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Source: Giphy.com

Briefing highlights

  • Global markets tumble again
  • Behind the market turmoil
  • Treasury yield at four-year high
  • Canadian dollar at 80 cents
  • Fairfax poised to acquire Carillion Canada
  • Broadcom raises bid for Qualcomm
  • What to expect from trade, jobs reports
  • Tesla, BCE in the earnings spotlight
  • What else to watch for this week
  • Court suspends sentence for Samsung’s Lee
  • Bitcoin sinks 10 per cent

As Samuel L. Jackson's character put it in Jurassic Park, hold on to your butts.

Global markets plunged again today, starting in Asia, then spreading into Europe and finally into North America, where stocks pulled back somewhat from early losses, only to plunge again.

Tokyo's Nikkei lost 2.6 per cent, and Hong Kong's Hang Seng 1.1 per cent. In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 tumbled by between 0.8 and 1.5 per cent.

And here's the damage in North America:

This comes after last week's market action ended with the theme park breaking down, and the raptors and T-Rex running loose, devouring everything in sight.

Remember the scene where the Jell-O's shaking on the end of Lex's spoon? And you're not sure what's going to happen but you just know it's going to be edge-of-your seat? That's where we are today.

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The S&P 500 and the S&P/TSX composite each tumbled 3.9 per cent last week, and bond yields spiked, as markets digested what the wage data in the U.S. jobs report could mean for inflation and Federal Reserve interest rate hikes, ending in Friday's ugly scene with investors dashing madly for the exits from Jurassic Park.

It has been a tumultuous start to the year, to say the least.

"After one of the more volatile starts to the year in two decades – only once in 20 years have stocks rallied this much in January (2001) or bonds sold off this much (2009) – global markets enter February with a few interesting milestones and reversals," said analysts at JPMorgan Chase.

Among those milestones were the drop in bond prices and spike in treasury yields to the highest in several years.

"The reversals are [last] week's decline in stocks, commodities and [emerging market] currencies; spikes in rate/currency/equity volatility; and inversion of the usual negative correlation between stock and bond prices," the JPMorgan analysts said in their report.

"Note, however, that these moves are still trivial in a year when equities have returned about four times more than they usually do in a month, and when volatility in most markets remains in the lower quartile of long-term ranges."

Here's a look at what's happening, and why:

Stocks: You've heard of chaos theory?

"This selloff has been a long time coming and the only unknown has been the timing and the trigger," said CMC Markets chief analyst Michael Hewson.

Markets have been jittery, and with good reason, as analysts keep wondering when the long run finally ends with a creepy dilophosaurus spitting in your face like it did to Nedry.

Source: Giphy.com

Friday's rout was sparked by a strong U.S. jobs report that, most importantly, showed average hourly earnings climbing 2.9 per cent from a year earlier, the fastest pace since mid-2009.

Which makes investors think the Fed will move forcefully to fight an inflationary push, possibly three or four times this year as the era of cheap money ends.

"[Friday's] wages data have caused complacent investors to reassess the timing and pace of future rate rises, sending yields sharply higher," CMC's Hewson said.

Rising yields make bonds more attractive relative to stocks, especially in the United States, where shares are trading at some of their highest valuations in history. Of course, if yields continue to rise, bond prices will decline. Thus, you get more income if you hold bonds to maturity, but there's the potential for significant losses if you have to sell.

"After striding into 2018, chin up and chest out, equity markets were served their first meaningful setback in what seems like ages," said Bank of Montreal senior economist Robert Kavcic.

As Mr. Kavcic put it, you can "take your pick of the many factors" that had the raptors running loose: "Surging bond yields and the realization that monetary tightening is now a real (and more significant) factor; some earnings misses from the likes of Google (though there were plenty of other positive surprises, like Amazon); or speculative enthusiasm draining after witnessing what's transpired in the crypto market – and let's not pretend the Nasdaq has run just on great fundamentals alone."

JPMorgan Chase, for one, doesn't fear a market meltdown, with "some consolidation not surprising" given the strength to this point.

"Our global equity strategy team believes that rising bond yields should not sustainably derail equities," said John Normand, JPMorgan's head of cross-asset fundamental strategy.

"They highlight that over the last 15 years there was a positive correlation between equity valuation multiples and bond yields, and that the valuation cushion remains significant," he added in a report.

"Furthermore, weakness in bonds might bring about a reallocation of flows, out of fixed income and into equities. They continue to believe that dips should be bought into as the fundamental growth backdrop remains supportive for equities."

And quarterly earnings reports so far have been "robust," which should help buoy stocks given that about 80 per cent of S&P 500 companies topped estimates as of Friday.

And as for Canada, there's the added factor that the run-up in marijuana stocks was unique. That was a case of "speculative enthusiasm burning out," BMO's Mr. Kavcic said.

"When the online brokerages can't handle the flood of retail investors, it's usually a warning sign."

Bonds: I'm fairly alarmed here

Here's a warning from Kit Juckes, chief foreign exchange strategist at Société Générale, as the 10-year treasury yield hit 2.885 per cent today before easing slightly.

"As we move away from the super-low U.S. rate regime, or at least as we wonder just how low the peak in yields will be, we are likely to see both higher volatility across asset markets and weaker cross-asset correlations … Low rates/low [volatility] have fuelled synchronized risk-taking across the world. If the U.S. 10-year yield tests 3 per cent, we will test the buoyant global risk sentiment. If yields break higher, we may consequently see more chaotic-looking markets."

Société Générale also pointed out, though, that there is traditionally a spike in yields when a new chair takes over at the Federal Reserve, which is happening now as Jerome Powell replaces Janet Yellen.

Nonetheless, "there is a sense that the bond bear market could become a global troublemaker," JPMorgan strategists said.

"We half-agree."

They added, though, that there's no "commonly accepted definition" for such a bear market as there is for stocks, marked by a 20-per-cent drop, but that investors are worried.

Among their points:

1. For stocks, credit and emerging markets, it's "unreasonable" to think a specific treasury yield would simply kill their outperformance because "context matters as much or more than threshold." So while a yield near 3 per cent seems "alarming" because it's the steepest in four years, "rates look more normal (or perhaps even still too low) judged against the highest oil price in three years, the strongest global GDP growth in eight years or the lowest U.S. unemployment rate in almost 20 years."

2. Investors should be far more concerned by two kinds of developments in the bond market, those being "high-volatility ones due to a dramatic rethink on Fed policy, or ones driven more by inflation surprises than stronger activity data."

3. "Cyclical strength is why most risky markets have delivered positive returns through major bond selloffs of the past 15 years." Indeed, a look at world stock markets over 15 years showed their "resilience" in 10 examples of the 10-year yield climbing by about half a percentage point.

That doesn't mean there aren't scenarios where "one might worry about rate levels themselves independent of context."

Currencies: I bet you'll never look at birds the same way again

This one's a bit dicey because the U.S. dollar, which had been becoming something of a dinosaur, is a haven in times of stress.

And thus it rose Friday, showing it can still be a big beast when it awakens.

The greenback's fate will, of course, determine that of the Canadian dollar, which tumbled Friday.

Up to this point, analysts have taken a dim view of the U.S. currency, and all of this may play into the bond market.

"The debasing of the dollar by the U.S. administration conflicts with the spirit of the G20 but the 6-per-cent decline since December has reinforced optimism at the Fed that inflation will hit the 2-per-cent target this year," said strategists at Société Générale.

"With nominal GDP growth running at 2.5 to 3 per cent and new treasury benchmark supply rising, the risk of a deeper bear market correction has intensified."

JPMorgan still sees the U.S. dollar losing out.

"A strong hourly earnings number in [Friday's] U.S. payroll report has helped the USD index avoid a near-record eighth consecutive weekly decline," JPMorgan's Daniel Hui and Paul Meggyesi said as they changed their projections for major currencies.

"While the report [Friday] reinforces a period of consolidation after an extended trend in [foreign exchange] markets, the broader backdrop for the USD remains medium-term bearish for now."

As for the loonie, JPMorgan now sees the currency at about 82 cents by March, compared to its earlier forecast of 77 cents, and at 84 cents by the end of the year, compared to a previous projection of just over 83.5 cents.

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Hold onto your butts: The week ahead

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There's plenty on tap to scare us all over again, from economic readings to the quarterly results of some major companies.

There will be little in the way of fresh data in the U.S., but some Federal Reserve officials will be speaking, which, of course, much of the market angst is about.

"Fed speakers will be out in force, and with the firmer wage figure from January in hand they're likely to reinforce market expectations that rate hikes are on the way," said CIBC World Markets chief economist Avery Shenfeld.

Tuesday: No wonder you're extinct

Duelling reports will give us a sense of how trade in Canada and the U.S. ended 2017.

Economists expect the Canadian report to show the trade deficit narrowing only marginally in December from November's $2.5-billion. So expect something around $2.3-billion or $2.4-billion.

There should be some interesting bits to the report as oil producers struggle with the fat gap between Canadian prices and the U.S. and overseas benchmarks, West Texas Intermediate and Brent.

"A drop in oil prices, as the discount on Western Canada Select widened to a multiyear high, is expected to be a small negative for the trade balance, as it will hit exports while higher Brent/WTI lifts the price of refined energy imports," said Benjamin Reitzes, Canadian rates and macro strategist at Bank of Montreal.

"The loonie appreciated modestly in December, with the recent strengthening trend starting in the back half of the month," he added.

"Look for the currency to have a larger impact on the trade balance in the early part of 2018."

The U.S. report could see President Donald Trump sharpening his raptor claws, as it's expected to show a wider December deficit of US$52-billion. Which feeds into the question of whether NAFTA could soon be extinct.

The central banks of Australia and New Zealand start two days of decisions, the former today and the latter on Thursday.

Paul Dales of Capital Economics expects the Reserve Bank of Australia to hold steady at 1.5 per cent, and the Reserve Bank of New Zealand to stand firm at 1.75 per cent.

"And we doubt that they will hint that rate hikes are just around the corner in their other communications, either," Mr. Dales said.

Earnings galore: Allergan PLC, Anadarko Petroleum Corp., Archer Daniels Midland Co., BP PLC, Canaccord Genuity Group Inc., Equifax Inc., Finning International Inc., General Motors Co., Genworth MI Canada Inc., Indigo Books & Music Inc., Snap Inc., Walt Disney Co. and WestJet Airlines Ltd.

Wednesday: We've clocked the T-Rex at 32 miles an hour

And another big day for earnings, including some Canadian heavyweights: ATS Automation Tooling Systems Inc., Heroux-Devtek Inc., Manulife Financial Corp., Rio Tinto PLC, Suncor Energy Inc. and Tesla Inc.

Investors are fascinated by Tesla, so watch those numbers.

"The introduction of a number of new models over the past three years has added to the costs as well as the complexity of the production line, and while the order book looks healthy the problem is the company can't produce the cars quickly enough," said CMC's Mr. Hewson.

"In Q3 the company only managed to produce 260 Model 3 cars instead of the anticipated 1,500, due to battery manufacturing issues," he added.

"The company said it expected to be able to produce 5,000 Model 3s by the end of Q1 2018 as it sorted out its supply chain issues. This week's numbers will establish whether that target is anywhere close to being achieved, and whether the company is any closer to reducing its losses."

There are also a couple of indicators from China, including foreign direct investment and trade, plus Statistics Canada's monthly look at building permits, which economists expect to show a rise of 1 per cent in December.

Thursday: T-Rex doesn't want to be fed. He wants to hunt

All eyes will be on Carolyn Wilkins, the Bank of Canada's senior deputy governor, who speaks in Montebello, Quebec, in the afternoon.

Bank of Canada senior deputy governor Carolyn Wilkins

Observers don't expect the central bank to change its tune, though Ms. Wilkins has surprised the markets before.

It's also a big day for governor Mark Carney and the Bank of England, which releases its rate decision, inflation report and meeting minutes.

Royal Bank of Canada expects the central bank's monetary policy committee to hold its key rate steady at 0.5 per cent.

"With the pound at its highest levels since the Brexit vote against the U.S. dollar, MPC officials will be hoping that the 18-per-cent gain from a year ago will start to have a downward effect on the headline inflation rate," added CMC's Mr. Hewson.

"For now that doesn't seem to be happening, if recent rises in input prices are anything to go by," he added.

"Bank of England governor Mark Carney will be hoping at his Thursday press conference, that U.K. wage growth starts to move in a similar direction to U.S. wages in the coming months so he can start guiding expectations of another rise in interest rates for later this year, against a backdrop of an improving economy. "

Also on tap are Japanese current account numbers and Canada Mortgage and Housing Corp.'s monthly look at construction starts, expected to show a drop of 3.7 per cent in January on an annualized basis.

Earnings: We start with the T-Rex of corporate Canada, BCE Inc., but also have Canada Goose Holdings Inc., CVS Health Corp., Domtar Corp., Gluskin Sheff + Associates, Great-West Lifeco Inc., Interfor Corp., Kellogg Co., Phillip Morris International Inc., Telus Corp., Thomson Reuters Corp., Twitter Inc., Tyson Foods Inc. and Viacom Inc.

Friday: If the Pirates of the Caribbean breaks down, the pirates don't eat the tourists

The morning will also be edge-of-your-seat because Statistics Canada's labour force survey, or LFS, is always hard to call so the forecasting system breaks down.

And the January report is no exception, with economists projecting a wide range of possibilities, from job losses of 12,000 in January to gains of 20,000 after two straight strong readings.

Unemployment is forecast to hold at 5.8 per cent.

Here's Toronto-Dominion Bank, which expects to see a loss of 12,000 jobs: "The LFS report should send mixed signals and markets could be grappling with weakness in jobs but a surge in wage growth on account of the Ontario minimum wage hike. Because we see wages as a lagging indicator relative to jobs, and because the monthly surge in wages will be largely driven by a one-off policy adjustment, we expect the Bank [of Canada] to be concerned by the underlying trends in the labour market and focus more on jobs this month."

And here's CIBC, which forecasts another gain, to the tune of 13,000 jobs: "The offset for consumer pocket books could come from firmer wages. We've already seen the pay rate measured in the LFS move higher, although the Bank of Canada has outlined a new measure that is stacking up to only 2.2 per cent. Look for the LFS measure, and the BoC's new metric, to accelerate in the months ahead … Job growth was phenomenal in 2017, and will still be pretty good in 2018. Although average annual growth will benefit from the strong hand-off seen over the past few months, the monthly pace will be roughly half of last year's trend."

Markets will also be juggling consumer price index readings from China and earnings from companies that include CAE Inc., Cameco Corp., IGM Financial Inc. and Moody's Corp.

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