These are stories Report on Business is following Tuesday, Dec. 16, 2014.
Oil, and turmoil
Oil prices stabilized today, but only after sinking to fresh lows this morning and sending shudders through Russia and across financial markets.
North American stocks were mixed, though Toronto's S&P/TSX composite rose sharply.
The question now is whether this is just a pause in the crude freefall.
Hit hardest was the ruble, which touched a record low against the U.S. dollar despite a stunning middle-of-the-night rate hike by Russia's central bank to defend the crushed currency.
"The Russian bear is well and truly awake, now," Kit Juckes, the chief of foreign exchange at Société Générale, said in a research note to clients as the ruble tumbled to 80 against the U.S. dollar despite the central bank's aggressive move to hike its benchmark rate to 17 per cent.
The troubled Russian currency then perked up somewhat, but there's little change to the outlook.
Russia, of course, has been battered by the plunge in oil prices, which slipped again today to multi-year lows before recovering.
Brent crude, a global benchmark, slipped below $60 (U.S.) a barrel. West Texas Intermediate, the U.S. benchmark, also slipped before picking up.
The Canadian dollar hit a multi-year low, as well, touching a low point of 85.69 cents U.S. before rebounding to above the 86-cent mark. It was just shy of that by late afternoon.
The U.S. dollar weakened against several currencies, though some observers expect it to strengthen after the Federal Reserve's policy statement tomorrow afternoon. This is certainly playing into today's action as stocks push sharply higher.
"Contagion from Russia's problems is high on the list of issues for markets, but perhaps all the excitement has a positive angle to it," said market analyst Chris Beauchamp of IG in London.
"The Fed is likely to have taken note of the rout in oil and the growing problems in Russia and factored them into its outlook, as well as the impact on inflation of declining oil prices," he said.
"This could lead to a more dovish statement than had been anticipated, which could provide the foundation on which investors can build a sustained end-of-year rally."
Russia is front and centre in the oil collapse, heading into a likely recession as the Central Bank of Russia scrambles to deal with the fallout and stem a capital outflow and rising inflation.
"The CBR threw everything including the kitchen sink at the currency problem overnight following the largest one-day drop against the dollar since 1998," said market analyst Craig Erlam of Alpari in London.
"Initially, the 6.5-percentage-point rate hike to 17 per cent appeared to have brought some short-term reprieve for the ruble but unfortunately for the CBR, it was much more short-term than they hoped and it wasn't long before the markets rejected the central banks efforts and opted to continue on the same course," he said, adding that "I get the feeling that traders are just taking a breather and there could be some more crazy selling to come in the ruble."
The outlook for Russia's economy also grows bleaker by the day, with no end in sight.
"What if you crushed your economy by hiking rates to save the currency, to offset building import price inflation, and to mitigate the risk of a full collapse of the financial system and yet traders responded to an act of desperation by pummelling the currency?" said Derek Holt of Bank of Nova Scotia.
"This is the exact dilemma facing Russia's central bank," he added.
At the same time, Russia now expects its economy could contract by about 4.5 per cent next year should Brent average $60.
"Which is about where it is now so I'm not sure that qualifies as a forecast," said Mr. Holt.
Observers believe the move in Russia isn't enough as its crisis deepens by the day."
"Since the rate hike had little impact, it's clear this is a confidence crisis and interest rate hikes probably won't be able to halt the decline barring an astronomical increase (even then maybe not)," said senior economist Benjamin Reitzes of BMO Nesbitt Burns.
"Moreover, the sharp increase in interest rates will weaken the economy even more (beyond the drop in oil prices and sanctions), also making the ruble less attractive," he added.
"Perhaps more likely at this point, the government could institute capital controls to stem the outflow of capital. The ruble has lost 55 per cent of its value this year and inflation is at 9 per cent and likely rising further. A crisis is developing."
- Russia increases key interest rate to 17 per cent to stem ruble rout
- Apple halts online sales in Russia over plunging ruble
- Bill Curry: 'Dramatically lower oil prices' won't stop balanced budget, Harper says
- Canadian dollar slumps below 86 cents amid oil bust
- Welcome to an 87¢ loonie (Wait long enough, it’ll be 81¢)
- Carrie Tait: OPEC holds firm on production as oil prices spiral
- Shawn McCarthy and Eric Reguly: The Saudi standoff: Oil-rich nation takes on world's high-cost producers
- Follow our Inside the Market blog (for subscribers)
Economists are fast revising their forecasts for Canada's economy, and those of its provinces, amid the spectacular collapse in oil prices.
BMO Nesbitt Burns, for example, has lowered its outlook for economic growth next year to just 2.2 per cent, which would mark the sharpest shortfall to the United States since 2003.
Should Canadian growth slip further, to 2 per cent, for example, it would mark the worst performance relative to that of the United States since 1996, said BMO chief economist Douglas Porter.
Today, CIBC World Markets added its voice, in a new report on just how painful the shock could be to Canada.
"The recent dive in crude oil prices is an unprecedented development for the Canadian economy," said CIBC economists Avery Shenfeld, Peter Buchanan and Warren Lovely.
"Even after allowing for the cushions provided by tighter heavy oil spreads and a weaker C$, the local currency value of a weighted index of Canadian barrels is down over 40 per cent in the last four months," they added.
"That's unprecedented since, while we've seen retreats of that magnitude before, the recent ones were demand-led corrections in which broader U.S. or global recessions did much of the economic damage to Canada."
Even if demand moves up, CIBC said, oil could still average just $70 a barrel next year.
"Some aggregates, like real GDP, will see a smaller hit than many who think of Canada only as North America's resource hub might conclude," said the CIBC report.
"But within that story lie major sectoral and geographic wins and losses, and a much larger terms of trade hit to nominal GDP, national income and the fiscal performance of oil-exporting provinces."
The provinces of Alberta, Saskatchewan and Newfoundland and Labrador are in the eye of this storm, as is the federal government, when it comes to revenues.
Indeed, just yesterday, Alberta Premier Jim Prentice unveiled cost-cutting measures such as a "hiring restraint," limited spending where possible, and curtailed "discretionary grants, travel, training and other related costs."
Newfoundland and Labrador, in turn, rejigged its 2014-2015 projection for a deeper deficit of more than $900-million, or 2.5 per cent of gross domestic product.
That, said senior economist Robert Kavcic, would be the deepest in Canada and is largely because of the oil crunch.
"Recall that the province generates almost a third of its revenue from offshore royalties, and was budgeting for Brent prices around $105," he said.
"Get ready for more bad news from Canada's other oil-rich provinces … As a very rough guideline, assuming WTI bounces back to average around $65 next year, Alberta would be looking at a $5-billion to $7-billion revenue shortfall (more than 10 per cent of revenue), while Saskatchewan is facing a gap of at least $500-million (roughly 4 per cent of revenue), all else equal," Mr. Kavcic added.
"Fortunately, these provinces entered this period in a relatively healthy fiscal situation, and both maintain reserve funds large enough to cover these shortfalls, should they choose to use them."
"So pick your economic indicator - real or nominal GDP, business investment, employment, corporate profits, merchandise trade, housing starts - and oil's deep dive will leave a notable mark on prospects in a handful of provinces in 2015," the CIBC economists said.
Provinces such as Ontario and Quebec, of course, will get something of a boost from lower energy costs and a weaker dollar.
Oil's plunge is, of course, playing out across Canada's oil patch, and will also play into the Bank of Canada's thinking amid expectations that its benchmark rate will now be held lower for longer.
"It is worth noting that capital spending plans from the oil patch have begun to reflect the recent price moves (today's announcement by Encana showed weaker planned capital spending than we were initially looking for)," said Mark Chandler, Royal Bank of Canada's senior strategist for rates and currencies.
"With the mining, oil and gas sector responsible for about 40 per cent of all private, non-residential capital spending according to [Statistics Canada's] public and private investment intentions survey (the next iteration due at the end of February, based on surveys over the October-to-January period), the BoC's assumption of a 0.4-percentage-point contribution from the business investment channel may be at risk."
- Bill Curry: Falling oil price puts Ottawa's surplus at risk
- Moody's sees modest rise in debt in most Canadian provinces (Not so fast, four of you)
- Oil's toll: Folks in Alberta, Saskatchewan, Newfoundland will be poorer
Repsol to acquire Talisman
Shares of Talisman Energy Inc. surged today in the wake of its deal to be swallowed by Spain's Repsol SA.
As The Globe and Mail's Jeffrey Jones reports, Repsol will expand both globally and in Canada with the $8.3-billion (U.S.) acquisition of the Canadian energy company.
Repsol is offering $8 a share for Talisman, with, when debt's included, brings the total to about $13-billion.
Canaccord Genuity analyst Richard Griffith described the deal as "probably a relief for Talisman shareholders."
That may be putting it mildly given the stock performance until word of Repsol's overtures were known.
And even then.
Encana focuses on four
As noted, Encana Corp. came in with its 2015 budget this morning, one it says gives it the "flexibility to respond to the challenges and act on potential opportunities presented in this volatile price environment."
The Canadian energy company based its spending plans on the assumption of $70 oil, and, of course, WTI is well below that today.
Encana said next year's spending of between $2.7-billion and $2.9-billion will focus on four of its "highest margin growth plays," including Montney, Duvernay, Eagle Ford and Permian.
Encana expects overall production of between 405,000 and 440,000 barrels of oil equivalent a day.
- Jeffrey Jones and Carrie Tait: Encana plans to spend big, but where is the money?
- Canadian Oil Sands lowers guidance for 2014 Syncrude output
- Encana budgets up to $2.9-billion for capital spending in 2015
Mattamy to buy Monarch
Canada's largest builder of new houses has taken a big step into the high-rise segment of the home construction market, The Globe and Mail's Richard Blackwell writes.
Mattamy Homes Ltd., which has operations in Ontario, Alberta and in several U.S. states, has signed a deal to buy Monarch Corp., the Canadian division of U.S. homebuilder Taylor Morrison Home Corp. and one of Canada's oldest real estate companies.
The $330-million purchase will add Monarch's low rise homebuilding operations in Southern Ontario, as well as its high rise business in Toronto, to Mattamy's current portfolio.
Fairfax in deal
Fairfax Financial Holdings Ltd. is expanding its reach into Europe's financial sector with an acquisition of three Eastern European property and casualty companies from Australia's largest insurer, The Globe and Mail's Jacquie McNish report.
Toronto-based Fairfax, which owns a variety of insurance and reinsurance companies, agreed to acquire subsidiaries in the Czech Republic, Hungary and Slovakia from Sydney-based QBE Insurance Ltd.
The companies did not disclose the value of the transaction, but the three divisions have combined premium income of more than $40-million (U.S.). The insurance divisions primarily sell property, casualty and travel insurance to commercial customers.
Factory sales slip
Canadian manufacturing suffered a setback in October, but only the second such hit this year.
Factory sales slipped 0.6 per cent two months ago, largely on aerospace, Statistics Canada said today.
Despite the overall dip, producers in 15 of 21 industries measured, or more than 60 per cent of the entire sector, reported higher sales.
Inventories rose 0.5 per cent, the inventory-to-sales ratio inched up to 1.35, unfilled orders climbed 0.5 per cent, and new orders fell 1.9 per cent.
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