Top of the Morning

The Globe and Mail’s David Parkinson writes that those puzzled by the meager growth of business investment in Canada should look to the Far East:

Emanuella Enenajor, senior Canada economist at Merrill Lynch, said in a research report this month that Canadian capital spending trends have historically been highly correlated not with economic growth or export growth, but rather with global commodity prices…

This is where we look to China – the world’s great engine for commodity demand over the past decade. It’s no coincidence that this stagnation in commodity prices came as China’s economic growth slowed from near 10 per cent annually to 7.5 per cent, around which it has waffled for the past two years.

With China’s economy continuing to struggle through transitional pains and a multitude of hangovers from its heady and tumultuous boom, it doesn’t look likely to reignite commodity prices any time soon. Toss in Europe’s economic woes, and the commodity engine that drives Canadian business investment could remain stalled for a while yet.

On the Homefront

TSX 60 futures are moving higher ahead of the open after the composite index booked a tiny gain on Thursday.

 

The loonie is trading in a tight range this morning, lingering below 0.913 against the U.S. dollar.

 

The yield on the the five-year Government of Canada bond spiked on Thursday evening before retreating to about 1.72 percent this morning.

 

TransCanada targeted by American activists. The pipeline company best known for the enduring struggle over Keystone XL is making headlines for a different reason. Reuters was the first to report that several activist investors in the United States might be looking to shake things up at TransCanada (TRP). One such hedge fund rumoured to have an interest in the name is Dan Loeb’s Third Point, who recently had a position in BlackBerry (BBRY) that he exited in the first quarter. The Business News Network’s Amber Kanwar notes that activists would likely encourage the company to return more money to shareholders, as it yields less than its U.S. peers, and push management to spin off its power business into a separate publicly traded company. The latter move would create one utility firm centered on yield while allowing TransCanada to retain its focus on growth. Meanwhile, CEO Russ Girling told The Wall Street Journal that the costs associated with building Keystone XL have “increased significantly,” and could potentially be double the current estimate of $5.4 billion.

 

Inflation set to hold steady. At 8:30am (EDT), Statistics Canada will release the latest reading on inflation for the month of August. Economists are calling for the headline rate to remain at 2.1 percent while the core rate, a measure that strips out a number of volatile items, edges up to 1.8 percent. Inflation has, for the most part, risen faster than the the Bank of Canada’s thought it would throughout 2014, but hasn’t provoked any hawkish tilt from monetary policymakers. That’s because Governor Stephen Poloz has done an artful job of switching from fretting about too-low inflation to concern over the size of the output gap. As such, this once-sacrosanct metric is now, in the short-term, an afterthought when it comes to monetary policy. There’s also reason to believe that the governor’s stance – that inflation has been fuelled by temporary factors like higher energy prices – is a prudent one. “Some of the transitory factors highlighted by the Bank of Canada as culprits in inflation’s rapid gains earlier in the year have abated, but better growth and weak readings from a year ago have prevented inflation from dropping-off meaningfully,” writes CIBC economist Nick Exarhos. In July, inflation moderated, with the core rate up 1.7 percent year-over-year (from 1.8) and the headline rate coming in at 2.1 percent (from 2.4). The drop-off in the latter was due in large part to a monthly decline in the price of gasoline. We received evidence that this softening trend is energy costs is continuing recently, as natural gas distributor Enbridge (ENB) applied to lower prices for its customers in Ontario.

UPDATE: Core inflation came in well above expectations in August, rising to 2.1 percent.

 

Russian steelmaker plans to spin off North American unit. Bloomberg reports that Russian steel giant Evraz is planning an initial public offering of its North American division, which analysts estimate is worth about $2 billion. There’s a Canadian connection to this spin-off, as Evraz’s North American unit includes IPSCO, the Regina-based business that was acquired by Swedish steel company SSAB in 2008 and had most of its assets sold to the Russian firm soon thereafter.

Daily Dispatches

Residents of Scotland rejected independence from the United Kingdom by a substantial margin, with less than 45 percent of votes cast in support of autonomy. The prospect of a messy divorce has been avoided (at least for now), but Prime Minister David Cameron still has deliver on promises made during this campaign to ensure that unity with Britain remains attractive to the majority of Scots. Meanwhile, IG market strategist Chris Weston observes that participants in the Asian trade were enthused by this news, which gave the British pound strength. “There has been a sense of excitement through the markets today, not just because of the binary outcome in the Scottish referendum, but because there seems to be a fundamental shift occurring through the capital markets,” he writes, observing that investors seem to be grappling with the potential glide path higher for rates in the United States.

 

Today, investors will be going gaga for BABA – the ticker that Chinese e-commerce company Alibaba will trade under on the New York Stock Exchange. On Thursday evening, the company priced its initial public offering at $68 per share, the upper end of the announced range. The most-anticipated IPO of the year is set to be the largest in the history of the United States, raising roughly $22 billion, and has the potential to surpass the record set by the Agricultural Bank of China for the biggest IPO on record. The Canada Pension Plan Investment Board (CPPIB) has invested about $160 million in Alibaba, getting in on financing rounds that attached a significantly lower valuation to the company than the current one. The Globe and Mail’s Boyd Erman believes that CPPIB is likely to hold on to its stake rather than sell it on the open market.

 

All industries activity in Japan dipped 0.2 percent month-over-month in July, defying expectations for a solid increase. In addition, the government’s latest economic report downgraded its assessment of the economic outlook, highlighting the weakness in private consumption. These are just the latest signs that the island nation’s economy continues to sputter following the sales tax hike implemented in April, and may need to add monetary stimulus or delay the scheduled fiscal drag in order to keep the Abenomics recovery story intact. This bad news has crushed the yen, which is trading at a six-year low against the greenback.