Canada Market Cheat Sheet (February 14, 2011)

Saturday, February 12th, 2011

TSX and Subgroups – Week Ending February 11, 2011

TSX and Subgroups – YTD to February 11, 2011

TSX and Subgroups – 1 Year Ending February 11, 2011

Strengths

• Canada Has Trade Surplus; Exports Jump Most Since ’82. Canada unexpectedly posted its first trade surplus in 10 months in December as energy and metals powered the biggest jump in exports in almost three decades.
• Canada returns to trade surplus in December. OTTAWA (Reuters) – Soaring exports of crude oil and other energy products unexpectedly tipped Canada’s trade balance into surplus in December after nine months of deficits, fueling hopes the much-coveted export recovery is gaining traction.[Reuters]
• Improved leasing market boosts Brookfield. Brookfield Office Properties (BPO-T17.28-0.18-1.03%) says the companies who fill its office towers in key markets such as New York and Washington are acting more decisively when it comes to leasing office space, as it reported fourth-quarter results that were just above analysts’ expectations. The company, which has offices in most large Canadian and U.S. cities, said funds from operations in the quarter were 40 cents a share, the same as last year. Analysts had expected 39 cents. Brookfield cited an improving leasing market for the gains. [Globe and Mail]
• SNC-Lavalin Will Buy Rest of AltaLink From Macquarie for C$213 Million. SNC-Lavalin Group Inc. said it will buy the part of AltaLink LP that it doesn’t own from Macquarie Essential Assets Partnership for C$213 million. SNC-Lavalin now holds an indirect 76.92 percent ownership interest in the Calgary-based transmission company. [Bloomberg]
• Canaccord boosts dividend as profit more than doubles. Canaccord Financial Inc. (CF-T15.92-0.08-0.50%) is raising its dividend after profit more than doubled in the third quarter on an improvement in the economy. The financial services firm said Thursday that it would pay a 7.5-cent-per-share dividend on March 15, an increase from the previous payout of 5 cents a share.[Bloomberg]

Weaknesses

• Fed’s illusion of prosperity bound to vanish. U.S. Federal Reserve Board chairman Ben Bernanke recently congratulated himself on CNBC for helping boost the Russell 2000 stock index by 30 per cent. The San Francisco Federal Reserve Bank just published a report that claims the second round of quantitative easing – so-called QE2 – is a success because the U.S. inflation rate is a percentage point higher than it would have been absent the Fed intervention. [Globe and Mail]
• Home prices could dive if rates rise, analyst says. Higher interest rates could “easily” cause Canadian home prices to collapse, Capital Economics warned in a bleak report that suggests the housing market is likely to suffer the same sort of crash that has plagued countries such as the United States. [Globe and Mail]
• Housing market will be stable next two years: RBC. A stronger economy will offset the effects of higher mortgage rates and keep Canadian house prices stable over the next two years, according to the Royal Bank of Canada. In a market update that has the bank forecasting price gains of 0.5 per cent in 2011 and 1.3 per cent in 2012, economist Robert Hogue said that after two years of “gyrating wildly,” the Canadian housing market is likely to be a much less interesting place for the next several years. [Globe and Mail]

Opportunities

• Drilling technology sparks new oil boom. Gary Williams recalls the last time the oil industry showed up in his tiny town of Waskada, Man. Crews punched holes in the prairie ground, then disappeared as suddenly as they arrived when those holes came up empty. But that was 30 years ago. This time, it’s different. Armed with new drilling technology and eager to reap the rewards of oil’s high prices, companies are tapping complex geological formations, and the crude is flowing, adding Manitoba to Canada’s list of significant oil-producing provinces.
• PetroChina pays $5.4 billion for Canadian gas assets. PetroChina is purchasing half of a prolific shale gas project from Canada’s Encana Corp for C$5.4 billion ($5.4 billion), marking the largest Chinese investment yet in a foreign natural gas asset.
• Global stock exchange consolidation may just be starting. As the heads of the TMX Group Inc. (X-T42.150.020.05%)and London Stock Exchange Group Inc. sat together in Toronto to unveil their $7-billion merger plan, Deutsche Boerse AG and NYSE Euronext Inc. (NYX-N38.310.511.35%)confirmed that they too are in talks to create a vast new exchange company that would combine the New York Stock Exchange with Germany’s main market. The Deutsche Boerse-NYSE plan would create what would be the world’s biggest market operator by revenue. The deals mark the resumption of a wave of mergers that in the past decade has seen exchanges unveil more than 600 purchases worth $94-billion (U.S.), according to Thomson Reuters. More than half that activity has been via cross-border deals as the industry has gone from one where each country had one or two major exchanges to one where transnational conglomerates dominate. [Globe and Mail]
• China pays $5.4-billion for B.C. gas play. PetroChina International Investment Co. Ltd. (PTR-N133.760.150.11%) has agreed to pay $5.4-billion in a natural gas investment with Encana Corp. (ECA-T31.03-0.99-3.09%) that promises to be the largest Chinese investment in Canadian energy assets. The deal underscores the voracious appetite Asian firms have for North America’s vast deposits of oil and gas – and speaks to the growing attraction of Canadian energy assets to overseas companies, which are increasingly looking at ways to buy western reserves that can some day be delivered to consumers in China and South Korea.[Globe and Mail]
• Canadian developers go shopping in Brazil. Real estate companies are sinking billions into the South American country’s property market, saying it is ripe for consolidation. When the more than one million residents of Campinas, Brazil go shopping, they wander open-air markets and visit a smattering of outdoor strip malls. Despite a swelling middle class, the bustling industrial region about an hour outside of capital Sao Paulo has very little indoor retail space. The lack of a proper shopping mall is the kind of thing that Pierre Lalonde dreams about when trying to decide where to invest Ivanhoe Cambridge’s money. [Globe and Mail]

Threats

• Canadian Currency Strengthens as Trade Surplus Buoys Interest-Rate Outlook.The Canadian dollar rose against most of its major counterparts as an unexpected trade surplus in December encouraged speculation the Bank of Canada will raise borrowing costs sooner than other central banks.
• Canada to say next week if review of LSE bid needed. Canada hopes to announce next week whether it will review the London Stock Exchange’s bid to merge with Canadian exchange operator TMX Group, Industry Minister Tony Clement said on Thursday.[Reuters]
• Mortgage rates on the upswing. Canadian banks are once again ratcheting up mortgage rates, as government bond yields rise because of worries about inflation and growing confidence in the global economic recovery. Toronto-Dominion Bank and Canadian Imperial Bank of Commerce were the first two banks out of the gate with mortgage hikes Monday. Both banks raised the rate on their standard five-year fixed mortgages to 5.44 per cent, an increase of one-quarter of a percentage point, or 25 basis points. Economists predict the other major banks will soon follow suit, perhaps as early as Tuesday. The yield on five-year Canadian government bond yields has gone up sharply of late, jumping 24 basis points last week alone, and mortgage prices closely track these bonds. [Globe and Mail]
• Pharmacies face upheaval with private-label drug ruling. An obscure line of generic prescription drugs launched by Shoppers Drug Mart Corp. (SC-T39.380.842.18%) has the potential to help ease its regulatory-reform pain but at the same time shake up the pharmacy sector. The company began to roll out its private-label line last year in most provinces to counter new laws meant to reduce the cost of government drug plans. Ontario, for one, had prohibited generic drug companies from paying rebates to drugstores – rebates that had been worth an estimated $750-million a year to the pharmacies. On Thursday, Shoppers released its year-end results, showing profits had been dragged down by the regulatory changes. [Globe and Mail]
• Strong loonie shifting Canadian production offshore: EDC. Canadian firms are increasingly shifting their production offshore in response to the pressures of globalization and the strong loonie, Export Development Canada says. A new study from the Crown corporation shows sales from foreign affiliates of Canadian firms grew by more than twice the rate of exports from firms inside Canada between the years 2000 and 2008.[Bloomberg]

Tags: Altalink, Bank Of Canada, Banks Canada, Ben Bernanke, Brazil, C 213, Canaccord, Canadian Currency, Canadian Market, Central Banks, China, Currency, energy, Energy Products, Export Recovery, Federal Reserve Board, Federal Reserve Board Chairman, Funds From Operations, Globe And Mail, Globe Investor, Interest Rate Outlook, Leasing Market, Leasing Office Space, Macquarie, Office Towers, oil, Ownership Interest, Profit More Than Doubles, Rbc, Reuters, Share Dividend, Snc Lavalin, Subgroups, Theglobeandmail, Three Decades, Trade Balance, Trade Surplus, Transmission Company, Week Ending February
Posted in Brazil, Canadian Market, Energy & Natural Resources, Markets, Oil and Gas, Outlook | Comments Off

Why China Can’t Divorce the Dollar

Friday, October 16th, 2009

Yesterday, we discussed the hype about the imminent death of the US dollar that is bubbling up these days, that is sending the Canadian dollar to parity, stocks and gold to new highs, and lifting commodity prices in general. In his FT.com column, Martin Wolf contends that it is the success of American economic policy that is sinking the dollar, and on the subject of China says:

Relevant policy is made by the Federal Reserve, which has no mandate to preserve the dollar’s external value. The only way China’s policymakers can preserve the domestic value of external holdings is to support the dollar without limit, which compromises China’s domestic monetary stability and will prove self-defeating in the end.

Wolf’s thesis is that the zeroing out of interest rates and re-liquidification of the US economy in the face of the credit crisis has crowded investors, both domestic and foreign, out of money market instruments and short term treasuries, into risk assets for yield or growth. It is the crowding out that has proven to be a success for the market and, as consequence, the devaluation of the greenback.

This presents short-term problems for China and its export recovery, but it is not yet time for China to deal with the advent of divorce from the US dollar as a reserve currency.

Mark Gimien, says China is not about to stop propping up the dollar, because in the meantime, the value of the RMB is rising, making its exports more expensive.

The dollar-renminbi trade is a perfect case study in being careful what you wish for. Though American exporters complain about an undervalued renminbi, China’s currency management turns out to have some enormous advantages for the American economy. China’s voracious demand for dollars—and the Treasury bonds to sink those dollars into—is a key reason why the U.S. government can borrow cheaply and keep U.S. interest rates low.

…

For a while now, economists have wondered when China will tire of lending cheaply to the U.S. government. The longer the process continues, the more China stands to lose over the long run; China is effectively propping up the dollar, and, thanks to its enormous holdings of Treasury bonds, gets left holding the proverbial bag when the dollar falls in value—as it already has in relation to the euro. Eventually, the thinking among economists goes, China will tire of getting rock-bottom interest on U.S. Treasuries while watching the value of its dollar-hoard shrink. This is why people like Ferguson and New York University economist Nouriel Roubini—one of the more prescient (and pessimistic) observers of the meltdown—are predicting an economic divorce between the two massive trading partners.

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So should we be worried? In the long run, yes—but we probably won’t see a massive and sudden catastrophe. China does want to disentangle itself from its reliance on the dollar. To do that, though, it also has to decrease its reliance on exports to the United States. That won’t happen overnight. As bad as the financial meltdown has been for the United States, it has been even worse for much of the rest of the world. The United States is the world’s consumer of last (and, well, first, too) resort, so the irony of American economic problems is that, as an oft-repeated adage has it, a U.S. sneeze tends to cause pneumonia in its trade partners.

One of the key economic memes of the past years has been the emergence of a robust Chinese consumer middle class. It is absolutely true that China’s middle class and its domestic consumption have both grown dramatically. Even in this economic climate, Chinese retail sales are up by double digit percentages. China remains, however, an export-led economy.

Another question to ponder from the domestic China perspective is one of confidence. How confident would the Chinese be in their own currency if it were not pegged to the US dollar?

When you cut through all of the noise surrounding the fate of the dollar, and look at the economic probabilities, the conclusion you can make is that China and the world for that matter have got far more incentive at the hinge of our economic crisis to do their respective parts to defend balance, not as a favour or whim, but as a matter of economic continuity. China’s best move is a smoother and longer term transition to independence from its symbiotic co-existence with the US dollar economy.

A US/China divorce is many years away, a long term proposition at worst. The more important issues in the present still rest on how monetary authorities will rebalance currency valuations, and that ultimately will slow or reverse the flow of liquidity out of the dollar. A reversal in the dollar’s decline would be negative for equity markets and other risk assets in the short term.

Tags: American Economic Policy, American Economy, American Exporters, Canadian Dollar, Canadian Market, China, China Currency, Commodities, Commodity Prices, Credit Crisis, Currency Management, Devaluation, Economist Nouriel Roubini, Economy China, Emerging Markets, Enormous Advantages, Export Recovery, Federal Reserve, Gold, Greenback, Hype, Imminent Death, Mandate, Martin Wolf, Meltdown, Monetary Stability, Money Market Instruments, New Highs, New York University, Parity, Policymakers, Relevant Policy, Reserve Currency, RMB, Rock Bottom, Treasuries, Treasury Bonds
Posted in Canadian Market, Gold, Markets | Comments Off

China: Signs of a recovery – already?

Saturday, April 4th, 2009

This post is a guest contribution by James Pressler* of Northern Trust Company.

We are just over six months into this global financial crisis, and most major economies have yet to get back on their feet. Yet somehow, the numbers coming out of Beijing suggest that the Chinese economy has already dusted itself off and is preparing to take off at a dramatic pace. Is such a quick recovery possible, and if so, how do other countries get in on it?

Our first piece of evidence is found within today’s PMI release for March. Given the particular survey methodology behind this index, we do not give the PMI significant attention, although it does carry weight in the markets at large. The overall PMI rose above the breakeven line of 50, and new orders broke above the line for the second consecutive month. These numbers suggest that the manufacturing sector of the economy was in contraction for about five months and below its usual pace for about nine months. Considering the wealth of anecdotal discussion of widespread shutdowns and mass layoffs, it seems odd to think that the worst has passed.

It also seems odd to see that another key category of the overall PMI – export orders – is doing surprisingly well. While neither the export orders index nor the imports index has crossed above 50, they both have come back from horrible droughts and appear set to break the line in April. Again, this is reassuring to see, but it does seem odd that this same kind of turnaround has not been witnessed in China’s main trading partners. For all the energy of China’s export recovery, few countries are showing any increased import demand these days, and those countries that supply China with economic inputs have not been bragging about a recovery in sales.

One indicator that we do pay particular attention to is bank credit, and several sources in Beijing suggest that lending has been dramatic through Q1. The People’s Bank of China (PBoC) reports that lending has spiked since November, with the main indicators exceeding the 17% rate officials are comfortable with. This growth is driven primarily by the government’s fiscal stimulus drive and its call for banks to lend more vigorously to offset the economic slowdown. From this perspective it is difficult to argue against the figures, and we recognize that plenty of entities will be putting large amounts of yuan to work in the coming months.

Our main concern for the near-term, however, focuses on how these funds will be put to use. The Chinese banking system has been improving its balance sheets over the past few months, but a significant amount of non-performing loans and ‘special mention’ loans still weigh on the sector’s ability to generate credit. If this wild growth in credit generation does not ignite self-sustaining economic activity, there is every chance that today’s big loans could become tomorrow’s burdens. For now we remain cautious – more so than the rallying Asian markets – and wait for more signals that can either confirm or refute all this economic activity.

Source: James Pressler, Northern Trust – Daily Global Commentary, April 2, 2009.

*James Pressler is an associate international economist at The Northern Trust Company, Chicago. He joined the bank in 1993 and has been in Economic Research since 1995.

Tags: Array, Bank Of China, China Signs, Chinese Economy, Contraction, Dramatic Pace, Droughts, Export Orders, Export Recovery, Global Financial Crisis, Import Demand, James Pressler, Manufacturing Sector, Mass Layoffs, Northern Trust Company, Pboc, Pmi, Second Consecutive Month, Shutdowns, Supply China, Survey Methodology
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