By Colin Cieszynski, CFA, CMT, CFTe, Chief Market Strategist The once in a generation crash in crude oil prices of nearly 60% in the last year can have significant short-term negative and some long-term positive effects on the economies and markets of oil producing countries like Canada and Norway. The initial economic impact on the oil price crash has been negative with layoffs in the oil patch driving up unemployment and dampening consumer spending, while driving down the value of CAD and NOK. In response to this, both the Bank of Canada and Norges Bank cut interest rates cut interest rates once. Despite calls from the street for more aggressive easing, both central banks have held off, preferring to assess the situation. Why? Because the positive impact of lower energy prices takes longer to be seen across the whole economy. Cheaper energy cuts costs for both consumers and businesses while lower currencies benefits manufacturers and other exporters including resource companies. Tourism also can benefit from as the lower currencies discourage travel of citizens abroad while encouraging citizens of countries with less impacted currencies (like the US for example) to visit. The second quarter may find both Canada and Norway stuck in between a rock and a hard place with the negative effect on oil price sensitive industries and regions clear as day but the positive effects of the lower currencies and lower energy prices not apparent yet. There is a small chance either central bank could cut interest rates again but with Bank of Canada Governor Poloz still talking about his last cut as an insurance policy, cuts from either appear unlikely in Q2 unless oil goes down through $40.00 in which case all bets are off and pressure on both central banks to cut rates again could ramp up dramatically. Although they are not joined at the hip, both central banks face similar economic conditions at the moment S so far the two banks have acted in tandem in delivering surprise cuts (Norges Bank surprised and cut first in December) then not cutting when more was expected (Bank of Canada surprised and held off first in March). Traders active in either market should keep an eye on both central banks over the next few months to reduce getting surprised and caught off side. Meeting dates this quarter are: April 15 Bank of Canada May 5 Norges Bank May 27 Bank of Canada June 18 Norges Bank Focus Chart: Canada and Norway market action through the crude oil crash The chart below shows how Canadian and Norwegian currencies and stocks have fared relative to crude oil over the last few months. Generally speaking, Canadian markets are more sensitive to the WTI price while Norway would be expected to be more sensitive to Brent. Through the crash phase both WTI performed similarly although Brent has done a bit better in the recent stabilization phase. Surprisingly stock indices in both countries have not really fallen very much and are currently about flat over year. At their lowest point, Norway was down about 10% and Canada down about 5%, but more recently, the performance gap has closed to almost zero. This reflects that while the oil sector has been impacted by lower energy prices, other sectors have benefitted. Over the last year there has been a widening gap in performance between the two currencies. CAD has not fallen as much as NOK even though both WTI and Brent are both about the same. This suggests that CAD has benefitted from Canada’s proximity to the stronger US economy and USD. Meanwhile, NOK has been dragged down by Norway’s proximity to the struggling Eurozone and weakening EUR. It remains to be seen if the ECB’s new stimulus program will help to close the regional performance gap between North America and Europe. If we were to see oil embark on a new downleg in Q2, which would be signaled by a break of $40.00 support, both stocks and both currencies could be dragged down as well but as before, currencies could be more sensitive to oil moves in both directions. Source: CMC Markets The chart below highlights the impact of the oil price crash on stocks and sectors in Canada. While the broader S&P/TSX 60 has held up relatively well, energy stocks have been dragged down the drain by the oil price crash. What is interesting is that some parts of the energy sector have been hit harder than others. Oil and gas service companies like Precision Drilling have been hit particularly, hard, falling as much as the commodity prices. This is because in tough times, the first thing producers do is cut exploration and capital budgets and squeeze their suppliers and service providers to cut costs before they cut production. In contrast, integrated oils like Suncor Energy have not fallen as fast as production levels are maintained and they have exposure to gasoline which has rebounded more quickly than crude oil. The overall sector index bottomed out in December, about a month ahead of the actual crude price and though it fell off more dramatically, the service sector appears to be bouncing back more strongly as well and could be more volatile in both directions going forward. If oil continues to stabilize, the sector could level off or rebound but if oil goes down again and breaks $40.00, oil and gas stocks could take another tumble. Source: CMC Markets CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
Q2 Market Outlook: Canada and Norway try to pick up the pieces after oil crash
20:00, 29 March 2015