Strategists warn of ‘the coming energy recession’

Your top financial and economic news for Oct. 20


In the wake of the Bank of Canada’s decision to remove forward guidance, the Financial Post’s Terence Corcoran discusses how the central bank has evolved under the leadership of Stephen Poloz:

Meet the Bank of Canada — a humble institution that, under governor Stephen Poloz, is becoming a decidedly human-scale institution with specific and limited established objectives.

Canada never joined the great global experiment in economic stimulus via quantitative easing. And under Poloz, the Bank of Canada has moved to an even tighter focus on its core objective, maintaining stable prices without pretending to be a national economic saviour…

[Former Bank of Canada governor David] Dodge says Poloz appears to be highlighting a shift in the belief that “monetary policy was everything, and the maestro was the head of the central bank.” Fiscal and regulatory policy had little role to play. “Maybe we’ve been putting a little too much stock in what can be done through monetary policy.”

As the celestial world of central banking twists and turns, the Bank of Canada seems to be keeping its feet on terra firma. Several years ago, Gordon Thiessen, then governor of the Bank of Canada, identified the limits of central banking power. “Over the longer term,” Thiessen said, “monetary policy has its effects only on the rate of inflation.” The bank’s objective remains low inflation in the context of a floating dollar, and interest rates will be set based on the best data available at the time. When it comes to running a central bank, it seems the rest of the world could stand to learn something from Canada — again.

On the homefront

The first two sessions of last week’s shortened trade were as terrible as the final two were terrific. After a pair of monster losses left the TSX down more than 10 per cent from its Sept. 3 peak, Canada’s benchmark index rebounded — along with the price of crude oil — to finish the week flat, faring far better than its U.S. counterparts. Bank of Montreal senior economist Robert Kavcic notes that most of the explanations for last week’s broad-based sell-off were unsatisfying. “The excuses were all lined up this week; but, one by one, they failed to justify such a dramatic move. China is softening. True, but that’s been coming for ages, and growth is still holding slightly above seven per cent. Europe is stagnating. No doubt, but hopes weren’t exactly high on this front going into October,” he writes. “Oil prices plunged to the low-80s. Terrible for Canadian stocks, yes, but a sizable tax cut for U.S. consumers.”


The Canadian dollar is modestly higher against the greenback to trade around 0.888 this morning.


Chinese firm reportedly interested in BlackBerry. Citing a source familiar with the matter, Benzinga’s Charles Gross writes that Chinese-based computer technology company Lenovo could make an offer for BlackBerry (BBRY) as early as this week. When BlackBerry’s “for sale” sign was up in 2013, there were constant rumblings that the Chinese company was looking to acquire the Waterloo, Ont.-based former tech darling. In November 2013, the Globe and Mail reported that “Ottawa made it clear in high-level discussions with BlackBerry that it would not approve a Chinese company buying a company deeply tied into Canada’s telecom infrastructure,” after learning that Lenovo was pursuing BlackBerry. It is difficult to envision a reason why the government’s position would have changed since then; as such, there’s little light at the end of the tunnel for Lenovo. In general, it’s probably wise to take all BlackBerry takeover chatter with a grain of salt. If all of the rumours that surfaced last year were true, this company certainly would not still be a standalone entity.


Canadian pharma giant to release earnings. Valeant Pharmaceuticals (VRX) is slated to published its Q3 earnings report before the market opens. The firm is currently in the midst of one of the most bitter hostile takeover bids in recent memory as looks to acquire Allergan with a little help from Pershing Square, which is run by billionaire activist investor Bill Ackman. The Botox maker has made the case that it will do better as a standalone entity, suggesting that the Canadian pharma giant’s Bausch & Lomb segment — which Valeant says will serve as a blueprint for an integration of Allergan — is deteriorating. Meanwhile, Ackman alleges that his lawyers have seen documents that prove Allergan’s management was looking to deceive market participants. Valeant CEO Michael Pearson has set the bar high, writing that “we expect our results to be better than consensus on revenue, and better than the guidance we provided in our second quarter earnings call for Cash EPS, organic growth, restructuring charges and adjusted cash flow from operations.” In particular, Pearson anticipates double-digit same-store organic growth from Bausch & Lomb.

UPDATE: Valeant posted a strong set of Q3 results, including a large beat on cash EPS.


Forget about a railway mega-merger. This morning, Canadian Pacific Railway (CP) confirmed that its exploratory conversations with CSX Corp. about a possible transaction have been terminated, and that no further talks are planned. The press release noted that “regulatory concerns appear to be a major deterrent for many railroads considering combinations.”

Daily dispatches

Is the carnage in WTI crude behind us? The price per barrel is hovering around the $83 mark this morning, well off its lows of last week. However, as Bloombergs Matthew Boesler points out, credit strategists at Citi don’t think that it’s time for investors in energy-related equities to become complacent, and warn of what they call the coming energy recession. “While it’s difficult to say how bad the situation could become for energy companies, the signs are not encouraging,” writes the group led by Jason Shoup. “Indeed, if an era of low yields has opened the door to a potentially damaging misallocation of capital, there’s plenty of evidence that energy may be the sector to worry about most.”


The Japanese economy is sputtering, and Prime Minister Shinzo Abe knows it. In an interview with the Financial Times, the nation’s leader suggested that hiking the sales tax in 2015 would be “meaningless” if it reduced economic activity by so much that fewer revenues were collected. The Japanese economy contracted by a large amount in Q2 following the implementation of an increase to the sales tax that was implemented in April. This note of caution on tax increases may have helped lift the Nikkei by nearly four per cent on Monday.


IBM is cratering in the pre-market trade after an abysmal set of quarterly results that saw revenues fall and earnings come in well below expectations. CEO Ginni Rometty said that the company’s results “point to the unprecedented pace of change in our industry,” words that should strike fear in investors’ hearts.


The world’s second-largest economy will be in the spotlight this evening, with China’s National Bureau of Statistics publishing a smorgasbord of data. The most important figure, gross domestic product, is expected to show that growth moderated to 7.2 per cent in the third quarter (from 7.5 per cent in Q2) relative to the same period in 2013. September’s readings on industrial production, fixed asset investment, and retail sales are also scheduled to be released.

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