Yahoo Finance Rate hikes, trade wars and oil cuts: Five things to watch for in 2019
The last 12 months have seen several major developments in the Canadian business world.
After more than a year of tumultuous negotiations that often appeared to be on the brink of falling apart, a revamped NAFTA deal was signed by Canada, the United States and Mexico. The deal brought a much-needed end to an extended period of uncertainty that had many investors sitting impatiently on the sidelines.
While the trade deal was welcome news for the business community, slumping oil prices and a steep discount on the price of Alberta heavy crude has weighed on the economy and led to drastic provincially-imposed production cuts.
But, above all, 2018 may be remembered as the year of cannabis. Investors poured money into the notoriously volatile sector, hoping to capitalize on the highly-anticipated recreational legalization.
We might not have a crystal ball that will tell us how the next year will shape up, but there are more than a few stories that the Yahoo Finance Canada team will be keeping a close eye on through 2019.
The pace of rate hikes
All eyes will be on Bank of Canada Governor Stephen Poloz next year and the pace at which he decides to hike interest rates in 2019.
Up until recently, many economists were confident the BoC would hike rates three times next year. But those expectations were scaled back after the December meeting, where the Bank opted (unsurprisingly) to leave rates alone.
Canada’s economy expanded at a slower pace in the most recent quarter. Plummeting oil prices and a widening differential between Alberta oil and the American benchmark resulted in some downside risks.
Bank of Montreal Capital Markets Deputy Chief Economist Michael Gregory changed his 2019 forecast for the Bank of Canada, calling for two rate hikes instead of three that will be spaced further apart (in April and October.)
“We judge the Bank’s ‘decidedly data dependent’ path to neutrality will now be a longer one,” Gregory wrote on Tuesday.
Oil prices, production cuts
This year was certainly a rough one for Western Canadian Select. The price for a barrel of heavy Alberta oil plummeted at one point to $10, a steep discount from its American counterpart. The differential – which climbed as high as $50 – prompted Alberta Premier Rachel Notley to take the drastic action of cutting oil production in the province for the first time since the 1980s.
The cuts come into effect in 2019 and will see production scaled back by 325,000 barrels per day, representing an 8.7 per cent reduction. The reduction will drop to 95,000 barrels a day once storage levels – which Notley says are at record highs – also decrease.
The industry is split on whether this is the best move to improve the differential, with some companies commending Notley for the move (Cenovus Energy Inc. (CVE.TO), for example) and others warning of the unintended consequence. (Looking at you, Suncor. (SU.TO))
How the cuts will impact not only the oil price differential, but the Alberta and Canadian economies overall, will be closely monitored next year.
“The forced shut-in of production and the oil price shock have significant consequences for the Canadian outlook,” Scotiabank Chief Economist Jean-François Perrault wrote in a recent note to clients.
“We currently believe that oil market developments, both international and Canada-specific, will knock 0.3 percentage points from Canadian growth in 2019.”
Trade wars
Just because Canada, the U.S. and Mexico reached a new NAFTA deal (or USMCA/CUSMA/whatever you want to call it these days), doesn’t mean everything is settled just yet. The November midterm election saw the U.S. House of Representatives flip for the Democrats, which could potentially throw a wrench into plans for a smooth ratification in the United States.
But a bigger issue to watch may be the ongoing trade war between the U.S. and China. Despite the fact that the two sides agreed to a 90-day truce in December, there are still concerns that the dispute could escalate in 2019 and lead to a recession that would be felt around the world.
“Economic uncertainty is on the rise, owing largely to elevated concerns about the U.S.-China trade war,” Perrault wrote in a note to clients.
“We have long flagged this as the single most important risk to the outlook, and while our read of developments continues to be that they will come to a negotiated agreement, given the costs of an escalation to the conflict, markets appear much more pessimistic that an orderly outcome will be achieved.”
Will market volatility continue?
As highlighted by Perrault in his recent note, equity markets around the world have already fallen sharply on fears that the U.S.-China conflict will worsen. Concerns are mounting that the trend will continue into 2019.
This year was a bad one for the Toronto Stock Exchange. As Bank of Montreal economist Douglas Porter put it in a research note, “the TSX was bludgeoned this year (down nearly 10 per cent year-to-date) by trade tensions, a housing slowdown and weak domestic oil prices.”
“Next year’s growth outlook is dulled by oil production cuts, slower U.S. spending, slipping auto sales and the overhang of record consumer debt,” Porter wrote in his research note.
“But with the big interest-sensitive sectors still gearing lower, we look for 2019 Canadian GDP growth to simmer down to a 1.8 per cent pace following this year’s as expected 2.1 per cent advance. With population growth recently in at 1.4 per cent year over year, this points to quite modest capital gains.”
Cannabis
As mentioned, Cannabis was arguably the business story of the year in 2018. While legalization is finally upon us, you shouldn’t expect things to settle down in the sector anytime soon.
Canada is still sorting out the wrinkles of cannabis legalization, including regulating the retail landscape in Ontario and grappling with supply issues. Now that the recreational market is (mostly) up and running, analysts expect that more reliable sales and revenue figures will help sort out the winners from the losers of the cannabis sector in 2019.
The Canadian government is also expected to unveil regulations for selling edibles, beverages and other forms of cannabis, which could provide investors and companies with significant opportunities going forward.
Chris Wiggins, one-third of an independent analysis team called TheCannalysts, is dubbing 2019 the “year of the vape.” Another area to monitor will be the U.S. market, which some analysts expect to become more liberal going forward.
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