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Stock market angst: You want the good or bad news first? (Then let's talk about the Canadian dollar)

Briefing highlights

  • Markets at a glance
  • The good and the bad news
  • Whither the Canadian dollar
  • Canada loses 88,000 jobs in January
  • Unemployment inches up to 5.9%

Global markets are mixed, though, as we've seen over the past few days, the open can look a lot different than the close.

Asian and European stocks fell across the board. And here's what North America looks like:

This has been a tumultuous week across global markets, to say the least. It began with a U.S. jobs report a week ago that showed strong wage gains, suggesting inflationary pressures could prompt the Federal Reserve to raise interest rates three or four times this year.

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Amid ups and downs, the Dow Jones industrial average ended Thursday with a loss of more than 1,000 points.

So, in the wake of the plunge into official correction mode, you want the good news or the bad news first?

The good news

The longer-term view doesn't look so bad, right?

"The naysayers and bears finally have what they have been striving for: a double-digit percentage pullback. To be clear, our view is steadfast that U.S. stocks remain within a longer-term secular bull market. However, we are admittedly disappointed that calmer heads have yet to prevail considering that multiples have actually compressed, earnings have yet to be revised lower, and economic conditions have not deviated over the past week, based on the data that we analyze." Brian Belski, chief investment strategist, Bank of Montreal

"These levels are starting to make for uncomfortable viewing, but they are not by any means representing the end of the world. Even with further headline-making losses, this pullback still represents what is considered a normal pullback under standard market conditions. The problem is, because we haven't actually seen a serious pullback in the past few years of this bull market, it is creating quite a stir." London Capital Group

"All that the recent equity market swoon has done is lower equity valuations to an extent we have not seen since 2012. The S&P 500 at 2,581 currently trades at less than 17x expected 2018 [earnings per share] and a bit more than 15x earnings expecations for 2019. Effectively, what the market is saying is that equity market multiple contraction is appropriate for an economic environment that looks extremely sound fundamentally (especially in therms of household balance sheets) and that is likely to get a non-trivial step up from significant tax policy. Huh?" Analysts Tom Porcelli and Jacob Oubina, Royal Bank of Canada

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The bad news

Take your pick of sayings: It's always darkest before the dawn, it ain't over till it's over, in the time of darkest defeat, victory may be nearest. Here's the short-term look, which, of course, looks ugly.

"U.S. bond yields started edging higher again [Friday], looking to retest the 2.9-per-cent level and a four-year high, with the 3-per-cent level now a very realistic probablility. A U.S. government shutdown which started at midnight isn't helping sentiment either. While this continued optimist about how the U.S. economy is likely to perform is a good thing, for U.S. stocks whose valuations are still at elevated levels, they may not be particularly good news given that yield differentials are no longer working in their favour, unlike in Europe where dividend yields are still higher than the yields on government debt." Michael Hewson, chief analyst, CMC Markets

"We forecast that the U.S. stock market will fall a bit further this year and next, which would probably see volatility rise again. But this is because we think that markets are still positioned for an unrealistic combination of continued unrealistic combination of continued strong growth and low inflation - not because the VIX index is high." Kerrie Walsh, economist, Capital Economics

"Market bottoms are a process and typically take time to prove themselves through retests and duration. However, analysis does show us that some of the worst days in history portend to better performance directly following sharp periods of weakness. Furthermore, when we study historical price performance of specific days of the week, Thursday and Monday stand out as the two worst days. Therefore, if history is indeed a guidepost, it is likely too early to make the capitulation call just yet." BMO's Mr. Belski

"If we get a hot CPI print, it will insert additional uncertainty, but if we get a quiet, below-consensus print, you may see yields down and quities rally." Jason Ware, chief investment officer, Albion Financial Group, to Reuters

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Mr. Ware was referring to next Wednesday's U.S. government measure of the consumer price index, and where inflation stood in January. Obviously, it's key given what sparked the market rout.

RBC expects that report to show a rise in consumer prices of about 0.4 per cent from December, given higher prices at the gas pump, but still a dip in annual inflation to 2 per cent from 2.1 per cent.

Mr. Belski believes the mood in the markets "could be even darker into the weekend when investors have more time to worry, with Monday providing the best chance (based on history and the way this week is unfolding) for a low to take shape."

Yes, TGIF, but Mr. Belski found that of the 25 toughest days in the history of the S&P 500, 12 of them were Mondays. It's also "the only negative day of the week on average since 1928."

For the record, Mr. Belski hasn't changed his view, that the S&P 500 will close the year at 2,950.

Then there's the loonie

The Canadian dollar has slumped to just below 79.5 US cents, trading today between 78.9 and 79.6 US cents. That translates to a loss of two pennies from about 81.5 US cents just last week, before the market troubles sent investors scrambling for the haven that is the U.S. dollar.

Mark McCormick, North American head of foreign exchange strategy at TD Securities, believes the loonie will see 79 US cents before we're done. Which it did today, at least briefly.

"We hold our negative bias against CAD, expecting a rally back towards 1.2660," Mr. McCormick said, referring to the Canadian dollar by its symbol.

And by rally, he meant the U.S versus the Canadian dollar. That 1.2660 is what translates to just about 79 US cents.

There is, of course, much more feeding into this.

"A more pronounced squeeze in the buck is likely to feed into commodity prices, with oil likely to act as a headwind for CAD near term" Mr. McCormick said.

Analysts are watching the Canadian, Australian and New Zealand dollars given their commodity links.

"The USD/CAD … is at fair value, give or take, and needs oil prices to hold in their new higher range to have any hope of a move to USD/CAD 1.20," said analysts at Société Générale, meaning a loonie just below 83.5 US cents.

"Our preference for the three dollar currencies puts CAD first, and the [purchasing power parity] valuations don't argue with that, but mostly they suggest that it will be the trend in commodity prices that determines wehter the [Australian dollar] and CAD are stuck in ranges or can make further gains over the course of 2018."

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Unemployment inches up

Canada's unemployment rate inched up to 5.9 per cent in January as the country lost 88,000 jobs, according to the federal statistics agency.

We lost a huge 137,000 part-time jobs, but full-time positions rose by 49,000, Statistics Canada said today.

These monthly reports can be volatile and difficult to forecast. Consider that economists had projected today's reading would show anything from a loss of 12,000 positions in January to a gain of 20,000.

"Market participants are getting schooled in the ways of Canada's employment numbers, and the lesson seems to be that when they're too good to be true, they might not be," said CIBC World Markets chief economist Avery Shenfeld.

"Those looking for the impact of the minimum wage hike in Ontario might find evidence in a 51,000 drop in that province's employment (all of which was in part-time, where we would be looking for that impact), but curiously, all of that was due to a drop in labour force participation (with the jobless rate actually edging lower)," he added.

"Hard to argue that higher minimum wages would cause Ontarians to decide not to work or look for jobs. Wages did move up nationally to a more heated 3.3 per cent, but the Bank of Canada will average that in with other wage series. Ove rall, a mysterious mix of good and bad, with the latter's impact blunted by how strong job gains were in the lead up to these figures."

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