Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web
A Bloomberg report suggests that Canadian bank balance sheets are far more vulnerable to financial pain in the oil patch, through lines of credit,
"Canadian banks' exposure to the struggling oil-and-gas industry totals $107-billion ($80-billion U.S.) when including untapped credit lines with outstanding loans, according to a review of company filings.
"That's double the $50-billion in total outstanding loans generally highlighted by Royal Bank of Canada, Toronto-Dominion Bank and the country's four other large lenders in quarterly earnings calls and presentations. The figure represented 2 percent of total lending as of Jan. 31."
The report makes a good point, but I'm not sure things are as dire as the tone suggests. The major banks can easily withdraw credit facilities as the liability becomes a problem. That would, of course, cause some corporate bankruptcies, but I don't think domestic bank solvency is anywhere close to being at risk.
"Untapped Loans Double Canadian Banks Oil Exposure to $80 Billion" – Bloomberg
"Reserve Worries Dog Canada Banks" – Wall Street Journal
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After I wrote that U.S. Treasury bonds, not the oil price, were the main drivers of the loonie, yesterday proved me wrong, at least temporarily. U.S. two-year bond yields climbed along side the loonie as oil prices stabilized and better-than-expected Canadian economic data was reported. I hate being wrong, but, for the mid-term, I still haven't changed my mind about the Treasury market and the loonie. We'll see.
Report on Business' Mike "the hardest working man in the business" Babad asks whether the loonie rally has gone too far,
"Heading toward the 75-cent U.S. mark before dipping slightly today, the loonie had jumped by almost 10 per cent since its depths in January.
"'But note that underlying commodity prices, which have been the dominant driver for the currency for years, have been much more stable than the [Canadian dollar] in the past three months,' said BMO Nesbitt Burns chief economist Douglas Porter. 'And, just as the deep dive in January looked overdone, this rapid rebound also looks overdone, assuming resource prices don't soon follow suit,' he added."
"Has the loonie gone too far?" – Babad, Report on Business
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Bloomberg cites derivatives positioning as a sign that traders do not expect the oil price rally to continue, "[Option traders] are paying the most since July to protect against lower prices by the end of the year, compared with the cost of hedging the risk of more expensive crude. As U.S. production shows continued resilience to low prices, Iran returns to global markets and Saudi Arabia keeps pumping, options markets show the threat of "lower for longer" prices hasn't disappeared."
"Even a Modest Oil Recovery Is Doubted by Options Traders: Chart" – Bloomberg
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I should be accustom to great informative posts on China from David Keohane by now, but I'm still pleasantly surprised by the quality of information and analysis,
"[China] bumped up credit to provide space for an economic slowdown. Hmmm. Yeah. That seems like something which can't go on forever and reminds us of the larger macro narrative in China at the moment — even if recent [bank reserve requirements] cuts might well be seen as credit, growth neutral there is a trend at work that's hard to ignore… As Michael Pettis said via email while chatting to us about the Reuters piece, "every policy choice Beijing faces ultimately boils down to choosing among a higher debt burden, higher unemployment, and wealth transfers to households. Maintaining these useless factories means allowing the debt burden to rise. Closing them down means forcing up unemployment, unless Beijing can create another equivalent source of unlevered demand."
"Layoffs, redistribution and Chinese tail risks" – Keohane, FT Alphaville
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Tweet of the Day: "@Samir_Madani Port of #Rotterdam right now. Just look at all those #oil supertankers! Damn, that's crowded!! pic.twitter.com/wFMf2TPyYd " - Twitter
Diversion: This is a political column so opinions will differ, but I found economics professor Tyler Cowen's "What are the core differences between Republicans and Democrats?" very objective and surprising. The extent to which Canadians apply this analysis to the domestic political environment is, of course, subject to prior beliefs.
"What are the core differences between Republicans and Democrats?" – Cowen, Marginal Revolution
Scott Barlow