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Briefing highlights

  • Investors dump federal bonds
  • GM halts Oshawa production because of U.S. strike
  • Stocks, loonie, oil at a glance
  • Retail sales rise, but on price changes
  • Cannabis sales top $100-million for first time
  • U.S. manufacturing appears in recession: Bullard
  • Required Reading

Investors dump federal bonds

Investors are shying away from Canada as global uncertainty rages.

Foreigners divested Canadian securities on a net basis in July for the second month in a row, to the tune of $1.2-billion, according to the latest report.

Notable was what National Bank Financial referred to as the ongoing “dumping” of Canadian government bonds largely in the secondary market.

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Source: National Bank Financial

And that sell-off by foreign investors is only the tip of the iceberg.

“Indeed, the $10-billion net divestment of outstanding issues in July is the worst on record, and the [year-to-date] tally is the second-worst in a decade,” Sandra Kagango, associate in National Bank Financial’s fixed income, currencies and commodities group, said in a report on Statistics Canada’s findings this week.

These monthly reports can be “somewhat choppy,” Ms. Kagango said later, which is why it may be better to look at trends or year-to-date numbers.

Benjamin Reitzes, Bank of Montreal’s Canadian rates and macro strategist, also cited what he called waning interest among foreign investors after “nearly a decade of strong interest.”

Source: Bank of Montreal

“There’s been net selling in government of Canada and government agency bonds over the past year,” Mr. Reitzes said.

“Interest in provincial debt has softened, as well, while buying of corporates has slowed sharply, though both are still seeing net buying (for now).”

As for why we’re seeing this “reported dumping” of Canadian government bonds in the secondary market, Ms. Kagango cited a few reasons.

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“The generally elevated level of global policy uncertainty in recent months has led investors to turn to more safe and/or liquid assets, holding back the C$ relative to its fundamental value,” Ms. Kagango said.

“Simply put, international investors don’t necessarily seek to hide in C$ assets when volatility is elevated,” she added.

“Volatility may not have been higher in July (vs. June, for instance), but this is a broader theme we’ve been dealing with off and on for some time.”

Added to that is the fact that U.S. Treasuries have outperformed Canadian government bonds.

“Finally, while the future behaviour of international capital flows is difficult to determine, Canada still has a non-trivial current account deficit in need of financing,” Ms. Kagango said.

“In other words, we still need to import a lot of capital in one form or another,” she added.

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“For many years, we’ve pulling in foreign portfolio dollars to finance this shortfall. Absent a notable pick-up in inbound foreign direct investment, Canada will need to remain attractive to international investors. Which could mean maintaining relatively higher yields to reverse the recent exodus of foreign portfolio investment or a persistently cheaper Canadian dollar to bolster exports.”

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GM halts Oshawa production

Car and truck production at General Motors Co.’s assembly plant in Oshawa, Ont., has halted and 2,000 hourly employees are laid off temporarily as the strike by 49,000 GM workers in the U.S. enters its fifth day, The Globe and Mail’s Eric Atkins reports.

The United Auto Workers’ strike began on Monday, stopping operations at more than 50 plants and warehouses in the United States, and halting the flow of parts and vehicles on which the North American auto industry depends.

“Vehicle operations in Oshawa have stopped as a result of the UAW strike,” said Jennifer Wright, a spokeswoman for GM Canada.

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Markets at a glance

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Retail sales rise, cannabis sales surge

Canadian retail sales climbed 0.4 per cent in July, rising for the first month in three, but that increase was largely the result of price changes.

If you strip out those price changes, Statistics Canada said today, volumes were basically flat.

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Still, six of the 11 sectors tracked by the agency posted stronger sales, accounting for 71 per cent of all shopping.

Auto and auto parts dealers scored their biggest increase since February, with sales up 1.5 per cent.

“July isn't shaping up to be a great month for the Canadian economy, with a modestly disappointing retail report joining earlier data on manufacturing in painting a less bright picture for the start of the third quarter,” said CIBC World Markets chief economist Avery Shenfeld, referring to the flat volumes.

“This extends a trend of lacklustre results for retailers, since volumes have seen no growth over the past 12 months,” he added.

“That leaves the Canadian economy more dependent on trade and capital spending, with both seen as vulnerable to a global slowdown. Downside risks to Q3 and second half growth are why we see a Bank of Canada rate cut as likely by December.”

And here’s a nifty tidbit from Statistics Canada: Sales at cannabis stores surged 14.3 per cent to top $100-million for the first time.

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“Gains at cannabis stores were widespread, and across all provinces, with double-digit growth reported in eight provinces,” Statistics Canada said.

“Throughout July, there were over 300 cannabis stores in operation across Canada, a number that has more than doubled since legalization in October, 2018.”

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Ticker

U.S. manufacturing appears in recession: Bullard

From Reuters: The U.S. manufacturing sector “already appears in recession” and overall economic growth is expected to slow “in the near horizon,” St. Louis Federal Reserve Bank President James Bullard said on Friday, explaining why he dissented at a recent Fed meeting and wanted a deeper, half percentage point rate cut.

Choice selling 30 properties

From The Canadian Press: Choice Properties Real Estate Investment Trust has signed a deal to sell 30 properties in mostly smaller communities across Canada for $426-million. The portfolio includes 27 stand-alone retail properties and three distribution centres.

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China cuts rate

From Reuters: China cut its new one-year benchmark lending rate for the second month in a row, a step by the central bank to try to wrestle down borrowing costs and support the economy as the Sino-U.S. trade war drags on. But the move was far more cautious than easing by the U.S. Federal Reserve and the European Central Bank over the past week, suggesting Chinese policy makers remain reluctant to join a global stimulus wave due to worries about mounting debt.

RBS appoints new CEO

From Reuters: Royal Bank of Scotland has appointed Alison Rose as its new chief executive, becoming the first major British lender to appoint a woman to its top job. Rose, who was widely tipped to get the role, will succeed outgoing CEO Ross McEwan on Nov. 1. He is due to join National Australia Bank as their next chief executive.

Oil trader loses millions

From Reuters: Mitsubishi Corp., Japan’s biggest trading house by revenue, said a trader at its Singapore-based unit has lost US$320-million through unauthorized transactions in crude oil derivatives, and the matter has been reported to the police. The announcement is a blow for the Japanese trading company, which invests in everything from salmon to natural gas and trades many commodities around the world.

Thomas Cook seeks funds

From Reuters: Britain’s Thomas Cook urgently needs US$251-million to satisfy its lenders or one of the world’s oldest holiday companies could collapse in the next few days, potentially leaving hundreds of thousands of holidaymakers stranded. It agreed to key terms of a recapitalization plan last month with a Chinese shareholder and the firm’s banks, but released a statement Friday saying a last-minute demand for additional funding puts that deal at risk.

Managers prepare for long trade war

From Reuters: A profit warning and muted outlook from package delivery company FedEx Corp is prompting some high-profile fund managers to prepare for the trade war between the United States and China to last longer than many had originally anticipated.

India cuts corporate taxes

From Reuters: India’s government slashed corporate taxes, giving a surprise US$20.5-billion break aimed at reviving private investment and lifting growth from a six-year low that has caused job losses and fueled discontent in the countryside.

Bracing for higher insurance costs

From Reuters: The aviation industry is bracing for double-digit insurance premium hikes for the first time in about 15 years, as insurers wrestle with higher costs from aircraft groundings, including the grounding of Boeing Co.’s 737 MAX jets following two fatal crashes, insurance executives said.

Japanese inflation slows

From Reuters: Japan’s core consumer inflation slowed to a new two-year low in August due to lower oil costs and feeble economic growth, adding to the central bank’s growing challenges in achieving its elusive 2-per-cent price target.

Required Reading

Supplies pinched

Eastern Canadian refiners are scrambling to secure crude supplies as the attack on Saud energy infrastructure reverberates through the global oil market and has already led to higher gasoline prices in many parts of Canada. Brent Jang and Jeffrey Jones report.

Indebted suburban voters

Columnist David Parkinson looks at why politicians are targeting indebted suburban voters this election

Calm down

Investors have no need to panic when it comes to this week’s money market madness, Ian McGugan writes.

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