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Briefing highlights

  • Rosenberg, others on the markets
  • Stocks, Canadian dollar, oil at a glance
  • Lowe’s closing several Canadian stores
  • Lowe’s also restructures Canadian operations
  • Inflation at 1.9 per cent, won’t move BoC
  • Target raises outlook
  • China lowers a key rate
  • What analysts are saying today
  • Alibaba looks at $11-billion valuation
  • Required Reading

‘Kool-Aid’

David Rosenberg sees the writing on the wall for the stock market rally.

Not everyone sees it that way – some see the current rally continuing – but Mr. Rosenberg suggests things may turn.

“Enjoy it while it lasts, but think of how artificial it all really is and how to prepare yourself, at these lofty price levels, for the reversal that is as inevitable as night following day and vice versa,” the chief economist at Gluskin Sheff + Associates said.

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“The stock market surely remains on wheels and is being driven by concentrated gains in certain large cap names and a major shift in economic sentiment, with views that a ‘phase one’ trade agreement is coming our way soon,” he added in a report to clients.

Mr. Rosenberg, who will be leaving Gluskin Sheff soon to start his own firm, was referring to market hopes that the U.S. and China are closing in on the first stage of a trade deal, which would defuse their heated tariff war. Markets, of course, have moved up and down on related comments.

Indeed, President Donald Trump’s latest warning that he could boost tariffs even more, in the absence of a deal, is rippling through markets today.

“The announcement from the U.S. president has hit stock markets this morning as traders are gearing up for some sort of tough response from the Chinese government,” said CMC Markets analyst David Madden.

“Beijing have a track record of standing up to Trump so the trading relationship is likely to be strained in the near-term.”

“Never before has the prospect of accelerated Chinese buying of U.S. soybeans elicited such a dramatic response across the asset classes,” Mr. Rosenberg said, noting the Dow Jones Industrial Average topped 28,000 on Friday.

“But there is no doubt that investors are now back drinking vast amounts of Kool-Aid,” he added.

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“In barely more than a month, we have seen portfolio managers move from their highest cash levels and recession concerns in a decade to downright exuberance. The just-released [Bank of America Merrill Lynch] survey of institutional investors showed the biggest improvement in economic growth expectations in the year ahead since the poll began in 1994.”

Simona Gambarini, markets economist at Capital Economics in London, isn’t as downbeat as Mr. Rosenberg. But she doesn’t see a phase one trade deal driving up the markets.

“Optimism about trade has been a factor behind the rally in global equities in the past month,” she said.

“But with a ‘mini-deal’ now largely discounted in the markets, and economic growth unlikely to do better than stagnate over the next couple of years, we suspect that any further upside for stock prices will be limited.”

Indeed, “the upshot is that we expect global equities to make little to no headway between now and end-2021,” Ms. Gambarini said.

Citigroup strategists have a different view, noting that global stocks have climbed 20 per cent so far this year despite outflows of US$230-billion, according to research firm EPFR.

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“This has happened in only two other years (2012 and 2016),” they said.

And in both cases, stocks climbed by about 20 per cent more when outflows turn to inflows, they said.

Bipan Rai, North America head of foreign exchange strategy at CIBC World Markets, said he believes the global economic softness is “stabilizing.”

He noted, too, that major central banks are being “extremely accommodative.”

“Speaking from a valuation standpoint, low rates equate to higher equities,” Mr. Rai said.

“Currently, the barriers to rate hikes are still too high to lead to a pronounced equity sell-off or an extension of the economic slowdown.”

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He also pointed to the Organization for Economic Co-operation and Development’s composite leading indicators (CLIs).

“The CLI series also highlights economies that are growing above or below trend,” Mr. Rai said.

“Over the past decade, the performance of the equity market has been highly correlated to a count of the major economies in this series…. Note that the series is now starting to grow – indicating that more major economies are expected to grow above trend. This should provide support for equities.”

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Markets at a glance

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Lowe’s shutters Canadian stores

Lowe’s Cos. Inc. is restructuring its Canadian operations, shutting 34 “underperforming” outlets, among other things.

It’s the second time the company has closed several of its Canadian outlets.

This came as the chain posted a small drop in sales in its third-quarter results, but a rise in profit.

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Lowe’s profit rose to US$1.05-billion, or US$1.36 a share, from US$629-million or 78 US cents a year earlier. Revenue slipped to $17.39-billion from US$17.42-billion.

The latest results included a non-cash charge of US$53-million from its third-quarter review of Canada, the company said.

“This review led to long-lived asset impairments and a change to the Canadian leadership team in the third quarter,” Lowe’s said.

“Based on the findings of the strategic review, in the fourth quarter, the company decided to take the following actions to improve future sales performance and profitability: Close 34 underperforming stores in Canada; undertake a process to simplify multiple Canadian store banners to drive efficiency and reduce operational complexity; reorganize the corporate support structure across Canada to more efficiently serve stores; and rationalize the product assortment across the simplified Canadian store banners, to present a more co-ordinated assortment to the customer.”

Tony Cioffi, the interim president of Lowe’s Canada, said in a separate statement that the company is “taking decisive action” to build the operation.

“While making decisions that impact our associates and their families is never easy, closing underperforming stores is a necessary step in our plan to ensure the long-term stability and growth of our Canadian business.”

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Inflation holds at 1.9 per cent

Annual inflation is holding at 1.9 per cent in Canada.

But if you strip out prices at the gas pump, you’re looking at 2.3 per cent.

Consumer prices rose in October at a seasonally adjusted pace of 0.3 per cent from September, which, in turn, saw a slight decline.

Gasoline prices fell 6.7 per cent last month from a year earlier, hot on the heels of a 10-per-cent annual drop in September, Statistics Canada said.

“Although global demand for oil remained low in October, there were slight price increases on a monthly basis amid temporary supply disruptions in the Middle East, and a decline in crude oil inventories in the United States,” the agency added.

The cost of fresh fruit also rose.

And after several months of rising prices of at least 2.7 per cent, the cost of cars eased off in October to an increase of 1.8 per cent.

“The lower level of growth was attributable, in part, to larger rebates compared with October 2018,” Statistics Canada said.

Notable, too, was the spike in rental costs, said Bank of Montreal chief economist Douglas Porter. They climbed 0.7 per cent in October from September, and a “hefty” 3.7 per cent from a year earlier, the latter marking the sharpest rise since 1991.

There’s little here to move the Bank of Canada.

“If there's one thing that isn't keeping governor [Stephen] Poloz up at night, it's inflation, which again came in on both the headline and core measures almost bang on the Bank of Canada's 2-per-cent target,” said CIBC World Markets senior economist Royce Mendes.

“Heading into the turn of the year, the lapping of weak gasoline prices from a year ago could see headline inflation accelerate a bit, but that shouldn't have many implications for underlying price pressures,” Mr. Mendes added.

“As a result, the Bank of Canada will be more attuned to growth indicators rather than any wiggles in inflation when determining whether a rate cut is warranted in the months to come.”

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Ticker

Target raises outlook

From Reuters: Target Corp. raised its full-year profit forecast after posting better-than-expected quarterly comparable sales, as the retailer expects a strong holiday shopping season. The company raised its full-year adjusted profit forecast to between US$6.25 and US$6.45 per share, compared with the prior range of between US$5.90 and US$6.20 per share. Sales at established Target stores rose 4.5 per cent in the third quarter ended Nov. 2, beating analysts’ average estimate of a 3.6-per-cent rise, according to IBES data from Refinitiv.

China lowers rate

From Reuters: China lowered its lending benchmark rate, as widely expected, to reduce company funding costs and shore up an economy hurt by slowing demand and U.S. trade tariffs. The cut was the second to a key Chinese rate this week and came a day after central bank governor Yi Gang said Beijing would step up credit support and lower real lending rates, as pressure on the world’s second-largest economy increases. The one-year loan prime rate, which is set by the People’s Bank of China based on quotes from a panel of banks, fell five basis points to 4.15 per cent from 4.20 per cent in October. The five-year LPR was lowered by the same margin to 4.80 per cent from 4.85 per cent.

Zambia boosts rate

From Reuters: Zambia’s central bank raised the country’s benchmark lending rate by 125 basis points to 11.5 per cent, citing rising consumer price inflation and the need to restore macroeconomic stability. “If we don’t take any action, inflation will remain outside the target range,” governor Denny Kalyalya said at a briefing in Lusaka.

Also ...

What analysts are saying today

“The catalyst for the risk aversion is renewed concerns about when and indeed whether a U.S./Chinese trade deal will be signed, after China protested at the U.S. Senate passing legislation aimed at defending human rights in Hong Kong. The less existing tariffs are rolled back, the less room there is for any further yuan appreciation (some tariff roll-back is already priced in) and the more markets worry about further tariffs being imposed the greater the fear will be that, as well as the economic damage of failure to reach a deal, we will see renewed yuan weakness.” Kit Juckes, global fixed income strategist, Société Générale

“Trade wars may soon be back on the agenda, as the U.S. passes a bill backing the protestors, and the diplomatic spat between the U.K. and China escalates - a Chinese response via tariffs may not be long in coming, threatening to revive the trade conflict between the U.S. and China as a result. This would likely turn the current weakness into equities into something more substantial, echoing the see-saw moves seen earlier in the year.” Chris Beauchamp, chief market analyst, IG

“Alibaba has set shares at around 176 [Hong Kong] dollars, making a valuation of $11-billion - the biggest so far this year. Hong Kong eased its listing rules last year, which has opened the doors to a secondary listing from Chinese tech darling Alibaba. The company has huge cash stockpiles so doesn’t need to raise the funds in Hong Kong. The advantage for Alibaba is twofold. It can diversity its shareholder base during the U.S.-China trade war and it can command a high price, in part because investors in HK are clamouring for something positive amidst the protests.” Jasper Lawler, head of research, London Capital Group

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Required Reading

CN strike leaves many reeling

A strike by 3,200 Canadian National Railway Co. train conductors and yard workers has closed Canada’s largest rail freight network, triggering fears about the impact on farmers, mining companies and other pillars of the economy, Eric Atkins writes.

Encana shareholder to vote against move

Encana Corp.’s proposed move to the U.S. is “a lousy plan” that breaches the oil company’s responsibility to realize full value for Canadian investors and should be rejected, according to one of its largest shareholders. Emma Graney reports.

Wilkins warns on debt

Bloated global debts could feed a “perfect storm” of financial risk in the event of a trade-war-induced global economic slump, making the downturn “deeper than usual and fraught with financial stresses,” Bank of Canada Senior Deputy Governor Carolyn Wilkins said. David Parkinson reports.

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