Top of the morning

In a special to The Globe and Mail, Carl Mortished comments on an oft-overlooked but potentially very important ripple effect from the shale revolution and drop-off in oil prices:

A great pipeline of money that flowed from consumers to OPEC treasuries and back into Western capital markets is broken and the consequence of the liquidity shortfall could be rising bond yields and dearer money…

[T]he wider worry is whether the loss of petrodollar liquidity will exacerbate the ending of the Federal Reserve’s money-printing support to the credit markets. If the formerly rich sovereign wealth funds stop depositing cash in U.S. and European banks just as the Fed stops creating new dollars, will we see weaker bond prices and sharper rises in yields?…

The petrodollar surpluses tend to end up in T-bills and bank deposits while the U.S. consumer’s traditional behaviour when he feels richer is to go shopping, a boon to businesses that make and sell stuff rather than the savings industry.

On the homefront

The TSX finished in the red on Wednesday as natural resource stocks – and in particular, the Energy sector – sold off ahead of today’s OPEC decision on oil production (previewed below). TSX 60 futures are softening ahead of the open.
The loonie is holding up fairly well around 0.889 against the greenback despite weakness in crude oil.

 

Canada’s Buffett to make major investment in his native land. Fairfax Financial Holdings (FFH), led by Hyderabad-born Prem Watsa, is taking the lead role in funding a new public company that plans to invest in controlling or influential stakes in Indian businesses. This new firm, Fairfax India Holdings, to be listed in Toronto, has raised approximately $500 million (U.S.) from three investors to date, 60 percent of which is coming from Fairfax. “We believe India will be transformed by the business-friendly government of Prime Minister Modi,” said Watsa in a press release. Indian equities have been on a prolonged tear, and the decline in the price of oil serves as a further tailwind for the nation’s economy.

 

TransCanada tweaks bylaws. In an attempt to shore up its defences against activist investors, pipeline company TransCanada (TRP) announced a key change to its corporate bylaws after the close on Thursday. The company is instituting a framework in which shareholders must give advance notice of nominations to the board of directors, rather than have a situation in which investors could surprise the company with nominations at a meeting. The firm has been targeted by activist hedge fund Sandall Management, which wants the company to boost the use of its master limited partnership in order to increase shareholder value and split up its pipeline and power businesses into separate company. TransCanada indicated that it has considered these options before, and declined to take the activist’s advice.

Daily dispatches

The near-contract for WTI crude oil hit a four-year low this morning, dipping below $72 per barrel. This comes amid a growing consensus, based on statements made by oil ministers, that oil cartel OPEC will not deliver a meaningful cut in production following its meeting in Vienna, if at all. Saudi Arabia, the cartel’s largest member, appears to be more concerned with preserving market share rather than propping up the price. Ali al-Naimi, Saudi oil minister, indicated that the Gulf Cooperation Council (which also includes Kuwait, Qatar, and the UAE) reached a consensus prior to this meeting; a source suggests this decision was not to cut output whatsoever. Other members, notably Venezuela and Ecuador, would like production – though not necessarily their own – to be curtailed in order to give the price a lift. The prevailing wisdom is that the lack of an output cut has not been fully priced in to the market, in which case market participants should expect further weakness in crude if such an outcome does occur. Of course, the price action following this decision is anything but a sure bet, but even the declaration of a nominal reduction in production might not support the price of crude too much, as OPEC nations would still have to follow through on such a stance. We’re expecting an announcement sometime this morning as it tends to leak before the press conference, which is scheduled to begin at 10:00am (EST).

UPDATE: OPEC has elected to maintain its production target at 30 million barrels per day. The near contract for WTI briefly dipped below $71 per barrel following this news.

 

Business investment in Australia unexpectedly rose in Q3, albeit modestly, up by 0.2 percent quarter-over-quarter. Though economists had been looking for a decline of 1.9 percent, this encouraging print isn’t expected to arouse hawkish spirits within the nation’s central bank.

 

U.S. markets are closed today for the Thanksgiving holiday.