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Briefing highlights

  • U.S.-China deal to hit Canada
  • What analysts say about the deal
  • Stocks, Canadian dollar, oil at a glance
  • Home sales surge from year earlier
  • Bank of America profit slips
  • German economic growth slows
  • Required Reading

Deal to hit Canada

A Citigroup economist has studied what the proposed U.S.-China trade deal could mean from various angles, and determined that Canada and Mexico will be hurt under most of them.

Citigroup global economist Dana Peterson said in her report that the two countries, part of the U.S.-Mexico-Canada trade pact, “might experience reduced bilateral trade value with the U.S. under most scenarios.”

The so-called phase one trade deal is scheduled to be signed in Washington today.

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Among the details that are known, the United States will stop calling Beijing a “currency manipulator,” while China buys US$50-billion more in American energy products and at the same time spends US$32-billion more on agriculture over a two-year period. There are also pledges for tens of billions on manufactured products.

There are questions surrounding the deal, though, specifically where it concerns the timing of reductions to U.S. tariffs.

“The purchases represent a direct increase in economic activity and a thawing of the U.S.-China tensions, which it is hoped will open up international trade more generally,” said Jasper Lawler, head of research and education at London Capital Group.

Citigroup’s Ms. Peterson looked at this through an American lens, but, of course, trade both ways would be affected.

“The U.S.’s two largest export markets – Canada and Mexico – might experience reduced bilateral trade value with the U.S. under most strategies,” Ms. Peterson said.

“If the U.S. were to reduce exports with third-party trading partners in order to satisfy the terms of the U.S.-China trade deal according to the proposed ‘shopping list,’ then Mexico and Canada might be the most affected in nominal trade value,” she added.

“Hong Kong, South Korea, Taiwan, Malaysia, Japan, Australia and several EU member states follow.”

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Scenarios vary. Under two of them, Canada could see a drop in imports of U.S. goods to the tune of an average 1.19 per cent or 0.65 per cent of our gross domestic product, Ms. Peterson calculated.

The corresponding numbers for Mexico are 1.73 and 0.93 per cent.

Canada, of course, already has a fractured relationship with China since our detention of Huawei Technologies executive Meng Wanzhou, who faces extradition to the U.S.

Among other things, there are now restrictions on certain Canadian agricultural exports.

And as columnist Barrie McKenna writes, the U.S.-China deal could hit Canadian exports of soybeans, canola oil, frozen pork, lentils, beans, wheat, coal and seafood.

Read more

What analysts say about the deal

Just getting to this stage is a huge relief.

— Jennifer Lee, Bank of Montreal

“Yes, the media will be trying to capture that Kodak moment at 11:30 am ET when both leaders finally put phase one of the U.S./China trade deal to bed. Though there is plenty of hard work ahead (phase two) and, certainly, other trading partners will suffer from this new effort, just getting to this stage is a huge relief, broadly speaking.” Jennifer Lee, senior economist, Bank of Montreal

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“While on the one hand, the risk of further escalations has now gone and is to be welcomed, tariffs are still higher now than they were two years ago, and in the short term are unlikely to come down, meaning that as far as China and the U.S are concerned, this is as good as it gets, until well into 2021. This realization on the part of U.S. investors, that any further progress on trade was unlikely until well into next year, sent U.S. markets into retreat after another day of record highs, to close more or less flat on the day [Tuesday].” Michael Hewson, chief analyst, CMC Markets

“This is a fairly one-sided result for the U.S. administration and hence is a clear sign of the extent of the slowdown in the Chinese economy. [The U.S. dollar versus the yuan] is now likely to stay in a range until the Chinese economy rebounds next year. The deal is good till the U.S. election. Beyond this actual delivery likely depends on whether we have a Democratic or Republican administration. All of the deal rests on Chinese goodwill, which is likely to come in short supply once its economy rebounds. We expect the impact on the equity markets to be very muted as it digests the deal.” Sébastien Galy, senior macro strategist, Nordea Asset Management

There have been conflicting reports recently, but it seems quite likely that the full details of the deal, particularly China’s commitments on additional agricultural product purchases, will not be made public. Reports have suggested that the US$200-billion of total additional purchases that China will commit to would be spread fairly evenly across manufacturing, energy, agriculture and services. The 86-page document also contains guarantees on technology transfer policies and conditions under which the U.S. could re-impose tariffs that were dropped as part of the deal, though again little is known on the detail.” Adam Cole, chief currency strategist, Royal Bank of Canada

“The U.S. and China are expected to sign an interim trade deal today, and it appears that traders are content to sit to on the fence until the agreement is made official. The finer details of the deal are expected to be made public later, so in the meantime, volatility is expected to be low. A huge amount of good news has already been factored into the equity markets, so it is understandable that things are quiet ahead of the agreement being made official. It was reported yesterday the tariffs will remain in place for at least 10 months after the signing of the deal, so U.S.-China relations might settle down.” David Madden, analyst, CMC Markets

Markets at a glance

Read more

Home sales climb from year ago

Home sales across Canada dipped in December from November, but surged from the low levels of a year earlier, fresh statistics show.

Sales slipped 0.9 per cent on a monthly basis, but climbed 22.7 per cent on an annual basis, the Canadian Real Estate Association said today.

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Average prices rose 9.6 per cent from a year earlier, while the MLS home price index gained 3.4 per cent.

The monthly slide in sales ended “a streak of monthly gains that began last March,” the real estate group said.

“Activity is currently about 18 per cent above the six-year low reached in February, 2019, but ends the year about 7 per cent below the heights recorded in 2016 and 2017.”

Read more

Ticker

Bank of America profit slips

From Reuters: Bank of America Corp. posted a 4.1-per-cent fall in quarterly profit, as lower interest rates crimped the second-biggest U.S. lender’s ability to earn more from loans. Net income applicable to common shareholders fell to US$6.75-billion, or 74 US cents per share, in the fourth quarter ended Dec. 31 from US$7.04-billion, or 70 US cents, a year earlier.

German growth slows

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From Reuters: The German economy grew by 0.6 per cent in 2019, the weakest expansion rate since 2013 and a marked cooling from the previous year, as export-dependent manufacturers in Europe’s largest economy face increased headwinds from trade disputes and less foreign demand.

U.K. inflation slows

From The Associated Press: Inflation in Britain has fallen to its lowest level since November 2016, official figures showed, heightening expectations that the Bank of England will cut interest rates this month. The Office for National Statistics said consumer prices rose by 1.3 per cent in the year to December, down from 1.5 per cent the previous month.

BoJ tweaks outlook

From Reuters: The Bank of Japan cut its economic assessment for three of the country’s nine regions but remained cautiously optimistic that domestic demand could help offset a slowdown in exports and manufacturing. All of the regions kept their assessment on private consumption unchanged, despite fluctuations in spending patterns around the Oct. 1 sales tax hike, likely backing the BoJ’s rosy view that solid domestic demand will offset external headwinds. The BoJ’s optimism is likely to allow it to justify keeping monetary policy steady for the time being.

Also ...

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Required Reading

Nightmares

Hydro-Québec’s export dreams have turned into nightmares, columnist Konrad Yakabuski argues.

TC to ramp up

TC Energy Corp. plans to ramp up activity on Keystone XL pipeline construction next month and commence building the two-kilometre-long U.S.-Canada border segment in April. Emma Graney reports.

BlackRock’s green strategy

BlackRock’s green investing strategy is not a moral awakening, columnist Ian McGugan writes.

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