Top of the morning
Investors who were short bonds at the beginning of this year in anticipation of rising yields — a widely-held view — got hammered. However, according to Bloomberg, the experts are once again confidently calling for weakness in fixed income:
Given the chance to speculate on declines in only one asset class, 45 per cent of investors, traders and analysts in a quarterly Bloomberg Global poll conducted last week picked debt securities of some type as their top choice, more than three times the percentage who selected gold. Among the options, most chose government debt and junk bonds over assets that also included stocks, commodities, currencies and real estate.
While the resilience of treasuries to speculative-grade corporate bonds and emerging-market sovereign debt surprised almost everyone this year, bond skeptics are still convinced that a strengthening U.S. economy will ultimately lead to higher yields as the Federal Reserve lifts interest rates. The poll respondents were bearish on bonds even as they said a lack of inflation, which has propelled the biggest global bond returns in a decade, was a greater threat to the economy than inflation.
On the homefront
The TSX bested its U.S. counterparts last week for the first time since mid-September, and booked its fifth straight week of gains. Canada’s benchmark index has now eliminated all of October’s losses. While WTI crude oil futures continue to linger well below $80 per barrel and close to four-year lows, the carnage in bullion appears to have subsided. Natural resource stocks have not, by and large, played the starring role in the index’s recovery. TSX 60 futures are moving lower ahead of the open.
Broad U.S. dollar strength has pushed the loonie down to 0.884 against the greenback this morning.
Valeant seen coming up empty in quest for Allergan. Media reports indicate that Irish-headquartered Actavis is finalizing a deal to acquire Botox maker Allergan for over $210 per share, and that an announcement of such a transaction is imminent. Valeant Pharmaceuticals (VRX) teamed up with activist investor Bill Ackman in an attempt to acquire Allergan, but its hostile takeover attempt was not well received by management, which rebuffed its advances. The Canadian pharma giant said it was prepared to offer at least $200 per share, a substantial premium to the current value of its most recent bid. A special meeting of Allergan shareholders to vote on its proposal is scheduled for Dec. 18. Valeant has, historically, shied away from bidding wars, so it appears as though Actavis will indeed be the white knight that Allergan has been longing for.
Home price appreciation set to “perk up.” At about 9:00 a.m. (EST), the Canadian Real Estate Association (CREA) will publish data on home sales and prices for October. Resales dipped on September, ending a seven-month winning streak of gains, but annual price growth continued to exceed five per cent. “Average price gains are expected to clock in at around six per cent y/y, little changed from the prior month,” writes Bank of Montreal senior economist Robert Kavcic. “The quality-adjusted MLS home price index, a better representation of market conditions, looks set to perk up slightly to 5.5 per cent y/y, due to some acceleration in Toronto and Vancouver.” The Bank of Canada has singled out those two housing markets, along with Calgary, as having enjoyed particularly strong rates of home price appreciation, but there has been little discussion of whether targeted macroprudential measures to cool those particular metropolitan areas would be wise.
Canadian private equity firm targeting Swiss juice-box maker. Bloomberg reports that Onex Corp. (OCX) is leading the bidding for packaging maker SIG Combibloc Group, and may acquire the company for over $4 billion. Management recently spoke favourably about the opportunities available in Europe; a purchase of SIG would be the firm’s biggest deal on the continent since 2010.
And just like that, Japan is back in a recession. The island nation’s economy unexpectedly contracted by an annualized 1.6 per cent in Q3; economists were expecting an increase of 2.1 per cent. In Q2, the economy shrank by 7.3 per cent. This decline was driven by a huge drawdown in inventories and a drop-off in business investment. Prime Minister Shinzo Abe had indicated that he would move to delay the second leg of the sales tax hike, which is currently scheduled for October 2015, if this reading was a weak one. Economist Paul Krugman has suggested that “a loss of fiscal credibility” might actually be beneficial for Japan, in that it could help spur inflation. The prime minister is likely to call a snap election shortly in hopes that he will strengthen his mandate. Japanese stocks got slammed following this print, slumping by three per cent.
International investors now have more opportunities to invest in Chinese equities. The Shanghai-Hong Kong Stock Connect, which allows investors in those locales to trade stocks on both exchanges, launched on Sunday evening. There was much more buying of mainland Chinese equities by investors in Hong Kong than flows in the other direction.
Alibaba is beloved by hedge funds, according to the 13F regulatory filings released on Friday. Janus Capital, Moore Capital, Tiger Management, Omega Advisors, and Jana Partners held a combined 6.9 million shares of the Chinese e-commerce company at the end of September, shortly after its wildly successful, record-setting initial public offering.
Mega-merger of oilfield services companies. Halliburton is set to purchase Baker Hughes in a cash and stock deal valued at $34.6 billion. The two parties estimate that they can generate $2 billion in annual synergies by uniting. Plummeting prices for crude oil have weighed on both stocks in recent months, as this development threatens to reduce margins and sales in the short term. Regulators are likely to give this transaction a thorough look-through, as it would be a merger of the world’s second and third-largest oilfield services companies (Schlumberger is the biggest). There’s a hefty termination fee of $3.5 billion that Halliburton would pay to Baker Hughes if regulators don’t approve the deal.
In the United States, October’s readings of industrial production and capacity utilization are slated to be released at 9:15 a.m. (EST).