Archives for November 25, 2018

What Happened in the Stock Market Today

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Stocks slumped on Black Friday, extending the week’s declines in the abbreviated post-Thanksgiving session. Both the Dow Jones Industrial Average (DJINDICES: ^DJI) and the S&P 500 (SNPINDEX: ^GSPC) lost about 0.7%.

Oil stocks led the broader market lower along with crude oil prices — with the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEMKT: XOP) falling 3.6% — despite signals from some OPEC countries of plans for another coordinated supply cut in the coming weeks. Elsewhere, retail stocks helped stem the indexes’ losses, with the SPDR S&P Retail ETF (NYSEMKT: XRT) gaining 0.3%.

As for individual stocks, Chinese e-commerce leader JD.com (NASDAQ: JD) and stateside industry juggernaut Amazon.com (NASDAQ: AMZN) both fell. Read on to learn why.

JD.com investors’ worries are twofold
Shares of JD.com lost 5.3% — making it the worst-performing stock listed on the Nasdaq — driven by a combination of ongoing trade-war concerns between China and the U.S., as well as an update on the investigation of a rape allegation against its founding CEO, Richard Liu.

On the former, it certainly didn’t help that Chinese stocks as a whole plunged on investor jitters ahead of a bilateral trade meeting at the G20 event next week between U.S. President Donald Trump and Chinese President Xi Jingping.

On the latter, it was revealed in an exclusive report late Wednesday that U.S. prosecutors are still grappling with evidence in an attempt to decide whether to push forward in the case against Liu concerning an incident that occurred in late August.

“Local prosecutors are weighing evidence that would move the case beyond a ‘he said, she said’ stalemate,” according to  report. “Among the issues being considered by the Hennepin County Attorney’s office: the divergent accounts of what happened that night, the initial determination by police that there was no crime, and the woman’s early hesitance to press charges against Liu.”

It’s hardly surprising to see JD stock extending its recent decline as the market assumes a worst-case scenario for both situations.

Amazon brings Black Friday overseas
Meanwhile, shares of Amazon rose as much as 1.3% early in the session after the company reported “record levels” of shopping in the U.K., with over 100,000 toys and 60,000 beauty items purchased from the company’s U.K. sites between midnight and midmorning.

This wouldn’t be unusual for Amazon if it were talking about its core U.S. business, where the day after Thanksgiving is the busiest retail shopping day of the year and typically marks the start of the important holiday-shopping season. But for many shareholders, Amazon’s relative strength in the U.K. today signals the early acceptance of “Black Friday” retail events in any number of potentially lucrative international markets.

But wasn’t all smooth sailing. Amazon stock gave up its early gains to close down 1% following separate reports that thousands of union workers across Europe are striking to protest “inhuman conditions” at its warehouses.

US, Korea, China Stock Markets Plummet: is Crypto Correlated?

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The crypto market is continuing to lose its value as the U.S., South Korea, and China demonstrate record high losses in their respective stock markets.

As an alternative store of value, cryptocurrencies are considered as viable long-term investments, especially by millennials, in a period of global financial market instability and volatility. However, recent weeks have shown that cryptocurrencies are still vulnerable to the weakening global economy and the asset class is not able to perform as a hedge against uncertainties in the market.

Global Markets Crash
A lack of correlation is not equivalent to an inverse correlation. Merely because an asset is not affected by a certain catalyst, which in the case of crypto could be the instability of the global market, it does not mean that the asset increases in value as a result.

Historically, the crypto market has demonstrated a lack of correlation with the global stock market and traditional markets like equities. It has consistently recorded independent price movements regardless of how the financial market performs.

Over the past several weeks, as investors began to head towards the exit of stock markets fearing a further drop in U.S. stocks, the price of major cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) plunged by more than 35 percent.

The U.S. stock market is experiencing one of its worst sell-offs in history and the trade war between the U.S. and China has led to a decline in the valuation of the Chinese stock market. Overnight, Shenzhen Composite fell 3.3 percent and Shanghai Composite dropped 2.5 percent.

The weakening U.S. and Chinese markets directly affected the economy of South Korea, which was already in decline due to the country’s struggling growth rate. The Kospi fell by 1.2 percent in the past two days and investors generally expect the instability of U.S. and Chinese markets to be sustained.

Alvin Cheung, associate director for Prudential Brokerage, told SCMP:

“There is a lot of negative news about the US criticising China before Trump and Xi meet next week, and that has dented sentiment. The mixed messages could be the US trying to win some bargaining chips for the upcoming meeting. Investors are on the sidelines, closely watching to see if the meeting will yield any concrete results.”

The trend of the global market is gearing towards the elimination of high-risk stocks, equities, bonds, and assets, which includes crypto. The short-term price drop of the market was triggered by the in-fighting of Bitcoin Cash and Bitcoin Cash SV, but the crippling global economy is said to be one of the major catalysts of the declining momentum of cryptocurrencies.

When Will Crypto Demonstrate Inverse Correlation?
Crypto could become a store of value, like gold, that is used by investors to hedge against the global economy. However, due to a lack of liquidity and infrastructure for retail traders, cryptocurrencies are not capable of operating as a hedging tool for large-scale investors.

As the market develops and the industry grows, better liquidity products will become available for both institutional and retail investors. Only then, crypto could potentially work as an inversely correlated asset to the global financial market.

Aimia president leaves less than three months after coming onboard

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Aimia launched a review of its strategic direction earlier this month.

MONTREAL — Aimia Inc. is announcing the departure of its president and chief strategy officer less than three months after taking the job.

In late August, the Montreal-based company hired Nathaniel Felsher from Deutsche Bank in New York, where he co-headed the firm’s aviation corporate and investment banking group.

Aimia says in a two-sentence release from Thursday that it acknowledges Felsher’s contributions and wishes him well in his future endeavours. Felsher, who has experience in data analytics, had worked with Aimia chief executive Jeremy Rabe in the past, and reported to him directly over the past 12 weeks.

Aimia is in transition mode, as it works to complete the sale of its flagship Aeroplan rewards program to an Air Canada-led consortium for $450 million. The company, which has seen its shares struggle in recent years, launched a review of its strategic direction earlier this month, with Rabe suggesting more asset sales on the horizon.

‘The case … no longer is clear cut.’ BoC’s inflation targeting policy meets resistance

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Carolyn Wilkins and Steven Poloz. As far as some younger people are concerned, Poloz is denying them a home. And for what? An economic indicator that never moves. The central bank is facing a test of its credibility, and it knows it

There are about three million Canadians working today who have no idea what real inflation looks like.

Since the mid-1990s, the Consumer Price Index has stayed pretty close to the Bank of Canada’s rough target of two per cent. That remained true in October, when the CPI was 2.4 per cent higher than a year earlier, Statistics Canada reported on Nov. 23. The “core” measures that policy makers created to remove noisier components of StatCan’s price basket were even closer to the bull’s eye, suggesting the central bank will carry on with its plan to raise interest rates as fast as economic conditions allow.

The newest members of Canada’s labour force — ages 15 to 24 — might be wondering what the fuss is about. Their parents and grandparents could tell them stories about how miserable life could be before heroes such as Paul Volcker, the former head of the U.S. Federal Reserve, and Gordon Thiessen, the Canadian central banker who introduced the current price-targeting regime, slew the inflation dragons.

But their own experience with central banks likely has been negative. The only price spikes they will have experienced are those being caused deliberately by Stephen Poloz, the current governor of the Bank of Canada, and his deputies on the Governing Council: StatCan’s measure of mortgage-interest costs rose seven per cent in October from a year earlier, compared with an annual gain of 3.8 per cent as recently as May.

As far as some of these kids are concerned, Poloz is denying them a home. And for what? An economic indicator that never moves. The central bank is facing a test of its credibility, and it knows it.

“When you are in the ’70s and the ’80s, and you see inflation, and that’s a dragon to slay, then everyone doesn’t like it, but they are behind you when you raise interest rates to achieve it,” Carolyn Wilkins, the senior deputy governor, said at an event hosted by McGill University’s Max Bell School of Public Policy on Nov. 20. “Once you are there, it kind of looks like a really silly thing to pursue,” she continued. “If you do your job well, people will think, ‘Why are you raising interest rates? There is no inflation.’ That’s because you do your job well.”

After a decade of extraordinary displays of financial alchemy, the central bankers are ready for things to get back to normal. The Fed is leading the way, having raised interest rates eight times since the end of 2015. The Bank of Canada is a few steps behind with five increases since July 2017. Dana Peterson, an economist at Citibank in New York, thinks Poloz and his lieutenants will leave the benchmark rate unchanged at their last policy meeting of 2018 on Dec. 5, and then lift it another quarter point, to two per cent, in January. That still would be low by historical standards, but it would be the highest since before the Financial Crisis. History means little if you’ve built a life around borrowing money for almost nothing.

“If you do your job well, people will think, ‘Why are you raising interest rates? There is no inflation.’ That’s because you do your job well”

– Carolyn Wilkins, deputy governor, Bank of Canada

 

That’s one of the reasons the central banks’ shift to normalcy is meeting some resistance. Greg Ip, a columnist at the Wall Street Journal, recently wrote about “QE babies,” the cohort of traders who never has worked in markets that weren’t being juiced by the Fed’s bond-buying policy known as quantitative easing. Those novice Masters of the Universe are therefore trembling at the site of higher interest rates.

At the same time, the embrace of inflation targeting by central banks is being second-guessed by some of the oldsters who were around when it happened. Volcker, who left the Fed in 1987, wrote in a commentary for Bloomberg News on Oct. 24 that he knew of no “theoretical justification” for basing monetary policy on achieving inflation of two per cent. Diane Bellemare, a senator from Quebec, asked Poloz and Wilkins on Oct. 31 whether they thought the central bank should also target jobs. David Romer, a famous economist at the University of California, Berkeley, informed an audience in Ottawa on Nov. 1 that early results of one of his current research efforts suggests policymakers could achieve better results by targeting economic forecasts.

“The case for inflation targeting no longer is clear cut,” Romer said at a conference hosted by the Bank of Canada. Rather than simply defend their current regimes, central banks should have the courage to prove there is no better way to determine where to set interest rates, Romer said in front of most of the Canadian central bank’s leaders.

Canada was among the first to adopt inflation targeting after years of exhaustive study by the best economists at the central bank, including a young researcher named Stephen Poloz. His response to the inquisition of a policy that he helped create? The most ambitious review of the Canadian monetary policy since the current regime was implemented back in 1992.

The Finance Department renews the Bank of Canada’s mandate every five years; the next renewal scheduled for 2021. Wilkins said at McGill that the central bank would use that time to conduct a “horse race” between inflation targeting and various contenders, including a dual mandate that would put jobs on an equal footing with inflation. Officials will be partial to the horse they know, but Wilkins insisted they are open to being persuaded that there could be a better way.

In the meantime, the central bank faces a more immediate challenge: teaching a new generation that runaway inflation is more than a fairy tale. “We’ll have to find different ways to explain it,” Wilkins said.

 

 

Inflation rate ticks up, but Bank of Canada likely to keep interest rates steady come December

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OTTAWA — Canada’s annual inflation rate remained above the central bank’s target for the ninth straight month in October, data showed on Friday, but markets saw few signs the Bank of Canada would hike interest rates next month.

Statistics Canada said the annual inflation rate edged up to 2.4 per cent from 2.2 per cent in September. Analysts in a Reuters poll had forecast it would stay at 2.2 per cent.

The central bank, which has consistently said inflation will move back down toward its 2 per cent target by early 2019, is due to announce its next interest rate decision on Dec. 5.

Andrew Grantham, senior economist at CIBC Capital Markets, said lower prices for oil — one of Canada’s main exports — would soon start pulling down inflation.

“We see nothing here to tip the Bank of Canada’s hand towards a December hike,” he said in a phone interview.

Market expectations of an interest rate hike on Dec. 5, as reflected in the overnight index swaps market, dipped to 23.20 per cent from 23.40 per cent. Earlier this month, that figure was above 30 per cent.

Two of the three central bank’s three core inflation measures posted gains while CPI common, which the bank says is the best gauge of the economy’s underperformance, was unchanged at 1.9 per cent.

“I think we’re going to see the headline number drop pretty heavily below 2 per cent in the November reading,” said Doug Porter, chief economist at BMO Capital Markets.

The Bank of Canada has hiked rates five times since July 2017, and says more increases will be needed. Rates are rising at “exactly” the right pace, Governor Stephen Poloz said on Nov. 5.

Prices for travel tours rose 3.0 per cent from October 2017 compared with a 4.4 per cent year-over-year decline in September. Passenger vehicle prices rose by 1.7 per cent compared with a year earlier on lower rebates and a greater variety of models.

The Canadian dollar extended its decline on the data, touching $1.3244 to the U.S. dollar, or 75.51 U.S. cents.

Separately, Statistics Canada said the value of retail trade rose by 0.2 per cent in September from August, in part due to higher sales at food stores. Stripping out the effect of price changes, volumes increased by 0.5 per cent.

“I think it’s a bit of a pleasant surprise. It’s nice to see the volumes coming up, a good way to end the quarter,” said Brian DePratto, a senior economist at TD Bank.

Business insolvencies in Canada climb at fastest pace since 2012 amid higher borrowing costs

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Higher interest rates are biting businesses that may be suffering from a decrease in consumer spending as households divert more money toward servicing debt

Insolvencies among Canadian corporations climbed 4.6 per cent in the third quarter, the sharpest increase in at least six years, a sign higher borrowing costs may be taking a toll on businesses.

Some 826 companies filed for insolvency in the three months through September, compared with 790 in the same period a year earlier, the Office of the Superintendent of Bankruptcies reported Friday. Quebec, Alberta and Manitoba saw the biggest increases. By sector, retail trade, transportation, construction and manufacturing were among the hardest hit. Insolvencies jumped 17.5 per cent in September, the last month of the quarter.

Interest rates have been on the rise since mid-2017, increasing costs for businesses that may also be suffering from a decrease in consumer spending as households divert more disposable income toward servicing debt. The latest figures mark a shift from a long-standing decline. Apart from a 0.1 per cent increase earlier this year, insolvency filings have fallen every quarter since 2015 on a year-earlier basis.

“It is a concerning number,” said Chantal Gingras, head of the Canadian Association of Insolvency and Restructuring Professionals, which represents about 1100 trustees. If the trend continues, “then it’s likely to accelerate the trend in consumer filings,” she said, adding she couldn’t say for sure why the third-quarter numbers moved higher.

The OSB breaks down insolvencies into bankruptcies, which increased 4.1 per cent in the third quarter, and proposals, where a debtor arranges with a creditor to repay a portion of what’s owed. Those climbed 5.9 per cent to 217.