Top of the morning
In Business Insider, former PIMCO CEO and co-CIO of PIMCO Mohamed El-Erian discusses the wisdom of yesterday’s decision by OPEC, which sent oil prices and Canada’s benchmark equity index plummeting:
OPEC has a history of opting for strategic rather than tactical decisions; and, this time around, it may have done so from a position of caution rather than overwhelming strength.
OPEC’s tactical decision would have been to cut its output ceiling as a means of limiting supply to the world energy market and, thus, boosting prices. But the impact of such a cut would have been less than in the past given the declining importance of OPEC oil in the global energy equation…
Due to both technology innovations (such as those impacting shale energy) and environmental considerations, the oil industry faces significant secular headwinds. A sustained decline in oil prices, while causing short-term pain for producers, serves to alleviate some of these headwinds – first, and foremost, by making some of the alternative energy sources less commercially viable.
On the homefront
The TSX got crushed, ending Thursday down triple digits as energy stocks suffered their worst one-day decline in more than three years. Oil cartel OPEC elected not to curtail production in response to falling prices, which, in turn, sent crude prices plunging to fresh four-year lows. Energy sector heavyweights like Suncor (SU) and Canadian Natural Resources (CNQ) tumbled by 5.7 and 7.1 percent, respectively. Airline stocks, however, were the beneficiaries of lower oil, which helps their bottom lines. Air Canada (AC) rose 1.5 percent, while WestJet (WJA) booked a gain of 6.5 percent. The near contract for WTI sank below $70 per barrel in the aftermath of OPEC’s decision, and continues to linger below that level this morning. TSX 60 futures are falling ahead of the open.
The loonie tanked in tandem with crude, and continued to drift lower overnight even as oil stabilized. The Canadian dollar is hovering around 0.877 against the greenback this morning.
The Canadian economy has strong momentum heading into year-end. At 8:30am (EST), Statistics Canada is set to release monthly GDP for September along with a reading of growth for the third quarter. The consensus estimate is that the economy expanded by 0.4 percent month-over-month in September after contracting in August and stagnating in July, suggesting that the nation has renewed economic momentum heading into the final quarter of the year. The Bank of Canada projected that the economy would grow by an annualized 2.3 percent quarter-over-quarter in Q3; private-sector economists are calling for growth of 2.1 percent. As always, it’s not just the level but also the composition of growth that will be of interest to policymakers, who want to see exports and business investment take the baton from consumer spending in terms of driving growth. While we’ve had reason to celebrate the revival of exports, business investment is still missing in action. “Business investment is likely to still be weak, something that may persist if oil prices hamper oil patch investment,” writes CIBC economist Nick Exarhos. “Export growth should help soften some of the blow, however, with a weaker loonie going into 2015 likely providing more support ahead.” A bright note: revisions from Statistics Canada mean that the starting point for the economy is higher, as growth in the first quarter was bumped up to 1 percent (from 0.9) and second-quarter growth as revised up to 3.6 percent (from 3.1).
Canadian patent problem. A study from the C.D. Howe Institute, detailed here by The Globe and Mail’s Barrie McKenna, found that Canadian patent filings per capita have been trending downwards since the new millennium. This suggests the nation is “struggling with the commercialization aspect of the innovation process,” according to the authors.
Pay your way into Canada. Ottawa is on the verge of unveiling a new immigrant investor plan, The Wall Street Journal reports. This program would enable those who hope to become Canadian residents to get their hands on a residency visa in exchange for an investment of $1 million in a venture capital fund, which the government would use to help finance start-ups.
Ugly European unemployment and inflation figures. Italy’s unemployment rate rose to a record 13.2 percent in October, while the number of unemployed people in France hit a new high of 3.5 million. Double-digit unemployment rates have become a terrifying status quo in the euro area, which sits at 11.5 percent for the region as a whole. Meanwhile, headline inflation was up 0.3 percent year-over-year across the euro area in October, while annual core inflation was running at a much better, but still far too low rate of 0.7 percent. This combination of cripplingly high unemployment and persistently subdued inflation puts additional pressure on the European Central Bank to make additional moves to stimulate the economy.
Impressive Japanese data. Industrial production for the island nation unexpectedly edged higher in October, while a bevy of other indicators were in line with or better than what economists had anticipated. “Data out of Japan including household spending, inflation, industrial production and unemployment showed some signs of improvement, or stabilisation perhaps,” writes IG market strategist Stan Shamu. “This has proved to be a positive for equities, particularly in the financial sector.” Another factor that might be giving equities a lift: the yield on Japanese government two-year bonds fell into negative territory on Friday, a byproduct of the Bank of Japan’s massive stimulus program that makes owning riskier assets more attractive.