Top of the Morning

The Globe and Mail’s Tim Kiladze writes that push by the Office of the Superintendent of Financial Institutions (OSFI) to have banks adhere to certain “broadly stated principles” might leave financial institutions yearning for strict, but specific, rules:

I can imagine that this gave the directors of financial institutions hives: here are some big ideas and suggestive words, and we will fine you if your interpretation of these words differs from ours. As a director charged with increasing responsibility in supervising financial institutions, freedom and control are good things, but clear rules are nice as well…

Principles tend to be flexible and consistent with policy purposes, while formal compliance with a set of rules doesn’t necessarily mean that you’re not going to engage in the harm that the rule was intended to prevent – take Enron and its rule-compliant “special purposes entities” that nonetheless obscured the true financial condition of the company. At the same time, rules help parties coordinate and predict each other’s behaviour. The world is a much safer place because traffic laws are rules-based. There’s not much debate that the rule of “stop on red, go on green” is preferable to the principle of “go through the intersection when it’s safe.”

On the Homefront

TSX 60 futures are trading to the downside, pointing to a lower open on Bay Street.

 

The Canadian is holding steady above 0.90 against the greenback this morning after U.S. dollar weakness pushed the pair higher on Wednesday afternoon.

 

The yield on the five-year Government of Canada bond tumbled on Wednesday afternoon and continued to fall overnight to trade at 1.46 per cent.

 

Botox maker hikes guidance, says it doesn’t need Valeant. This morning, Allergan boosted its guidance for the third quarter, fiscal 2014, and fiscal 2015. This announcement is the latest in a series of moves — including a round of cost cutting — to convince its shareholders that they will be better served by supporting the company as a standalone entity, rather than by accepting the premium that Valeant’s hostile takeover bid provides. “Today’s announced expectations for the third quarter and updated future outlook further demonstrate that there is a vast value gap between Valeant’s offer and the intrinsic value of Allergan,” said CEO David Pyott.

 

Pharmacy benefits manager makes acquisition. After the close on Wednesday, Catamaran Corp. (CCT) announced its intention to purchase the privately held Salveo Specialty Pharmacy, which, according to the press release, manages about $400 million in annual drug spend. This transaction will cost $260 million, and is expected to be funded by cash on hand. “This transaction affirms our commitment to investing in our specialty capabilities and the combination of BriovaRx and Salveo strongly positions Catamaran as one of the largest specialty pharmacies with a truly unique service offering,” said chairman and CEO Mark Thierer.

 

Canadian Tire boosts share buyback program. Before the market opened, Canadian Tire (CTC.A) announced that it would be buying back $400 million more of its own shares than previously thought and was continuing to evaluate potential acquisitions to increase its “category authority.” The company is aiming for average diluted EPS growth from eight to 10 per cent over the next three years. Management will host a conference call starting at 8:30 a.m. (EDT) to discuss its three-year vision.

 

A profitable, but unwelcome, break-up. This morning, Auxilium Pharmaceuticals announced that it is moving forward on a merger with Endo, walking away from a previous agreement to purchase Vancouver-based QLT Inc. and move its headquarters to Canada. As a result, QLT will receive a break-up fee of $28.4 million (USD). “In light of this development, we will immediately re-engage in our assessment of all potential strategic options,” said QLT chairman Jason Aryeh, according to the Globe and Mail.

Daily Dispatches

The release of minutes from the Federal Reserve’s meeting might not be a game-changer, but it was definitely a day-changer. North American equity markets experienced large intraday swings, surging on the news that monetary policy-makers were concerned that a strong greenback would dampen inflation and serve as a drag on American exports. This little tidbits from the Federal Open Market Committee (FOMC) had an impact across a variety of asset classes: bonds caught a bid, the U.S. dollar weakened, and gold spiked. “After a long period of underperformance as markets priced in a greater possibility of a rate hike, the FOMC minutes seem to have ‘temporarily’ poured cold water on this notion and given some relief to struggling equities,” writes IG market strategist Stan Shamu.

 

The U.S. earnings season unofficially got under way on Wednesday, with Alcoa releasing its quarterly results after the close. This company is often thought of as a canary in the coal mine — the better the global economy is doing, the more demand for aluminum there will be. In addition, the company also serves as a supplier for large transport companies. Alcoa beat on earnings and revenue by a solid margin, with management reaffirming its projection that global aluminum demand will grow by seven per cent this year.

 

After seeing employment inexplicably surge by a record amount in August, the latest Australian jobs print showed employment fell by nearly 30,000, about twice the expected decline. The national statistics agency also indicated that it would be reviewing its methodology — in particular, how the data are seasonally adjusted — in light of the volatility in jobs numbers seen during the past few months. This volatility has led the Australian Bureau of Statistics to instruct market watchers to focus on the unadjusted figures.

 

Another day, another disappointing data point out of Germany. Though the nation still booked a large trade surplus in August, exports tumbled by 5.8 per cent month-over-month. As has been the case in far too many instances as of late, this one-month drop was the worst since the beginning of 2009. Institutions that advise the government have slashed their GDP forecasts from 1.9 to 1.3 per cent for this year and from two to 1.2 per cent for next year, according to the Financial Times. Earlier this week, we received news that factory orders and industrial output in Germany experienced declines of a similar magnitude. There are growing fears that, based on the recent data flow, the eurozone’s economic heavyweight may be on the verge of a recession.

 

Nothing new from the Bank of England – monetary policymakers across the pond maintained the official bank rate at 0.5 per cent and the size of its monthly asset purchasing program.