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business briefing

Briefing highlights

  • A few stock market views
  • Markets at a glance
  • Oil prices slip
  • What to expect in debt report
  • What else to watch for this week
  • Ghosn charged for financial misconduct
  • India’s central bank chief resigns
  • Housing starts stronger than expected

You can’t handle the truth!

Jack Nicholson's character to Tom Cruise's character in 1992's A Few Good Men

Jack Nicholson in A Few Good Men

These are ugly days on global stock markets, leaving investors wondering if the seasonal strength that usually arrives this time of year will ever make an appearance.

The S&P 500 tumbled by more than 4.5 per cent last week, the Nasdaq almost 5 per cent, and the S&P/TSX Composite Index by about 2.5 per cent.

A chart pattern tracked by technical analysts and traders isn’t sending an encouraging sign. What is known as a death cross formed in the S&P 500 Friday for the first time since January 2016.

A death cross forms when an index’s near-term moving average of daily closing prices falls below its long-term moving average as both averages are declining. The 50- and 200-day moving averages are commonly used.

The S&P 500′s 50-day moving average is now 3.7 points below its declining 200-day moving average. The benchmark index is now down 10.16 per cent from its record close on Sept. 20.

Historically, the death cross has indicated a further fall for the index after the pattern emerges.

But that’s no guarantee. Here then are some of the latest views of the market’s prospects:

Luc Vallée, chief strategist, Laurentian Bank Securities

"We have been asked recently if we expect a Santa Claus end-of-year rally. We don’t. Not that it is impossible for the markets to regain some of the significant losses of recent days but we are skeptical about their ability to bounce back strongly and achieve new highs by the time 2019 arrives ... Because the selloff comes against a generally good Q3 earnings season, we believe that this might be a good entry point for equity. Depending on the probabilities one assigns to central banks making a policy mistake by raising rates too quickly and a full-fledged trade war developing over the course of 2019, the outlook on the relative value of equities versus bonds might vary greatly. Equity valuations are only attractive if the U.S.-China trade war gets resolved and reasonable only if negotiations drag on. If, on the contrary, President Trump decides to impose 25-per-cent tariffs on March 1 on all Chinese imports, and China fully retaliates soon after, equities are still unattractive at the current levels."

Bank of America Merrill Lynch research team

"The BofA Merrill Lynch research team is bearish stocks, bonds, and the U.S. dollar; bullish cash and commodities; and long on volatility. We expect to turn tactically risk-on in late spring, but to start 2019 with a bearish asset allocation of 50 per cent stocks, 25 per cent bonds and 25 per cent cash ... Earnings growth also is likely to slow in the U.S., though the near-term outlook remains somewhat positive. The [S&P 500] is expected to peak at or slightly above 3,000 before settling in at a year-end target of 2,900 ... Our U.S. equity strategists are overweight health care, technology, utilities, financials and industrials, and underweight consumer discretionary, communication services and real estate."

Brian Belski, chief investment strategist, BMO

“Based on TSX valuations and our client interactions, the overwhelmingly negative mantra, emotion, and sentiment that have smothered Canadian stock market performance throughout 2018 remain firmly in place. Investors do not really believe that the broader TSX is actually displaying improving, if not outright strong, fundamental metrics in terms of earnings growth, valuation, and operating performance. Instead, it seems that most Canadian-centric investors we speak with are resigned to wait for the perfect ‘trigger’ that will represent the buy signal ... We believe the steep discount of Canadian equities provides investors with an attractive entry point given our broadly bullish outlook. Our models indicate that the S&P/TSX index will achieve a year-end 2019 index target of 18,000 on earnings per share of $1,100. This represents an 18.5-per-cent gain from the November close.”

Marko Kolanovic, global head of quantitative and derivatives strategy, and Bram Kaplan, JPMorgan Chase

"We base our market outlook on the view that the business cycle will not end in 2019 ... The most recent (Q3) U.S. earnings season demonstrated the highest [earnings per share] growth, and second highest revenue growth, since 2010. Another reason why we don’t think the cycle end is close is because we think fiscal measures will supplement or replace monetary policies, not just in the U.S. but around the world ... For these reasons, we are still overweight equities and underweight bonds. For 2019, we forecast continued EPS growth at a rate of ~8 per cent and a price target of 3,100 on the S&P 500. Positive GDP and earnings are “reality,” which is currently starkly disconnected from equity sentiment, valuation, and positioning."

Oliver Jones, markets economist, Capital Economics

“We think that [last] week’s turbulence provides a reasonable guide to the trends to watch for in markets next year. In particular, while both the S&P 500 and U.S. Treasury yields have started to drop a little sooner than we had previously anticipated, we still suspect that both have much further to fall in 2019 ... Markets are forward-looking, and the broad-based nature of the decline in the S&P 500, as well as the flattening of the Treasury yield curve, point to worries about the prospects for the economy, which we think will get worse in 2019 as growth does indeed falter ... . On top of that, signs that growth in the rest of the world is already looking a little shaky can’t have helped. In our view, it is likely to weaken further in many countries next year, most notably in China ... Taking that all into account, we think that the U.S. stock market will fall further next year, perhaps to about 2,500, from closer to 2,700 now.”

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Markets at a glance

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Oil prices slip

OPEC+ is alive and well

Joan Pinto, CIBC

Oil prices are slipping today, kicking off a new week after an eventful past several days.

To recap, Alberta Premier Rachel Notley ordered a production cut of 325,000 barrels a day among provincial producers, starting next year. That played out over several days, boosting Western Canadian prices, with OPEC and its oil allies capping last week with a supply cut of 1.2 million barrels a day.

Will the decision by the cartel and its allies, a group known as OPEC+, work?

“We had suggested a cut of 1.5 million barrels per day was necessary,” said Joan Pinto, associate, energy specialist at CIBC World Markets.

“If U.S. production growth stays on the same trajectory as flagged by the agencies given their ongoing de-bottlenecking and if demand falters into extended trade war uncertainty, [Friday’s] 1.2 million barrels per day of a cut may actually not prove sufficient to get oil prices to soar, as has been the experience in Canada, but inch higher.”

As for the sector, added Toronto-Dominion Bank senior economist Fotios Raptis, “the woes of Canadian oil producers are now widely known, and this agreement, together with Albertan production cuts announced earlier [last] week, should alleviate some pressure on industry margins.”

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What to watch for this week

We owe a lot, and we're saving less than we thought.

So Friday's report on household debt will be telling.

Canadians are carrying a hefty debt burden, measured by the ratio of household credit to disposable income. That stood at 169.1 per cent in the second quarter, which means we owe $1.69 for each dollar we have to spend.

Credit growth, however, has been slowing amid new mortgage-qualification rules and rising interest rates. At the same time, though, income gains have lagged, which also factors into this Statistics Canada report for the third quarter.

BMO’s Benjamin Reitzes believes the key measure “was likely flat to slightly lower in Q3, as slowing debt growth was offset by softening income gains.”

That would be a good sign, welcomed by policy makers who have worked hard to head off a debt bubble.

"Note that debt ratios have risen in nearly every Q3 on record (except 1990), so a flat to down reading would be a good result," said Mr. Reitzes, BMO's Canadian rates and macro strategist.

"Still, with interest rates pushing higher, look for the debt ratio to trend lower over the next couple of quarters assuming income growth holds up."

Friday's report also looks at wealth, measured by assets and the ratio of net worth to disposable income. The latter has been "relatively flat" since the first quarter of last year, Mr. Reitzes said.

"Over all, Canadian balance sheets are in decent shape, even if debt ratios remain near record highs."

But let's look at what we're saving, given that Statistics Canada recently revised down those numbers.

Source: Capital Economics

“The sharp downward revisions to the saving rate imply that households are even more vulnerable to higher interest rate than we had previously thought,” said Stephen Brown, senior Canada economist at Capital Economics, though he noted that the third-quarter pace of just 0.8 per cent “somewhat overstates the short-term vulnerability of households' finances” because of how it’s calculated.

This all threatens to ripple through the economy, warned Katherine Judge and Royce Mendes of CIBC World Markets.

Earlier numbers indicated that, even while juggling bloated debts, at least "Canadians were stashing away more of their incomes in savings," Ms. Judge and Mr. Mendes said in a report, which meant we had some "extra room" to spend more.

But that has now been revised away.

"With higher interest rates more of a headwind to heavily indebted households north of the border, the lower savings rate is another reason to believe Canadian retailers will face a more challenging environment than those in the U.S.," Ms. Judge and Mr. Mendes said.

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Here's what else to watch for this week:


We'll get two readings of the country's real estate market, one from Canada Mortgage and Housing Corp., the other from Statistics Canada.

Economists expect the CMHC report to show housing starts slipped in November to an annual pace just shy of 200,000 from October's 206,000. The second report is forecast to show building permits fell in October, by 0.5 per cent.

"Following a strong 2017, homebuilders are feeling the pinch of higher interest rates and tighter lending standards," said CIBC's Mr. Mendes.

"It’s likely that November was another softer month for overall housing starts, but keep an eye on the details, too," he added.

“Homebuilding has shifted away from single-family starts and toward multiples. With each single-family start adding more to GDP than each multiple start, the headline slowdown in starts has actually masked the scale of the impact for the economy.”

At some point this week, Chinese leaders are also expected to hold their yearly Central Economic Work Conference.

"The communique released after the gathering may provide hints to the direction of policy over the coming quarters," said Chang Liu of Capital Economics.

"There are already signs that officials are planning to step up policy support."


This was to have been the day for Britain’s parliamentary Brexit vote, but Prime Minister Theresa May is cancelling it.

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A report on inflation, key to the interest rate deliberations of the Federal Reserve, is expected to show a decline in the annual rate to 2.2 per cent in November from October's 2.5 per cent.

That drop will be "largely on the oil price rout, which left gasoline prices down nearly 8 per cent, month over month," TD economists said in a forecast.


The European Central Bank won't change its key rate, but today's meeting is key for three reasons, noted BMO's Ms. Lee:

1: The ECB will release forecasts for GDP and inflation, and “we will likely see downward revisions to both, given weaker economic data and the plunge in energy prices.”

2: The central bank is expected to “stick to its guns and definitively state” that its quantitative easing asset-buying program will end this year.

3: The central bank will update its outlook for interest rates.

European Central Bank president Mario DraghiFrancisco Seco/The Associated Press

"With markets increasingly fixated on when the ECB is likely to start looking at raising rates, it is looking increasingly unlikely that the guidance that rates may have to rise in Q4 next year is in any way credible given the slowdowns being seen across Europe, as well as the civil unrest in France, which appears to show that consumers are struggling," said CMC Markets chief analyst Michael Hewson.

“We could well see the ECB’s guidance about the path of rates adjusted to reflect the change in the economic outlook across Europe, as well as the rest of the world.”

There are also some notable quarterly results on tap, including Costco Wholesale Corp, Empire Co., Transat AT Inc. and Transcontinental Inc.


Economists expect to see that retail sales in the U.S. rose 0.1 or 0.2 per cent in November.

“Headline retail sales surged in October, but the bulk of that strength likely reversed in November, owing to the nosedive in gas prices and softer auto sales,” said CIBC’s Ms. Judge.

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