7 per cent in July, while the services sector gained 0.3 per cent.

Construction and manufacturing declined, as did mining and oil and gas extraction.

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“Following four months of growth, oil and gas extraction (except oil sands) was down 4.7 per cent, the largest monthly decline in a decade, as both natural gas and oil extraction were down,” the federal statistics agency said.

“A major factor in the decline was the shutdown of some of Newfoundland and Labrador's offshore production facilities for a large part of the month as a result of maintenance issues,” it added.

“Oil sands extraction was down 1 per cent, as it continued the sequence of expansions and contractions observed over the course of the last four months.”

With the first month of the third quarter “undershooting expectations,” tracking projections for economic growth will be closed to the 1.5 per cent that the Bank of Canada forecast, said CIBC World Markets senior economist Royce Mendes.

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Markets at a glance

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Dorel suspends dividend

The U.S.-China trade war has hit Dorel Industries Inc. head on, prompting the Canadian company to suspend its dividend.

Dorel today cited the May increase in tariffs on Chinese imports, including furniture and bikes, to 25 per cent.

That hike is having “a much greater impact” on Dorel’s operations than the earlier 10-per-cent levy.

“We raised prices midway through the third quarter and this has had several negative consequences,” chief executive officer Martin Schwartz said in a statement.

“Not all competitors nor retailers raised prices at the same time or rate,” he added.

“Retailers have also changed their buying routines. New price points have caused some consumers to opt for different items, creating a considerable product mix imbalance. As well, elevated warehousing costs are still being incurred as the shift in demand has delayed our inventory balancing program.”

The impact of all this, the company said, is that “Dorel Home’s expected gross margin improvement from first half levels will be delayed to the beginning of 2020.”

Added to that is the fact some of the company’s major U.S. customers have postponed their Christmas deliveries to the start of the fourth quarter, while the stronger U.S. dollar has also hit the company.

“Tariffs have also impacted Dorel Sports’ mass merchant business,” it said.

“Although sales have remained strong, the mix has been negative, and gross margins are lower. Sales in the independent bicycle dealer (IBD) and Sporting Goods channels have remained strong and the outlook remains positive.”

The dividend it already announced in the summer will still be paid this week.

But “it is prudent to suspend the dividend until the chaotic market conditions created by tariffs are normalized,” Mr. Schwartz said.

Telus buying ADT Canada

Telus Corp. has struck a deal to buy ADT Services Canada Inc. for about $700-million.

The Canadian unit of ADT, which, among other things, is a security provider for homes and businesses, has about 500,000 customers.

“In the third quarter of 2019, Telus expects to have added more than 12,000 new customer additions to our security business, bringing our total security subscriber base to approximately 100,000 prior to the acquisition of ADT Canada,” the company said.

Read more

Europe in manufacturing slump

Manufacturing is settling into a slump in Europe.

The latest reading of HIS Markit’s purchasing managers index for the euro zone came in today at 45.7, the 50 mark separating contraction from expansion.

With all eyes on Germany, Europe’s economic powerhouse, individual countries also fared poorly.

“The latest manufacturing PMIs for September from Spain, Italy, France and Germany have served to reinforce the fragility of the manufacturing sector in Europe, with Spain weakening to 47.7, Italy to 47.8, and France and Germany weakening to 50.1 and 41.7, respectively, outlining even more starkly the task facing the [European Central Bank] in terms of the limits of monetary policy, and the need for fiscal reform in the euro area,” said CMC Markets chief analyst Michael Hewson.

Read more

Australia’s central bank cuts

Australia’s central bank trimmed its key rate today, citing global uncertainty and, notably, what other central banks are doing.

The Reserve Bank of Australia cut the cash rate by one-quarter of a percentage point to a record low 0.75 per cent.

“The board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target,” governor Philip Lowe said in releasing the decision.

“The economy still has spare capacity and lower interest rates will help make inroads into that,” he added.

“The board also took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes.”

The central bank could further still.

“Given weak inflation projections and our expectation that Australia’s labour market will fail to strengthen in the near term, we forecast the RBA to cut the benchmark rate one more time in this easing cycle, to 0.50 per cent,” said Tuuli McCully, Bank of Nova Scotia’s head of Asia-Pacific economics.

“We assess that the RBA would also be prepared to employ unconventional monetary policy tools to complement the interest rate cuts, should the achievement of the employment and inflation targets become subject to notable risks.”

Read more

Ticker

WTO cuts forecast

From Reuters: The World Trade Organization cut its forecast for growth in global trade this year by more than half and said further rounds of tariffs and retaliation, a slowing economy and a disorderly Brexit could squeeze it even more.

Euro inflation dips

From The Associated Press: Inflation in the 19-country euro zone weakened in September, slipping farther from the European Central Bank’s goal and underlining president Mario Draghi’s arguments for a recent stimulus package. Statistics agency Eurostat said the annual inflation rate eased to 0.9 per cent in September from 1 per cent in August.

South Africa PMI sinks

From Reuters: South Africa’s seasonally adjusted Absa Purchasing Managers’ Index sank to its lowest level in a decade in September, on weak demand linked to fears over slowing domestic and global growth, the survey showed. The index, which gauges manufacturing activity in Africa’s most industrialized economy, fell to 41.6 in September, from 45.7 in the previous month.

Japan boosts sales tax

From Reuters: Japan rolled out a twice-delayed increase in the sales tax to 10 per cent from 8 per cent, a move that is seen as critical for fixing the country’s tattered finances but that could tip the economy into recession by dampening consumer sentiment.

Also ...

What analysts are saying today

“The currency war continues to rumble on, with the RBA rate cut overnight giving the actions of other central banks as one reason for their rate cut. This marks just the latest in a series of central banks who are now willing to cite other central bank action as a reason to ease, with markets finding themselves back into the middle of yet another currency war.” Joshua Mahony, senior market analyst, IG

“The fourth quarter is under way. Just like Q3 but with darker mornings (in London, anyway). The dollar's the strongest of the major currencies this morning, much as it was in Q3. The key to a dollar turn is a U.S. economic turn for the worse. Kit Juckes, global fixed income strategist, Société Générale

“Gold has finally broken through US$1,480 support and could be facing further losses in the coming weeks as sentiment shifts towards the yellow metal. The move has been coming for some time and a failure to break US$1,535 last week was the final nail in the coffin, with gold tumbling almost 5 per cent in the week that followed.” Craig Erlam, senior market analyst, Oanda

“It was broadly a positive session in Europe yesterday as the U.S.-China trading relationship became a little less tense. Peter Navarro, a trade advisor to the White House, rubbished the idea that the U.S. were considering delisting Chinese companies from U.S. stock exchanges. Mr Navarro described the prospect of such a move a ‘fake news,’ hence why we saw a largely positive end to the European trading session. Trade talks between the two sides are set to take place next week, so the comments from the trade advisor helped lay the foundation for trade negotiations. The tit-for-tat tariff spat is basically at the worst it has been, but the fact that both side are due to meet next week has helped lift sentiment.” David Madden, analyst, CMC Markets

“Oil prices are recovering slightly after falling almost 4 per cent on Monday on reports that Saudi Arabia has fully restored output at the facilities that were attacked only two weeks ago.There was a lot of skepticism around whether they would manage to fully restore these facilities but this remarkable turnaround has apparently been delivered.” Oanda’s Mr. Erlam

Required Reading

Revenue forecasts questioned

The Liberal Party’s plan to levy a new tax on some digital technology companies is running into skepticism from economists and trade experts who say it might not generate the promised amount of revenue and risks creating new trade frictions with the United States. Sean Silcoff reports.

Plan faces more uncertainty

As Hudson’s Bay Co.'s executive chairman seeks to privatize the retailer, his company is facing more uncertainty due to problems at one of its partners, WeWork, and further criticism from a dissident shareholder. Rachelle Younglai and Jeffrey Jones report.

Cable companies win temporary stay

The Federal Court of Appeal has granted a temporary stay on a CRTC ruling that would have forced large cable and telephone companies to lower the rates they charge smaller internet providers for access to their networks, Alexandra Posadzki writes.

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