January 7th, 2020

Daily Market Commentary

Canadian Headlines

• Economists expect Canada and the U.S. to compete for the top spot for growth among the Group of Seven countries in 2020, yet the latest population data reveal the two nations have starkly different forces driving their expansions. The Census Bureau reported Dec. 30 that net international migration in the U.S. plummeted for a third straight year in 2019 to a decade low of 595,000. Along with declining birthrates, that helped slow annual population growth to the weakest in a century, according to an analysis by Brookings Institution demographer William Frey. Last year, Canada added a net 437,000 people from abroad, despite being only a tenth the size of the U.S., helping to drive its fastest population increase in 30 years, even with declines in fertility.
• Home sales dropped in Toronto in December, but prices continued to rise as demand outstripped a dwindling supply of units available for purchase. The number of homes sold in Canada’s largest city fell 3% from November, the biggest decline since February, the Toronto Real Estate Board said Tuesday. Still, benchmark prices kept climbing, rising 0.5% last month to record highs and bringing gains to 7.3% from the previous year, the fastest pace of year-over-year growth since 2017. Toronto’s housing market has tightened considerably over the past year as buyers took advantage of lower interest rates and adjusted to mortgage stress tests, but there are fewer homes to be bought. In December, the sales to new listings ratio — a measure of market balance — reached 1.25, pointing to a market tilted heavily in favor of sellers.
• Mexico’s move to divert a TC Energy Corp. gas pipeline from indigenous lands is reigniting concerns over the future of energy projects in the country. The plan to deviate the Tuxpan-Tula conduit in central Mexico, announced by President Andres Manuel Lopez Obrador over the weekend, follows a restructuring of contracts last year that forced pipeline operators to cut shipping rates. The decision creates a precedent that could be replicated as local communities have opposed several pipeline projects in Mexico, stalling construction and leading to a slowdown in investment, said Nina Fahy, head of North American natural gas for consultancy Energy Aspects Ltd.

World Headlines

• European stocks rose on Tuesday, rebounding from two days of losses as technology shares, retailers and banks gained, while investors kept an eye out for any escalation in tensions in the Middle East. The Stoxx Europe 600 Index was up 0.6% as of 8:11 a.m. London time. Among individual stocks, Premier Oil jumped 12% after agreeing to buy some North Sea assets from BP for $625 million. Shares in Aston Martin slid 11% after the British automaker said that profit fell last year. Chip stocks led the tech sector higher after U.S. peer Microchip Technology’s third-quarter sales beat estimates. It’s been a shaky start to 2020 for European equities, with the Stoxx 600 Index up 0.7% so far. A recent U.S. airstrike which killed a prominent Iranian general stoked geopolitical tension, lowering demand for risk assets globally, following a rally at the end of last year on renewed optimism over a trade deal between the U.S. and China, and a favorable result in the U.K’s general election. Investors are watching for any retaliation from Iran against the U.S.
• U.S. equity futures were steady on Tuesday and stocks in Europe and Asia advanced as investors attempted to set aside their fears about escalating tensions in the Middle East. Treasuries fluctuated and the euro declined. Contracts for the S&P 500 gave up all of the morning’s advance before steadying.
• Japanese stocks rose Tuesday, after gains in the U.S. market signaled that concerns over friction in the Middle East have been factored into equity prices. Electronics and auto makers boosted the Topix index the most, helping the benchmark recover its loss on Monday. The S&P 500 Index rebounded as U.S. technology companies led a recovery. While crude oil futures pared some gains, the situation in the Middle East remained tense. The U.S. ordered additional forces into the region, and Defense Secretary Mark Esper has said that the U.S. hasn’t decided on whether to leave Iraq.
• Oil eased from a three-month high in London as traders waited to see whether the clash between the U.S. and Iran would lead to a disruption in Middle East crude supplies. Brent futures retreated below $69 a barrel after a two-day surge following a U.S. airstrike on a top Iranian general pushed prices above $70 for the first time since September. While Iran’s semi-official Fars news agency said the Islamic Republic is assessing 13 retaliation ‘scenarios’ against the U.S., and the White House ordered additional forces to the Middle East, oil flows out of the region continue unimpeded for now.
• Gold held near the highest level in more than six years as risk appetite crept back into equity markets, with investors on alert for Iran’s next move in the showdown with the U.S. Gold, which climbed 2.4% over the past two days to approach $1,600 an ounce, was little changed Tuesday as equities in Europe and Asia jumped. Bullion investors have been in thrall to developments in the Middle East in the past few days after a U.S. drone strike killed General Qassem Soleimani. Iran is assessing 13 scenarios to respond and even the weakest of those options would be a “historic nightmare” for the U.S., the head of Iran’s national security council was cited as saying by the nation’s semi-official Fars news agency.
• India’s economy is on track for its slowest growth since at least 2013, weighed down by a shadow banking crisis, weak investment and a slump in spending. Gross domestic product will grow 5% in the year through March 2020, the Statistics Ministry said in a statement in New Delhi on Tuesday. That is in line with the median estimate in a Bloomberg survey of 22 economists and compares with 6.8% expansion in the previous year. That pace will place India, which was the world’s fastest-growing major economy last year, behind regional peers like China, Vietnam and the Philippines, all of which are seen expanding close to 6% or more.
• The risk of a U.S.-Iran conflict is bringing fresh focus to the question of what Jerome Powell meant when he said it will take a “material” change in the outlook for the Federal Reserve to raise or lower interest rates. The answer so far — as investors wait to see how Tehran responds to the U.S. killing of its top general — is that it will take quite a lot to meet that threshold, which the Fed chairman repeated at his press conference on Dec. 11. Policy makers have signaled they’ll keep rates on hold all year and their reaction since news broke Friday of the fatal U.S. airstrike has been to play up the country’s economic resilience. One reason for that is the three rate cuts undertaken in 2019, taken out in part as “insurance” against unforeseen geopolitical developments on the global stage.
• Tesla Inc. kicked off production in China, marking a major step in Chief Executive Officer Elon Musk’s global push for electric-vehicle domination and heralding what could be the dawn of real competition in the world’s largest EV market. Musk presided over a ceremony on Tuesday at a new multibillion-dollar plant near Shanghai — its first outside the U.S. — where the American company handed over the first China-made Model 3 sedans to the public, the first one being a white sedan going to a man from the nearby city of Wuxi. Technically, deliveries began last week but those were to employees.
• President Donald Trump is wavering over how he wants his impeachment trial in the Senate to unfold, people familiar with his thinking said, but an offer by his former top national security aide to testify challenged Republican plans for a quick proceeding. Senate Majority Leader Mitch McConnell gave no indication that John Bolton’s willingness to testify was putting pressure on him to yield to Democrats’ demands for additional witness testimony. At least one GOP senator expressed an interest in hearing from Bolton but didn’t back a subpoena.
• Polish inflation accelerated to a seven-year high, advancing toward the upper end of the central bank’s target range and backing calls from a minority on its board for a first increase in interest rates in eight years. Preliminary data on Tuesday showed consumer prices rose 3.4% from a year earlier in December, up from 2.6% in November and above all 20 estimates in a Bloomberg survey of economists. Poland’s currency slumped and bond yields rose as much as 9 basis points in reaction.
• Premier Oil Plc agreed to buy assets in the U.K. North Sea, sending the shares soaring but prompting an immediate objection from its largest creditor. Premier plans to purchase the Andrew Area and Shearwater assets from BP Plc for $625 million, as well as an additional stake in the Tolmount Area from Dana Petroleum Ltd. The London-based company, saddled with almost $2 billion of debt, will sell shares to fund the deals and seek to extend credit facilities.
• Oil buyers in Asia are increasingly wary that Iraq’s entanglement in the worsening dispute between the U.S. and Iran could disrupt shipments from one of their key Middle East suppliers. At least five buyers from China to India said the loss of Iraqi barrels would be particularly challenging because of already-tight supplies of the quality of oil exported by OPEC’s second-biggest producer, according to people familiar, who asked not to be identified as they’re not authorized to speak to the media. While there’s been no material threat to Iraq’s oil production, U.S. President Donald Trump late Sunday threatened heavy sanctions against the country if it followed through on a vote by parliament to expel foreign forces from its territory. Trade measures against Iran have already reduced shipments from the Islamic Republic to a trickle.
• Japanese prosecutors have obtained an arrest warrant for Carole Ghosn, the wife of Carlos Ghosn, the latest move by the country to contain the fallout from the former auto executive’s daring escape from trial a week ago. Prosecutors issued a statement announcing the warrant on Tuesday. The action means Carole, who is now in Lebanon with Ghosn, could be arrested if she returns to Japan. Authorities said they obtained the warrant against Ghosn’s wife for giving false testimony in court last April. Ghosn had been barred from meeting his wife while he was on bail in Japan, because authorities believed she had been aiding him in covering up for his crimes. That was the “straw that broke the camel’s back” in his decision to flee, Ghosn told Fox Business Network’s Maria Bartiromo.
• After feeling ignored over Brexit for the last four years, British business is hoping for a change of fortune in 2020. As Prime Minister Boris Johnson prepares to start trade talks with the European Union, U.K. companies are gearing up to lobby for a final accord that limits any economic disruption. At stake is access to the U.K.’s single biggest export market. U.K. companies have had a torrid time since the 2016 referendum, wasting resources on stockpiling and contingency planning in anticipation of cliff-edge deadlines that have come and gone. Johnson’s big election win may have ended the immediate political uncertainty, but there’s still significant doubt over the future relationship with the EU and what it will mean for businesses.
• General Motors Co. warned pressure on its China business to persist this year as the world’s biggest auto market suffers a prolonged slump, exacerbated by a lackluster economy and the trade war with the U.S. GM and its partners sold 3.09 million vehicles in China in 2019, according to a statement Tuesday. That represents a 15% decline for a company that was once the top foreign automaker in China. The U.S. automaker’s sales in China have tumbled even more than the industry. Added strain has come from a consumer backlash to President Donald Trump’s trade policies, a Bloomberg Intelligence report said in November.
• Britain’s billionaire Issa brothers built one of the world’s largest independent gas station chains through a series of debt-fueled purchases. Now they’re weighing their biggest-ever acquisition. EG Group, the U.K. company led by Mohsin and Zuber Issa, is working with a financial adviser as it evaluates making a bid for Caltex Australia Ltd., people with knowledge of the matter said. Any offer for the $6 billion company could start a takeover battle with Canadian convenience-store giant Alimentation Couche-Tard Inc., whose initial bid for Caltex was rejected. The string of deals has turned closely held EG Group into a global giant with about 5,000 fuel station and convenience store sites across Europe, North America and Australia. The Issas have come a long way from their humble origins in 2001, when they bought a single gas station in an old mill town outside Manchester.

*All sources from Bloomberg unless otherwise specified