Top of the Morning

The Financial Times’ Martin Wolf shares his gloomy view of what’s been driving global economic progress for the past 25 years:

Without an unsustainable credit boom somewhere, the world economy seems incapable of generating growth in demand sufficient to absorb potential supply. It looks like a law of the conservation of credit booms. Consider the past quarter century: a credit boom in Japan that collapsed after 1990; a credit boom in Asian emerging economies that collapsed in 1997; a credit boom in the north Atlantic economies that collapsed after 2007; and finally in China. Each is greeted as a new era of prosperity, to collapse into crisis and post-crisis malaise…

These credit booms did not come out of nowhere. They are the outcome of the policies adopted to sustain demand as previous bubbles collapsed, usually elsewhere in the world economy. That is what has happened to China. We need to escape from this grim and apparently relentless cycle. But for now, we have made a Faustian bargain with private sector-driven credit booms. A great deal more trouble surely lies ahead.

On the Homefront

TSX 60 futures are virtually flat ahead of the open after yesterday’s triple-digit loss for the composite index.

 

The Canadian dollar is holding steady around 0.895 against the greenback after falling on Tuesday.

 

The yield on the five-year Government of Canada bond is moving higher this morning to trade at 1.54 percent.

 

WTI crude oil futures continue to come under pressure, with the near contract trading below $88 per barrel this morning. Though the price will likely find support around $85 – some suppliers wouldn’t be able to justify production below such a level – an extended period with sub-$90 WTI certainly isn’t good news for Canadian oil companies, or the TSX in general.

 

Valeant plans to bump up its bid for Allergan. Citing a source familiar with the matter, Bloomberg reports that Valeant Pharmaceuticals (VRX) will hike its hostile bid for Botox maker Allergan close to the upcoming December 18 meeting of shareholders. Such a move would likely entice more shareholders to support Pershing Square’s push to remove members of Allergan’s board of directors at this meeting, and replace them with people who favour Valeant’s bid. The Canadian pharma giant had previously indicated that it would not raise its offer until Allergan’s management were willing to sit down and negotiate.

 

SNC-Lavalin CEO says company is too big to prosecute. “The head of Canadian engineering giant SNC-Lavalin Group Inc. says any move by authorities to charge the company in connection with an extensive bribery scandal would immediately threaten its future and could force it to close down,” writes The Globe and Mail’s Richard Blackwell. CEO Robert Card indicated that criminal charges would hurt the company’s reputation, impairing its ability to do business – especially with the government. This, in turn, could trigger an ownership change, which Card says would put 5,000 Canadian jobs in jeopardy.

 

Housing starts set to stay elevated. At 8:15am (EDT), the Canada Mortgage and Housing Corporation (CMHC) will release September’s reading of housing starts. In light of the 16 percent monthly decline in residential building permits seen during August, there’s some downside risk to the consensus estimate that starts will come in at an annualized rate of about 198,000. Multi-family intentions saw the steepest fall, as such, that’s the segment that is most likely to experience a pullback. In August, starts moderated across all property types, falling to 192,400. In general, housing activity – whether it be price appreciation, home sales, or construction activity – has exceeded economists’ expectations thus far in 2014.

UPDATE: Housing starts came in virtually in line with the consensus estimate, with the six-month moving average rising to its highest level since January 2013.

 

Quebec drugstore chain reports solid results. Jean Coutu (PJC.A) released its Q2 results for fiscal 2015 before the market opened. The drugstore chain reported adjusted earnings per share of $0.28, in line with analysts’ expectations, on better than expected revenues of $674.4 million. Same-store sales rose 2.4 percent compared to the same period in 2013. “Our performance demonstrates the strength of our business plan,” said President and CEO Francois J. Coutu. The stock has been on an impressive run since mid-2010, and ended Tuesday at a record closing high.

 

CN train derailed in Saskatchewan. 26 CN rail cars are off the tracks close to Clair, Saskatchewan, leading to a fire after petroleum distillates leaked from two cars. Local authorities have declared a state of emergency, and the area has been evacuated.

Daily Dispatches

Tuesday’s big sell-off was a bit too convenient, according to IG chief market strategist Chris Weston. “Concerns around global growth have been cited as the reason behind the collapse in risk sentiment and that seems logical given the moves lower in U.S. bond yields,” he writes. However, most in the market knew there was a strong chance the IMF and World Bank would alter their forecasts some time ago.”

 

China’s HSBC Services PMI fell to 53.5 in September from 54.1 in its previous reading, suggesting a slower rate of expansion in the sector. This is yet another sign that, as TriVest Wealth portfolio manager Martin Pelletier put it, the world’s second-largest economy is “clearly not firing on all cylinders.”

 

The minutes from the Federal Reserve’s September meeting will be released at 2:00pm (EDT). Traders will be looking to see if the growing consensus amongst monetary policymakers matches what the “dot plot” of projections indicated – that rate hikes are coming sooner than previously expected.