Oh, relax, Liberal minority governments can be good for the Toronto stock market

Briefing highlights

• Liberal minorities and the TSX
• Stocks, Canadian dollar, oil at a glance
• ECB holds rates steady
• Draghi prepares to bow out
• Precision Drilling loss narrows
• Husky Energy profit slips
• Twitter misses estimates
• Teck profit slides
• Tesla surges: What analysts are saying
• Required Reading

Liberal minorities and the TSX

Investors don’t like uncertainty, but relax, because Liberal minority governments can be good for the Toronto stock market.

“With one of the tightest federal elections in recent history now concluded, the historical significance of a Liberal minority with respect to the stock market performance is mixed, but slightly more positive than Conservative minorities, especially at the start,” said Brian Belski, Bank of Montreal’s chief investment strategist, and his colleague Ryan Bohren.

“Furthermore, minority governments tend to be more fiscally stimulative on average, with Liberal minority governments historically being the most stimulative type of government," they added in a post-election report.

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Here’s what Mr. Belski and Mr. Bohren found:

• Since the mid-1940s, the Toronto market ran up an average 6 per cent in the six months after a minority Liberal government was elected. That popped to 13.5 per cent over 12 months, though the performance ebbed given that the annualized average was just 6.5 per cent for the term of the government.
• “Minority governments are more stimulative on average, but Liberal minority governments have been the most stimulative type of government. In fact, since 1960, when a Liberal minority government has been formed, real government spending growth has averaged 5.7 per cent in the following 12 months, well ahead of the average 3- to 4-per-cent growth post all elections.”
• Given that markets don’t like uncertainty, it’s worth noting Mr. Belski and Mr. Bohren found that “Liberal governments can be stable.” They noted that the five such administrations since 1935 have lasted an average 2.5 years.

Their colleagues, BMO chief economist Douglas Porter and senior economist Robert Kavcic, said “there’s not much to move the needle on equities broadly” regarding a minority government, with interest rates and oil prices being more important.

“And, unlike the cannabis sector in 2015, there’s no apparent big winner from this result,” they said.

Given that the Liberals will have to be propped up, likely by the New Democratic Party, there are some obvious issues this time out, notably for the energy and telecom industries.

“Environmental policies were among the greatest differences in party platforms,” said CIBC chief economist Avery Shenfeld.

“The NDP said its priorities included ‘bold action’ on climate change, but its leader did not stipulate that its support was contingent on stopping the Trans Mountain pipeline that it has opposed.”

BMO’s Mr. Porter and Mr. Kavcic agreed the Trans Mountain project comes with a big “question mark.”

“The NDP have opposed the pipeline, but to a lesser extent than the [Bloc Québécois] or the Green Party,” they added.

“Still, it’s worth noting that between the Liberals and Conservatives, a strong majority of MPs will be in support of the project, and recall that it has already been approved – so doesn’t necessarily face a confidence vote in the House. Whether or not the Liberals can finesse the project forward, or if it is a hard no from the NDP, remains to be seen.”

Mr. Belski and Mr. Bohren said they believe the concerns over pipelines are “misplaced.”

“Although over all we continue to believe the impact of the election to be relatively minor, negative sentiment towards energy and pipelines is likely to be the main narrative,” they said.

“Ultimately, we believe fundamentals matter and, according to our work, energy companies have made significant adjustments in recent years, including reduced pipeline dependency, and have significantly restored cash flow and profitability.”

As for telecom, the Liberals and NDP have “actively endorsed” trimming the cost to consumers of their mobile phones, said Mr. Porter and Mr. Kavcic.

“What form that takes (i.e., through regulation, subsidies or more competition) is unclear, but is something to watch in the telecom sector.”

There are, of course, many unknowns, from whether Liberal budgets will win the support needed to keep them afloat to the tremendous uncertainty of U.S. trade policy, which has dogged stock markets.

“Going forward, some market volatility may be expected around pivotal votes of confidence, notably budgets, and it remains to be seen how markets will digest a potential further widening of budget deficits and/or tax increases stemming from compromises and agreements around pharmacare or other spending measures,” said Toronto-Dominion Bank senior economist Brian DePratto.

“That said, the federal debt level is low, as are borrowing costs, and this is hardly Canada’s first minority government – absent major tax increases, expect any reactions to be short-lived,” he added.

Read more

• Follow our federal election coverage
• How will Trudeau’s minority Parliament work? An ongoing guide to the new balance of power
• Matt Lundy: From housing reform to carbon pricing: How a Liberal minority could affect business and consumers
• Trudeau’s Liberals have a minority government. What now? A guide to the day after
• David Parkinson: What a Liberal minority government means for the economy
• Don’t freak out over budget deficits (no matter who wins the federal election tonight)
• Bill Curry, Marieke Walsh: Trudeau wants Trans Mountain pipeline completed as ‘quickly as possible’
• Tim Shufelt: Markets could be in for another rough ride in 2020. Here are three things to look out for

Markets at a glance

Read more

• Follow our Inside the Market

ECB holds rates steady

President Mario Draghi closed out his tenure at the European Central Bank today with no change in policy, having moved forcefully at the ECB’s last meeting.

This being his final meeting, he’ll hand the job over to Christine Lagarde, former chief of the International Monetary Fund and a former French finance minister, who takes over Nov. 1.

“I quite admire the man … for his boldness, vision, leadership and communication style at the helm of a divided central bank in a fragmented euro zone economy and market,” said Derek Holt, Bank of Nova Scotia’s head of capital markets economics.

“I’m more worried about what a non-economist without Draghi’s stripes and with zero experience in central banking might do, especially put in the context of a highly divided ECB, but we’ll see.”

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The ECB said it could still offer more stimulus depending on the economic outlook.

“The governing council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 per cent, within its projection horizon,” the central bank said.

Read more

• ECB leaves policy unchanged as Mario Draghi’s tenure ends

Precision loss narrows

Precision Drilling Corp. narrowed its third-quarter loss as it lauded its gains of market share in Canada and the U.S.

The company posted a loss of $4-million, or a penny a share, compared to a loss of $31-million or 10 cents a year earlier.

Revenue dipped 2 per cent to $376-million.

Precision noted its market share increases so far this year, as its average U.S. rig count rose 7 per cent while the industry chalked up a 4-per-cent decline. Precision’s Canadian average rig count fell 25 per cent, a slower pace than the industry’s 32 per cent.

Read more

• Precision Drilling’s quarterly loss narrows

Ticker

Husky Energy profit slips

From Reuters: Husky Energy Inc. reported a 50-per-cent drop in quarterly profit, as the integrated oil and gas company was hurt a drop in U.S. refining margins and lower crude oil prices. Net earnings fell to $273-million, or 26 cents a share, in the three months ended Sept. 30, from $545-million, or 53 cents, a year earlier.

Twitter misses estimates

From Reuters: Twitter Inc. posted lower-than-expected third-quarter revenue and profit, which the company attributed to advertising problems including product bugs and unusually low demand over the summer. However, the social media platform did record another rise in daily users who see ads on the site, beating analyst estimates. Revenue rose 9 per cent from a year earlier to US$824-million, missing Wall Street expectations of US$874-million, based on IBES data from Refinitiv. Third-quarter net income was US$37-million, or five US cents a share.

Teck profit slides

From The Canadian Press: Teck Resources Ltd. says it is focusing on improving efficiency and productivity after it reported its third-quarter profit fell compared with a year ago. Chief executive officer Don Lindsay said global economic uncertainties are having a “significant negative effect” on prices for its products, particularly steelmaking coal. Teck reported a profit attributable to shareholders of $369-million, or 66 cents a share, for the quarter ended Sept. 30, compared with a profit of $1.28-billion or $2.23 a share a year earlier.

Euro zone activity flat

From Reuters: Euro zone business activity barely expanded in October as demand shrank, according to a survey. IHS Markit’s flash composite PMI, seen as a good guide to economic health, was 50.2, just above September’s more than six-year low final reading of 50.1 but still perilously close to the 50 mark that separates growth from contraction.

Nokia cuts profit forecasts

From Reuters: Finnish telecom network equipment maker Nokia reported third-quarter profit in-line with expectations but lowered its full-year profit forecasts for 2019 and 2020, citing tough competition and additional investments. Nokia now sees 2019 underlying earnings per share at €0.18 to €0.24 and 2020 EPS at €0.20 to €0.30 . Nokia reported a slip in underlying earnings to €0.05 per share during the July to September period, compared to €0.06 a year ago.

Hyundai profit climbs

From Reuters: South Korea’s Hyundai Motor said third-quarter net profit rose 59 per cent, missing analysts’ consensus, after it set aside additional costs to address potential engine defects in the U.S. and home markets. Net profit was the equivalent of US$364.75-million.

Daimler profit up slightly

From Reuters: Daimler reported a slight rise in third-quarter operating profit, boosted by higher sales of Mercedes-Benz cars, but announced cost cuts and warned that legal provisions tied to diesel litigation could rise. Group earnings before interest and taxes rose 8 per cent to €2.69-billion , up from €2.49-billion in the year-earlier period, boosted by an 8-per-cent rise in sales of luxury cars.

Norway holds rates

From Reuters: Norway’s central bank kept its main interest rate unchanged at 1.5 per cent, and said the economy had developed largely in line with forecasts made in September. Norges Bank last month raised rates for the fourth time in a year amid solid domestic growth, but said further tightening was unlikely as the global economy gradually slows.

Also ...

• Cost-cutting helps Dow beat profit estimates
• U.S. trade adviser says initial China trade deal will include section on intellectual property
• 3M cuts profit forecast as slowing Asia demand hampers revenue

What analysts are saying today

“Tesla’s positive revenue announcement was a shocker that no one anticipated. The electric car maker posted the first positive revenue in more than a year, a quarter earlier than expected and charmed investors. Elsewhere, Microsoft’s revenues jumped 14% in Q3, beating already-strong analyst estimates, although Azure’s sales fell short of expectations … This far, the U.S. earnings session revealed better-than-anticipated third-quarter results for many companies, giving some relief to investors regarding the negative bearings of a yearlong trade dispute with China.” Ipek Ozkardeskaya, senior market analyst, London Capital Group

“The resilience of European markets has been all the more surprising given that a lot of recent economic data has been anything but resilient. The sclerotic nature of the growth story in Europe is starting to fuel concerns that the weakness in the manufacturing sector could start to seep into the services side of the economy.” Michael Hewson, chief analyst, CMC Markets

“Equities in the euro zone have outperformed those in the U.S. since early October. While we expect this trend to continue, we think that both will fall in the rest of this year, as global growth slows further.” Simona Gambarini, markets economist, Capital Economics

“[Mario Draghi] leaves with the job of reviving the economy unfinished, and as he hands over the monetary baton to Christine Lagarde she might as well use it to beat up finance ministers and campaign for Europe’s fiscal ‘rules’ to be thrown into the Rhine. If she can do that, the euro will recover; if she can’t, it is likely to struggle, rising against the dollar only when that falls across the board.” Kit Juckes, global fixed income strategist, Société Générale

Read more

• Slower growth in Microsoft cloud business casts shadow over results
• Tesla shares soar after surprise profit

Required Reading

Quebec would push ahead

Quebec says it would push ahead with its own carbon market if the U.S. government is successful in killing the emissions trading system it has in place with the state of California. Nicolas Van Praet reports.

We don’t care about balancing the books

Election results make it clear that voters don’t care about balanced budgets, columnist David Parkinson writes.

Zuckerberg confronts Congress

Facebook Inc. chief executive Mark Zuckerberg confronted a hostile U.S. Congress on Wednesday as he defended plans for a global cryptocurrency project against an intensifying backlash by regulators who say they have lost trust in the social-media giant. Tamsin McMahon reports.