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Briefing highlights

  • What U.S. shutdown could mean
  • Markets at a glance
  • Back to the NAFTA bargaining table
  • Grand thoughts in Davos
  • What else to watch for this week
  • AIG to buy reinsurer Validus
  • Celgene to buy Juno Therapeutics

'Fiscal conflict'

History suggests stocks may ride out Washington's political storm, but that the U.S. dollar could suffer.

There's already an impact. New York stocks started down though rebounded somewhat, while the U.S. dollar is under pressure and the Canadian dollar is well above 80 cents (U.S.).

"The U.S. government shutdown is weighing on the greenback this morning, boosting the loonie," said Benjamin Reitzes, Bank of Montreal's Canadian rates and macro strategist. "The evolution of the shutdown will impact markets as well."

This time's different than past shutdowns, and there are other factors at play, but there are also similarities that make the current stalemate more dicey.

"I don't expect too much of a market reaction - it's not as if political dysfunction is anything new in the U.S.," said CMC Markets chief analyst Michael Hewson.

"It's just surprising when it afflicts those in the same party."

Having said that, it "might be another story" if the government shutdown drags on, Mr. Hewson added.

"The market's new obsession is the recent dysfunction in Washington," said Mark McCormick, North American head of foreign exchange strategy at TD Securities.

"The government shutdown injects a new element of a risk premium into G10 [currencies], which is also likely to have offset the impact of the rise in the [10-year U.S. treasury]," he added.

"As the circus plays out, we exercise caution on chasing the [U.S.] lower over the next week few weeks, however. Instead, we look to use any positioning-inspired rallies in the buck to get fresh short exposure at better levels."

The other concern is the risk that looms.

"While a government shutdown is less concerning for markets, the threat of a failure to make payment on treasury securities or other government securities is more volatility-inducing," said Andrew Hollenhorst and Veronica Clark of Citigroup Inc.

"Congress confronts the 'hard' debt ceiling in March, and a failure to avert the shutdown may be read through to increased risk of an inability to re-raise or re-suspend the debt ceiling," they added in a report that preceded the actual breakdown.

Here's what's happened before:

Royal Bank of Canada agreed this time could be different, at least for the already embattled U.S. dollar.

"A shutdown would impact Q1 GDP though one would expect a positive offset to Q2, assuming the situation was resolved," said Elsa Lignos, RBC's global head of foreign exchange strategy in London.

It's different this time, and possibly more trouble for the U.S. currency, given three factors.

First off, "relations between Congress and the President are unusual and in many ways dysfunctional," Ms. Lignos said.

Second, she added, "Congress needs to raise the debt ceiling within the next few months - deadline anywhere from late February to early April - failure to do so would have wider repercussions," she added.

And, notably, "momentum and sentiment are already negative-USD so it is pushing on an open door."

Daniel Hui of JPMorgan Chase agreed that "fiscal conflict is associated with USD weakening vs. other reserve assets. When the government shut down for 17 days in 2013, for example, the greenback lost 2.8 per cent, from peak to trough, in the 25 days leading up to the stoppage "and was slow to recover thereafter."

Of course, as the U.S. dollar falters, the loonie gains, though other issues are affecting the Canadian currency, notably speculation over Bank of Canada interest rate hikes going forward, and fears surrounding negotiations toward a revised North American free-trade agreement, which resume in Montreal this week.

"The shutdown is bearish for the U.S. dollar at the margin, but that's a theme that the market has been running with for some time, anyway," said Bipan Rai, executive director of macro strategy at CIBC World Markets.

"There are some signs that the situation could be resolved this week, but we would view that as an opportunity to sell the trade-weighted USD on rallies. So far, the [Canadian dollar] reaction is slightly positive, but expect the loonie to take its cue from broad sentiment on the USD this week."

Both the Bank of Canada's latest comments and NAFTA concerns have already roiled the loonie.

"If the history of NAFTA tensions from 2017 are a guide, there is some heightened risk narrowly against MXN and CAC headed into this next round of negotiations [this] week, but any risk premium associated with NAFTA risks has quickly faded with the fading of news interest," Mr. Hui said, referring to the peso and the loonie by their symbols.

Where the greenback's concerned, it's "not convincing that broader U.S. protectionism is driving a material part of the current USD discount," he added.

"This is probably because, so far, the administration has not been clear or focused executing broader consistent trade policy agenda. But if media suspicions are correct and Trump does indeed signal a more comprehensive, activist and aggressive trade agenda, this could more meaningfully weigh on the broad dollar similar to prior periods of outright U.S. trade war."

Not to mention the fact that Canada is taking a more aggressive stance, launching a complaint against the U.S. at the World Trade Organization and, on Friday, appealing American duties against Bombardier Inc. and softwood lumber exports under NAFTA's Chapter 19.

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Markets at a glance

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Grand thoughts in Davos, fisticuffs in Montreal: The week ahead

A fascinating week, this: One gathering will see the world's political, economic and business minds think grand thoughts, while the other could determine the fates of the Canadian, U.S. and Mexican economies.

Tuesday marks the start of the annual World Economic Forum do in Davos, and the official launch of the sixth round of NAFTA talks. Given the bitter divisions on the latter, there's much angst as trade negotiators get back to it.

In Davos, several world leaders will be among the attendees, no doubt watching to see who President Donald Trump can anger and whether he thinks Switzerland is a you-know-what hole.

In the run-up to that, French President Emmanuel Macron is holding a "stopover" summit at the famed Palace of Versailles, where he'll chat with the likes of Lloyd Blankfein of Goldman Sachs and Sheryl Sandberg of Facebook.

France’s President Emmanuel Macron gestures during his meeting with German Chancellor Angela Merkel, at the Elysee Palace, in Paris, Friday, Jan. 19, 2018

"Many investors will be in Europe for the Davos summit, so we've suggested a stopover in Paris," one of his aides told Reuters.

Versailles and Davos aside, all eyes will be on Montreal, where Canada, the U.S. and Mexico make their latest attempt to overhaul the North American free-trade agreement, which Mr. Trump has threatened to kill if he doesn't get a fair deal.

Observers believe an agreement will emerge in the end, though possibly a much different version.

"It is likely that the tone of our trade talks with the U.S. and Mexico will intensify over the coming months, that agreement on a renegotiated and modernized NAFTA may not be reached by the current end-March deadline, and that the NAFTA discussions may enter a 'shadow' period during the remainder of 2018, during which the agreement remains in effect, but its future seems uncertain," Bank of Nova Scotia economists said in their latest outlook.

"Investors, businesses, and households should look through these tensions: The incentives remain aligned for eventual agreement on a revised NAFTA, but we may not see a consensus on how this will look until 2019," they added.

Far from the madding crowds in Davos and Montreal, it's also a big week for a couple of central banks and a crucial few days for investors scouring the quarterly earnings reports of several major companies.

"While it's still early days and only a handful of S&P 500 companies have reported, expectations are for solid growth in the quarter," said Bank of Montreal senior economist Robert Kavcic.

"Operating earnings for the index are expected to rise 12 per cent year over year, according to Thomson Reuters' tally of estimates, continuing the strong momentum seen through 2017," he added.

"In fact, calendar 2018 earnings growth is currently expected to accelerate to more than 14 per cent year over year, up from 12 per cent year over year in 2017."

Monday: Coming soon to Netflix

Netflix Inc. reports fourth-quarter results and a business outlook that may tell us both what to watch and where to invest.

"In its last quarter the company posted yet another bumper quarter in adding 5.3 million new subscribers, taking its total subscriber base to 109.3 million," said CMC's Mr. Hewson.

"The company was also bullish on its outlook, predicting that they expected to see another 6.3 million subscribers by year end," he added.

"The company's share price has continued to go from strength to strength since then, helped by price rises to a number of its content packages which don't appear to be affecting demand for its content."

We'll know today if Netflix met that goal, and how its stock might react.

"Recently launched new series of The Crown as well as a new Star Trek franchise series could help in this regard, and they'll need to help given that the company is looking to spend around $7-billion to $8-billion for this year on new content," Mr. Hewson said, adding that revenue for the year is expected to climb to $11.7-billion from the previous year's $10.8-billion.

Halliburton Co., TD Ameritrade Holding Corp. and UBS Group AG also report.

Tuesday: Fisticuffs, big thoughts and monetary policy

Along with NAFTA and the World Economic Forumf, markets will be watching for the Bank of Japan's policy statement and outlook.

"The recent move by the Japanese central bank to reduce by $10-billion the amount of its monthly bond-buying program jolted the markets earlier this month, particularly since the general consensus had been that the BoJ was in for the long haul," said CMC's Mr. Hewson.

"This month's actions have shown that can't be taken for granted, so markets will be paying close attention to not only what [governor Haruhiko] Kuroda does, but also about how he guides future expectations of policy moves later on into 2018."

Bank of Japan governor Haruhiko Kuroda attends a news conference at central bank headquarters in Tokyo, Oct. 31, 2017

On the earnings front: AGF Management Ltd., Canadian National Railway Co., Johnson & Johnson, Procter & Gamble Co. and Verizon Communications Inc., among others.

Wednesday: 'Flash'

"Flash" readings of IHS/Markit purchasing managers indices will give us a sense of how Europe, the U.S. and Japan are faring.

The last readings, noted Royal Bank of Canada, showed the euro zone composite at 58.1 in December, the 50-mark separating contraction from expansion. The manufacturing PMI alone was a record 60.6.

"With those December PMIs showing new orders remaining elevated, our expectation is that the latest release will show activity running at a similar level this month, and we expect both to remain close to recent highs this month," RBC said.

At the same time, Britain reports employment and wage levels. And "it is more important than ever that wages growth shows further signs of edging higher in the three months to November," Mr. Hewson said, citing recent inflation data.

"The omens look positive, having seen a significant increases in the minimum wage start to show up in the numbers," he added.

"London wages have risen in excess of 4.5 per cent, while elsewhere in the country we've seen rises of up to 3.6 per cent, for up to 150,000 workers, and this really ought to start pulling the headline rate higher."

The jobless level is expected to hold at 4.3 per cent, the lowest in more than four decades.

Some key earnings: Ford Motor Co., General Dynamics Corp., General Electric Co. and Whirlpool Corp.

Thursday: A few events and a non-event

For all intents and purposes, said BMO senior economist Jennifer Lee, the European Central Bank meeting should be a non-event.

She expects no change to the outlook for rates and asset purchases, but believes there could be commentary surrounding the euro.

"The Q&A will be scrutinized for comments on the euro, which hit a three-year high of $1.223 earlier [last] week, something that has not gone unnoticed by ECB officials," Ms. Lee said.

"In fact, a few policy makers voiced their opinions [last] week that had the effect of weakening the currency."

Statistics Canada's monthly retail sales report could be an actual event as economists expect it to show a rise of between 0.6 and more than 1 per cent in November.

"Novembers have been chewing into what was typically a December holiday shopping rush, and 2017 should have been no different," said Nick Exarhos of CIBC World Markets.

"Add in what was a good month for gas prices, and filling station spending will have helped the overall [reading excluding auto sales] track a solid 1.1-per-cent gain. And with car-lot spending keeping pace, the headline result will likely match that figure."

In the U.S., markets will get the latest stats on home sales and trade.

Earnings biggies included American Airlines Group, Caterpillar Inc., Intel Corp. and Rogers Communications Inc.

Oh, and Starbucks Corp., which, unlike rival Tim Hortons, doesn't have the Canadian labour movement complaining loudly.

Friday: Loose change

Can you feel all that loose change in your pocket after December's lower prices?

Economists expect Statistics Canada's report to show consumer prices easing by 0.3 or 0.4 per cent in December from November amid lower costs at the pump, bringing the annual inflation rate down to 1.9 per cent from November's 2.1 per cent.

Watch, too, for the potential impact on a couple of other fronts.

"First, wireless carriers introduced a limited-time low cost data plan, which (if picked up) could add some downward pressure to the headline [rate]," said BMO's Mr. Reitzes.

"Second, we'll be watching for price pressures in industries that will be impacted by Ontario's Jan. 1 minimum wage hike," he added.

"Anecdotal evidence suggests the food service industry has implemented steep price increases, though that may not show up until January and the industry has a small share of the [consumer price index] basket."

If there's anyone releasing statistics in Washington, given the shutdown, there are also key reports from the U.S., which observers expect to record fourth-quarter economic growth at an annual pace of 3 per cent, possibly a shade above or below, and Britain, in turn expected at 0.4 per cent, not annualized.

Deutsche Bank expects the U.S. report to show growth of 3.3 per cent.

"If our Q4 estimate is close to the mark, it would be the third consecutive quarter of 3-per-cent-plus inflation-adjusted output growth and the economy will have ended the year having expanded 2.7 per cent [fourth quarter over fourth quarter]," Deutsche Bank said, noting the latter would mark the best showing since 2014's 2.7 per cent.

Earnings; Colgate-Palmolive Co., Honeywell International Inc. and Lear Corp.

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