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Business Briefing Markets should shift their outlook from ‘hope’ to ‘fear’

Briefing highlights

  • JPMorgan’s advice to investors
  • Manufacturing readings mixed
  • Stocks, loonie, oil at a glance
  • What to watch for on Brexit
  • What to expect in jobs reports
  • Ticker: The latest news
  • Required Reading: Pot shops and pump prices

How long can hope outlast fear?

— JPMorgan Chase

Investors should be changing their outlook from hope to fear as the second quarter kicks off, JPMorgan Chase strategists advise.

Their comments come in an uncertain global economic climate and amid concerns over what the recent inversion of the U.S. yield curve could mean, among other things.

They also come in a week when we'll get more indications of where things stand.

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The “dominant global macro narrative” in the first three months of the year was one of investors pricing in a rebound in global economic growth, global foreign exchange strategist Daniel Hui and his colleagues at JPMorgan, Paul Meggyesi and Patrick Locke, said in their look at currency markets.

That was driven by the outlook for central bank policy, the easing of trade tensions in the U.S., and Chinese authorities moving to juice their economy.

That should change as a new quarter dawns, though.

"Given recent developments, the start of 2Q is shaping up to look like markets will need to shift away from pricing hope to pricing in fears that the global growth downturn is accelerating, not rebounding, and that central bank dovish shifts are failing to catch up to deteriorating momentum, rather than getting ahead of tail risks," Mr. Hui, Mr. Meggyesi and Mr. Locke said.

They cited, as reasons, the most recent measures of global manufacturing, with purchasing managers indexes tumbling considerably, the "current run of negative activity surprises," now the second-longest in 10 years, and volatility in emerging markets.

And, of course, how markets are pricing the outlook for major central banks, such as the Federal Reserve, and their benchmark rates, which are on hold until further notice.

We’ll see more on the manufacturing front today as purchasing managers indexes are released around the world. It’s not likely to be the prettiest of pictures.

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Already, China’s latest numbers are boosting sentiment, with the PMI rising above the 50 mark that separates contraction from expansion.

“Both the Caixin and official measures of manufacturing PMI rebounded back above the 50 level in March, however some caution should be exercised as the recovery could also have been driven by a post-Chinese New Year catch-up, after hitting three-year lows in February,” said CMC Markets chief analyst Michael Hewson.

“Furthermore, both readings, while positive, were still pretty feeble, in edging just above stagnation levels.”

Elsewhere, he noted, there was “no respite” for Germany, France or Italy, whose PMIs all declined, and are below the 50 mark, with Germany at its worst showing since mid-2012.

“This is quite a worrying trend for a region where the only real expansion has come about as a result from a central bank that has only just stopped its asset purchase program, and is set to launch a new loan program in September,” Mr. Hewson said.

The U.S., however, turned in a stronger performance as the Institute for Supply Management’s PMI increased to 55.3 in March from February’s 54.2.

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That, said CIBC’s Mr. Shenfeld, is a reading “consistent with reasonable factory sector growth.”

The big scary talk of late was all about the inversion of the U.S. bond yield curve, and what that means for the economic outlook. Some say that signals a recession.

As The Globe and Mail's Ian McGugan writes, the yield on three-month U.S. government bonds moved last month above that of the 10-year. In Canada last week, the yield on 10-year government paper stood just a shade above the two-year.

"Many see the inversion of the U.S. yield curve, with mid-term rates below shorter yields, as a grim reaper for this expansion," said CIBC World Markets chief economist Avery Shenfeld.

"But is it?"

High rates can spark recessions, of course, Mr. Shenfeld said, but not an inverted curve.

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"That said, the shape of the curve does tell us something: Markets see enough signs of a slowdown to bet that the next moves by the Fed and the Bank of Canada will be rate cuts, not hikes," Mr. Shenfeld said.

"Anyone buying a mid-term bond at a yield below a three-month bill is doing so under the assumption that three-month rates are set to fall."

That might be the case in the U.S., he added, but the Bank of Canada probably wouldn't match just one rate cut by the U.S. central bank. More than one cut by the Fed, though, would be a different matter.

We'll see what all this means for stock markets, which rebounded in the first quarter after taking a drubbing in the fourth.

"Instead of being a grim reaper, the yield curve might instead be telling us that it expects central banks to ease policy enough to keep the [economic expansionary] cycle going," Mr. Shenfeld said.

"That fits better with what investors are saying about equities in not running for the exits. U.S. rate cuts that extend the cycle, rather than mark the end of it, might be just what equities need."

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Key, too, will be what first-quarter corporate results suggest.

“At the overall market level, our global strategists have been calling for equities to sideways consolidate as we head into the Q1 reporting season,” said JPMorgan’s John Normand, head of cross-asset fundamental strategy.

"They note that many tactical indicators have started to appear toppy, and the earnings results are likely to be mixed, at best," he added.

"Having said that, they do not think that any potential weakness is likely to be material, or prolonged, as positioning is still light. They advise to use dips as an opportunity to add further, as they expect the rebound to gain fundamental traction in [the second half], with both macro and earnings trending higher."

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Markets at a glance

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What to watch for this week

The biggies will be the Canadian and U.S. jobs reports. And, as always, whatever develops on the Brexit front.

“The days of the U.K. remaining in the EU seem to be numbered, given the deadlock in Parliament,” said Bank of Montreal senior economist Jennifer Lee, referring to the string of votes Prime Minister Theresa May has lost on her Brexit divorce deal with the rest of the European Union.

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"But some offer another option that should be given more consideration," she added.

"Revoke Article 50, hold a general election (who thinks they can do a better job at negotiating?), then propose a second referendum," she added.

Invoking Article 50 of the EU Treaty triggered the Brexit process after the 2016 referendum. The results of a second such vote probably wouldn't differ all that much, Ms. Lee said.

"But, at least lawmakers will have the comfort of knowing that the votes were cast by citizens armed with a much better understanding of what Brexit means," she added.

"There will be less finger-pointing and blame, as it would be clearer what people want and lawmakers would act on their behalf."

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Here's what else to watch for:

TUESDAY

The U.S. durable goods orders report is expected to show a drop of 1.7 per cent in February from January.

WEDNESDAY

American and Chinese trade negotiators go back at it, this time in Washington.

"China’s stock markets rose on Friday on optimism about progress in the U.S.-China trade talks," said Chang Liu of Capital Economics.

"While no official statement has been released following the negotiations in Beijing [last] week, the U.S. Treasury Secretary on Friday described the latest round of talks as having been 'constructive,'" he added.

"Trade will remain the focus [this] week, with China’s Vice Premier Liu He scheduled to arrive in Washington on Wednesday to continue negotiations."

Also on tap are quarterly results from CannaRoyalty Corp., Hudson's Bay Co., Reitmans Canada Ltd. and Roots Corp.

THURSDAY

Among the corporate reports are fourth-quarter results from Constellation Brands Inc.

The alcohol and pot company, remember, has already warned of a hit to annual profit, partly because it bought into Canada's Canopy Growth in a high-profile investment in cannabis.

"New CEO Bill Newlands may well outline plans to cut some of the lower end of its wine portfolio given recent weakness in this area, and instead focus on the higher value and higher margin part of the business as it looks to monetize its recent venture into the marijuana business."

FRIDAY

Watch stock markets and the Canadian dollar as the U.S. and Canada release their March jobs reports.

It's always near impossible to forecast the monthly Canadian report, but economists expect it to show anywhere from a loss of 10,000 jobs to a gain of 20,000, with unemployment holding at 5.8 per cent.

“Employment readings according to the labour force survey have been on fire lately, so it’s no surprise that the consensus [among economists] is looking for something to give this time around,” said CIBC senior economist Royce Mendes, who projects a slim increase of 2,000 jobs.

"While Canadian payroll data confirmed that job creation started the year on a good note, most other measures of the economy have been more muted."

Economists generally expect the U.S. report, in turn, to show job creation to the tune of 175,000, with unemployment at 3.8 per cent.

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Ticker

Fight for control

The largest shareholder in Knight Therapeutics Inc. is launching a proxy fight today for control of the $1-billion drug company, following a year-long activist campaign against Canadian pharmaceutical entrepreneur Jonathan Goodman, Andrew Willis reports.

Retail sales slip

U.S. retail sales slipped in February, by 0.2 per cent, but January’s numbers were revised up to show a gain of 0.7 per cent. Said BMO senior economist Sal Guatieri: “We still see supportive household fundamentals (income, low debt burden, elevated confidence) driving the consumer forward and keeping the expansion alive, albeit at a much slower rate than last year given less support from tax cuts. Sustained job and income gains will be crucial to keep the consumer’s engine running, though.”

Kellogg sells Keebler

Kellogg Co. is selling some of its businesses, including Keebler, to Ferrero Group for US$1.3-billion.

Lira weakens

Turkey’s lira depreciated again after President Tayyip Erdogan’s party lost out in local elections in Ankara and, probably, Istanbul, Reuters reports.

Required Reading

Ontario pot shops open

Ontario will see its first handful of legal cannabis shops open today. Many more will remain closed, racking up big rent bills for aspiring retailers still hoping to eventually access the country’s largest consumer market. There is no telling how long they may have to wait, Jameson Berkeson writes.

Watch pump prices

Canadians in four provinces should expect to see a spike in pump prices today, the most visible sign of the federal government’s carbon tax that is meant to spur reductions in greenhouse gas emissions but at the same time has sparked a political storm. The Liberal government’s climate-change levy takes effect in Saskatchewan, Manitoba, Ontario and New Brunswick, four jurisdictions that do not have provincial carbon pricing plans. Shawn McCarthy reports.

Ten reasons to love dividend investing

People occasionally accuse The Globe and Mail’s John Heinzl of being obsessed with dividends. They’re right. Dividend investing isn’t the only strategy that works, but our investing columnist believes it is one of the simplest and most effective ways for small investors to build wealth. Read his 10 reasons why.

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