Top of the morning

At Maclean’s, Andrew Leach discusses how the drop-off in the loonie has helped cushion the blow that oil producers received as crude oil tumbled:

With the impact of the Canadian dollar taken into account, the long view on oil in Canadian dollar terms is not anywhere near as bearish as you might think. In fact, looking three to five years out, which would be the relevant time horizon for the start-up of a new oil sands projects, the market is now reflecting expected future cash flows higher than we’ve seen in at the same period each of the last three years…

Over the past four months, the Canadian dollar has done what you’d expect it to do—it has acted as a shock absorber, buffering the Canadian economy from a significant commodity shock. Of course, this shock absorption isn’t free—it comes at the expense of our global purchasing power and, thus, Canadians’ real wages and real wealth, but it’s important to recognize nonetheless.

On the homefront

The TSX surged by triple digits on Friday as natural resource stocks carried the index higher. Gold broke out, supporting the long-battered miners, while the price of crude also rose. Uranium producers enjoyed the most impressive gains, with Cameco (CCO) and Denison Miners (DML) up 11 and 20 per cent, respectively, as Japan plans to restart its nuclear reactors. However, as of late October, Canada’s benchmark index has advanced by less than the S&P 500 this year, thanks in large part to the dropoff in commodity prices. Once the decline in the loonie is taken into account, this underperformance is much worse. TSX 60 futures are moving higher ahead of the open.

 

The loonie is up modestly against its U.S. counterpart to trade at 0.884 this morning.

 

WTI crude oil futures are trading at their highest level since the beginning of the month, approaching the $80 per barrel mark.

 

Housing starts on deck. At 8:15 a.m. (EST), the Canada Mortgage and Housing Corporation will release housing starts for October. Starts are expected to inch up from 197,300 in September to just shy of 200,000. Construction activity has been more robust than virtually all experts predicted in 2014. Though the Bank of Canada does not think there is widespread overbuilding, senior deputy governor Carolyn Wilkins opined that her biggest worry on financial stability was that monetary policy-makers don’t know the extent to which there is overbuilding and overvaluation, and what could trigger it to unravel. Above-inflation home price appreciation has been fairly localized in 2014, which makes one wonder if targeted macroprudential measures are needed to cool the real estate markets in select metropolitan areas.

UPDATE: Housing starts moderated substantially in October, driven by a plunge in new multi-family builds.

 

Canada enhances economic ties with China. The rumours have been confirmed: Canada will indeed get the first yuan-clearing bank in the Americas, which is said to be located in Toronto. Speaking to members of the press in Toronto last Monday, Bank of Canada governor Stephen Poloz indicated that this hub was a “very positive possibility” that would reduce costs for Canadian firms that trade with China. Separately, Prime Minister Stephen Harper said that executives from both companies inked trade agreements worth more than $2.5 billion, which are expected to create over 2,000 jobs in a variety of industries.The world’s second-largest economy is also Canada’s second-largest trading partner. In mid-September, Canada ratified an investment deal with China known as FIPA, which opens up investment between the two countries. At the time, economist Stephen Gordon explained that the concerns of “excitable nationalists” who disapproved of the pact were largely overstated.

 

Bombarider may compete for newly available Mexican rail contract. Mexican authorities have cancelled a deal that would see a Chinese-led consortium build a high-speed rail due to public “doubts and concerns.” Pierre Beaudoin, CEO of Bombardier (BBD.B), said that the firm is mulling over the possibility of submitting a bid, but referred the six-month period to put one together as a tight window.

 

BlackBerry receives a vote of confidence. On Friday, it was revealed that the Ontario Teachers Pension Plan had accumulated nearly 7.8 million shares of BlackBerry (BBRY) in the third quarter. The company has made substantial progress in cutting costs and stemming the rate of revenue declines since John Chen took over in late November 2013. Shares of the former tech giant are up nearly 60 per cent on the Nasdaq over this period.

 

Shell offers cost estimate for B.C. LNG export terminal. Susannah Pierce of LNG Canada, which is led by Royal Dutch Shell, thinks a plant which would be in Kitimat, B.C., could cost between $25 and $40 billion. The province recently announced a tax structure for these projects, which lowered the ceiling on the tax rate that would be paid by an established firm relative to figures outlined in February.

Daily dispatches

Inflation in China is hovering near a give-year low. In October, prices were up 1.6 per cent year-over-year, in line with the consensus estimate. This subdued level of inflation gives the People’s Bank of China the ability to loosen monetary policy to support economic activity if it so desires. Producer prices fell 2.2 per cent on an annual basis, a larger decrease than economists had been expecting.

 

Meanwhile, Chinese exports soared by double digits in October, ahead of what economists had called for, while imports didn’t rise by as much as anticipated. The nation booked a trade surplus of $45.4 billion the month.

 

The United States labour market is close to firing on all cylinders. “All up, the U.S. has logged nine consecutive 200,000 plus prints and this has taken the year to date average to 215,000,” writes IG market strategist Stan Shamu. “This is significantly bullish for the U.S. economy and I feel nothing has changed from a policy perspective.” Wage growth, the last piece of the puzzle that would indicate that full employment has been reached, remains missing in action.

 

European investors less pessimistic. For the first time since July, the Sentix investor confidence index rose in November, edging up from -13.7 to -11.9. “The latest announcements by the Bank of Japan and the European Central Bank (ECB) let investors’ 6-month-expectations rise again visibly,” reads the press release. “This is rather remarkable as it recently looked as if the ECB would have lost its power to turn economic expectations round.”

Italian industrial production slumped by 0.9 per cent month-over-month in September, another unwelcome sign for a nation that is in the midst of a triple-dip recession.

 

The Russian ruble continues to recover from its recent slide against the majors as the central bank announced that it will let the currency float freely, and will no longer set daily trading channels at which point it would act to weaken or support the currency. Intervention will be used to help mitigate threats to financial stability and “to counter speculative demand,” said Elvira Nabiullina, head of the Central Bank of Russia.

 

A symbolic referendum in Catalonia held on Sunday showed that the vast majority of voters in the region favour independence from Spain.