Asian Morning Briefing : U.S.Stocks Rise

By Nirmala Menon 

        OTTAWA--Canada's central bank delivered a shock interest-rate cut Wednesday, becoming the first Group of Seven country to slash rates in response to the oil-price collapse and its impact on economic growth.
        The Bank of Canada, which had been widely expected to hold rates steady before raising them later in the year or in early 2016, cut its benchmark overnight rate by a quarter percentage point to 0.75%--the first cut to the rate since April 2009, when the economy was mired in recession.
        Sliding oil prices, which the central bank said it expects will recover to around $60 in the medium-term, will erode growth and inflation for Canada, it said in a statement announcing the interest-rate cut. It lowered its growth forecast for the first half of 2015 to 1.5% and to 2.1% for the full year from 2.4%.
        The bank offered no signals ahead of time that it might change course on rates, and the news was greeted with shock in Canada, where some exporters cheered the accompanying fall in the currency and in the cost of debt.
        But that potential fall in debt costs will likely stoke fears that the Canadian consumer, already the most overleveraged among major economies, could borrow more, a risk the bank highlighted on Wednesday.
        Canada's central bank made the move as the European Central Bank is readying a proposal for a quantitative easing program of EUR50 billion (U.S. $58 billion) a month aimed at stimulating growth.
        Slower global growth and demand for energy, especially in emerging markets like China, is weighing heavily on crude prices because production is surging, especially in North America.
        While other economies, including that of the U.S., will get a boost from lower energy prices that may stimulate consumers to spend more, the slump will be "unambiguously negative" for Canada, the Bank of Canada said. Unlike the U.S., Canada is a net exporter of oil. Energy extraction and related industries account for a much bigger share of the economy, with around 11% of GDP stemming from direct and indirect energy activities, according to government data.
        The Canadian central bank's decision to cut rates is a marked policy divergence from the U.S. Federal Reserve, which is widely expected to start raising rates this year. Other central banks that have recently cut rates include those of Denmark, Egypt, India, Romania and Turkey.
        Stephen Poloz, the governor of the Bank of Canada, acknowledged at an Ottawa news conference that the move had surprised markets. "The market consequences will be what they are," he said.
        Last week, Bank of Canada Deputy Governor Timothy Lane, after a speech titled "Oil Prices and their Impact on the Economy," told a trade group in Madison, Wis., that there wouldn't be any "drastic" changes in the Bank of Canada's policy outlook.
        The Canadian dollar fell sharply Wednesday, dropping 1.8% from Tuesday's close, moving to 81.29 U.S. cents in late trading from 82.55 U.S. cents late Tuesday, according to data provider CQG.
        Canada's main stock benchmark gained on the rate cut, but a global bump in oil prices accounted for the biggest part of the index gain, with the S&P/TSX closing up 1.8% and the heavily weighted energy group rising 3.2%, following higher crude prices in New York trading. Interest-rate sensitive financials and industrial groups, which may benefit from a boost in domestic and export economic activity resulting from rate cut, also gained.
        The Canadian dollar dropped sharply Wednesday, losing about 1.5% by midday trading since late Tuesday. The U.S. dollar was most recently at C$1.2305, up from C$1.2114 at Tuesday's close, according to data provider CQG.
        Canada's main stock benchmark gained on the rate cut, but a global bump in oil prices accounted for the biggest part of the index gain, with the S&P/TSX rising by 1.9% in midday trading and the heavily weighted energy group rising 4.5%, following higher crude prices in New York trading. Interest-rate sensitive financial and industrial groups--which may benefit from a boost in domestic and export economic activity resulting from rate cut--also gained.
        Many here welcomed the drop in the Canadian dollar. For Canada's large mining industry, the loonie's fall helps to offset lower commodities prices, given those prices are denominated in U.S. dollars.
        "Absolutely, that is good news for us," said George Ogilvie, the CEO of Ontario-based miner Kirkland Lake Gold Inc. At current levels, the fall in the loonie against the dollar will add some $31 million this year to Kirkland's balance sheet.
        But while rate cuts are typically good news for indebted companies, the heavily leveraged Kirkland Lake isn't taking too much comfort from Wednesday's news. "What we've seen in the past is sometimes the bank makes a rate cut but the private and commercial lenders don't pass them on to general public" and companies, Mr. Ogilvie said.
        In the manufacturing hubs of Quebec and Ontario, a weaker dollar has been viewed as a support for exports, which have recently started to regain some of the ground lost during the recession and its aftermath.
        But a weaker currency amounts to a double-edged sword for some companies, since so much of their input costs are in U.S. dollars. "When our dollar falls, the cost of our inputs increases," said Trevor Welch, president and general manager of Textile Manufacturing Co. Ltd., a Toronto-based producer of braided goods such as skate laces and cords for clothing such as hoodies.
        "The upside is that when it comes time to sell our goods internationally, we are more competitive--at least in the U.S. market," Mr. Welch said. That market accounts for 10% to 25% of the company's sales, depending on the year, he estimates.
        Textile Manufacturing, which will mark its 100th anniversary next month, is actively looking for new U.S. customers. "We're in the game again," said Mr. Welch, in reference to the weaker Canadian dollar.
        Still, there is "considerable uncertainty about the speed" of recovery in non-energy exports, the central bank said in its statement. And those gains are unlikely to outweigh the drag of lower oil prices, especially on business investment, which has been led by the resource-rich countries.
        Reaction in Calgary, the hub of the country's energy industry, was muted since the rate cut isn't expected to reverse the direction of global oil prices.
        "The feeling in the corporate community overall is that it's not going to do a heck of a lot. The key challenge is a lower global oil price. The interest rate cut won't alleviate the pain created by lower oil prices," Adam Legge, president of the Calgary Chamber of Commerce, said in an interview.
        In a review of its industry forecasts, the Canadian Association of Petroleum Producers, an industry group, estimates a 33% decline in capital spending in 2015 and a projected slowdown in growth of oil production from its prior forecast of about 65,000 barrels a day in 2015 and 120,000 barrels a day in 2016.
        According to the review, capital investment in Western Canada, including the oil sands, will total $46 billion in 2015, down 33% from $69 billion invested in 2014. The new 2015 forecast for total Western Canadian oil production is 3.6 million barrels a day, about 150,000 barrels a day higher than total 2014 production of 3.5 million barrels a day, with a similar rate of growth expected in 2016.
        TODAY'S HEADLINES:
        ECB to Propose $58B in Monthly Bond Buys
        A proposal from the ECB's executive board calls for bond purchases of roughly $58 billion per month that would last for a minimum of one year, according to people familiar with the matter.
        EBay Announces Job Cuts, Icahn Pact
        EBay announced plans to cut about 2,400 jobs, or about 7% of its workforce, as the e-commerce giant prepares to spin off its PayPal electronic-payments business later this year from marketplace.
        American Express Results Rise as Cardmember Spending Grows
        American Express disappointed investors despite a fourth-quarter rise in profit, as expenses climbed and the company was hit by a large provision for loans that could sour.
        S&P Agrees to Nearly $80 Million Settlement
        Standard & Poor's Ratings Services agreed to pay nearly $80 million to resolve an investigation by the Securities & Exchange Commission and two states into its mortgage-backed securities.
        CFTC's Bowen Calls for Review of Retail Forex Rules
        Lax standards in the $5 trillion-a-day foreign exchange market could be harming the industry and placing mom-and-pop investors at undue risk, a top U.S. derivatives regulator said. 2:55 PM
        Bank of Canada Shocks With Rate Cut 'Insurance' Against Oil Slump
        The Bank of Canada cut its benchmark overnight rate by a quarter percentage point to 0.75%, describing the move as "insurance" against the potential economic toll of collapsing oil prices.
        Kinder Morgan CEO to Step Down in June
        Kinder Morgan said Rich Kinder intends to transition out of the CEO role in June and will become executive chairman. The company also said it plans to acquire Bakken Shale assets in a deal valued at roughly $3 billion.
        U.S. Housing Starts End Year Solidly, up 4.4%
        U.S. housing starts climbed 4.4% in December from a month earlier to a seasonally adjusted annual rate of 1.089 million. Single-family units increased 7.2% to a rate of 728,000, the highest level since March 2008.
        GE to Pay $464 Million More in Alstom Deal
        In addition to the $17 billion GE is paying to acquire the energy assets of France-based Alstom, the company has agreed to additional contracts that will cost the equivalent of $464 million.
        Tootsie Roll CEO Melvin Gordon Dies at 95
        Tootsie Roll Industries said Chief Executive Melvin Gordon died after a brief illness after leading the candy company since 1962. Shares gained 3.5% as investors likely began eyeing the company as a potential takeover candidate.
        RECENT DJ DOMINANTS:
        GM Creditors Win Challenge to $1.5 Billion Loan
        Italy PM Renzi: My Dream Is 'Parity' Between Euro and Dollar
        P&G Executive Taylor's New Role Puts Him in Lead for CEO Job
        Poland's Central Banker Rzonca: No Room for Cutting Rates
        Brevan Howard Survives Currency Turmoil
        TODAY'S CALENDAR:
        (All times GMT, followed by country and event)
        2130 NZ Dec BNZ - BusinessNZ Performance of Manufacturing Index (PMI)
        0000 AUS Jan Consumer Inflationary Expectations Survey
        0001 UK Dec UK monthly automotive manufacturing figures
        0030 TAI Dec Employment / Unemployment
        0300 SKA Dec Net barter terms of trade
        0500 JPN Dec Steel Production
        0500 JPN Jan Bank of Japan Monthly Report released
        0830 HK Dec CPI
        0900 MAL Jan International Reserves, middle of month Reserves
        0900 ITA Nov Industrial turnover & orders
        0930 UK Dec CML mortgage lending figures
        0930 UK Dec Public sector finances
        0930 UK Dec Capital issuance
        0930 UK Q4 Bank of England Trends in Lending report
        1000 ITA Nov Retail Sales
        1100 UK Jan CBI Quarterly Industrial Trends Survey
        1245 EU EU interest rate announcement
        1330 US 01/17 Unemployment Insurance Weekly Claims Report - Initial Claims
        1330 CAN Nov Employment Insurance
        1400 US Nov U.S. Monthly House Price Index
        1445 US Bloomberg Consumer Comfort Index
        1500 EU Jan FCCI Flash Consumer Confidence Indicator
        1500 US 01/10 DJ-BTMU U.S. Business Barometer
        1530 US EIA Weekly Natural Gas Storage Report
        1600 US Jan Federal Reserve Bank of Kansas City Survey of Tenth District Manufacturing
        1600 US 01/16 EIA Weekly Petroleum Status Report
        2130 US Foreign Central Bank Holdings
        2130 US Money Stock Measures
        2130 US Federal Discount Window Borrowings
        Access Investor Kit for The Dow Chemical Co.
        Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US2605431038
        (END) Dow Jones Newswires

        January 21, 2015 17:30 ET (22:30 GMT)
        Alistair MacDonald, Rita Trichur and Chester Dawson
        Write to Nirmala Menon at nirmala.menon@wsj.com
        (END) Dow Jones Newswires

        January 21, 2015 17:21 ET (22:21 GMT)

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