Top of the Morning
In the Financial Times, Martin Wolf makes an impassioned plea for stronger reforms to the financial system:
Policy-makers rely overwhelmingly on monetary policy as the stabilization instrument of choice. But monetary policy works via asset prices and credit expansion. This combination certainly risks a repeat of crises. This is particularly the case if, as seems plausible, there is structurally deficient demand. Policy-makers may be doomed to create new bubbles to replace old ones…
The business model of contemporary banking has been this: employ as much implicitly or explicitly guaranteed debt as possible; employ as little equity as one can; promise a high return on equity; link bonuses to the achievement of this return target in the short term; ensure that as few as possible of those rewards are clawed back in the event of catastrophe; and become rich. This was a wonderful model for banks. For everybody else, it was a disaster.
The new regulatory regime is an astonishingly complex response to the failures of this model. But “keep it simple, stupid” is as good a rule in regulation as it is in life. The sensible solution seems clear: force banks to fund themselves with equity to a far greater extent than they do today.
On the Homefront
TSX 60 futures are moving higher after the composite index closed at a record high on Wednesday.
The loonie is up modestly this morning, trading above 0.919 against the greenback.
Will Canadian export growth continue to accelerate in Q3? At 8:30am (EDT), Statistics Canada will release figures on July’s monthly trade balance. Economists are calling for a surplus of about $1 billion on the month after June’s surplus totalled $1.9 billion, the nation’s largest since 2011. These monthly prints have been quite volatile and subject to significant revisions. However, trade figures remain one of the most important Canadian data points to watch, as the Bank of Canada is looking for a rebalancing of growth towards this segment in order to put the economy on a more sustainable path. Exports surged by an annualized 17.8 per cent quarter-over-quarter in Q2, which helped elicit a more optimistic tone from Canada’s monetary policy-makers in their latest communiqué on Wednesday. Ahead of this release, Scotiabank economists Derek Holt and Dov Zigler suggested that resource exports might retrace some of June’s gains, while shipments of autos were likely to increase.
UPDATE: Canada posted a massive trade surplus of $2.6 billion in July, the nation’s largest since 2008.
Manulife makes major acquisition. Canada’s biggest LifeCo by market cap, Manulife (MFC), announced that it was purchasing the Canadian operations of Standard Life for $4 billion. This deal with strengthen the company’s performance in Quebec, as Standard Life has a large presence in that province. The transaction will be partially funded by the issuance of $2.1 billion in subscription receipts, $500 million of which will be sold in a private placement to the Caisse de dépôt et placement du Quebec, the province’s pension fund. Shares of Manulife are up only single-digits in 2014, as the expected rise in bond yields has failed to materialize.
Shuffle of the C-Suite continues at Canada’s big banks. The CEO of the Royal Bank of Canada’s Carribbean unit, Suresh Sookoo, is stepping down at the end of October and will be replaced by Kirk Dudtschak, president of Caribbean banking. Meanwhile, Tom Milroy, group head and CEO of Bank of Montreal Capital Markets, is also retiring and will be succeeded by Darryl White in November. White currently serves as the head of global investment and corporate banking, and is also a director of the Montreal Canadiens.
Suncor makes sale. After the market closed on Wednesday, Suncor Energy (SU) announced that it would be selling non-core assets for $168.5 million. “The sale of the Wilson Creek assets is consistent with our disciplined approach to managing our portfolio,” said president and CEO Steve Williams. Shares of the vertically integrated energy giant are up nearly 20 per cent year-to-date but have been drifting downwards since mid-June.
Waterloo-based logistics firm posts small miss on earnings. Descartes Systems Group’s (DSG) Q2 results for fiscal 2015 failed to live up to analysts’ expectations. Earnings per diluted share came in at $0.05, a penny below the consensus estimate, while revenues of $42.7 million were also a tad light. Descartes’ place in the center of global trade makes all commentary from management invaluable to investors.
Ebbing geopolitical tensions would be mutually beneficial for both the Russian and European economies, according to IG market strategist Stan Shamu. “A resolution would reduce the probability of more sanctions being imposed and prevent further strain on the region,” he writes. “Europe is heading into autumn, when energy needs tend to rise, and with Russia controlling most of the region’s supplies, any restrictions could be detrimental.”
The Bank of Japan made no changes to policy in its latest statement, though governor Haruhiko Kuroda did say that he didn’t think a weaker yen “would be particularly bad for Japan’s economy.” The island nation’s economy contracted sharply in the second quarter, largely attributed to the implementation of a sales tax hike in April.
Mark Carney’s Bank of England also stuck with the status quo on rates and the size of its monthly asset purchases following its September meeting. The minutes from the Bank’s August meeting showed that two members of the monetary policy committee preferred to raise rates immediately.
German factory orders rose 4.6 month-over-month in July, a bigger pick-up than economists had forecast, and June’s figures were also revised upwards. This strong data point out of Europe — a particularly rare unicorn as of late — came prior to the European Central Bank announcement this morning.
The European Central Bank made a number of interest rate reductions in an attempt to help stimulate economic activity and inflation in the eurozone. The central bank lowered its benchmark interest rate to 0.05 per cent, brought its deposit rate further into negative territory at -0.2 per cent, and cut its marginal lending rate to 0.3 per cent. President Mario Draghi will hold a press conference beginning at 8:30 a.m. (EDT), at which he may provide clues as to the probability and timing of additional stimulus. “A fresh staff forecast will be released during Draghi’s press conference and another downgrade to growth and inflation seems likely,” writes Bank of Montreal senior economist Benjamin Reitzes.
There’s a bevy of U.S. events on deck, with July’s trade figures, last week’s initial jobless claims, and a number of speeches from members of the Federal Reserve scheduled today.