Author: Consultant

EU energy ministers meet to discuss Russian gas, sanctions

European Union energy ministers will meet Monday to discuss Russia’s decision to cut gas supplies to Bulgaria and Poland, and debate planned new sanctions over Moscow’s war on Ukraine.

The 27 nation-bloc has imposed five rounds of sanctions on Russian officials, oligarchs, banks, companies and other organizations since Russian troops invaded Ukraine in February.

The European Commission is working on a sixth round of measures which could include oil restrictions, but Russia-dependent countries like Hungary and Slovakia are wary of taking tough action.

Germany believes it could cope if supplies of Russian oil were cut off due to an embargo or action by Moscow. Economy Minister Robert Habeck said that Russian oil now accounts for 12% of total imports, down from 35% before the war, and most of it goes to the Schwedt refinery near Berlin.

Habeck acknowledged that losing those supplies could result in a “bumpy” situation for the capital and surrounding region, with price hikes and shortages, but that wouldn’t result in Germany “slipping into an oil crisis.”

Still, Habeck added, “other countries aren’t so far yet and I think that needs to be respected.”RUSSIA-UKRAINE WARLive updates l Finland ends deal for Russian nuclear plantEU energy ministers meet to discuss Russian gas, sanctionsUkraine city awaits 1st evacuees from Mariupol steel plantFigure skating body details proposal to hike age limit to 17

The commission, the EU’s executive branch, could announce it new sanction proposals later this week. The measures would have to be approved by the member countries – a process that can take several days.

The energy ministers will also look at what steps to take should Russia ramp up its pressure by cutting gas supplies to other countries.

The EU imports around 40% of the gas it consumes from Russia, but some member countries are more heavily dependent on Russian supplies than others.

In a move last week branded in Europe as “blackmail,” Russian energy giant Gazprom cut supplies to Bulgaria and Poland. It came after Russian President Vladimir Putin said that “unfriendly” countries must start paying for gas in rubles, Russia’s currency.

Bulgaria and Poland have refused to do so, like most EU countries. More Gazprom bills are due on May 20, and the bloc is wary that Russia might turn off more taps then. Russia rejects the claims of blackmail and says that Bulgaria and Poland missed their payment deadlines.

The commission has warned that companies which comply with the terms of Putin’s decree insisting that companies convert euros to rubles through two accounts at Gazprombank would contravene the bloc’s sanctions.

Despite the pressure, Europe does have some leverage in the dispute since it pays Russia $400 million a day for gas, a huge dent in Moscow’s coffers should it opt for a complete cutoff.

Off the Dutch North Sea coast, meanwhile, a fuel tanker stood idle at anchor after port workers in Amsterdam said they would not unload its cargo of Russian diesel. The Marshall Islands-flagged Sunny Liger was initially scheduled to unload in Sweden, but dockers there refused to carry out the work.

Dutch port employees who are members of the FNV dockers’ union say they also refused to unload the tanker out of solidarity with their Swedish colleagues. Union spokeswoman Asmae Hajjari told NOS Radio 1 over the weekend that “the ship is not welcome.”

Asia-Pacific stocks lower as data show Chinese factory activity contracted in April

• Asia-Pacific stocks slipped on Monday.
• Chinese economic data released over the weekend showed a contraction in April factory activity.
• Markets in Hong Kong, mainland China, Singapore and Taiwan were closed on Monday for a holiday.

Finland has walked a political tightrope between Moscow and the West for decades. But that could be about to end

Finland could be about to announce that it’s joining the military alliance NATO — in what would mark a dramatic U-turn for its foreign policy and potentially anger Russian President Vladimir Putin.

The Nordic nation shares a 808-mile land border with Russia and has carefully walked a foreign policy tightrope between Moscow and the West for many decades. Finland adopted a neutrality policy during the Cold War, meaning it would avoid confrontation with Russia. And in the early stages of World War II, the Finns successfully repelled a Soviet invasion in what became known as the “Winter War.”

But its long-standing neutrality, cherished by many Finns, could be about to end due to Russia’s unprovoked invasion of Ukraine.

Jacob Kirkegaard, a senior fellow at the German Marshall Fund of the United States, told CNBC that Finland’s accession to NATO would put an end to the idea of “forced neutrality between East and West.”

“This highlights how Russia’s atrocious actions in Ukraine have forced previous neutral countries to commit fully to NATO in the ‘you are either fully with us, or we will not protect you’,” he said.

Russia has repeatedly stated that it’s against any enlargement of NATO, which was one of the reasons given by the Kremlin for its invasion of Ukraine. Volodymyr Zelenskyy, the president of Ukraine, had been vocal about his desire to join the alliance before the invasion, but has since conceded that it’s now unlikely.

Public opinion

So far, NATO nations (with 30 members in total) have supported Ukraine with military equipment, but they have refused to send troops as this would effectively put Russia and the West at war. One of the guiding principles of NATO is that an attack on one member is considered an attack on all of them.

“I won’t give any kind of timetable when we will make our decisions, but I think it will happen quite fast,” Finland’s Prime Minister Sanna Marin said last week, adding that her country’s NATO membership would be decided “within weeks.”

Opinion polls show that since Russia’s invasion of Ukraine on Feb. 24, a majority of Finns are now in favor of joining NATO. Former Finnish Prime Minister Alexander Stubb said Thursday that “definitely” Finland would be applying for NATO membership in mid-May. Finland’s position on NATO is a direct result of Ukraine war, says NATO chief

NATO would likely benefit from Finland’s geographical location and military capabilities. Its secretary general, Jens Stoltenberg, has already said the country would be warmly welcomed.

Risks

But, at the same time, Helsinki is also aware of the risks in joining the alliance.

In a report to the Finnish Parliament in mid-April, the country’s Foreign Ministry said: “If Finland applied for NATO membership, it should be prepared for extensive efforts to exercise influence and risks that are difficult to anticipate, such as increasing tensions on the border between Finland and Russia.”

Russia has said that it would have to “rebalance the situation” if Finland’s NATO membership were to go ahead.

Perhaps, even more importantly, Finland’s bid to join NATO could also push Sweden to do the same.

Speaking earlier this week, alongside her Finnish counterpart, Sweden’s Prime Minister Magdalena Andersson said her country was doing the same analysis as Finland.

“Finnish entry into NATO will see also traditionally more reluctant Sweden join at the same time. This ends several centuries of neutrality for Sweden and adds to NATO a major military power and arms producer,” Kirkegaard also said.

It’s not just Russia – China’s also contributing to higher inflation worldwide, report says

Russia is guilty of creating a food security crisis and higher energy prices through its war with Ukraine, but China has — under the radar — also taken actions in three areas that are exacerbating inflation worldwide, said the Peterson Institute for International Economics.

“Russia’s war in Ukraine has taken a shocking toll on the region,” wrote PIIE analysts Chad Bown and Yilin Wang. “It has also contributed to a global food crisis, as Russia is blocking vital fertilizer exports needed by farmers elsewhere, and Ukraine’s role as the breadbasket for Africa and the Middle East has been destroyed.”

“But there is another, unappreciated risk to global food security,” they wrote in a note last week.The trouble with China is that it continues to act like a small country … they can also be beggar-thy-neighbor, with China selecting the policy that solves a domestic problem by passing along its cost to people elsewhere.Chad Bown and Yilin WangPETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS ANALYSTS

The analysts singled out restrictions and tariffs imposed by China in two major commodities — fertilizer and pork.

China’s curbs have extended beyond food. The Asian giant, one of the world’s biggest steel producers, has also slapped on restrictions on the material, the Washington-based think tank noted.

All those moves have led to higher prices elsewhere, even as they benefited China’s own people, according to the report.

“The trouble with China is that it continues to act like a small country. Its policies often have the desired effect at home — say, reducing input costs to industry or one set of Chinese farmers or by increasing returns to another,” the analysts wrote.

“But they can also be beggar-thy-neighbor, with China selecting the policy that solves a domestic problem by passing along its cost to people elsewhere,” they added.

Fertilizer

Prices of fertilizer in China and around the world started rising last year, as a result of strong demand and higher energy prices, but have since pushed even higher following the Russia-Ukraine war.

Last July, authorities ordered major Chinese firms to suspend exporting fertilizer “to ensure the supply of the domestic chemical fertilizer market,” PIIE noted. By October, as prices continued to rise, authorities started mandating additional scrutiny on exports.

The curbs have continued through this year, and are set to last till at least after the end of summer, Reuters reported.

“This combination of nontariff barriers led Chinese fertilizer exports to decline sharply. With more production kept at home, Chinese fertilizer prices leveled off and have since even started to fall,” the analysts wrote.WATCH NOWVIDEO03:53The global shortage of fertilizer is a huge problem, says CF Industries Holdings CEO

That was in stark contrast to the situation worldwide, where fertilizer prices continued to soar more than twice the levels seen a year earlier, the think tank said.

China’s share of global fertilizer exports was 24% for phosphates, 13% for nitrogen and 2% for potash — before the restrictions, according to PIIE.

PIIE analysts said that China’s decision to take fertilizer supplies off world markets only “pushes the problem onto others.”

When there is less fertilizer, less food is grown, and that “could hardly come at a worse time” given that the Russia-Ukraine war is already threatening global food supply, they added. Russia and Ukraine are major exporters of crops such as wheat, barley, corn and sunflower oil.

“At such a critical moment, China needs to do more — not less — to help overcome the potential humanitarian challenge likely to arise in many poor, fertilizer- and food-importing countries,” the report said.

Steel

Steel prices in China and around the world accelerated in the last couple of years as the country announced it would bring down its steel domestic production in order to meet decarbonization goals.WATCH NOWVIDEO02:23China’s steel exports could decline amid road to net-zero emissions: Tata Steel

In order to bring down surging prices domestically, authorities last year lifted a ban on steel scrap imports. They also implemented a few rounds of export restrictions, and increased export taxes on five steel products.

By March this year, China’s steel prices were 5% lower than before the restrictions.

“But as in the case of fertilizer, these decreases came at the expense of the rest of the world, where prices outside of China remain higher,” said the PIIE analysts. “The concern is the widening of the wedge between the world and Chinese prices of steel that has emerged since January 2021.”

Pork

The story of higher pork prices globally began in 2018, when China — which then produced half the world’s pork supply — saw its hog population hit by a major outbreak of African swine fever.

That compelled the country to cull 40% of its herd, which caused its pork prices to more than double by late 2019. World prices followed suit, jumping 25% as China imported more pork and pulled supplies off markets, according to PIIE.

“China reduced the price pressure at home beginning in 2019 by tapping into imports before more recently shutting them down. These policies affected the rest of the world,” PIIE analysts wrote.We’re not just concerned about food prices but also availability, says Ospraie’s Anderson

Beijing also cut tariffs on pork imports in 2020, which likely caused consumers elsewhere to suffer higher prices as a result as supply fell, said the think tank.

However, authorities raised those tariffs again this year as the swine fever problem eased.

“A potential unintended benefit will be reaped if, in the current environment of high global meat prices, China’s tariff unexpectedly frees up world supplies and helps mitigate pressure on pork prices facing consumers outside China,” the report said.

Agnico Eagle reports ‘exceptional’ first quarter results, sees continued strength ahead

As investors work out whether they’re more concerned about inflation or interest rates, it’s been a wild ride for miners such as Toronto-based Agnico Eagle Mines Ltd., which reported first quarter results on Thursday afternoon.

The company, the top gold producer in Canada, reiterated production in 2022 should surge to at least 3.2 million ounces — up 60 per cent from the 2 million ounces record set in 2021 — despite lingering effects from COVID-19 that caused workforce disruptions at the start of the year.

It also announced adjusted earnings per share in the first quarter of 61 cents, beating consensus estimates of 39 cents, which Fahad Tariq, an analyst at Credit Suisse, attributed to “fundamentally … higher revenue and lower depreciation.”

Agnico’s freshly minted chief executive Ammar Al-Joundi, who took over in February after the unexpected departure of chief executive Tony Makuch barely two weeks into the job, called the results “stellar.”

“The first quarter, we think, is our weakest quarter, and the first quarter was a good quarter,” Al-Joundi said in an interview on Friday morning. “So we see continuing strength through the rest of the year.”

Challenges in the first quarter came from labour disruptions from the Omicron variant of COVID-19, higher-than-expected inflation, and costs from integrating Kirkland Lake Gold’s operations and workforce after the $13.5-billion acquisition closed in February.

Al-Joundi added Agnico’s costs came in lower than expected, which he called “exceptional” given inflation pressures, with the company reporting all-in sustaining costs at US$1,079.

The first quarter, we think, is our weakest quarter, and the first quarter was a good quarterAMMAR AL-JOUNDI

Despite gold prices remaining elevated at US$1,907 per ounce, investors have oscillated between jazzed and non-plussed. Agnico’s share price has slid 14.8 per cent since April 18 from $83.97 to $71.52 per share as of April 28, but it bounced 5.76 per cent higher on Friday to $75.64.

It mimics a broader trend sweeping across the gold industry. Gold hit an all-time high in August 2020, briefly breaking more than US$2,000 per ounce before settling to a range between US$1,700 and US$1,900 per ounce. But investors’ shine for gold mining companies quickly wore off and throughout much of 2021 share prices traded at levels similar to where they were when gold prices, and their profits, were much lower.

That all appeared to change in late January when Russian troops gathered on the borders of Ukraine and eventually invaded the country. Amid subsequent western sanctions against Russia, and the trade disruptions it caused, gold prices shot back above US$2,000 per ounce in March.

Despite the fluctuations, gold remains far above the US$1,150 to US$1,300 per ounce range that dominated from roughly 2014 to 2019.

Nonetheless, the price of the VanEck Gold Miners ETF, a basket of the world’s largest gold miners, has been up and down. After peaking at US$42.94 per share in late July 2020, it slid down to US$29.30 — a 30 per cent drop, and around where it stood for most of 2019 when gold prices were hundreds of dollars lower.

But as Russian invaded Ukraine earlier this year, the index surged back up to US$40.86 in early April, only to spend the last few weeks sliding. It’s down 16.7 per cent to US$35.41 as of April 29.

Similarly, Agnico’s share price has gyrated, hitting a high of $109.74 in November 2020 before sliding all the way down to $59.04 as of Jan. 22. In recent weeks, it had been rising again but is down 15 per cent this month.

The fluctuating price of gold is largely tied to a stronger U.S. dollar and the potential for “aggressive rate hikes” by the central bank in the U.S., Credit Suisse analyst Tariq said.

“As we have written previously, weekly gold price oscillations seem to depend on which macro factors investors are focusing on that week — interest rates or inflation,” he wrote.

Gold typically benefits as a safe-haven asset in times of inflation, but that can be offset if the the U.S. dollar value rises with increased interest rates.

Agnico said it managed to keep inflation down by hedging its purchases of currencies and diesel, the fuel that powers much of its operations.

Weekly gold price oscillations seem to depend on which macro factors investors are focusing on that week — interest rates or inflationFAHAD TARIQ

“These hedges have partially mitigated the effect of inflationary pressures to date and are expected to provide a degree of protection against inflation for the 2022 sealift diesel costs,” the company said in a press release.

Al-Joundi said the company expected inflation to be around three to five per cent as 2021 ended, but the rate has been closer to five to seven per cent in the first few months of 2022. He said he believes inflation will probably end up around seven to 10 per cent.

“One of the big advantages we have is 40 per cent of our costs are labour,” he added, “and labour hasn’t seen the same inflation as consumables.”

Agnico’s merger with Kirkland Lake Gold helped propel its guidance for 2022 gold production to record highs, but because the deal only closed in February, the quarter results do not reflect a fully merged company.

Kirkland’s chief executive Makuch was originally slated to be CEO of the merged company, but quickly departed with no reason offered. Still, Al-Joundi, Agnico’s longtime chief financial officer and heir-apparent to the CEO spot before the merger, told shareholders “the integration has gone exceedingly well.”

Indeed, in the wake of Makuch’s departure, the company bumped up its estimates for pre-tax savings from general and administrative corporate synergies, from US$145 million in the first five years to US$200 million, and from US$320 million over the next decade to US$400 million.

Meanwhile, estimates for operational synergies from the merger remain unchanged at about US$1.1 billion over the next decade.

It declared a 40 cents dividend.

Though Agnico announced lower first quarter net income of $109.8 million, down from US$145.2 million last year, it said its results were affected by COVID-19 challenges, inflationary cost pressures and costs related to the Kirkland Lake merger.

On the positive side, the company said the effects of COVID-19, which had caused it to send its Nunavummiut workforce home in December 2021 to prevent the inadvertent spread of the virus into the local community, were easing. After consulting with the government, Agnico began returning its workforce in mid-March.

Canadian electric bus maker NFI slashes profit outlook because of ‘critical’ supply shortage

Electric bus maker NFI Group Inc. slashed its profit outlook Friday, warning that a shortage of “critical” microprocessors would cut its deliveries for the rest of the year.

The Winnipeg-based company cut its guidance for adjusted earnings before interest, taxes, depreciation and amortization for 2022 to between US$15 million and US$45 million because of “supply chain challenges.”

According to FactSet, the previous outlook for adjusted Ebitda was between US$100 million and US$130 million, reports Dow Jones Newswires.

The company said it was recently notified by its primary North American control module supplier that it would be unable to provide consistent supply for the rest of the year because of microprocessor shortages. The bus maker is working to find alternative suppliers but expects it will have to lower production at some of its plants.

“The control module is a critical component for vehicle operations, and this shortage will impair NFI’s production of North American transit buses,” NFI said in a statement Friday.

The disruption means the company will have to hold almost completed vehicles in inventory until the microprocessor control modules arrive and can be installed.

NFI stock was trading down almost 17 per cent in Toronto Friday.

Canadian auto parts maker Magna International Inc also cut its profit forecast Friday because of the global semiconductor shortage and the rising cost of raw materials.

The chip shortage has forced many of Magna’s clients, such as Toyota, General Motors, Ford Motor and Stellantis, to either cut production or temporarily shutter plants, Reuters reports.

Canada’s economy poised to grow in the first quarter, dodging America’s fate

Canada will face growing economic headwinds with considerable momentum.

Statistics Canada on April 29 reported that gross domestic product grew 1.1 per cent in February, and the agency estimated the economy likely expanded 0.5 per cent in March, suggesting Canada pushed through the Omicron wave with relative ease.

That wasn’t a given at the end of last year. Many assumed strict health restrictions in Ontario and Quebec over the winter months would kill economic activity, as they had at previous times during the pandemic. The Bank of Canada cited uncertainty over COVID-19 as one of the reasons it opted against raising interest rates in January, even though inflation had surged well above the high end of its comfort zone.

Now, the strength of Canada’s economy is giving the central bank reason to accelerate interest-rate increases. Policymakers earlier this month said GDP likely expanded at an annual rate of three per cent in the first quarter, compared with a January estimate of two per cent. Statistics Canada’s monthly tallies of economic output are calculated differently than its quarterly assessments, but the former generally aligns with the latter. GDP grew about 0.5 per cent from December to January, suggesting the quarterly rate of growth will exceed five per cent, economists said.

“Today’s GDP report reinforces the view that the momentum in Canada’s economy is unrelenting,” James Orlando, a senior economist at Toronto-Dominion Bank, said in a note. “Compared to our neighbour to the south and our global peers, Canada is clearly outperforming.”

Indeed, the first of three estimates of first-quarter growth in the United States by the Commerce Department this week showed the world’s largest economy shrank at an annual rate of 1.4 per cent, surprising most Wall Street forecasters, who were expecting an increase. Canadian bond yields rose after Canada’s numbers were released, suggesting investors anticipate evidence of stronger growth will keep pressure on the Bank of Canada to raise its benchmark rate at a relatively aggressive pace as it tries to catch up to inflation.

“Pressure continues to build for the Bank of Canada to ease off the monetary policy accelerator more rapidly,” Claire Fan, an economist at Royal Bank of Canada, told clients, adding that a second consecutive half-point increase is “looking increasingly likely” at the central bank’s next policy announcement on June 1.

GDP got a boost from some predictable sources. Restaurants and hotels led the way, as the lifting of health restrictions led to a 15 per cent increase in output by the food and accommodation industry, Statistics Canada said. Oil producers and miners posted a 3.4 per cent gain, the biggest since the end of 2020, as companies benefited from increased demand and higher prices. Construction and “computer systems design,” a proxy for the digital technology industry, also posted notable increases.

The surprising momentum could be tested in the months ahead, because a growing number of signals suggest global inflation, ongoing supply disruptions and uncertainty over the war in Ukraine could slow the recovery from the COVID-19 recession. Amazon.com Inc. on April 28 said it had downgraded its outlook amid rising costs and weaker demand for the goods it sells online. And Bank of Canada governor Tiff Macklem indicated in parliamentary testimony this week that he’s wary of what recent COVID-19 lockdowns in China portend for global growth and supply-side inflation.

Indeed, it isn’t difficult to find economists who think Canada and other big economies are setting up for another recession. But such speculation won’t stop the Bank of Canada from raising interest rates in the short term, since Macklem told lawmakers that he and his deputies will be considering another half-point increase when they next gather to decide on the benchmark-rate setting.

“The Canadian economy is in good shape,” he told the House finance committee on April 25. “It can handle higher interest rates. It needs higher interest rates.”

Economic Calendar: May 2 – May 6, 2022

Monday May 2

China PMI

Japan manufacturing PMI

Euro zone manufacturing PMI and economic and consumer confidence

Germany retail sales

(9:30 a.m. ET) S&P Global Manufacturing PMI for April.

(10 a.m. ET) U.S. ISM Manufacturing PMI for April.

(10 a.m. ET) U.S. construction spending for March. The Street expects a rise of 0.8 per cent from February.

Earnings include: Capital Power Corp.; Cargojet Inc.; European Commercial REIT; Gibson Energy Inc.; MEG Energy Corp.; New Gold Inc.; Nutrien Ltd.; TMX Group Ltd.

—

Tuesday May 3

Euro zone PPI and jobless rate

Germany unemployment

(10 a.m. ET) U.S. factory orders for March. Consensus is an increase of 1.1 per cent from February.

(10 a.m. ET) U.S. Job Openings and Labor Turnover Survey for March.

(12:30 p.m. ET) Bank of Canada Deputy Governor Carolyn Rogers speaks in Toronto on BoC’s operational independence and public accountability to Women in Capital Markets.

Also: U.S. and Canadian auto sales for April.

Earnings include: Advanced Micro Devices Inc.; Airbnb Inc.; B2Gold Corp.; Canfor Corp.; Colliers International Group Inc.; Dream Industrial REIT; First Capital Realty Inc.; IAMGold Corp.; International Petroleum Corp.; Lion Electric Corp.; Lundin Gold Inc.; Pfizer Inc.; Restaurant Brands International Inc.; Russel Metals Inc.; SSR Mining Inc.; Starbucks Corp.; Suncor Energy Inc.; Tamarack Valley Energy Ltd.; Thomson Reuters Corp.; Topaz Energy Corp.; Waste Connections Inc.

—

Wednesday May 4

Euro zone PMI and retail sales

Germany trade surplus

(8:30 a.m. ET) Canada’s merchandise trade balance for March.

(8:30 a.m. ET) U.S. ADP National Employment Report for April. Estimate is an increase of 395,000 jobs from March.

(8:30 a.m. ET) U.S. goods and services trade deficit for March.

(10 a.m. ET) U.S. ISM Services PMI.

(2 p.m. ET) U.S. Fed announcement with Chair Jerome Powell’s press conference to follow.

Earnings include: Barrick Gold Corp.; Brookfield Infrastructure Partners LP; Centerra Gold Inc.; Ceridian HCM Holding Inc.; Constellation Software Inc.; eBay Inc.; Filo Mining Corp.; Fortis Inc.; Franco-Nevada Corp.; GFL Environmental Holdings Inc.; Gildan Activewear Inc.; Great-West Lifeco Inc.; Green Thumb Holdings Inc.; Killam Properties Inc.; Loblaw Companies Ltd.; Maple Leaf Foods Inc.; Moderna Inc.; Open Text Corp.; Parkland Fuel Corp.; Primo Water Corp.; Spin Master Corp.; Stelco Holdings Inc.; TransAlta Renewables Inc.; Uber Technologies Inc.

—

Thursday May 5

China Caixin services and composite PMI

Germany factory orders

(8:30 a.m. ET) U.S. initial jobless claims for week of April 30. Estimate is 180,000, matching the previous week.

(8:30 a.m. ET) U.S. productivity and unit labour costs for Q1.

(9:40 a.m. ET) Bank of Canada Deputy Governor Lawrence Schembri speaks in Gatineau, Que., on economic reconciliation, inclusion and prosperity to the NACC Indigenous Prosperity Forum.

Also: OPEC+ meeting

Earnings include: Advantage Oil & Gas Ltd.; ARC Resources Ltd.; BCE Inc.; Bombardier Ltd.; Cameco Corp.; Canadian Natural Resources Ltd.; Chartwell Retirement Residences; ConocoPhillips; Endeavour Mining Corp.; Hydro One Ltd.; IGM Financial Inc.; Kinaxis Inc.; Kirkland Lake Gold Ltd.; Labrador Iron Ore Royalty Corp.; Linamar Corp.; Pembina Pipeline Corp.; Pretium Resources Inc.; Shopify Inc.; SNC-Lavalin Group Inc.; Wheaton Precious Metals Corp.

—

Friday May 6

Japan foreign reserves

Germany industrial production

(8:30 a.m. ET) Canadian employment for April. The Street is expecting an increase of 0.2 per cent (or 40,000 jobs) from March with the unemployment rate falling 0.1 per cent to 5.2 per cent and average hourly wages rising 3.9 per cent year-over-year.

(8:30 a.m. ET) U.S. nonfarm payrolls for April. Consensus is an increase of 395,000 from March with the unemployment rate falling 0.1 per cent to 3.5 per cent and average hourly wages increasig 0.4 per cent.

(10 a.m. ET) Canada’s Ivey PMI for April.

(3 p.m. ET) U.S. consumer credit for March.

Earnings include: Ballard Power Systems Inc.; Brookfield Business Partners LP; Brookfield Renewable Partners LP; Enbridge Inc.; Energy Fuels Inc.; Enerplus Corp.; Premium Brands Holdings Corp.; Telus Corp.; Telus International; TransAlta Corp.; Westshore Terminals Investment Corp.

Tempted by Canadian bank stocks during the sell-off?

Recession clouds are moving in and Canadian bank stocks are down, but the case for buying the dip has a serious flaw: Recessions tend to hit bank stocks a lot harder.

Share prices for the Big Six have tumbled nearly 12 per cent from their highs in early February, on average.

The declines follow Russia’s invasion of Ukraine, concerns about the housing market and fears that inflation-fighting interest rate hikes by the U.S. Federal Reserve and the Bank of Canada could derail the North American economy.

Large U.S. banks, whose first-quarter financial results earlier this month were weaker than a year ago, have been faring considerably worse than their Canadian counterparts.

The KBW Nasdaq Bank Index, which tracks 24 U.S. national and regional names including Citigroup Inc. and JPMorgan Chase & Co., has fallen 23 per cent since mid-January.

This dismal performance, which is a lot worse than the broader S&P 500, is raising questions about whether Canadian banks are due for a more serious correction.

“One big question we ask ourselves when facing economic/geopolitical uncertainty is whether investors are amply compensated for these risks. In our view, it’s still early to jump in with unbridled enthusiasm,” Gabriel Dechaine, an analyst at National Bank of Canada NA-T -0.93%decrease, said in a note.

Mr. Dechaine looked at the performance of Canadian bank stocks during the past five recessions, focusing on what happens to valuations when economic activity declines.

Rising mortgage rates have crushed the shares of one of the TSX’s best long-term performers. Is this the time to buy?

Why is gold holding up so well when interest rates are marching steadily higher?

In particular, he compared stock prices with book values, or assets minus liabilities. The takeaway: Recessions sent price-to-book ratios down by an average of 40 per cent from prerecession peaks.

During the current market jitters, price-to-book ratios for the Big Six have fallen just 11 per cent, as of April 24. This implies bank stocks are only partly reflecting an economic contraction.

“In other words, it would appear the market is pricing in about a 25 per cent probability of a recession. In comparison, U.S. bank stocks are pricing in about a 40 per cent probability of a recession using the same methodology,” Mr. Dechaine said.

That’s not the only reason he’s cautious about the sector right now.

The period when valuations compress tends to last about 14 months, on average. The current bout of declining valuations has been going for just two months so far.

As well, dividend yields are an important motivating factor for investors. However, yields don’t look as enticing when bond yields are rising.

The difference between the average yield on a Big Six stock and the yield on the Government of Canada 10-year bond – just 75 basis points, or three-quarters of a percentage point – is narrower than at any time over the past decade. The average spread is 2.4 percentage points.

“We’d need to see that spread at least get to a historical average in order to get more excited about the sector,” Mr. Dechaine said.

He is not the only analyst expressing reservations about Canadian bank stocks right now.

Paul Holden, an analyst at CIBC Capital Markets, pointed out recently that a recession could cause the sector to tumble 30 per cent.

Still, Mr. Holden and Mr. Dechaine acknowledge that a recession is a rising risk, rather than a done deal. And, of course, Canadian banks don’t necessarily follow in lockstep with U.S. banks.

Meny Grauman, an analyst at Bank of Nova Scotia BNS-T -0.94%decrease, argued in a research note on Monday that Canadian banks are actually better off than their U.S. counterparts in some key areas.

Their investment banking revenues at the Big Six tend to be less volatile.

Also, Canadian banks have been slower to release credit reserves built up during the worst of the pandemic. This gives them a relatively large capital buffer against a downturn, which helps explain why Canadian bank stocks have been outperforming U.S. banks this year.

“In our view, Canadian bank outperformance makes a lot of sense – as it reflects a number of fundamental differences that make the outlook for Canadian banks more positive than for their U.S. peers,” Mr. Grauman said in his note.

Yes, there’s a buying opportunity here. But the economy may dictate the timing.