Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
TD economist Marc Ercolao explains the potential for tariffs on Canadian goods,
“A big near-term question is how Trump’s tariff policy will jolt U.S.-Canadian trade relations. ... In short, the existing USMCA trade agreement with the U.S. (and Mexico) could keep Canada insulated from tariffs, so long as we make a handful of concessions come the pact’s review in 2026. That said, we do not discount the very real risk that Trump could move forward with tariffs on Canada, which would have immediate negative impacts on GDP, inflation, and trade. Trump’s presidency also puts the Canadian dollar on a different path. Our forecast for higher U.S. inflation will result in a slower pace of U.S. rate cuts in 2025, widening the spread between the Bank of Canada and the Fed, and pressuring the loonie lower … It would not surprise us to see the CAD temporarily break below 70 cents in the near-term.”
The Weekly Bottom Line – TD Economics
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Morgan Stanley chief investment officer Michael Wilson likes large-cap, higher-quality cyclical stocks,
“[The election] outcome was not priced, in our view. This dynamic allowed for significant outperformance of Financials, Industrials, and commodity cyclicals on Wednesday of last week. We see further follow through to the upside in quality cyclicals as prospects for a lighter regulatory environment, supportive tax policy and a potential rebound in animal spirits should rise following last week’s results. These developments come on the back of a macro backdrop that was already becoming more supportive of cyclical outperformance.”
Stocks on Mr. Wilson’s Fresh Money Buy List that fit the theme include Bank of America, Eaton Corp PLC, Northrup Grumman and Centerpoint Energy Inc.
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BofA Securities commodity strategist Warren Russell surveys the global crude market,
“The oil market has been pushed and pulled in 2H24 by bullish geopolitical risk and the threat of bearish 2025 balances, underpinned by slower demand growth and accelerating non-OPEC supply. OPEC+’s plan to ratably hike output in 2025 is also weighing on market sentiment and should blunt the bullishness of any potential supply disruption. Brent crude oil prices swung from a low of $68 in early September to a high of $81/bbl in early October and have recently settled into the middle of the range near $74, a level that seems fair given all the uncertainty. Indeed, geopolitical tensions between Iran and Israel remain high, with no disruptions to show, and while refining margins hint at weak oil demand, inventories are below pre-COVID levels and not yet rising meaningfully .,.. OPEC+ has sought opportunities to raise output ever since it started ceding market share in late 2022”
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The sentiment among Wall Street strategists after the election has been that the election of Mr. Trump is bullish for stocks until the ten-year U.S. bond yield hits 5.0 per cent. Here’s J.P. Morgan’s Mislav Matejka:
“With Trump’s win, we assumed an initial positive market response. The question down the line will be over the sustainability of the move, and that in turn will depend on bond yields’ behaviour. After all, in 2016 the bond yields spike started from sub 2% on 10 year, vs current 4%+, and fiscal deficit was less than half of the current one. Yields approaching 5% could prove trickier for risk assets to digest. Also, the key will be what priorities the incoming administration focuses on. It is plausible that S&P 500 stays supported into year end, and thereafter takes its cue from the above two drivers … Beneath the surface, in 2016 small caps rallied after Trump won. We have argued last Monday that this is the area that could benefit, and given the very low positioning, the outperformance of small caps could be the case again, even with higher yields. We reiterate our reversal of longstanding large vs small preference, and the upgrade of small caps to overweight”
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Diversion: “New results on tariff history do not favor protectionism” – Marginal Revolution