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Toronto market rebounds as oil climbs to 7-year high

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Toronto market stock index rose on Tuesday as a seven-year high for oil prices bolstered energy shares and bank stocks benefited from a steeper yield curve, with the index recovering from a two-and-half-month low the day before.

The Toronto Stock Exchange’s S&P/TSX composite index ended up 131.18 points, or 0.7%, at 20,183.43. On Monday, it posted its lowest closing level since July 20.

“Energy stocks are helping to drive the index today,” said Lorne Steinberg, president, Lorne Steinberg Wealth Management Inc.

The energy group climbed 2.8% as oil rose to its highest level since 2014, supported by the OPEC+ decision on Monday to stick to planned output rises. U.S. crude prices settled 1.7% higher at $78.93 a barrel.

Consumer discretionary stocks added 1%, while financials, which account for about 30% of the Toronto market’s capitalization, were up 0.9%.

“We remain very bullish on banks,” Steinberg said. “They still seem to be a pretty cheap, attractive sector in the market and a huge beneficiary of a steeper yield curve.”

A steeper yield curve, or a wider gap between long-term and short-term rates, helps improve the profit margins of banks.

The gap between the Canadian 2- and 10-year yields widened by 4.1 basis points to 100 basis points in favor of the longer-term bond, the widest gap since June.

Worries around higher inflation and a slowdown in economic growth have rattled investor sentiment in recent weeks. Still, the Toronto market has gained nearly 16% since the start of the year.

Gains for the TSX on Tuesday came as data showed Canada‘s trade surplus with the world widening in August to C$1.9 billion.

Canada‘s employment report for September is due on Friday, which could offer clues on the Bank of Canada policy outlook.

 

(Reporting by Fergal Smith; Additional reporting by Amal S in Bengaluru; Editing by Lisa Shumaker)

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U.S. energy transition to create Mexico auto jobs, climate envoy Kerry says

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Mexico‘s manufacturing sector stands to benefit from a U.S. transition away from fossil fuels including through the creation of jobs for building electric vehicles, John Kerry, climate adviser to U.S. President Joe Biden, said on Monday.

“Mexico’s industrial base, already deeply integrated with the rest of North America, absolutely stands to benefit from the energy transition,” Kerry said alongside Mexican President Andres Manuel Lopez Obrador in Mexico’s Chiapas state, near the southern border with Guatemala.

Kerry traveled to Mexico to meet with his counterparts ahead of the upcoming United Nations’ COP26 climate conference in Glasgow, Scotland, which neither Lopez Obrador nor his foreign minister is expected to attend.

“When we switch from gasoline to electrified vehicles, there are going to be a lot of good-paying jobs here in Mexico because of the connection already of the automobile industry and our two countries,” said Kerry, who visited a flagship reforestation project promoted by Mexico.

The production of automobiles in North America is highly integrated through the U.S.-Mexico-Canada Agreement (USMCA)

Under Biden and Kerry, the United States has stressed the need for more aggressive action to address global warming. Lopez Obrador, on the other hand, has cut the environment ministry’s budget as part of an austerity drive and dismantled policies promoting private investment in renewable energy.

Research coalition Climate Action Tracker rates Mexico’s overall climate plan as “Highly Insufficient”, saying its policies and actions will “lead to rising, rather than falling, emissions and are not at all consistent with the Paris Agreement’s 1.5°C temperature limit.”

Lopez Obrador says he will tackle carbon emissions by revitalizing dilapidated hydropower projects under state control and through the tree planting program, called Sembrando Vida, which aims to plant 700,000 trees.

But he has also focused on reviving state-run oil and power generation companies, and his government has prioritized fossil fuels over renewable energy sources for Mexico’s national grid.

Mexico, the second-largest greenhouse gas emitter in Latin America, is seen as vulnerable to climate change and extreme weather patterns, with tropical cyclones and floods battering the country every year.

By 2030, Mexico plans to reduce greenhouse gas emissions by 22% over a business-as-usual scenario. Brazil, the region’s biggest polluter, aims to cut its emissions by 43% by 2030 compared to 2005 levels.

(Reporting by Anthony Esposito and Drazen Jorgic; Editing by Cynthia Osterman and Karishma Singh)

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What's Happening in the World Economy: Wall Street is Bullish on the US – Bloomberg

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Hello. Today we look at what U.S. banks are saying, the events of the coming week and how low interest rates fuel the rise of superstar firms. 

Got to Wear Shades

It was a rip-roaring quarter, and the future is looking bright even amid a welter of risks facing the U.S. economy. That’s the essential takeaway from the earnings from the biggest American banks late last week.

Wall Street is very different from Main Street, but with their tens of millions of individual customers across the country, and business with companies both big and small, they do have a proverbial finger on the pulse of the economy.

Here are some takeaways from the slew of reports and public comments:

Overall Growth

  • “Hopefully a year from now, there will be no supply chain problem. The pandemic will become endemic and I think it’s very good to have good healthy growth, which we have. And I think it’s good to have unemployment at 4%, it’s good that their jobs are open, I think it’s good the wages are going up along,” said JPMorgan Chase CEO Jamie Dimon.
  • “We are likely past the worst of the pandemic’s effects on the global economy,” said Goldman Sachs CEO David Solomon.
  • “Growth has come off the boil a tad. We are watching three things very closely: a slowdown in China and its impact on global growth, inflation and supply constraints in labor, materials and energy and finally, what happens next with the U.S. debt-ceiling negotiations. These are also the issues which repeatedly surface in our conversations with clients,” said Citigroup CEO Jane Fraser.

State of Consumer

  • Bank of America’s credit card tracker signaled it has turned a corner. Average outstanding balances were up about 3% in the third quarter from the previous three months. That’s the first quarter-over-quarter gain since before the pandemic.
  • Wells Fargo saw credit-card revenue climb 4%, which the bank attributed in part to more spending on its cards. Credit card balances grew for the first time since the fourth quarter of 2020.
  • Citigroup’s Fraser said consumer balance sheets remain “unusually strong.” For more on that score, see Jill Shah’s reporting on household finances in a story out today.

Lighter Burden

Spending on debt is at the lowest since at least the 1980s

Source: Federal Reserve Bank of St. Louis

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Business Lending

Growth among the big banks was propelled by investment banking and trading activities, rather than from core lending. Credit to businesses showed a mixed bag:

  • JPMorgan’s commercial and industrial loans were down 3%, although they rose 1% when excluding paycheck protection program credit, a government-supported initiative during the pandemic.
  • Bank of America’s ex-PPP loans were up 9%, Evercore ISI analysts highlighted.

Inflation

  • “Inflation in general is running at a much higher pace than we thought it would be just a few months ago and certainly it’s going to be there a little bit longer. We are seeing a little bit of pressure in wages but not across the board — really only in certain pockets of the company,” said Wells Fargo CFO Mike Santomassimo. 
  • “Inflation is clearly not temporary,” said Bank of America CEO Brian Moynihan.
  • “You have inflation, it’s 4%. It’s been 4% now for the better part of a couple of quarters and it’s in my view unlikely to be lower than that next quarter or the quarter after that,” said JPMorgan’s Dimon. Still, “people are always focusing too much on immediate concerns. If you have inflation of 4% or 5%, we’re still going to open deposit accounts, checking accounts and grow our business.”

Further to that last note by Dimon, consider the view of the Federal Reserve’s army of more than 400 Ph.D. economists on inflation.

Fed staff are predicting that inflation will be back under 2% in 2022, buying into the view that price pressures will be transitory, Steve Matthews reports.

And that’s a view worth considering: Fed staff forecasts historically bettered Wall Street consensus forecasts, Steve shows here.

Chris Anstey

The Week Ahead

China got the week in economics going with a downbeat third quarter growth report that showed the effect a power crunch and property slump are having. GDP expanded 4.9% from a year earlier, the National Bureau of Statistics said Monday, down from 7.9% in the previous three months.

Industrial output missed estimates for September and investment slowed, bur retail sales did manage to beat economists’ estimates.  The upshot is that the world’s second biggest economy is set to slow further. 

#lazy-img-380107390:beforepadding-top:57.88643533123028%;relates to Wall Street Banks Are Bulls on U.S. Economy

Elsewhere, Turkey may cut interest rates while Russia raises them, a new reading of U.K. inflation will keep focus on the Bank of England’s possible response, and the Federal Reserve will release its Beige Book. 

Click here for our wrap of what’s coming up in the global economy.

Today’s Must Reads

  • Calming words | People’s Bank of China Governor Yi Gang said authorities can contain risks posed to the Chinese economy and financial system from the struggles of China Evergrande. The use of “contained” may sound familiar to those who remember 2008. 
  • Hawkish signal | Bank of England Governor Andrew Bailey moved to strengthen the case for raising interest rates, saying the central bank will “have to act” to curb inflationary forces. That’s even as economists grow increasingly pessimistic about the outlook for the U.K. recovery.
  • Global gridlock | Ports are growing more congested as the pandemic era’s supply shocks intensify, threatening to spoil the holiday shopping season, erode corporate profits and drive up consumer prices. Here’s a look at what those stuck aboard are up to. 
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  • Inflation surge | New Zealand inflation surged at the fastest pace in 10 years in the third quarter, reinforcing bets that the central bank there will keep raising rates.
  • Team Transitory | As for the Philippines, central bank Governor Benjamin Diokno said he’s with “team transitory” and that it’s more prudent for the country to delay monetary tightening. Among those also in that camp is European Central Bank President Christine Lagarde, who said on Saturday the current spike in inflation is unlikely to last.
  • Socking it away | Consumers in Europe and the U.S. aren’t rushing to spend more than $2.7 trillion in savings saved during the pandemic, dashing hopes for a consumption-fueled boost to economic growth.
#lazy-img-380107770:beforepadding-top:82.54486133768353%;relates to Wall Street Banks Are Bulls on U.S. Economy

Need-to-Know Research

Low interest rates are contributing to the rise of so-called superstar companies, according to new research from economists including Atif Mian and Amir Sufi. 

The paper, circulated on Monday by the National Bureau for Economic Research, uses data on companies’ financials and monetary policy shocks to find that falling rates disproportionately benefit industry leaders, especially when rates are already low.

That’s because the cost of borrowing falls more for industry leaders; big companies are able to raise more debt, increase leverage, and buy back more shares; and capital investment and acquisitions increase more for those who dominate sectors.

“All three of these effects also snowball as the interest rate approaches zero,” the authors said. “The findings provide empirical support to the idea that extremely low interest rates and the rise of superstar firms are connected.”

Read the full research here.

On #EconTwitter

TV’s “Succession” is back and the Top 1% are still getting wealthier…

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    What China's Slowing Economy Means for Investors – Barron's

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    Containers stacked at Qingdao port, in China’s eastern Shandong province, on Oct. 18, 2021. China’s economy slow more than expected in the third quarter.


    STR/AFP via Getty Images

    China’s economy slowed even more than expected, growing at just 4.9% in the third quarter, as the country grappled with a power shortage, Covid-related restrictions, a crackdown on a range of companies, and debt troubles in its property sector. Some of those pressures could ease into the end of the year, but China’s economy may be on the path to slowing down for a while still—and that could have global ramifications.

    The reading was the second weakest quarter over quarter growth on record since rates were published in 2010, according to Capital Economics’ Julian Evans-Pritchard, who says the firm’s own metrics point toward an even more pronounced downturn.

    Industry, construction and services were all weak. Infrastructure spending softened, and there was a pullback in real estate investing as the property sector goes through its own tremors amid the debt travails of




    China Evergrande Group

    (ticker: 3333: Hong Kong) and others.

    Though services could rebound this quarter, Evans-Pritchard sees the weakness in industry only deepening as factories need to ration power due to environmental restrictions and rising prices for thermal coal.

    The property downturn has been offset a bit by the world’s pent-up demand for goods, which is boosting Chinese exports. But Evans-Pritchard cautions that foreign demand is likely to decelerate over the coming year as backlogs are cleared, with the firm expecting China to see just 3% growth, the slowest pace since the global financial crisis.

    Next year is a big one for Beijing with the Winter Olympics and the 20th Party Congress and strategists expect authorities to be more proactive in clarifying its initiatives and increase efforts to manage the slowdown. Already, Beijing has picked up rhetoric and even engaged in some policy tweaks, with the People’s Bank of China last week noting that commercial banks had excessively limited lending to developers. That could help improve home-buyer confidence, according to a note from Gavekal Dragonomics analysts.

    But there is reason for caution, with TS Lombard’s Rory Green worried about  a higher possibility of a policy misstep, less effective stimulus and a weaker consumer recovery. Though policy makers are being more accommodative to help support consumer confidence, Green says it’s hard to ignore the blinking financial stress signals as key funding channels are under pressure. “Financing for development reliably leads investment by nine months, thus a large contraction in property is unavoidable,” he added.

    That is troubling for an economy that is so heavily reliant on property, especially because it’s not clear if authorities’ targeted stimulus will be enough. That could keep investors wary about China, as well as China-related plays including some commodities in the near-term.

    In fact, TS Lombard strategists Larry Brainard and Jon Harrison in a separate note caution that the growth slowdown in China and the threat of a stronger dollar increase risks for emerging market investors, especially exporters and commodity producers—a reason they have turned negative on Brazilian stocks though they are still positive on India and Russia.

    Another risk: The supply shortages rippling through the world are tripping up emerging markets as well. Take the bottlenecks in semiconductor chips hobbling the auto sector—and countries like Mexico and Hungary that are part of that supply chain. Add in the power shortages not just in China but also India and Brazil and Capital Economics’ team sees another challenge to economic growth—and pressure on policy makers who now have to contend with inflationary pressures even though their economies could use some stimulus.  

    It isn’t clear those concerns are baked into the market yet. The




    iShares Emerging Markets

    exchange-traded fund (EEM) was down slightly on Monday at $51.83 while the


    MSCI China

    ETF (MCHI)  was up a fraction at $70.84. The


    iShares MSCI Brazil

    ETF (EWZ) fell 1% at $32.92.

    Write to Reshma Kapadia at reshma.kapadia@barrons.com

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