Currency traders bracing for possible ‘hawkish hold’ from Bank of Canada

Foreign-exchange traders who had all but priced in a Bank of Canada rate hike are suddenly paying up to hedge against the risk of a letdown at Wednesday’s policy meeting.

The country’s five biggest lenders all brought forward their rate-hike expectations to January from April this month after the nation’s jobless rate dropped to its lowest in more than 40 years. But the cost to protect against loonie losses has skyrocketed after reports the U.S. would withdraw from the North American Free Trade Agreement gave investors pause and thrust the prospect of a stand-pat BoC into the spotlight.

Implied volatility contracts with a tenor of one week spiked to 10.6 intraday Tuesday, the highest since the days surrounding the central bank’s September gathering, when officials shocked markets with their second hike in as many meetings. The loonie fell as much as about 0.95 per cent Jan. 10, the most in more than two months, the day the NAFTA speculation swirled. The Canadian currency has gained about 6 per cent versus the U.S. dollar in the past 12 months, and the pair currently trades around $1.2430.

The market-implied odds that the BoC raises rates this week still stand at about 92 per cent, based on overnight index swap pricing. They fell to as low as 73 per cent last week after Canadian officials said they saw an increasing likelihood that U.S. President Donald Trump would withdraw from NAFTA. Twenty-six of 27 economists surveyed by Bloomberg forecast the central bank will raise its benchmark rate 25 basis points to 1.25 per cent.

“There are more two-way risks around the hike than the bond market is pricing in,” said Mark McCormick, a strategist at TD Securities, which pushed forward its rate-increase call to January. McCormick said he puts the odds of a rate boost this week around 65 per cent.

Even if the BoC did hike, it probably wouldn’t do much to help the Canadian dollar since NAFTA talks resume next week and there’s more at stake in the next round of negotiations, McCormick said.

‘Hawkish Hold’

If the Bank of Canada does raise rates Wednesday, it could signal that further increases are unlikely to be aggressive, a so-called “dovish” hike, in an effort to extend the economy’s stellar 2017 performance. And if it leaves rates unchanged, the bank could still offer a resolute tone on gradual tightening as policy makers must now be wary of stoking inflation.

“In the event that we do get a hike, it would be a dovish hike,” said Eric Theoret, a currency strategist at Scotiabank. “In the event we get a hold, it would be a hawkish hold because in the event of a hold, I don’t think it’s an environment in which they’d want to ease financial conditions. That’s the outcome I would lean toward, a hawkish hold.”

Scotiabank’s house view is for a rate increase Wednesday, though Theoret says “the hawkish hold is underappreciated as an outcome.”

Following the report on Canadian officials’ concerns about NAFTA negotiations, a White House official said there hasn’t been any change in the president’s position on the agreement. U.S. Treasury Secretary Steven Mnuchin said Jan. 11 he expects the pact “will be renegotiated, or we’ll pull out.”

The sixth round of NAFTA talks is scheduled to start Jan. 23 in Montreal. Canada, Mexico and the U.S. have already planned a subsequent round of talks in February in Mexico City, two people familiar with plans said.

Hudson’s Bay shares plummet after retailer reports lower sales, almost doubled losses

TORONTO — Sales at Hudson’s Bay Co. slid 4.2 per cent and losses almost doubled as the department store conglomerate saw ongoing weakness in its Lord & Taylor and European business.

The retailer’s shares plunged 11 per cent to $10.58 in early trading. The company’s stock had fallen 20 per cent over the last year prior to Wednesday’s market open due to the retailer’s tepid performance and concerns about the future of department stores.

HBC declared a net loss of $243 million, or $1.33 per share, compared with $125 million (69 cents) in the prior year. Analysts were expecting a net loss of $138.2 million, according to mean estimates from Thomson Reuters. Retail sales fell to $3.16 billion from $3.3 billion in the third quarter of 2016.

Citing lower customer traffic across of its banners and higher sales promotions, chief financial officer Ed Record said overall third quarter results failed to meet management’s expectations.

“The workforce reductions made as part of our transformation plan caused some operational challenges, particularly in our digital business, which we are working to address,” he said in a statement accompanying earnings. “We know we can do better, and our highest priorities include increasing comparable sales, improving margins, and prioritizing our capital investments as we focus on further developing our digital business.”

Comparable or same-store sales, a key sales measure that strips out the effects of square footage changes, fell 5.1 per cent, and fell 3.2 on a constant currency basis. Management said same-store sales rose 0.2 per cent at Saks Fifth Avenue and were positive for the 29th consecutive quarter at Hudson’s Bay in Canada, though the company did not break out the Canadian retailer’s performance.

But sales in HBC’s “department store group,” which includes Hudson’s Bay in Canada, Lord & Taylor stores in the U.S. and Home Outfitters, fell 3.7 per cent.

Same-store sales slid 3 per cent at HBC Europe and by 7.6 per cent at HBC’s off price division, which includes Saks Off Fifth.

Record said the retailer will reduce its inventory in order to decrease the number of sales it is holding to clear merchandise and re-allocate resources to improve its online capabilities.

Financial Post

Where are Canadian stocks headed? RBC’s bear takes on BMO’s bull in 2018 market standoff

Two prominent strategists are making starkly different forecasts of where Canada’s stock market is headed as a two-month rally stalls.

On the bull side is Brian Belski, chief investment strategist at BMO Capital Markets, who sees the S&P/TSX Composite Index hitting 17,600 by the end of 2018 — about 10 per cent higher than current levels. Taking the bearish view is Matt Barasch, Canadian equity strategist at RBC Capital Markets. Barasch has a 2018 year-end target of 16,300, just 1.8 per cent above Monday’s close.

After struggling through much of 2017 in the red, Canada’s benchmark index is up 4.7 per cent this year, still the third-worst developed market amid a ferocious global rally.

Bull Case

Belski has previously accused Canadian investors of harbouring an “Eeyore complex,” after the morose Winnie-the-Pooh character. He believes strong company fundamentals will eventually override investors’ gloom.

Canadian investors tend to overreact to bad news and then pile into stocks when the outlook starts to brighten, he said.

“In 2016, Canadian investors were positioned for Armageddon and US$15 oil and the banks to go bankrupt; when that didn’t happen, it was a rush to own stocks,” Belski said. “In 2017, it was doubt and rhetoric and what’s going to happen with NAFTA and tariffs and all of a sudden when nothing was happening there’s a fourth-quarter rally.”

He believes Canada is full of strong companies, citing the railways and consumer stocks like Loblaw Cos., Canadian Tire Corp., Dollarama Inc., and Restaurant Brands International Inc. Belski recommends an overweight position in financials, industrials and materials.

Belski has a strong track record of calling the market. In 2016, his year-end level of 15,300 was only 12 points off, and his 16,000 target for 2017 is so far on track — unless a Santa Claus rally gives it another boost.

Bear Case

Barasch, meanwhile, sees Canadian stocks as essentially range-bound for the next year. He lowered his recommendation on the S&P/TSX to market weight from overweight, blaming stretched valuations and a lack of catalysts to drive further multiple expansion.

Possible headwinds include trade threats, central banks unwinding their balance sheets, slowing domestic growth, U.S. tax reform, stagnating oil prices, U.S. election risk, and signs that China is beginning to slow.

“As markets become more fully valued and earnings are recovering, your willingness to look past some of these issues begins to wane,” Barasch said in a phone interview.

Barasch arrived at his 16,300 target by taking his 2018 earnings per share forecast of US$930, a number he calls “fairly aggressive,” and applying a multiple of 17.5 times.

“That would be close to the 90th percentile in terms of valuation historically for the TSX, so it’s not an insignificant multiple,” he said. Barasch recommends an overweight position in real estate, food-staples retail, railroads and life insurers.

Barasch only initiated coverage of the index in May 2016 with a 12-month target for May 2017 of 15,200. It closed out that month not far off at 15,350. He then called for the benchmark to close out 2017 at 16,300 before pushing that target back to 2018.

The biggest risk to his 2018 outlook would be a sudden rise in oil prices, Barasch said. West Texas Intermediate is currently trading at about US$56 a barrel.

“If six months from now oil’s at US$65 and some of these other issues have cleared the deck, then we’re probably going to be wrong, but absent that I think there’s a good chance that 2018’s just going to be a year where you’re going to really have to grind it out for returns.”

Hudson’s Bay investors want debt reduction, payouts from real estate proceeds

TORONTO — As Hudson’s Bay Co steps up the pace of extracting value from its US$5 billion property portfolio, the department store chain’s shareholders want it to reduce debt, return cash to them and not invest the proceeds in traditional retail operations.

Hudson’s Bay is not new to selling real estate, but its actions are under greater scrutiny amid rising tensions between the company and activist hedge fund Land & Buildings, which says it holds about 5 per cent of the company.

The fund wants the owner of Saks Fifth Avenue and Lord & Taylor to sell or convert stores to alternate uses and transform itself into a real estate play. It values HBC’s real estate at about $35 a share, three times more than the company’s current level.

“The perception, and in some cases, the reality, is that ( Inc) is speeding bricks and mortar retailers into submission,” said Jonathan Norwood of Mackenzie Investments, HBC’s eighth-biggest shareholder.

“If they sell the real estate, we want to see the money used to reduce debt and returned to shareholders,” added Norwood, who co-leads Mackenzie’s value-focused Cundill team. “We don’t want it going to revitalize or grow the retail operations.”

HBC is exploring the sale of its Vancouver flagship store, estimated at about $800 million (US$628.4 million), after selling its Lord & Taylor property in Manhattan for US$850 million last month.

Selling properties will further expose HBC to a brutal retail market but has not deterred the company from opening new stores in the Netherlands this year.

“It’s hard for an investor to get excited about new store openings when existing stores are on rocky ground,” said Joshua Varghese, portfolio manager at CI Investments, HBC’s sixth-largest shareholder.

The company should “seriously consider” a 3 billion euro offer from Signa Holdings for its German stores, Varghese said, noting HBC shares are unlikely to see significant gains without clarity on the company’s strategy.

An HBC spokeswoman declined to say whether the company has identified areas to deploy the proceeds from any future asset sales. It will use funds from the Lord & Taylor sale to pay down debt, which totalled $3.4 billion as of July 29, excluding its two joint ventures.

HBC’s net debt was 4.7 times earnings before interest, taxes, depreciation and amortization after the Lord & Taylor sale, compared with an industry average of 2, according to Royal Bank of Canada.

“If Richard (Baker, HBC’s executive chairman) sells the Vancouver store, he’ll probably pay off debt on the operating company,” said an HBC shareholder who declined to be identified. “I don’t think they’ll sell all the stores; they’re monetizing individual stores where demand is good.”


© Thomson Reuters 2017

Supergirl actor’s claim that Chipotle food almost killed him sends shares on roller-coaster ride

Chipotle Mexican Grill Inc. said there’s no connection between the company and an illness suffered by Supergirl actor Jeremy Jordan, who blamed the burrito chain for making him severely sick.

“There is not a link and there are no other reports of illness at the restaurant,” Quinn Kelsey, a spokeswoman for the Denver-based company, said in an email. The location — in Houston — hasn’t been closed, she said.

The incident threatens to renew concerns about food safety at Chipotle, which has struggled to bounce back from an E. coli crisis in 2015 that sickened customers. Jordan said last week that he was hospitalized after eating at the chain.

The actor, who plays Winn Schott on “Supergirl,” posted an Instagram story on Thursday from his hospital bed, saying that “the food did not agree with me and I almost died,” according to People.

The celebrity’s complaint sent Chipotle shares tumbling in early trading on Monday, extending a rout this year. Chipotle’s denial of a link prompted a brief recovery for the stock, but the rebound was quickly erased in regular trading.

The shares fell as much as 5.9 per cent to US$263, bringing them to the lowest level in almost five years. They had already declined 26 per cent in 2017 through the end of last week.

The company said on Monday morning that it had reached the actor to determine where and when he ate, Kelsey said.

“We were able to confirm that there were no reports of illness, all employees were healthy, and that all food protocols were followed and logged,” she said. “We take all claims seriously, but we can’t confirm any link to Chipotle given the details he shared with us.”

The company had begun to restore its reputation in the past year, but a norovirus incident in Virginia and a viral video of mice at a Dallas location sparked a fresh round of negative headlines.

Chipotle also suffered a data breach earlier this year, an incident that hurt its earnings and contributed to another stock slump. This year’s hurricanes rocked Chipotle as well: It had 425 restaurants in the direct path of the storms.

Canadian penny stock West High Yield dives 83% after $750 million deal vaporizes

A Canadian penny stock plunged 83 per cent in the first day of trading after its US$750-million mining deal collapsed, bringing an end to a wild ride that saw its shares surge almost 1,000 per cent in a single day.

West High Yield (W.H.Y.) Resources Ltd. dropped to 34 cents at 10:20 a.m. in Toronto after resuming trading for the first time since Oct. 5. That was the day the tiny Calgary-based explorer announced what would have been one of the year’s biggest mining deals — the sale of its main magnesium assets to an obscure buyer, Gryphon Enterprises LLC.

The deal fell through after Gryphon failed to come up with a deposit of less than 1 per cent of the transaction value, or US$500,000, by a Nov. 6 deadline. The collapse of the deal spelled the end of the brief but extraordinary rally that had propelled a company with no revenue to a market value of $114 million (US$90 million). Trading under the ticker WHY, its stock jumped to as high as $3.80, from just 36 cents the previous day, and ended the session at $2, sparking a review by regulators in Alberta.

From the beginning, however, there were questions about the deal. It wasn’t clear why Gryphon, which doesn’t have a website, was prepared to pay US$750 million for West High Yield’s assets in British Columbia, when the whole company was worth only US$16 million. According to the purchase and sale agreement, Gryphon’s chief executive officer used an AOL email address and the firm was based at a residential house built in 1992 in Swanton, Maryland.

West High Yield had continued to trade on Oct. 5 as more red flags appeared and volume soared. That sparked criticism from some that the regulators should have stepped in earlier to take control of the situation. Trading was halted on Oct. 6.

The Investment Industry Regulatory Organization of Canada has said it won’t reverse trades from that day because the announcement “did not contain information which was either misstated or inaccurate.” The Alberta Securities Commission has declined to comment on whether it’s still reviewing the company and the deal.

–With assistance from Danielle Bochove

Equitable Group earnings hit by funding done to address Canadian banks liquidity issue

TORONTO — Equitable Group Inc. says earnings were up in the third quarter but profit growth was tempered by the need to shore up liquidity through funding facilities from Canada’s major banks.

The company says net income came in at $37.9 million or $2.21 per diluted share for the quarter ending Sept. 30, up from $35.2 million or $2.16 per share for the same period last year.

Equitable says earnings were, however, reduced by $0.42 per share in the quarter because of actions it took in the second quarter to address liquidity issues.

The company says those actions included securing a two-year, $2-billion funding facility from Canada’s six largest banks, and insuring and securitizing an $892-million portfolio of existing residential mortgages to protect itself during what it says was a period of funding market volatility.

Equitable says deposit principal was $10.5 billion at the end of the quarter, up 14 per cent from a year earlier and up five per cent from the end of June.

The company says it is Canada’s ninth largest independent schedule I bank, running branchless operations including its EQ Bank digital banking arm which provides services to more than 43,000 Canadians.

The $750 million mega mining deal that came up $750 million short: Why the deal flopped

It was one of 2017’s mega mining deals. And then it wasn’t.

West High Yield (W.H.Y.) Resources Ltd. — the tiny Canadian explorer that surged nearly 1,000 per cent last month after announcing a pact to sell its main assets for US$750 million — said the deal has collapsed. The buyer couldn’t come up with a deposit for less than 1 per cent of the transaction value, or US$500,000.

“The purchaser failed to pay the deposit” by the Nov. 6 deadline, Calgary-based West High Yield, which trades under the ticker WHY, said in a statement late Tuesday. “The board of directors of the company decided to terminate the agreement.”

The collapse ends a transaction that sparked a review by regulators following West High Yield’s extraordinary surge on Oct. 5 after it announced the deal. The stock jumped to $2, from just 36 cents the previous day, giving the company with no revenue a market value of $114 million (US$89 million). The cash deal to sell the magnesium deposit in British Columbia to Gryphon Enterprises LLC would have been worth about 46 times West High Yield’s value the day before the announcement, making it one of the biggest mining asset sales in the world this year.

From the beginning there were questions about the deal, and the stock surge raised eyebrows among some investors in Canada, where the junior stock exchange has been dubbed the “wild west” for its volatile penny stocks.

Little information could be found on Maryland-based Gryphon Enterprises or its chief executive officer, Stephen Cummins. According to a West High Yield filing, the Toronto office of law firm Baker McKenzie represented Gryphon. Immediately following the announcement, Baker McKenzie’s global head of mining said he was unaware of the transaction.

Named in Error

In a statement last Friday, West High Yield said the law firm had been named in error and that Gryphon “has received advice” from Houston-based Thomas J. Kenan. It also had warned then of “substantial risk” that the buyer might not obtain financing for the deal. The company also warned last week that its prior claim that the assets hold about 3,000 years of magnesium supply “should not be relied upon.”

When reached by phone Monday, Kenan confirmed that he represents Cummins in the U.S., and that two or possibly three companies want to loan Gryphon money. “We’re dealing with reputable companies and people,” he said.

“He’s not a crook, I’ll just tell you that right now, I wouldn’t associate with one,” Kenan said of Cummins. “But sometimes he’s not very practical; he reaches very far and is always working on great big deals.”

West High Yield said that while it’s disappointed the deal was terminated, it “continues to believe, based on testing done to date, that the assets have significant value.” It intends to continue its efforts to secure mining and rock quarry permits for the property, it said.

Stock Halted

The stock has been halted since Oct. 6 amid an inquiry by the Alberta Securities Commission.”The company is in discussions regarding when its shares will resume trading,” West High Yield said Tuesday. Hilary McMeekin, an ASC spokeswoman, as well as Cummins and West High Yield CEO Frank Marasco didn’t immediately respond to a requests late Tuesday seeking comment.

Grant McGlaughlin, a partner at Toronto law firm Goodmans LLP, said the Baker McKenzie error was a “red flag.”

Lawyers and companies on both sides of large asset sales are always “intimately” involved during discussions leading up to an agreement, McGlaughlin said Monday by phone. “I’ve never seen it in 21 years where someone hasn’t had direct contact with a buyer’s counsel on a US$750 million deal.”  

–With assistance from Joe Deaux and David Scanlan