Top of the morning

Over at the Globe and Mail, Scott Barlow highlights a long-term trend that suggests emerging markets — and in turn, the TSX — may be set to underperform U.S. equities:

The 30-year pattern shows that it is extremely rare for emerging markets equities to outperform when the trade-weighted U.S. dollar is rising. The factors driving this are numerous – cross border asset flows, U.S. Federal Reserve monetary policy (low rates definitely motivated emerging markets investment. The only real question is how much), relative bond yields, global investor risk tolerance … The list could go on for another page.

It appears that we’ve entered a new cycle of dollar strengthening that began in 2011. This idea is supported by recent data from Europe and Japan showing rapidly slowing economies and significant deflationary effects. The trend in U.S. data has been strong, particularly in comparison to Europe and Asia, and this will attract foreign flows that strengthen the dollar further…

The S&P/TSX Composite Index has moved almost in lockstep with emerging markets stocks in recent years. The domestic benchmark’s relatively high weighting in resource stocks – which benefited tremendously from the infrastructure and construction booms in China and elsewhere – explain the close relationship.

On the homefront

The TSX ended the week above 15,000 for the first time since late September, with natural resources stocks helping the index beat its U.S. counterparts on the week. TSX 60 futures are moving higher ahead of the open.

 

A perfect storm fuelled a massive rise in the Canadian dollar on Friday. Early that morning, China’s central bank announced a pair of surprised rate cuts, giving commodity currencies a lift. Later, Canadian inflation surprised to the upside, hitting 2.4 per cent in October, with the core rate running at its highest level since February 2012. The loonie is weakening modestly against the greenback this morning to trade at 0889.

 

Policy must address widening inequality. TD Economics is set to release a report today warning that, absent action from policy-makers, income inequality in Canada will widen, and will look a lot more like the situation south of the border. “If Canada doesn’t want to have higher income inequality in the future, governments will have to lean against the trend toward that outcome,” TD chief economist Craig Alexander, one of the authors of this study, told the Globe and Mail’s Tavia Grant.

 

Canada’s auto loan market a “ticking time bomb?” That’s how the Financial Post’s Garry Marr and Barbara Shecter characterize the situation, drawing attention to some dubious lending practices, like the prevalence of negative equity loans. “Spurred by tantalizingly low interest rates, sweeteners like stretched-out loan timelines, and increasingly confident consumers who worship their wheels, car debt has been growing at a phenomenal pace in recent years — faster than any segment of the credit market,” they write.

 

Onex to buy Swiss packaging firm. Confirming last week’s rumours, Canadian private-equity firm Onex Corp. (OCX) agreed to purchase SIG Combibloc Group for up to $4.7 billion. Beyond the sticker price, Onex will pay an additional $217 million if the business meets its performance targets over the next two years. “SIG’s management team has successfully proven its ability to enter and grow in new markets, while maintaining its standard of excellence in existing markets,” said Onex managing director Nigel Wright.

Daily dispatches

Asian markets soared on Monday, playing catch-up following the rate cuts made by China’s central bank on Friday. “Central-bank support never gets old,” quipped Adrian Miller, director of fixed income strategy at GMP Securities. While the efficacy of PBoC’s move is debatable, the important takeaway is that Chinese monetary policy-makers have demonstrated their commitment to adding accommodation in the wake of slowing inflation and growth, and that their approach may be more aggressive than previously assumed. To this end, citing sources familiar with the matter, Reuters reports that more measures to ease policy in China are in the offing.

 

World powers and Iran appear to have been unable to broker a deal regarding the Middle Eastern nation’s nuclear program. The deadline for such an agreement (today!) is likely to be extended, with discussions resuming before the year is out. “It became increasingly clear during a week of intensive negotiations between the top U.S. and Iranian diplomats that what officials close to the talks have been predicting privately for weeks will likely be correct: barring a last-minute decision by Iran to compromise, a final deal is still too far off to hammer out by the parties’ self-imposed deadline later on Monday,” write Reuters’ Louis Charbonneau and Fredrik Dahl. All else equal, the absence of an agreement is likely a net positive for the price of oil, as sanctions will continue to limit Iran’s ability to ramp up exports of crude.

 

Bond yields in Italy, France, and Spain are at record lows as market participants look for the European Central Bank to embark upon a program of purchasing sovereign debt in the face of persistently low levels of inflation and very meagre growth.

 

A reading of German corporate confidence snapped a six-month skid in November, with the Ifo business climate index unexpectedly rising to 104.7. “Expectations with regard to the months ahead are also brighter,” writes Hans-Werner Sinn, president of the Ifo Institute. “The downturn in the German economy has ground to a halt for the moment at least.”

 

The end of the year is typically very quiet, but that might not be the case this time around. “There are five weeks to Christmas and six to the New Year, but traders still have to navigate through the lower liquidity and the raft of December event risk,” writes IG chief market strategist Chris Weston. “Here we get the ECB meeting (Dec. 4), the second Targeted Long-Term Refinancing Operation (Dec. 11) and the Japanese election (Dec. 14); plenty for macro-focused traders to watch.”