August 29th, 2019

Daily Market Commentary

Canadian Headlines

• Canadian stocks rose for a third straight session, highlighted by a strong rally for energy after oil inventory data. The S&P/TSX Composite Index climbed 0.5% to 16,271.65. Energy led the way, while health care also rose after a weak session Tuesday for marijuana stocks. Information technology and industrials were the only two laggards Wednesday. Meanwhile, Enbridge Inc.’s proposed shift to long-term crude shipping contracts on its Mainline pipeline network is drawing the ire of a growing number of producers, and now Canada’s energy regulator is getting involved, which could delay the process.
• Toronto-Dominion Bank has started to get spending under control, though that wasn’t enough to help the company meet analysts’ expectations. Expenses had been growing faster than revenue at the Toronto-based bank since the fourth quarter of 2018. The trend ended in the fiscal third quarter, with non-interest expenses rising 4.7% from a year earlier, less than the 6.1% increase in revenue. Earnings missed estimates by a penny. Third-quarter net income rose 4.6% to C$3.25 billion, or C$1.74 a share, from C$3.11 billion, or C$1.65, a year earlier. Adjusted per-share earnings totaled C$1.79, missing the C$1.80 average estimate of 13 analysts
• Canada’s energy bonds, many of which have lagged a corporate debt rally, could get a boost should the opposition Conservative Party defeat Prime Minister Justin Trudeau in October elections, according to analysts at Toronto-Dominion Bank and Manulife Investments. Conservative Leader Andrew Scheer’s pledge to scale back new approval requirements for energy projects would be seen as a positive development for the industry, according to James Spicer, a New York-based analyst at TD Securities.

World Headlines

• European stocks climbed the most in a week on optimism that there could be a breakthrough in the trade dispute between the U.S. and China. The Stoxx Europe 600 Index was up 1.1% as of 11:30 a.m. London time after China indicated it wouldn’t immediately retaliate against the latest U.S. tariff increase announced last week. Italy’s FTSE MIB Index rallied 1.9%, with banks leading gains, as the country’s shares got an additional boost from the prospect of a stable coalition after Giuseppe Conte was tasked with forming a government supported by the Five Star Movement and the Democratic Party.
• U.S. equity futures climbed with European stocks while Asian shares pared declines after China indicated it wouldn’t immediately retaliate against the latest American tariff increase. Treasuries slipped, while a dollar gauge held near a nine-month high. Market sentiment remains delicate after President Donald Trump’s recent pronouncements on trade and as investors try to sustain optimism for a resolution. The latest comments from China follow those of Treasury Secretary Steven Mnuchin, who said U.S. trade officials expect Chinese negotiators to visit Washington, though he wouldn’t say whether a previously planned September meeting would take place. White House trade adviser Peter Navarro played down a quick resolution.
• Stocks across Asia trimmed declines on the remarks. In Europe, Italy’s bonds surged and its equities outperformed as the country moved toward forming a new government. The Chinese mainland yuan strengthened for the first time in 11 sessions, while the pound added to Wednesday’s decline on increasing the risk of a no-deal Brexit.
• Oil rose, erasing earlier losses, as investors weighed a sizable drop in U.S. crude inventories amid China’s latest indication that it won’t escalate the ongoing trade war with the U.S. Futures in New York rose as much as 0.8% following an almost 4% rally over the previous two sessions. European and U.S. equities also pared earlier declines on Thursday as a spokesman for China’s commerce ministry signaled that the country wouldn’t immediately retaliate against the latest U.S. tariff increase, saying that it was more important to discuss removing the extra duties.
• Platinum futures jumped to a 15-month high as the unloved precious metal draws investor interest after months in the doldrums. Volume in platinum is four times higher than the 100-day average for the time of day. The metal rallied 4.7% on Wednesday, the most since 2009. Platinum, used in autocatalysts and jewelry, has been largely ignored this year as gold, silver and palladium all surged to multiyear highs. The high volumes likely point to speculative buying, Commerzbank analysts said in a note Thursday.
• China’s biggest banks responded to government demands to help spur a slowing economy. The cost of their efforts has been disappointing profits and shrinking loan margins. Repeated calls by policy makers for banks to advance more credit to the struggling private sector and small businesses have taken a toll on the industry’s financial performance this year. China Construction Bank Corp. and Bank of Communications Co. posted weaker-than-expected first-half profits as lending margins declined. On Thursday, Industrial & Commercial Bank of China Ltd. said its profit was up 4.7% to 167.9 billion yuan ($23.5 billion), matching analyst estimates, according to a survey conducted by Bloomberg. Net interest margin at the world’s biggest lender narrowed to 2.29% from 2.3% a year earlier.
• Germany’s labor market looks like it’s starting to crack under the weight of a manufacturing recession, raising the pressure for the government to respond with fiscal stimulus. The number of people out of work increased by 4,000 to 2.29 million in August, the fourth straight month that joblessness failed to drop after six years of almost continuous decline. The unemployment rate remained at 5%, near a record low.
• Sony Corp. agreed to sell its 5% stake in Olympus Corp. back to the health-care devices company, one of several moves that American activist investor Dan Loeb had suggested the Japanese technology giant make. Sony will sell the shares to Olympus for 80.4 billion yen ($760 million) and the two companies will continue their business alliance, including a joint venture, they said in separate statements. Olympus plans to buy back up to 6.22% of its shares for 99 billion yen. In June, Loeb disclosed a $1.5 billion stake in Sony and encouraged the company to spin off its semiconductor division and focus on its main entertainment business. Loeb also said Sony should consider selling its stakes in companies including music streaming service Spotify Technology SA and Olympus, and improve its capital structure.
• China indicated that it wouldn’t immediately retaliate against the latest U.S. tariff increase announced by President Donald Trump last week, emphasizing the need to discuss ways to deescalate the trade war between the world’s two largest economies. “China has ample means for retaliation, but thinks the question that should be discussed now is about removing the new tariffs to prevent escalation of the trade war,” Ministry of Commerce spokesman Gao Feng told reporters in Beijing on Thursday. “China is lodging solemn representations with the U.S. on the matter.” When asked if that meant China wouldn’t retaliate at all for the latest escalation by the U.S., Gao didn’t elaborate but repeated the same comments. China has hit back against each previous tariff increase by the U.S., so not responding in kind this time may signal a change in strategy.
• Hurricane Dorian is set to become a major hurricane in the next couple of days, gathering force as it heads toward Florida’s east coast, where it may bring 115 mile-per-hour winds and drenching rain when it hits there sometime early next week. It would be the first major hurricane to slam into Florida’s east coast in 15 years. The storm reached St. Croix and St. Thomas in the U.S. Virgin Islands Wednesday afternoon, according to the U.S. National Hurricane Center in Miami, and is expected to stay over the water, gaining strength in its northwest march toward Florida.
• Barclays Plc is in talks to sell its New York-based automated options trading business to electronic market maker GTS. Negotiations are at an advanced stage, but there’s no assurance a deal will be struck, according to people familiar with the matter who asked not to be identified discussing private talks. Barclays representatives and a GTS spokesman declined to comment. Known internally as Automated Volatility Trading, the business buys and sells options to offer liquidity in that market. Its technology and equities heritage make it a natural fit for GTS, which has become one of the largest market makers at the New York Stock Exchange.
• Boeing Co. aims to clear its 737 Max for flight as soon as October. But the planemaker also is plotting how it would respond to a far worse scenario: a grounding that stretches months longer. Complicating both efforts is the tightest U.S. labor market in half a century. With experienced mechanics and engineers increasingly difficult to hire, Boeing is pondering what once loomed as a last-ditch choice — a temporary factory shutdown — to preserve its workforce. The Chicago-based company wants to avoid a potential unraveling of manufacturing expertise across a broad swath of North America as its recovers from the Max crisis. That’s the risk if large numbers of highly skilled workers from the 600 mostly U.S. companies building components for the jet were to move on to other jobs at a time of historically low unemployment.
• British Prime Minister Boris Johnson’s move to suspend parliament and come good on his promise to avoid any more delays to Brexit has set the clock running for his opponents to thwart him. The question is whether they can do it in time. In another dramatic turn of events in the U.K.’s three-year quest to leave the European Union, Johnson was granted permission by the Queen to “prorogue” the House of Commons, shutting down the debating chamber on Sept. 12 ostensibly so he can come back with a new legislative program a month later.
• Japanese exports to South Korea of hydrogen fluoride gas, vital to semiconductor manufacturing, slumped by 84% in July compared with the previous month, according to figures released by the Ministry of Finance. Japan last month stepped up monitoring of exports to South Korea of the gas and two other materials used in the tech industry, citing national security concerns. The move ratcheted up tensions between the neighbors and was followed by Tokyo removing South Korea from a list of trusted export destinations that benefit from less-strict monitoring of sales on a broad range of products.
• Death. Taxes. China’s biggest oil company losing a ton of money on imported natural gas. Like clockwork, when PetroChina Co. opens its books to investors, it reveals how much money it lost selling overseas gas to customers in China. The 11.2 billion yuan ($1.6 billion) loss in the first half of this year it announced Thursday brings the grand total to $34 billion since 2011, when they started regularly breaking out the figures in earnings reports.
• Like the letters on a lighted marquee going dark one by one, Blackstone Group Inc. has been losing the co-founders of its $139 billion credit business, GSO Capital Partners. The “O” left first, in 2015. “S” followed in 2018. Now, finally, the “G” — Bennett Goodman — is making his exit. For months, speculation has swirled on Wall Street that Goodman, 62, might join one of his former partners at a rival firm. But in an interview he said “there’s no plan to get the band back together.” Instead, Goodman intends to build a family office and explore opportunities to invest the wealth he’s amassed over 35 years in finance. That means giving up most of his duties on Dec. 31, stepping down as a senior managing director and board member while continuing to advise parts of Blackstone’s business.
• Best Buy Co. delivered slower-than-expected quarterly sales and reduced its outlook for the year, a rough start for the gadget retailer’s new chief executive officer. Shares fell in early trading. Comparable-store sales in the U.S. — the company’s most-watched metric — rose 1.9%, missing analysts’ projections compiled by Consensus Metrix. The retailer also lowered its full-year sales forecast and the midpoint of its profit projection fell short Wall Street’s expectations.
• Lenders thought it was time to shrink their mortgage businesses. Now they’re finding they were wrong. With rates for home loans sinking to their lowest levels since late 2016, Wells Fargo & Co., the biggest mortgage lender in the U.S., has boosted staffing for the business by about 10% this year and plans to keep hiring. Bank of America Corp. is hiring in areas including sales, processing, and underwriting. The mortgage industry has added almost 5,000 employees since March, a 1.5% gain, according to the Bureau of Labor Statistics. It’s a stark reversal from a year ago, when the Federal Reserve was hiking interest rates and banks were cutting thousands of jobs.
• Bank of America Corp. is building up its teams focused on the world’s wealthiest family offices, buyout firms and sovereign wealth funds to take advantage of a surge in dealmaking. The Charlotte, North Carolina-based firm has made a series of senior appointments in recent months and put some of its top bankers on a new Global Private Capital Council. The moves give Bank of America a more formal structure to identify new business from the deep-pocketed investors, said Luigi Rizzo, head of investment banking for Europe, the Middle East and Africa

*All sources from Bloomberg unless otherwise specified