Top of the Morning

The Globe and Mail’s Jeffrey Jones and Jeff Lewis write that declining demand and the ensuing dip in oil prices may reduce the growth prospects for Canadian oil companies, which make up a substantial portion of the TSX:

The price weakness is remarkable in that it comes in the midst of heightened tensions in hot spots such as Iraq, Libya and Ukraine. It shows how fears of supply disruptions are having a shrinking influence on markets as production in countries outside OPEC, including Canada, surges and demand growth shrinks.

Deep discounts on heavy oil, once the bane of the Canadian sector, have shrunk since early 2013 as export transportation options have grown. But now returns for oil producers are shrinking again due to the lower world benchmarks…

Canadian energy shares, which had a sharp runup in the first half of the year, have weakened with oil and natural gas prices. But even now they are looking pricey by some measures, including the historical relationship between oil and the Toronto Stock Exchange’s group of oil and gas stocks. The two have diverged to the widest margin in five years.

The group is down 7.4 per cent since the end of June, and yet investors are still placing big bets on share issues and initial public offerings.

On the Homefront

TSX 60 futures are trading to the upside ahead of the open after the composite index booked a solid gain on Thursday.

 

The loonie is choppy this morning, trading in a band around 0.905 USD. The Canadian dollar sank to a five-month low against its U.S. counterpart on Thursday, but has actually performed rather well against most other majors since late March.

 

Just how indebted are Canadian households? At 8:30 a.m. (EDT), Statistics Canada will provide the latest update on an oft-cited measure of the indebtedness of Canadian households: the ratio of household credit market debt to disposable income. This metric has declined for back-to-back quarters, falling 0.7 percentage points to 163.2 percent in Q1. However, economists project that household debt-to-income will move higher in this reading. “The housing market firmed following a weak Q1 and debt growth chugged along at about a four per cent annualized pace for a seventh consecutive quarter,” writes Bank of Montreal senior economist Benjamin Reitzes. “That pace of debt accumulation alone isn’t worrying, as it’s well below pre-crisis trends, but very soft income growth in Q2 is going to push the debt ratio higher.” The resurgence of housing activity — a key driver of increased indebtedness — has caught the attention of Canada’s monetary policymakers. In the Bank of Canada’s latest communiqué, the governing council omitted its usual reference to the “constructive evolution of household imbalances” and indicated that the market has been “stronger than anticipated.” Douglas Porter, chief economist at the Bank of Montreal, told us that a marked rise in indebtedness would be “a small scare for the bank.” Right before Q2 began, the Bank of Montreal cut its posted five-year fixed mortgage rate below three per cent in an attempt to attract customers during the prime home-buying season. Economists at CIBC have warned that consumer spending is likely to take a hit when mortgage rates rise, as an increase in interest costs will displace other discretionary purchases.

UPDATE: Household debt-to-income rose in Q2, but remains below the record high set in the third quarter of 2013.

 

Pershing Square, Valeant increase level of support from Allergan shareholders. Reuters reports that Pershing Square’s Bill Ackman has amassed the support of 35 per cent of Allergan’s shareholders, well above the 25 per cent threshold required to force the Botox maker to call a special meeting and slightly higher than the previously reported level of support (33.8 per cent). These 1.2 percentage points may not sound like much, but in this case, they might make a world a difference. Allergan is attempting to block Pershing Square from voting its stake, which is just shy of 10 per cent, alleging that Ackman and Valeant engaged in insider trading. This new boost in support renders Allergan’s tactic ineffective, at least for the purposes of preventing a special meeting. Ackman, a billionaire activist investor, has teamed up with Valeant Pharmaceuticals (VRX) in a hostile takeover bid for Allergan, and hasn’t shied away from expressing his opinion of the Botox-maker’s management. At this special meeting, which is currently scheduled for Dec. 18, Pershing Square will look to oust members of Allergan’s board of directors and replace them with people who favour the proposed transaction.

 

Canadian retailer posts big loss. Before the market opened, Hudson’s Bay Company (HBC) released its quarterly results for the 13-week period ending Aug. 2. The retailer booked a loss of $36 million, a sizable improvement compared to its $81-million loss in Q2 2013. Management attributed the loss to investment in its digital business and one-time costs related to asset sales. Revenues of $1.77 billion were in line with the consensus estimate, as same-store sales at Lord and Taylor rose 1.1 per cent, while sale-store sales at Saks Fifth Avenue increased by 2.2 per cent.

 

The skinny on the government’s EI premium cut. On Thursday morning, Finance Minister Joe Oliver announced that the Canadian government would be slashing EI premiums paid by small businesses by about 15 per cent in 2015, a move Ottawa says will save these companies $550 million over the next two years. Note: this measure does not reduce taxes paid by employees or businesses in general, but is a targeted measure for companies that pay less than $15,000 in EI premiums per year. The Canadian Federation of Independent Business (CFIB) praised the move, and projects that it will create 25,000 person years of employment over the next few years. However, many economists fear that this reduction may serve as a disincentive for small businesses to grow and hire, as they would eventually be unable to utilize these lower premiums. In a piece for Maclean’s, Laval University’s Stephen Gordon spells this out clearly. “For firms that are just under the $15,000 threshold, hiring a new worker would mean crossing the line and losing the tax credit entirely,” Gordon writes. “For firms that are just over the threshold, the incentives are even more perverse: firms may choose to actually reduce employment in order to be eligible for the tax credit.”

Daily Dispatches

Some rare good news from Europe: industrial production in the eurozone rose one per cent month-over-month in July on the heels of a 0.3 per cent decline in its previous reading. However, not every nation in the eurozone fared well. Italy, which is in the midst of a triple-dip recession, saw industrial production fall by one per cent on a monthly basis.

 

There’s a heavy slate of U.S. data due out this morning. At 8:30 a.m. (EDT), the Census Bureau will provide the latest update on retail sales in August. The consensus estimate is for headline sales to grow by 0.6 per cent month-over-month, with core retail sales (which excludes purchases of cars and gas) up 0.5 per cent. In tandem with those figures, the Bureau of Labour Statistics will release the latest price of import prices for August. And just before 10:00am, the UofM preliminary reading of September’s consumer sentiment index will be released, with economists calling for an increase from 82.5 to 83.3.

 

Credit growth in China soared in August, with the value of new loans skyrocketing more than 80 per cent month-over-month following a dropoff in July, which will do nothing to quell fears of a massive credit bubble. The nation has been attempting to transition away from credit-fuelled growth toward growth driven by domestic demand, and judging by this latest print, policy-makers still have work to do on this front. In October, the world’s second largest economy is expected to make it easier for foreign investors to purchase a wider array of domestic equities. The nation’s rapid economic growth hasn’t fuelled a parabolic rise in Chinese stocks, with the Shanghai Composite Index still trading well short of its 2007 peak.

 

Keep on eye on Chinese data scheduled to come out early Saturday morning, with readings on industrial production, fixed asset investment, and retail sales on the docket. These events “will help set the tone for Monday trade,” writes IG market strategist Stan Shamu.