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We may well be returning all our Christmas present for cash this year:

A gauge of global stocks tumbled on Friday after weak economic data from China and Europe intensified global growth worries as investors weighed the broader impact of the trade dispute between the United States and China.
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On Wall Street, U.S. stocks were not only hampered by growth worries but by a drop in Johnson & Johnson shares, which lost 10.04 per cent, its biggest drop since 2002, as the biggest drag on both the Dow and S&P 500. The company’s stock fell after Reuters reported that the pharma major knew its baby powder was contaminated with cancer-causing asbestos.

The Dow is now down more than 10 per cent from its Oct. 3 high, putting each of the three major U.S. indexes in correction territory.
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The Dow Jones Industrial Average fell 496.87 points, or 2.02 per cent, to 24,100.51, the S&P 500 lost 50.59 points, or 1.91 per cent, to 2,599.95 and the Nasdaq Composite dropped 159.67 points, or 2.26 per cent, to 6,910.67.

The energy sector pushed Canada’s main index lower on Friday, as oil prices declined after China reported slower economic growth, pointing to lower fuel demand from the world’s biggest oil importer.

The Toronto Stock Exchange’s S&P/TSX composite index unofficially closed down 155.28 points, or 1.05 per cent, at 14,595.07. It was a fresh two-year low.

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My unaffordable provincial government has cost me some more money:

One of the world’s biggest bond raters has cut Ontario’s credit rating to its lowest in 16 years, saying that revenue cuts by the Progressive Conservative government will exacerbate the province’s deficit and debt problems.

In a report issued Thursday afternoon, Moody’s Investors Service announced it had reduced Ontario’s long-term debt rating to Aa3 from Aa2. It was Moody’s second downgrade of the province this decade, the previous one was in 2012.

The move follows the province’s release of its fall economic statement last month, in which the first-year government of Premier Doug Ford estimated that it will run a deficit of $14.5-billion for the fiscal year ending March 31, 2019 – more than double what the previous Liberal government had projected in last spring’s budget. It also follows the release of the Financial Accountability Office of Ontario’s latest budget and economic outlook, which projected that the province’s deficits will inch higher over the Ford government’s four-year term – in part due to tax cuts that will take a bite out of revenues.
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Ontario is the country’s most indebted province, with about $325-billion of net debt. Its debt-to-GDP ratio is expected to top 40 per cent this year, second only to Newfoundland and Labrador.

The Canadian preferred share market was on wheels today:

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PerpetualDiscounts now yield 5.95%, equivalent to 7.74% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.10%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 360bp, unchanged from the figure reported December 5.

Update for discussion, 2018-12-13:

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I was discussing investment planning recently and after that discussion became interested in a casual check of Shen’s paper published by the Kansas City Fed, which I highlighted long ago.

I was particularly interested in checking the 20-year return differential between stocks and bonds in the light of his Chart 4, which basically shows that if you’re looking at a twenty-year holding period, then 100% stocks is the way to go.

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So, I got to wondering … how about the last twenty years? I mean, sure the market’s done very well over the past few years, but since 1998 we’ve had both the Tech Wreck and the Credit Crunch … so did the rule of thumb triumph or fail?

Looking for long-term results on the web can be a hellish experience, but I found what looks to be a good source … there’s a blog called DQYDJ (Don’t Quit Your Day Job) that has an S&P 500 calculator that knows about dividends, as well as a (ten year) Treasury calculator

Results? S&P 500, +6.104% annualized with dividends reinvested. 10-Year Treasury, +3.640% annualized with coupons reinvested. So equities – and the rule of thumb – win. I just wish someone would do this for Canada …

The penny-wise, pound-foolish, unaffordable premier of Ontario has done it again … S&P has put Hydro One on Outlook Negative:

• •The Washington Utilities and Transportation Commission (WUTC) has denied the merger petition between Hydro One Ltd. (HOL) and Avista Corp.
• •The WUTC’s decision, in our view, significantly increases the likelihood that the transaction will not close as expected, reducing the possibility of an imminent ratings downgrade on HOL.
• •However, in our assessment, the WUTC’s decision weakens HOL’s ability to track, adjust, and control the execution of its strategy, and raises broader concerns regarding HOL’s governance and strategic direction as it seeks a permanent CEO.
• •S&P Global Ratings affirmed its ‘A-‘ issuer credit ratings on HOL and subsidiary Hydro One Inc. (HOI) and removed the ratings from CreditWatch, where they were placed with negative implications on June 15, 2018. The outlook on both entities is negative.
• •We also affirmed our issue-level ratings on HOI, including the ‘A-‘ rating on its senior unsecured debt, and the ‘A-2’ global and ‘A-1 (LOW)’ Canadian National Scale ratings on its commercial paper program. We removed the ratings from CreditWatch with negative implications.
• •The negative outlooks reflect uncertainty about HOL’s ability to convert its strategy into constructive actions that support the company’s financial performance. In addition, the negative outlook incorporates broader concerns related to HOL’s governance, uncertainty regarding the company’s strategic direction, and our revised base-case assumption that the Avista transaction is unlikely to close as expected, the effect of which results in weaker stand-alone financial measures for HOL through 2019.

How did my party, the party of quiet businesslike competence, the party of Bill Davis, get taken over by buffoons, careerists and fearful bigots? And, more importantly, why are these turds costing me so much money?

Speaking of losing money, the Canadian Preferred Share market got hammered again today.

TXPR closed at 618.77, down 1.07% from Friday‘s close, but still comfortably above the 52-week low of 609.77 set on December 6. Volume was on the high side, but nothing extraordinary in the context of the last thirty days. Mind you, there was a huge number of issues trading more than 10,000 shares – the two observations taken together suggest to me that there is a lot of retail action but not much institutional.

CPD closed at 12.42, down 0.64% from Friday’s close, but still above the 52-week low of 12.11 touched on December 6. Volume of 204,412 was nothing special in the context of the past thirty days.

ZPR closed at 10.06, down 1.08% since Friday, but still well above the 52-week low of 9.80 reached on December 6. Volume of 389,094 was high but not out of line with the past thirty days.

Parts of the Canadian jobs number were good:

A blast of new jobs last month knocked the country’s unemployment rate down to its lowest level since Statistics Canada started measuring comparable data more than 40 years ago. But despite eye-catching progress, Friday’s numbers also delivered disappointment.

Canada added 94,100 net jobs for its largest monthly increase since March 2012 when there was a gain of 94,000 jobs, Statistics Canada said in its the labour force survey. The November surge was fuelled by other positives: 89,900 new full-time positions and 78,600 employee jobs in the private sector.

The jobless rate fell to 5.6 per cent last month from October’s reading of 5.8 per cent, which had been the previous low mark since comparable data first became available in 1976. The old statistical approach — prior to 1976 — registered an unemployment rate reading of 5.4 per cent in 1974.

The improvements, however, obscured a key piece of data: weakening wage growth.

Year-over-year average hourly wage growth for permanent employees continued its decline in November to 1.46 per cent — its lowest reading since July 2017.

So basically, we are cementing our position as a low-productivity society based on low wages. Great.

Meanwhile, in the States:

[Finding new employees] is a headache employers across the country are confronting, as Friday’s monthly jobs report from the government illustrated. The unemployment rate in November held steady at 3.7 percent — the lowest in nearly half a century. And while the pace of hiring slowed to 155,000 from October’s above-average showing, the parade of payroll gains marched on uninterrupted for the 98th month.

After a week in which the markets gyrated and presidential tweets caused trade tensions to flare, the labor market’s steadiness offered a dose of calm.
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Average hourly earnings rose 0.2 percent in November, keeping the year-over-year average at 3.1 percent for the second month in a row, a level not seen since the recession.

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An exhausting day began with the news that China’s getting huffy about the arrest of one of its citizens:

• •Canada has arrested Meng Wanzhou, the chief financial officer of China’s Huawei Technologies, who now faces extradition to the United States on suspicion she violated U.S. trade sanctions against Iran.
• •Prime Minister Justin Trudeau said Thursday he knew in advance of the pending arrest. U.S. national security adviser John Bolton told NPR he was also aware of the arrest before it happened.
• •China has lashed out at Canada for offering no explanation of Ms. Meng’s arrest, and has called for her immediate release.
• •Canada is preparing for possible Chinese cyberattacks in retaliation for the arrest.

So global equity markets tanked:

Stock markets around world slid on Thursday as the arrest of a top Chinese technology executive cast further shadows on U.S.-China trade relations, while oil prices sank after OPEC delayed an output decision.

The arrest of smartphone maker Huawei Technologies Co. Chief Financial Officer Meng Wanzhou in Canada for extradition to the United States came as Washington and Beijing prepared for talks aimed at resolving a bitter trade spat.
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The S&P 500 and Dow industrials ended slightly negative but well above their session lows in volatile trading on Thursday, while some big technology and Internet shares posted gains.

The Dow Jones Industrial Average fell 78.05 points, or 0.31 percent, to 24,949.02, the S&P 500 lost 4.1 points, or 0.15 per cent, to 2,695.96 and the Nasdaq Composite added 29.83 points, or 0.42 per cent, to 7,188.26.

Canada’s main stock index plunged to its lowest level in more than two weeks on Thursday, as oil prices pulled down energy shares, while the Bank of Canada Governor Stephen Poloz predicted that low oil prices would hurt the country’s economic growth.

… and five-year Canada yields (GOC-5) plummeted in a classic flight to safety; they now stand at 2.00%, well below recent peaks in the high two-forties.

Which added up to … an interesting day in the Canadian preferred share market:

TXPR touched a new 52-week low of 609.77, down 2.65% from yesterday’s close, before closing at 627.15, up (yes, up!) 0.12% (on a price basis) on the day. Volume was the third-highest over the last thirty days, beaten only by November 29 and November 27.

CPD touched a new 52-week low of 12.11, down 2.89% before closing at 12.58, up 0.88%. Volume of 568,691 was the highest of the past thirty days, well ahead of second place 448,850 on November 20.

ZPR touched a new 52-week low of 9.80, down 3.45% before closing at 10.19, up 0.39% on the day. Volume of 757,194 was the highest of the past thirty days, well ahead of second place 582,190 reached on November 30.

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The day began with the Bank of Canada rate announcement:

The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.

The global economic expansion is moderating largely as expected, but signs are emerging that trade conflicts are weighing more heavily on global demand. Recent encouraging developments at the G20 meetings are a reminder that there are upside as well as downside risks around trade policy. Growth in major advanced economies has slowed, although activity in the United States remains above potential.

Oil prices have fallen sharply since the October Monetary Policy Report (MPR), reflecting a combination of geopolitical developments, uncertainty about global growth prospects, and expansion of U.S. shale oil production. Benchmarks for western Canadian oil – both heavy and, more recently, light – have been pulled down even further by transportation constraints and a buildup of inventories. In light of these developments and associated cutbacks in production, activity in Canada’s energy sector will likely be materially weaker than expected.

The Canadian economy as a whole grew in line with the Bank’s projection in the third quarter, although data suggest less momentum going into the fourth quarter. Business investment fell in the third quarter, in large part due to heightened trade uncertainty during the summer. Business investment outside the energy sector is expected to strengthen with the signing of the USMCA, new federal government tax measures, and ongoing capacity constraints. Along with strong foreign demand, this increase in productive capacity should support continued growth in exports.

Household credit and regional housing markets appear to be stabilizing following a significant slowdown in recent quarters. The Bank continues to monitor the impact on both builders and buyers of tighter mortgage rules, regional housing policy changes, and higher interest rates.

Inflation has been evolving as expected and the Bank’s core measures are all tracking 2 per cent, consistent with an economy that has been operating close to its capacity. CPI inflation, at 2.4 per cent in October, is just above target but is expected to ease in coming months by more than the Bank had previously forecast, due to lower gasoline prices. Downward historical revisions by Statistics Canada to GDP, together with recent macroeconomic developments, indicate there may be additional room for non-inflationary growth. The Bank will reassess all of these factors in its new projection for the January MPR.

Weighing all of these developments, Governing Council continues to judge that the policy interest rate will need to rise into a neutral range to achieve the inflation target. The appropriate pace of rate increases will depend on a number of factors. These include the effect of higher interest rates on consumption and housing, and global trade policy developments. The persistence of the oil price shock, the evolution of business investment, and the Bank’s assessment of the economy’s capacity will also factor importantly into our decisions about the future stance of monetary policy.

So they’re still saying that the policy rate will rise, but there is a significant note of caution about how soon it will be. It’s a pity, of course, that the press release does not report the voting results and the reason for any dissents there might be, but Canadian policy makers are not brave enough to take a public stand contrary to consensus. Maybe we need better quality policy makers.

The IAIS has released its November / December 2018 newsletter, which reiterates its intentions regarding ICS 2.0:

In a session moderated by Secretary General Jonathan Dixon, the Chairs of the Policy Development, Macroprudential, and Implementation and Assessment Committees [Elise Liebers, Alberto Corinti and Jose (Pepe) Lopez Hoyo, respectively] provided updates on key IAIS initiatives within their respective areas, including revisions to the ICPs and ComFrame, along with progress in developing ICS Version 2.0, and the holistic framework for systemic risk. These projects are all on track, with delivery slated for year-end 2019.

Assiduous Readers will remember that ICS 2.0 is the critical standard relating to (among many other things) loss absorbency of preferred shares and therefore Deemed Maturities.

Money came into the Canadian bond market, with the Government of Canada 5-year yield (GOC-5) falling 6bp to 2.08%. And so …

… the Canadian preferred share market was hammered big-time today.

TXPR touched a new 52-week low of 626.20 before closing at 626.40, down a stunning 1.47% (on a price basis) on the day. Volume was high in the context of the last thirty days, but nothing spectacular. Not bad for a day when the US was closed though, and all the highly paid Bay Street professionals were doing their Christmas shopping!

CPD closed at a new 52-week low of 12.47, down 1.89% on the day. Volume was above average in the context of the last thirty days, but the lowest this week.

ZPR touched a new 52-week low of 10.145 before closing at 10.15, down a horrific 2.03% on the day. Volume was the third-highest of the past thirty days, exceeded only by November 30 and November 16.

PerpetualDiscounts now yield 5.94% (!), equivalent to 7.72% at the standard equivalency factor of 1.3x. Long corporates now yield about 4.10%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 360bp (!), a significant widening from the 350bp reported November 28.

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Broad markets were hammered today, with some help from the Stable Genius:

Stocks fell on Tuesday, after President Trump sowed confusion over the status of a truce in the trade war between the United States and China, while the bond market, often considered a safe haven for investors, sent a stark warning about expectations for an economic slowdown.

The S&P 500 dropped more than 3 percent, with economically sensitive financial and transportation stocks sliding.

The warning from the bond market came through what’s known as the yield curve, the difference between interest rates on short-term United States government bonds, such as two-year notes, and longer term bonds, such as the 10-year Treasury.
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The gap between the two-year and 10-year yields has decreased to less than 0.12 percentage points — the lowest it has been since before the financial crisis. Many analysts say it could soon fall below zero, a phenomenon known as an “inversion.”
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The Trump administration and Beijing said on Saturday that they had essentially reached an agreement to pause the trade war for 90 days while the two sides try and reach a formal trade deal. The S&P 500-stock index had climbed more than 1 percent on Monday following news of that deal.

But Mr. Trump’s tweet on Tuesday seemed to undercut the promise of that agreement.

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I’m not entirely happy about reproducing tweets to convey what in any other administration would be a major policy announcement, but nobody cares about my happiness.