From BlackBerry's rebirth to Facebook's 'Zucker punch': Promise and threat this week

This is a week of promise and threat: Promise if you're a BlackBerry Inc. shareholder, and threats to the tech sector and Ontario's credit rating.

Last week was ugly, with the S&P 500 slumping 6 per cent, and the S&P/TSX Composite about 3 per cent, amid the start of a U.S.-China tariff war and what Bank of Montreal senior economist Robert Kavcic calls the 'Zucker punch' to Facebook Inc.

"All sectors were down on the week, with technology slumping nearly 8 per cent – the Facebook data breach fiasco didn't help the mood in the sector," Mr. Kavcic said, referring to U.S. stocks.

Watch Facebook shares this week because the controversy over Cambridge Analytica and the misuse of data isn't likely to fade anytime soon, regardless of founder Mark Zuckerberg's apology and pledge to make good.

"This revelation does not bode well for the social media giant, and the negative publicity is likely to hit its revenue stream," CMC Markets analyst David Madden warned last week.

Nor is the U.S.-China trade spat going away. It's more likely to escalate.

And the "unfortunate truth" of that, said BMO's Mr. Kavcic, is that it's eroding a good climate for corporate earnings.

"In a nutshell, earnings growth usually accelerates because of share buybacks and cost cutting, or because of top-line demand growth – recently we've been witnessing the latter," Mr. Kavcic said.

"While it's true that buybacks are a steady source of support for per-share earnings, they have not accelerated meaningfully yet, running steadily around US$125-billion per quarter for the S&P 500," he added.

"That said, tax cuts and repatriation will likely increase buyback activity this year, but that would only build on the economy-driven strength seen to date."

There's more at play for tech stocks, of course.

"At the beginning of the month, President Trump indicated that he would implement tariffs in a 'loving way,' maybe in an attempt to suggest that he didn't want to spook equity investors," said CMC Markets chief analyst Michael Hewson.

"If recent price action is any guide, markets are clearly not 'loving' what is happening right now, which is being exacerbated by rising concerns that the tech sector, which has driven most of the gains in U.S equity markets, could be on the cusp of being clobbered by increasing regulation, as well as possible taxation changes."

This week also brings three budgets, from Ontario and Quebec, where pre-election spending should shower us with goodies, to Newfoundland and Labrador.

The calendar:

Monday: Crumbs

Other than watching Facebook's stock performance, there are pretty much only crumbs for markets today.

Spotify, the Swedish music streaming service, gives a corporate update in advance of going public in early April .

"The run-up to Easter sees a quiet week for markets on both the corporate and economic fronts," said IG chief market analyst Chris Beauchamp.

"Only consumer confidence in the U.S. is likely to provoke much comment, but with its initial public offering (IPO) looming, Spotify's financial forecasts will provide plenty of interest."

Tuesday: Plums

Quebec just might have some when it unveils its budget later in the day.

The province "continues to lean toward surpluses, debt reduction and tax relief," standing in "stark contrast" to Ontario, noted Bank of Montreal.

In fact, Quebec "will be tabling a fifth straight year in the black, with some modest further tax relief likely on the business side (recall that personal income taxes were reduced last year)," BMO's Canadian rates and macro strategist, Benjamin Reitzes, and Mr. Kavcic said in a lookahead.

"Most notably, the province has already announced that it intends to use $10-billion of Generations Fund savings (much of which has been amassed during recent surplus years) to pay down debt over the coming five years - this is positive from a spread perspective as it should lower the borrowing trajectory."

Newfoundland and Labrador also releases its budget, which "comes amidst still-tough times, both fiscally and economically," said CIBC World Markets chief economist Avery Shenfeld.

Also on tap are quarterly results from Lululemon Athletica Inc.

Wednesday: Thumbs (and more plums)

Remember before the iPhone when you used to see everyone typing with their thumbs on a BlackBerry?

Well, BlackBerry doesn't make its own BlackBerrys any longer, having sourced out that business amid a focus on security and software.

Royal Bank of Canada stock analyst Paul Treiber expects BlackBerry to report a 27-per-cent drop in revenue from a year earlier, to US$217-million, and adjusted earnings per share of nothing.

"We expect Q4 results in line with street expectations, though upside is possible on [intellectual property] revenue, similar to recent quarters," Mr. Treiber, whose price target in BlackBerry shares is US$11, said in a research note.

"Investors are likely to focus on BlackBerry's [fiscal 2019 estimated] software outlook; management may provide an outlook for 10– to 15-per-cent software growth, which would imply acceleration of non-IP software revenue," he added.

"We believe sustained 10- to 15-per-cent software growth is already priced into the shares."

CIBC analysts Todd Coupland and Amy Dyck have a more optimistic view, with a 12- to 18-month price target of US$15, expecting to see quarterly revenue of US$246-million and adjusted earnings per share of 7 US cents.

They noted, too, BlackBerry's recent partnership with Microsoft Corp., secure mobile access to the latter's apps.

"We view this announcement as positive for BlackBerry's core enterprise mobility business," the CIBC analysts said.

"While the economics and timing were not disclosed, our view is it supports our growth assumption for software (excluding licence revenue) in [fiscal] 2019 of 8 per cent."

Hudson's Bay Co. also reports quarterly results, as do AGF Management Ltd. and Walgreens Boots Alliance Inc.

There's also another reading of U.S. fourth-quarter economic growth, expected to show an annual pace of 2.4 or 2.5 per cent.

And the day's biggie:

Little Jack Horner
Sat in the corner
Eating a Christmas pie
He put in his thumb
And pulled out a plum
And said, "What a good boy am I!"

Ontario Finance Minister Charles Sousa delivers a pre-election budget expected to be ripe with plums, having already warned of a shortfall of about 1 per cent of gross domestic product, or $8-billion.

Ontario’s debt

Net debt, in billions (left axis)

Net debt to GDP (right axis)

$350

40%

300

35

30

250

200

25

20

150

100

15

10

50

0

5

1982

‘88

‘94

‘00

‘06

‘12

End of fiscal year

THE GLOBE AND MAIL, SOURCE: ONTARIO FINANCING

AUTHORITY, RBC ECONOMICS /NOTE: PROJECTED FOR 2017-18

Ontario’s debt

Net debt, in billions (left axis)

Net debt to GDP (right axis)

$350

40%

300

35

250

30

200

25

20

150

100

15

10

50

0

5

1982

1988

1994

2000

2006

2012

End of fiscal year

THE GLOBE AND MAIL, SOURCE: ONTARIO FINANCING AUTHORITY, RBC

ECONOMICS /NOTE: PROJECTED FOR 2017-18

Ontario’s debt

Net debt, in billions (left axis)

Net debt to GDP (right axis)

$350

40%

300

35

250

30

200

25

150

20

100

15

50

10

0

5

1982

1988

1994

2000

2006

2012

End of fiscal year

THE GLOBE AND MAIL, SOURCE: ONTARIO FINANCING AUTHORITY, RBC ECONOMICS

NOTE: PROJECTED FOR 2017-18

"Assuming revenue continues to expand alongside solid nominal GDP growth, that would open the door for a heavy slate of new spending promises - early indications are that health care, pharma and childcare costs will be major focuses," said BMO's Mr. Reitzes and Mr. Kavcic.

"And, if recent Liberal messaging is any guide, look for the province to focus on how this deficit doesn't cause a deterioration in the net debt-to-GDP ratio," they added.

"At any rate, this will be a spending-heavy, pre-election budget that likely won't do any favour from a credit perspective at this later stage of the cycle."

Thursday: Glum

Statistics Canada is expected to report that the Canadian economy almost flatlined in January, kicking off a year of slower growth than we saw in 2017.

Economists forecast the report will show GDP expanded by a tiny 0.1 per cent from December, with the possibility of no growth at all, amid slumping manufacturing sales and a housing market hit by new mortgage qualification rules that came into effect at the beginning of the year.

"Very marginal growth would reaffirm our point that even with some reduction in trade uncertainties, the Bank of Canada will be in no rush to raise interest rates again," said CIBC's Andrew Grantham.

"Indeed, the 0.1-per-cent reading for January would have us requiring stronger growth in the remainder of the quarter to meet our 2.2-per-cent forecast for Q1, let alone get up to the BoC's 2.5-per-cent projection."

We also get a final reading on Britain's economic growth in the fourth quarter, expected to show 0.4 per cent.

Friday: Done

Many of the world's major markets are closed for Good Friday.