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Briefing highlights

  • Ontario prepares fiscal update
  • Quebec a star among provinces
  • Stocks, Canadian dollar, oil at a glance
  • CPPIB in big renewable energy deal
  • Watch McDonald’s stock
  • Aphria boosts production capacity
  • Under Armour cuts outlook
  • Bausch raises its outlook
  • Apple fights California housing crisis
  • Stocks, earnings, Aramco: What analysts are saying
  • Required Reading

Fiscal updates

Yes, we all know what conservative means, but Ontario appears to be in better shape than its Conservative government would have had you believe, at least in the earlier going.

The question is whether the Tories will lighten up when they present their fiscal update on Wednesday.

Here's what Bank of Montreal senior economist Robert Kavcic said about the fiscal side of things, in a report on Ontario's announcement and Quebec's update a day later:

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"Ontario will continue to garner most attention given the significant policy shift (from spending to restraint) currently under way. In this year’s budget, the province projected a $10.3-billion deficit (1.2 per cent of GDP). But, since that time, the prior year [fiscal year 2018-19] deficit was reported at a much smaller-than-expected $7.4-billion, down from $11.7-billion assumed in the budget, and the new government’s initial $14.5-billion guidance (which, for the record, we always believed to be exaggerated)."

And on the economic front:

"The Ontario economy has tracked above expectations, with real GDP growth for 2019 and 2020 currently expected at roughly [0.2 to 0.3 of a percentage point] above the province's budget assumption. As such, we continue to believe that the self-inflicted bearish sentiment toward Ontario is overdone."

And, thus, Mr. Kavcic awaits Wednesday’s update to see if we’ll get something, now or maybe later instead.

"The question now is whether the province will let some better momentum ease the spending restraint, or if they will remain staunch ahead of potential future tax relief?"

Then there’s Quebec, which isn’t an issue because it’s doing so well.

“Quebec continues to run surpluses to the tune of an expected $5.6-billion in [fiscal year 2018-19] and $2.5-billion this fiscal year,” Mr. Kavcic said.

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“The economy continues to outperform the province’s almost skeptical expectations, with demographic flows, the job market and housing all persistently strong,” he added.

“This year’s budget continued to cut taxes and uphold what is arguably the most positive fiscal story in Canada – we don’t see that momentum changing in the near future.”

One of the questions hanging out there is whether the minority Liberal government in Ottawa wants to give us stuff that some provinces then counteract.

Benjamin Reitzes, BMO’s Canadian rates and macro strategist and Mr. Kavcic’s colleague, pointed out that Bank of Canada Governor Stephen Poloz puts the stimulus value of $5-billion in government largesse at the same as a one-quarter-of-a-percentage-point cut in interest rates.

“While we’re likely still a few weeks away from a government, more spending is fully expected, with PM [Justin] Trudeau focused on a personal tax cut (worth about $3-billion in year one),” Mr. Reitzes said.

Many observers believe the federal Liberals will turn to the New Democratic Party as their ally to keep the government afloat. The Liberals and NDP overlap on some fronts, so that makes sense.

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“As a general rule, minority governments tend to be fiscally expansive,” RBC Global Asset Management chief economist Eric Lascelles said.

"After all, they must attempt to deliver the fiscal priorities of multiple parties," he added in a report.

"And to the extent compromise is needed, parties are usually more than happy to abandon such promises as tax hikes and spending cuts, sticking instead to more popular fare such as tax cuts and spending increases."

Mr. Trudeau’s first government was “already tilted further to the left than the historical norm,” and making nice with the NDP could give that an added push.

Thus, Canada could see the economy "run a little bit hotter" in the shorter term before easing in the medium.

As with some other economists, Mr. Lascelles suggested Ottawa should be running a surplus given that unemployment is so low.

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"This is unlikely to happen given the Liberal and NDP campaign platforms," Mr. Lascelles said.

"As a result, should a recession strike, the deficit could grow quite large indeed. Fortunately, the cost of borrowing is stunningly low, and so Canada’s federal debt should remain manageable for the foreseeable future."

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Markets at a glance

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CPPIB in renewable energy deal

Canada Pension Plan Investment Board is putting billions into the takeover of a renewable energy company.

CPPIB said it struck a deal to buy Pattern Energy Group, which has almost 30 projects on the go in the U.S., Canada and Japan, for US$26.75 a share in cash. Reuters valued the deal at US$2.63-billion excluding debt.

CPPIB will then put its new holding together with private investment firm Riverstone Holdings LLC’s Pattern Development.

The proposed per-share offer is actually shy of where Pattern’s stock traded on Nasdaq before today’s open, but, it said, the value is almost 15 per cent above where the shares stood on Aug. 9, when “market rumours” about a potential takeover began.

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Pattern, which also trades in Toronto, took pains to explain what happened.

A special board committee “reviewed multiple bids as part of a thorough process that involved multiple parties and evaluated the transaction against the company’s standalone prospects, performance and outlook relative to historic trading multiples and yields,” chairman Alan Batkin said in a statement announcing the deal.

“Based on this review and in light of the transaction structure, the special committee unanimously determined that this transaction is in the best interest of the company’s shareholders and recommended it to the full Pattern Energy board, which also determined that this transaction is advisable and in the best interests of the company’s shareholders.”

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Watch McDonald’s stock

Keep an eye on McDonald’s Corp. stock after dramatic weekend developments that saw chief executive officer Steve Easterbrook leave the fast-food chain.

Mr. Easterbrook “separated from the company following the Board's determination that he violated company policy and demonstrated poor judgment involving a recent consensual relationship with an employee,” McDonald’s said in a statement Sunday.

He was replaced by Chris Kempczinski, who had been chief of U.S. operations.

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Aphria boosts capacity

I’ll bet old hippies never thought they’d see the day when a company would boast about double its production capacity for legal pot.

A child of the Sixties, I certainly didn’t.

Regardless, Aphria Inc. said today it now has a cultivation licence from Health Canada for a second cannabis greenhouse operation in Leamington, Ont., a facility it calls Aphria Diamond.

That means an extra 1.3 million square feet of production area, with 140,000 kg. of annual growing capacity.

When you put together everything, the company said, Aphria holds a cultivation area that tops 2.4 million square feet, with annual capacity of 255,000 kg.


Under Armour cuts outlook

From Reuters: Under Armour Inc. cut its forecast for annual revenue for a second straight time, adding to its troubles after the sportswear maker disclosed a federal probe related to its accounting practices. The company defended its accounting practices and disclosures, adding has been co-operating with investigators since 2017. The sportswear maker said it now expects revenue to grow about 2 per cent in fiscal 2019 compared with the prior forecast of a 3 to 4 per cent rise. However, fewer sales in off-price channels helped it forecast annual profit at the higher end of its prior range of about of 33 to 34 US cents a share. Net revenue fell about 1 per cent to US$1.43-billion in the third quarter ended Sept. 30. Net income rose to US$102.3-million, or 23 cents a share.

Bausch raises outlook

From The Canadian Press: Bausch Health Companies Inc. raised its profit and revenue guidance as it reported a US$49-million loss in its latest quarter. The drug company said it now expects full-year revenue in a range from US$8.475 and US$8.625-billion. Full-year adjusted earnings before interest, taxes, depreciation and amortization are expected to be in a range of US$3.50-billion and US$3.60-billion compared with earlier guidance for between $3.425-billion to $3.575-billion. The latest quarterly loss amounted to 14 US cents a share compared with a loss of US$350-million or US$1 a share in the same quarter last year.

Apple fights housing crisis

From Reuters: Apple Inc. said it would commit US$2.5-billion to easing a housing shortage that has driven up prices across California, with most of the money dedicated to funds that will be run either with or by the state government. In an interview with Reuters, chief executive officer Tim Cook said the company felt a “profound responsibility” to improve California’s housing crisis. Apple’s current headquarters - a ring of gleaming metal and glass nicknamed the “spaceship” in Cupertino, California - sits less than five miles from the suburban family home where co-founders Steve Jobs and Steve Wozniak assembled the first Apple computers in the 1970s.

Shale explorers’ shares fall

From Reuters: Shares in British shale gas explorers fell in the morning after the government announced over the weekend that it is imposing a moratorium on fracking. On Saturday the government said that the gas extraction technique risked causing too much disruption to local communities through earth tremors. Fracking, which involves extracting gas from rocks by breaking them up with water and chemicals at high pressure, is fiercely opposed by environmentalists who say it is at odds with Britain’s commitment to reach net zero carbon emissions by 2050.

Morale rebounds

From Reuters: Morale among investors in the euro zone jumped in November to its highest level since June on signs of an economic upswing in Asia and resilience in the U.S. economy, a survey showed. The Sentix research group said its investor sentiment index for the euro zone rose to -4.5 from -16.8 in October, when it hit its lowest level in more than six years.

South African bonds rally

From Reuters: South Africa’s dollar-denominated sovereign bonds jumped and yields of the local 10-year benchmark eased on Monday after Pretoria escaped a relegation to “junk” status by ratings agency Moody’s in the wake of last week’s bleak mid-term budget. Late on Friday, Moody’s left South Africa on the brink of “junk” status after it revised the outlook on the country’s last investment-grade credit rating to “negative,” piling pressure on President Cyril Ramaphosa to quicken the pace of reform.

What analysts are saying today

“The Bank of England meets this week, with an announcement on Thursday. Normally (i.e., before June, 2016), this would be a big deal. But the likelihood that the central bank would do anything except stay the course is low. Very low … But this time, and for the rest of time, the Monetary Policy Report will be released, replacing the Quarterly Inflation Report. (This may be Governor Carney showing his Canadian stripes.) The Monetary Policy Report, likely to be shortened to MPR, is described as the ‘next step in the evolution of’ the bank’s communications, with new thematic sections brought upfront.” Jennifer Lee, senior economist, Bank of Montreal

“For stock buyers, there is always a good excuse to jump on the back of a bull. If nothing, the rising enthusiasm regarding a U.S.-China deal and the fear-of-missing-out something big could continue fueling the ongoing rally - even though the divergence between the equity prices and the underlying company earnings have set off alarm bells for fundamental investors.” Ipek Ozkardeskaya, senior market analyst, London Capital Group

“The recovery in oil prices was also welcome news for Saudi Aramco as it looks to push its IPO out of the door next month. There has been talk that Saudi officials are softening their expectations about a US$2-trillion valuation, with some expectations that it could come in as low as US$1.5-trillion. Even if it were to come in lower than that, it would still make Aramco the world’s most valuable company, putting it above both Apple and Microsoft, who both have US$1-trillion valuations. It is true that its ability to generate profits outweighs every other company on the planet, however its vulnerability to external attacks was thrown into sharp relief in September with the drone strikes on its plants at Abqaiq and Khurais.” Michael Hewson, chief analyst CMC Markets

“We maintain our view of having portfolios that are resilient and well diversified as the global economic outlook won’t pick up until the second half of 2020. Yet the theme of recession in the United States is overdone in the earnings outlook and a continued series of positive surprises is helping U.S. equity markets to reach new highs. This is as true for the IT-oriented Nasdaq as it is for broader equity indices, though the Dow Industrial lags somewhat as the MSCI growth breaks higher. This is helped by hopes of a phase one agreement the U.S. and Chinese administrations desperately need.” Sébastien Galy, senior macro strategist, Nordea Asset Management

“Gold prices are playing tug-of-war with investors as markets remain concerned about earnings, but more optimistic that we will see more assuaging headlines regarding trade. Despite a strong outlook for U.S. stocks, gold remains well supported on a plethora of macro risks. Too many global political risks, such as Hong Kong protests or Argentina’s inevitable default, exist and even if trade becomes a nonissue, investors will want to have gold as part of their portfolio.” Edward Moya, senior market analyst, Oanda

“When I glanced at my Bloomberg terminal this morning, Sterling was the softest of the major currencies (marginally lower against the dollar) and the South African rand was the strongest (by far). The rand’s rally is relief-based, after Moody’s lowered the outlook to Baa3 -ive, but resisted the temptation to join S&P and Fitch with a sub-investment grade rating. On days with a bearish mindset, markets are capable of thumbing their collective nose at rating agencies, but this is not one of these days. Solid U.S. data and trade optimism have conspired to spread happiness to all corners of the world.” Kit Juckes, global fixed income strategist, Société Générale

Read more

Required Reading

Magro’s mission

Meet Chuck Magro, co-chair of a Business Council of Canada task force and the public face of a new initiative by Corporate Canada to prod post-election Ottawa to get serious about revving up the economy. Barry McKenna interviews the Nutrien CEO.

RBC capital markets chief has work cut out for him

Derek Neldner took the reins as group head of RBC Dominion Securities Inc. on Friday, and he’s got his work cut out for him, Rita Trichur writes.

Saskatchewan’s consumer debt crisis

As the trade war stings, more homeowners are falling behind on payments, Matt Lundy reports.

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