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You ain’t seen nothin' yet

B-b-b-baby, you just ain’t seen n-n-nothin' yet

— Bachman-Turner Overdrive

Briefing highlights

  • Nothin' yet, Part 1: ‘Real money investors
  • Stocks, Canadian dollar at a glance
  • Nothin' yet, Part 2: Trump vs. the Fed
  • Nothin' yet, Part 3: The next few days

Nothin' yet: Part 1

JPMorgan Chase has a warning for the markets: Further strife looms if "real money investors" throw in the towel.

“The still-elevated sensitivity of hedge funds to global equities suggests that not all types of hedge funds have capitulated yet, and is one of the reasons the equity market is still trading long,” said JPMorgan global market strategist Nikolaos Panigirtzoglou.

"However, hedge funds are not the only reason the equity market is still trading long. The equity position overhang by real money investors is another reason."

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Mr. Panigirtzoglou’s comments followed the wild market swings of the last couple of weeks, and ahead of what will be several widely watched quarterly earnings reports over the next few days. Today, stocks are up sharply.

As The Globe and Mail’s David Berman reports, Friday capped a volatile week as the S&P 500 slipped into correction territory at one point, with investors fretting over rising interest rates, China’s economy, trade battles and corporate earnings reports.

Each of the S&P 500 and Toronto's benchmark S&P/TSX Composite Index lost almost 4 per cent on the week.

"The recent breakdown looks like the most significant such turn since the 2015 trauma, and left U.S. equities down slightly on the year," said Bank of Montreal senior economist Robert Kavcic.

JPMorgan's Mr. Panigirtzoglou is watching that overhang he cited.

"Active equity mutual fund managers appear to be still overweight in equities, especially in Europe," Mr. Panigirtzoglou said.

"More importantly, the broader universe of end-investors, which encompasses both households and institutional investors such as pension funds, insurance companies, endowments and [sovereign wealth funds], still holds a big overweight in equities vs. bonds and cash on our calculations, even after incorporating [last] week's moves," he added in a report.

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"And in our opinion, this big equity overweight poses further downside for equity markets from here if negative momentum and sentiment eventually induce real money investors to capitulate also."

Which is what makes earnings reports, among other things, so important.

More than 85 per cent of the S&P 500 companies that have reported so far have topped profit estimates, though the revenue side has been less stellar.

"As much as we love to point to strong growth and earnings today, the reality is that those future profits are getting discounted at a higher rate as monetary policy normalizes," said BMO's Mr. Kavcic, referring to the Federal Reserve's interest rate hikes.

"Another factor behind the weakness is that the market is always looking six to 12 months down the road, and doing so now would almost certainly leave peak economic and earnings growth behind it."

As Mr. Kavcic noted, the "chatter" during this round of earnings reports has been more cautious, with some companies citing the effects of tariffs and others disappointing investors with their sales outlooks.

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“The overall share of S&P 500 companies beating revenue expectations has slumped to about 45 per cent over the past 30 days, down from nearly 70 per cent around the middle of the year – this suddenly looks a lot more normal,” Mr. Kavcic said.

"All told, with the market looking ahead at an environment where fiscal stimulus fades, interest rates are no longer stimulative, price and wage pressures are stronger and the earnings backdrop is ‘less good,' it’s understandable why equities are now consolidating big 2016-2017 gains."

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Markets at a glance

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Nothin' yet: Part 2

Photo illustration

Well, just one, really. But it's the big one.

President Donald Trump has been complaining loudly about chairman Jerome Powell's Fed raising rates.

Well, the Fed won't stop, nor will Mr. Trump.

As BMO’s Mr. Kavcic put it, “President Trump is still long, as shown by his agitation about rising rates."

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“The president took a few more jabs at the Fed [last] week, saying that chair Powell ‘almost looks like he’s happy raising interest rates,’ and complaining that ‘every time we do something great, he raises the interest rates,’” he added.

"Well, a funny thing tends to happen when you pour fiscal stimulus and big budget deficits on the economy, late in the cycle when the labour market is tight and inflation pressures are already bubbling - it raises the interest rates."

Of course, as JPMorgan’s John Normand noted, among the fears of investors is that “the Fed is committing its habitual policy mistake by overtightening.”

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Nothin' yet: Part 3

These promise to be an interesting few days for markets and the economy.

Coming off the wild swings of last week, investors will be closely watching quarterly results of some key companies and economic readings that will feed into speculation over when the Bank of Canada will raise interest rates again.

On the corporate front, big names such as Apple Inc., Facebook Inc., General Motors Co., BCE Inc., Cenovus Inc., Encana Inc., Canadian Natural Resources Ltd., Imperial Oil Ltd. and Suncor Energy Inc. will set the tone, the latter painting a picture of the energy patch.

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Where the economy's concerned, watch for some telling indicators and testimony to Ottawa committees from Bank of Canada governor Stephen Poloz and senior deputy Carolyn Wilkins.

Markets are speculating as to whether the central bank will boost its key overnight rate again in December, after last week's increase to 1.75 per cent, or wait until early next year.

Mr. Poloz, Ms. Wilkins and their colleagues were surprisingly more hawkish than expected when they raised the benchmark last Wednesday and signalled a faster pace of rate hikes.

Mr. Poloz and Ms. Wilkins will testify to the Commons finance committee Tuesday, and the Senate banking committee a day later.

Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen Poloz

Chris Wattie/Reuters

But also on tap are Statistics Canada's look at how the economy fared in August, on Wednesday, followed later in the week by its monthly reports in trade and jobs.

"The August GDP reading will be closely watched for signs of whether or not the data-dependent central bank will be able to hike rates again in December," said Royce Mendes of CIBC World Markets.

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"A modest gain, however, won’t do the trick," he added.

"Neither will a swing back into deficit territory for the trade balance on Friday, nor an only trend-like gain in jobs released alongside those numbers. Governor Poloz and senior deputy governor Wilkins could use their testimony in front of House and Senate Committees [this] week to clarify their thinking on how much further monetary tightening is needed with the economy barely running ahead of potential growth estimates."

Economists generally expect to see that the economy stalled in August, with no growth or a gain of just 0.1 per cent.

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These are just snippets of the week ahead. What else to watch for:


"It's one of life’s little mysteries as to why Chancellor Philip Hammond would schedule a budget statement before the U.K. government has sight of what sort of agreement it is likely to get with the EU over the Irish border," said CMC Markets chief analyst Michael Hewson, referring to the troubled Brexit negotiations.

"This Gordian Knot appears to have the capacity to completely derail any agreement, which would mean any budget calculations this week could quickly become moot and outdated if there is a significant deviation from the currently expected outcome of a transition period, which is due to start in April next year," he added.

"In this context we can probably only expect to see a few tweaks with extra measures to raise taxes or cut thresholds for the better off."

Watch, too, for PrairieSky Royalty Ltd.'s quarterly earnings report.


Besides Mr. Poloz and Ms. Wilkins kicking off their two days before government committees, economists expect to see a decline in the U.S. Conference Board's October look at consumer confidence.

Also on tap is the August S&P Case-Shiller home price index reading.

And here's where earnings start to get hot and heavy: Coca-Cola Co., Mastercard Inc., Stelco Holdings Inc., T-Mobile US Inc. and WestJet Airlines Ltd.

And, given the focus on tech stocks, Facebook Inc., which, remember, is also still recovering from the Cambridge Analytica controversy.

Facebook's Mark Zuckerberg


Facebook's reputation "has become a little tarnished as concerns over user privacy have started to become more mainstream," Mr. Hewson said, citing CEO Mark Zuckerberg's appointment of a former British deputy prime minster to the position of head of global communications.

That move “certainly raised a few eyebrows, but would appear to show that Facebook want to try and get the inside track on how politics in Europe works in order to try and shape any new regulation that may be coming its way,” Mr. Hewson said.

"The shares are down over 25 per cent from their summer highs on concerns that the recent bad publicity has caused users to dial down the amount of time they spend online."


Along with the GDP report, it's Day Two for Mr. Poloz and Ms. Wilkins, who aren't the only central bankers on stage.

"The Bank of Japan will probably nudge down its growth and inflation forecasts and keep policy loose at the meeting that ends on Wednesday," Capital Economics said in a lookahead.

And a huge day for quarterly results: Air Canada, Cenovus, Cogeco Inc. and Cogeco Communications Ltd., GM, GlaxoSmithKline, Great-West Lifeco Inc., Kellogg Co., Sherritt International Corp., Suncor and TransAlta Corp.


It's dubbed Super Thursday in London, where Governor Mark Carney's Bank of England releases its rate decision, a quarterly inflation report and minutes from its last meeting.

But "at this highly uncertain time for the country, the Bank of England will not be springing any surprise," said BMO senior economist Jennifer Lee, that uncertainty related to Brexit.

“The broader economy is co-operating, but the political uncertainty is likely handcuffing businesses from pursuing stronger investment,” Ms. Lee said.

"Much like the [European Central Bank], the BoE’s statement will likely be little changed and still point to a 'gradual' and 'limited' pace of future rate hikes.

Bank of England governor Mark Carney

Fred Lum

We'll also get a sense of the state of global manufacturing with the release of purchasing managers index readings around the world.

And are you ready for the earnings? BCE, Canadian Natural Resources, DowDuPont Inc., Encana, Fairfax Financial Holdingd Ltd., Gildan Activewear Inc., MEG Energy Corp., Pengrowth Energy Corp. and Starbucks Corp.

Also reporting is SNC-Lavalin Group Inc., so watch for updates on its Saudi operations.

And the market biggie: Apple.

Not only is the tech giant holding a Wednesday iEvent – my phrase, not Apple’s – it’s also releasing quarterly results.

That event in Brooklyn is expected to see updates to Apple's iPad Pro and its Mac computers.

"Under the tagline 'there’s more in the making,' new upgrades are well overdue for the iPad, which hasn’t seen any changes since June, 2017," said CMC's Mr. Hewson.

"We’ll also get the latest Q4 earnings update with some early indications of demand for the new Watch and iPhones."

Citigroup analyst Jim Suva believes the "negativity" over Apple shares is over the top.

"We reiterate our buy rating and increased our earnings model and target price to $265 from $230."


The talk about Canada’s jobs reports is becoming downright funny.

Economists' forecasts now increasingly come with caveats over the volatility of these reports, which make some projections almost useless.

Heading into this Statistics Canada report, for example, observers project it will show October job creation of between zero and 17,000 positions, and unemployment holding at 5.9 per cent. That follow September's huge employment gains.

Note that wide range, and how CIBC's Mr. Mendes phrased his bank's projection:

"It's always difficult to forecast the monthly employment change in the labour force survey, so we’re not exactly sticking our necks out calling for a trend-like gain of 10,000 jobs."

Analysts will focus on what this report suggests about wage gains, which, Citigroup CHECK economists noted, have downshifted in two of the past three months to stand at 2.2 per cent in September.

"The BoC indicated at their October policy meeting that wage growth has been softer than would be expected in a tight labour market and that wages should pick up," they said.

"Due to strong increases in wages at the end of 2017, an increase of 0.2 per cent, month over month, in October (the average increase over the last 12 months) would imply that the year-on-year reading will fall again, to the range of 2 to 2.1 per cent."

The U.S. jobs report, at the same time, is expected to show 190,000 positions created in October, with unemployment at 3.7 per cent.

There's also the agency's monthly look at the country's trade balance, which economists expect to show a drop back into a deficit, of up to $500-million, in September. That follows August's small surplus.

"That was the first surplus since December, 2016, and it may be challenging to repeat, though there’s a chance it could for a second month," said Benjamin Reitzes, BMO's Canadaian rates and macro strategist.

"While oil prices were healthy in September, October is going to be far more challenging with [Western Canada Select] prices falling sharply," he added.

“Non-energy commodity prices were down in September? though, a fourth straight monthly drop, which will weigh on exports (and imports to a lesser extent). This is the final month of Q3, and barring some sizable negative revisions, it looks like trade is going to add meaningfully to GDP for a second straight quarter.”

The U.S. also reports its trade deficit, which observers believe widened marginally in September to almost US$53.5-billion.

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