CIBC World Markets is taking a rosier view of the two Canadian banks with the largest American footprint.
In a note to clients, CIBC Equity Analyst Paul Holden raised his ratings on Bank of Montreal and Toronto-Dominion Bank to the equivalent of a buy on expectations that Joe Biden’s victory in the U.S. presidential election and the prospects for a viable COVID-19 vaccine could accelerate a return to more normal economic growth internationally.
Holden also lowered his ratings on Royal Bank of Canada and National Bank to the equivalent of a hold.
Holden said that a more normalized economic growth trajectory could reduce the needs for the banks to set aside large amounts of cash to offset potentially sour loans. BMO and TD could then deploy that cash through share buybacks or potential acquisitions.
“We expect [the Office of the Superintendent of Financial Institutions] will lift capital restrictions at some point in 2021 and perhaps earlier in the year with vaccine distribution,” Holden said. “We see this as a potential catalyst for the [banks] with dividend increases and share repurchases being likely. M&A is also possible for TD and BMO.”
Both OSFI and its American regulatory counterpart have put restrictions in place to prevent banks from increasing their dividends or launching large-scale share buybacks in an effort to ensure the banks have adequate liquidity to weather a protracted downturn and surge in sour loans.
While Holden changed his view on TD and BMO, he warned that it will take time for those growth themes to play out.
“Fiscal stimulus, monetary stimulus, strong house prices and a vaccine should encourage consumer spending and business investment. This is a theme for 2021, not so much for the coming quarter,” he said.
Canadian dollar notches 6-year high as U.S. inflation jumps
The Canadian dollar strengthened against its U.S. counterpart and all the other G10 currencies on Wednesday as oil prices rose and investors bet that the Bank of Canada would be more sensitive to rising inflation than the Federal Reserve.
U.S. consumer prices increased by the most in nearly 12 years in April as booming demand amid a reopening economy pushed against supply constraints.
“Higher inflation in the U.S. will spillover into Canada‘s economy and place upwards pressure on Canadian CPI,” said Simon Harvey, senior FX market analyst for Monex Europe and Monex Canada.
The Bank of Canada is likely to be “much more sensitive” to rising inflation than the Fed, Harvey said.
Last August, the Fed shifted to a new monetary policy strategy, putting new weight on bolstering the U.S. labor market and less on worries about too-high inflation.
The Bank of Canada last month changed its guidance to show it could start raising its benchmark interest rate from a record low of 0.25% in late 2022. It also tapered its bond purchases, becoming the first major central bank to cut back on pandemic-era money-printing stimulus programs.
The Canadian dollar was trading 0.3% higher at 1.2063 to the greenback, or 82.90 U.S. cents, the biggest gain among G10 currencies. It touched its strongest intraday level since May 2015 at 1.2046.
One of the major causes of inflation has been higher prices of some of the commodities that Canada produces, including oil.
U.S. crude oil futures were up 1.7% at $66.40 a barrel on signs of a speedy economic recovery and upbeat forecasts for energy demand.
Canadian government bond yields were higher across the curve, tracking the move in U.S. Treasuries. The 10-year touched its highest since April 29 at 1.587% before dipping to 1.581%, up 4.2 basis points on the day.
(Reporting by Fergal Smith; Editing by Andrea Ricci)
Oil prices rise on nagging fears of fuel shortages
Oil prices settled higher on Tuesday, as lingering fears of gasoline shortages due to an outage at the largest U.S. fuel pipeline system after a cyber attack brought futures back from an early drop of more than 1%.
Benchmark gasoline futures prices ended the session 0.3% higher at $2.1399 a gallon.
On Monday, Colonial Pipeline, which transports more than 2.5 million barrels per day (bpd) of gasoline, diesel and jet fuel, said it was working to restore much of its operations by the end of the week.
“While the short-term risk is being played down, the market is still visibly shaken by the event, given the nature of the attack and the scale of the infrastructure,” said Rystad Energy’s oil markets analyst Louise Dickson.
“The market is now concerned about the likelihood of such an event being repeated and about the severity of future attacks.”
Fuel supply disruption has driven gasoline prices at the pump to multi-year highs and demand has spiked in some areas served by the pipeline as motorists fill their tanks.
“With little information forthcoming from the private company, the market appears to be proceeding on the assumption that normal flows will resume by the upcoming weekend and since no operational problems appear to exist, this guidance would appear correct.” said Jim Ritterbusch, president of Ritterbusch and Associates.
Traders booked at least four tankers to store refined oil products off the U.S. Gulf Coast refining hub after a cyber attack that knocked out the pipeline, shipping data showed on Tuesday.
North Carolina, the U.S. Environmental Protection Agency and Department of Transportation issued waivers allowing fuel distributors and truck drivers to take steps to try to prevent gasoline shortages.
OPEC on Tuesday raised its forecast for demand for its crude by 200,000 bpd and stuck to its prediction of a strong recovery in global oil demand this year as growth in China and the United States counters the coronavirus crisis in India.
Meanwhile, the rapid spread of infections in India has increased calls to lock down the world’s second-most populous country and the third-largest oil importer and consumer.
India’s top state oil refiners have already started reducing runs and crude imports as the new coronavirus cuts fuel consumption, company officials told Reuters on Tuesday.
On the bullish side for crude, analysts are expecting data to show U.S. inventories fell by about 2.3 million barrels in the week to May 7 after a drop of 8 million barrels the previous week, a Reuters poll showed.
Gasoline stocks are expected to have fallen by about 400,000 barrels, analysts estimated ahead of reports from the American Petroleum Institute on Tuesday and the U.S. Energy Information Administration on Wednesday.
(Additional reporting by Devika Krishna Kumar, Julia Payne and Shadia Nasralla in London; Shu Zhang and Sonali Paul; Editing by Gabriela Baczynska, David Goodman and David Gregorio)
Wall Street slips as inflation jitters spark broad sell-off
Wall Street lost ground on Tuesday as rising commodity prices and labor shortages fueled fears that, despite reassurances from the U.S. Federal Reserve, near-term price spikes could translate into longer-term inflation.
By late afternoon the indexes were off their session lows, but the sell-off was fairly evenly dispersed across the sectors.
Economic data released on Tuesday from the Labor Department showed job openings at U.S. companies jumped to a record high in March, further evidence of the labor shortage hinted by Friday’s disappointing employment report.
The report suggests labor supply is not keeping up with surging demand as employers scramble to find qualified workers.
Burrito chain Chipotle Mexican Grill announced it would hike the average hourly wage of its workers to $15, a further sign that the worker shortage in the face of a demand revival could add fuel to the inflation surge.
That worker shortage, along with a supply drought in the face of booming demand could contribute to what is seen as inevitable prices spikes, which the U.S. Federal Reserve has repeatedly said are unlikely to translate into long-term inflation.
“The market is beginning to debate whether or not the Fed is right on inflation,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. “Will this be more than transitory? That’s what the market is beginning to discount.”
Market participants will scrutinize the Labor Department’s CPI report, due early Wednesday, for further signs of potential inflationary pressures. (Graphic on inflation) https://tmsnrt.rs/2SxpkST
The Dow Jones Industrial Average fell 456.51 points, or 1.31%, to 34,286.31, the S&P 500 lost 33.76 points, or 0.81%, to 4,154.67 and the Nasdaq Composite dropped 5.58 points, or 0.04%, to 13,396.28.
All 11 major sectors of the S&P 500 were in negative territory, with energy stocks suffering the largest percentage loss.
The CBOE Volatility index, a measure of investor anxiety, touched its highest level in two months.
First-quarter reporting season, which is providing the first year-on-year comparison to pandemic-related shutdowns, is approaching the finish line with 451 constituents of the S&P 500 having reported. Of those, 86.9% have beaten consensus expectations, according to Refinitiv IBES.
Analysts now see first-quarter S&P earnings growth of 50.5% year on year, up substantially from the 16% growth forecast at the beginning of the year, per Refinitiv.
Boeing Co was down 1.6% after the planemaker announced deliveries of its 737 MAX fell to just four planes in April due to an electrical problem.
Tesla Inc continued its slide, dropping 1.2% following the electric automaker’s decision to expand its Shanghai plant owing to heightened U.S.-China tensions.
Mall REIT Simon Property Group Inc fell 2.3% after the company said it does not expect a return to 2019 occupancy levels until next year or 2023.
L Brands Inc announced it will split into two publicly traded companies, Bath & Body Works and Victoria’s Secret. Its stock dropped 3.3%.
Declining issues outnumbered advancing ones on the NYSE by a 2.99-to-1 ratio; on Nasdaq, a 1.48-to-1 ratio favored decliners.
The S&P 500 posted five new 52-week highs and one new low; the Nasdaq Composite recorded 18 new highs and 216 new lows.
(Reporting by Stephen CulpAdditional reporting by Medha Singh and Sruthi Shankar in Bengaluru; Editing by Lisa Shumaker)