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Briefing highlights

  • Home prices to spike
  • Stocks, Canadian dollar, oil at a glance
  • LVMH in takeover deal for Tiffany (at breakfast)
  • Schwab strikes deal for TD Ameritrade
  • Uber stripped of London licence
  • Kirkland Lake Gold to buy Detour
  • What to watch for today
  • What analysts are saying
  • Required Reading: Board Games, bank earnings

Prices to spike

Capital Economics projects Canadian home prices could rise sharply next year amid lower mortgage rates and tighter markets.

That potential rise of at least 6 per cent by the second quarter wouldn't quite mark a return to the bad old days that prompted governments to pull out their fire hoses.

(Or the good old days, if you were selling or simply rubbing your hands in glee amid the wealth effect.)

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But it would make certain unaffordable markets even more so.

"Following the slump in mortgage rates, the rise in the sales-to-new-listings ratio suggests that house price inflation will surge," Stephen Brown, senior Canada economist at Capital Economics, said in his housing market forecast.

That ratio of sales to new listings is a key measure of a market’s tightness. While regional differences are wide across the country, nationally the ratio stood at 63.7 per cent in October, according to Bank of Nova Scotia, with 64 denoting a sellers’ market.

Source: Capital Economics

Home sales have rebounded from the thumping they took after the federal bank regulator established new mortgage-qualification stress tests in early 2018, to head off a credit bubble, and amid tax and other measures from the B.C. and Ontario governments to cool down the inflated Vancouver- and Toronto-area markets.

Sales in Canada now sit 8 per cent above their 10-year average, compared with February, when they sat 9 per cent below, Mr. Brown said.

Mr. Brown’s calculations, based on the MLS home price index, illustrate how “price momentum is building quickly.”

Indeed, over the past three months, prices have climbed 0.5 per cent from each preceding month.

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That, in turn has driven three-month gains to 5.5 per cent, at an annualized pace, from the previous three-month period, the best showing in two years, Mr. Brown said.

"If that pace is maintained, house price inflation will reach 6 per cent by the second quarter of 2020," he added.

“The sales-to-new-listing ratio suggests that house price inflation could rise by far more than that.”

All of this speaks to consumer spending, as well, and economists suggest that's waning.

But housing market gains should help, Mr. Brown said, noting that the Bank of Canada has estimated that we spend six cents for each dollar rise in the value of our homes.

Note, too, that Friday’s Statistics Canada report on retail sales, while lame, showed gains at building-materials outlets.

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“That strength in housing was evident in rising sales at building-material stores, which hit a record high on a volumes basis," said Royal Bank of Canada senior economist Josh Nye.

The wealth effect could be different this time out, according to Mr. Brown.

"There are reasons to think that households might save more of the gains from higher housing values in 2020 than they did in previous years," he said.

"For example, the sharp rise in consumer delinquencies in September seems to support our view that very high levels of household debt and limited liquid savings explain why consumer spending growth has lagged behind incomes growth in the past year."

Our finances are in better shape now, however, though the Bank of Canada is watching closely lest our elevated household debts get even further out of hand again.

Mr. Brown and other economists believe the central bank may cut its key overnight rate again at some point soon, meant to be "insurance" in uncertain times.

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"But with the housing market on the tear again, the key message now is that interest rates are far more likely to be held near their current levels than lowered significantly," he said.

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Markets at a glance

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Tiffany at breakfast

LVMH Moët Hennessy Louis Vuitton SE is, well, having Tiffany for breakfast today.

LVMH struck a deal to buy Tiffany & Co. for US16.2-billion, or US$135 a share in cash, bringing together two of the ultimate in luxury companies.

Together, they will boast brands including Louis Vuitton, Christian Dior Couture, Celine, Givenchy, Fendy, Bvlgari, TAG Heuer, Dior Watches and others. In wines and spirits alone, its brands include Moët & Chandon, Dom Pérignon, Krug, Château Cheval Blanc, Hennessy and Glenmorangie.

Tiffany, of course, was founded in 1837 and is now a global chain.

“The acquisition of Tiffany will strengthen LVMH’s position in jewelry and further increase its presence in the United States,” LVMH said in a statement announcing the deal.

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“The addition of Tiffany will transform LVMH’s watches and jewelry division and complement LVMH’s 75 distinguished houses.”

The deal should give LVMH “more exposure” to the U.S. luxury market, said CMC Markets analyst David Madden.

Some companies in the retail sector have complained about softer demand, but luxury brands tend to hold up well when economies cool as the mega rich usually fare better in a cooler economic climate,” he added.

Schwab strikes deal for Ameritrade

Unlike the LVMH-Tiffany marriage, this deal has less to do with celebrating elegance and more to do with the troubles and price war among discount brokers: The Charles Schwab Corp. is buying TD Ameritrade Holding Corp. in a US$26-billion all-stock agreement.

TD Ameritrade stockholders will get 1.0837 in Schwab shares for each of their shares.

Together, the companies said they would have 12 million accounts, US$1.3-trillion in client assets and some US$5-billion in revenue annually.

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As The Globe and Mail’s David Berman reports, the deal between the two biggest discount brokers comes amid an industry in turmoil. At the beginning of last month, Schwab cut its online trading fees, prompting TD Ameritrade to bring in zero commissions.

Toronto-Dominion Bank said it would hold a 13.4-per-cent stake in Schwab after the deal, given its 43-per-cent ownership of TD Ameritrade. That includes 9.9 per cent of voting common stock.

TD said it has struck a shareholders agreement with Schwab, and will have two seats on its board.

“This transaction adds significant value to TD’s investment and TD expects to record a sizeable revaluation gain at closing,” the bank added.

As The Globe and Mail’s James Bradshaw reports, TD also renegotiated an agreement to preserve some of the roughly $275-million in revenue it collects from a sweep deposit agreement with Ameritrade, though it will receive lower revenues over time.

“Given that the need for scale in the ebroker sector necessitates a bigger entity than TD would like to allocate sufficient capital to, the reduction in its relative stake should not come as much of a surprise after reports of the deal surfaced,” said Barclays analyst John Aiken.

“However, in a somewhat elegant solution, TD has negotiated the retention of its sweep agreement with Ameritrade (albeit with a declining balance),” he added.

“As we believe that TD feels it has greater strategic priorities for its capital, we agree with the strategic rationale for a reduced ownership stake. Further, we believe that the fact that TD will not immediately lose the broker deposits should receive some relief from investors, despite lower expected revenues in the future as the broker deposits are reduced.”

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Ticker

Competition Bureau recommendation

The Competition Bureau is recommending Rogers Communications Inc., BCE Inc. and Telus Corp. be required to sell temporary access to their wireless networks to certain regional carriers, The Globe and Mail’s Alexandra Posadzki reports. In a submission to the Canadian Radio-television and Telecommunications Commission (CRTC) published Monday, the bureau said such a requirement would spur greater competition and lead to lower wireless bills. However, it said Canada’s large national carriers should only be required to sell temporary access to those regional players who plan to invest in and expand their own networks. The CRTC will hold a public hearing next year on the state of the wireless industry.

Uber loses licence

From Reuters: Uber was stripped of its London operating licence for the second time in just over two years after the city’s regulator said a “pattern of failures” on safety and security meant the taxi app was not fit and proper. A change to Uber’s systems allowed unauthorized drivers to upload their photos to other driver accounts, meaning they could pick up passengers as if they were the booked driver. The Silicon Valley-based company, which has faced pushback from authorities and existing operators in several countries, said it would appeal.

Tesla rises

From Reuters: Tesla Inc. shares rose after chief executive officer Elon Musk tweeted over the weekend that the company had already received 200,000 orders for its futuristic Cybertruck pickup. The new truck, made of stainless steel used in rockets and priced at US$39,000 and above, failed to impress Wall Street last week after its “armoured glass” windows shattered in a launch demonstration and analysts argued the design would not have mass appeal.

Kirkland Lake Gold to buy Detour

From Reuters: Canadian miner Kirkland Lake Gold Ltd. said it would buy smaller rival Detour Gold Corp. for about $4.89-billion in an all-stock deal, as it looks to scale up its mining operations and boost reserves. Kirkland Lake Gold offered 0.4343 of a share to Detour Gold shareholders for each share held. Acquisitions in the sector have been scarce in recent years as miners focused on cost cutting, but the need to bolster shrinking reserves to boost growth and take advantage of rising gold prices are providing the impetus for consolidation.

What to watch for today

There’s not much on the calendar at this point, but Federal Reserve chair Jerome Powell speaks tonight on the economic expansion.

“Given the Fed’s well orchestrated message that the economy is in a good place and the current policy stance is appropriate, no market-moving headlines are likely … but you never know,” said Bank of Montreal senior economist Sal Guatieri.

What analysts are saying

“We’ll find out soon enough what Trump makes of China’s domestic clampdown on IP theft and violations and if the measures announced this weekend will be conducive to Washington and Beijing tying up loose ends. The interpretation of markets is that it has lowered the bar for a conclusion of the phase one trade deal and partial elimination of tariffs. The reaction is by no means one of ecstasy but a cautious nod and optimism that this week’s face-to-face negotiations will go ahead and could result in a formal agreement if not by Thanksgiving this Thursday then before the next tariff deadline of 15 December.” Société Générale

“An added complication to the prospect of any sort of China, U.S. deal has been events taking place in Hong Kong, against a backdrop of significant unrest. Weekend district elections appear to have prompted the various parties to take a step back to allow voting to take place, with pro-democracy candidates surging to a significant victory.” Michael Hewson, chief analyst, CMC Markets

“The world sits in a state of paralysis, waiting on policy makers to offer a signal on the direction for risk assets. The trade wars and Brexit are independent parts of this feedback loop, even though the former is much more critical for global assets. Still, it’s worth noting that the [euro] reflects both evolving processes. This week probably won’t offer any clear direction in the trade wars, which leaves us playing another round of headline ping pong. Still, this backdrop reinforces the many faces of the USD, which does have some tradeable themes.” Mark McCormick, global head of foreign exchange strategy, TD Securities

“The main focus this week will be on whether the slight glimmers of bottoming out – especially in the manufacturing sector – will turn brighter. Key data to watch will be the German ifo, the European Commission survey and the China [purchasing managers indexes]. Our view is that all three should improve, albeit only slightly, and following pronounced weakness in the prior months. Meanwhile the tiresome back and forth over a phase one U.S.-China trade deal looks set to continue, though some efforts to bring a swift conclusion before Thanksgiving is reportedly under way. We are skeptical this can be done, but live in hope.” Société Générale

Required Reading

Board Games

Canadian companies have steadily, but slowly, added women to their boards and executive ranks over the past decade as they respond to pressure from shareholders. The shift has been due in large part to regulations that forced them to disclose their gender diversity and explain how they intend to improve it. Next spring, the conversation will be bigger and broader. New federal rules will extend the diversity disclosure rules to race, disabilities and Indigenous heritage, requiring companies to include that information in circulars to shareholders. Canada is believed to be the first country to mandate companies to expand diversity disclosure beyond gender to other groups. David Milstead reports in our annual Board Games project.

Banks to kick off earnings

After years of strong results from outside the country, Canada’s six largest banks are expected to report international growth is slowing amid trade wars and recession concerns. At home, the banks are expected to set aside more capital for bad loans, in part because of low energy prices. Bank of Nova Scotia kicks off reporting fiscal 2019 financial results on Tuesday. Andrew Willis reports.

Groups call to end strike

The federal government is facing mounting calls to legislate striking Canadian National Railway Co. employees back to work as pockets of the Canadian economy began to show the strains five days after the country’s largest freight railway operator cut back to a fraction of its capacity. Sean Silcoff looks at the strike’s impact.

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