October 24th, 2019

Daily Market Commentary

Canadian Headlines

• Canadian stocks retreated for a second day after Rogers Communications Inc. cut its annual forecast, sending the communication services index down by the most since 2013. The S&P/TSX Composite Index fell 0.3% to 16,335.93. Rogers lost 8.1% to the lowest since June 2018 after it cited new unlimited data plans for its lower revenue outlook. Competitors BCE Inc., Telus Corp. and Shaw Communications Inc. all slid more than 4%. Real-estate stocks also fell as FirstService Corp. tumbled 9%, the most ever, following weak earnings. In total, 8 of 11 sectors were lower; 122 of the 233 stocks in the index fell, while 105 rose.
• Teck Resources Ltd. started a companywide cost-cutting program and will defer some planned capital projects as global economic uncertainty weighs on the prices of its commodities. The company is targeting reductions of about $500 million from previously planned spending through the end of 2020, according to its third-quarter results statement.

World Headlines

• European stocks climbed as investors assessed dozens of earnings updates and awaited Mario Draghi’s final policy meeting as European Central Bank president. The Stoxx Europe 600 Index rose 0.3% as of 8:02 a.m. in London. STMicroelectronics NV and Hermes International shares advanced as they reported sales that beat estimates, while Royal Bank of Scotland Group Plc dropped after the British lender swung to a loss in the third quarter. Nokia Oyj tumbled the most since 1991 after cutting its earnings outlook and pausing its dividend.
• U.S. futures edged higher and stocks rose in Europe and Asia as a raft of upbeat corporate results helped investors shrug off more signs that global growth is losing momentum. Sovereign bonds fluctuated on a busy day for central banks, with the ECB rate decision set to be the main focus. Futures on the S&P 500 and Dow indexes nudged upward and those on the Nasdaq 100 rose after solid earnings on Wednesday spurred gains in late trading.
• Japanese stocks rose on Thursday after U.S. earnings results eased investors’ concerns over the outlook for corporate profits. Transportation equipment and pharmaceutical makers lifted the benchmark gauge the most. Sentiment for the tech sector got a boost after Apple Inc. rallied to a record following Morgan Stanley’s decision to raise its price target. Caterpillar Inc. also climbed despite lowering its outlook for the year. Almost 80% of companies on the S&P 500 Index have exceeded profit expectations so far this reporting season.
• Oil fell as weak economic data from Germany added to concern over slowing global fuel demand, overshadowing a surprise pullback in U.S. crude stockpiles. Futures dropped 0.7% in New York as IHS Market’s measure of German manufacturing and services signaled the nation’s slump will persist into the fourth quarter. Prices surged 2.7% on Wednesday — the biggest rally since Saudi Arabia’s energy facilities were attacked in mid-September — as American crude inventories shrank by 1.7 million barrels last week, compared with a forecast 3-million barrel gain in a Bloomberg survey.
• Platinum rose to the highest in more than three weeks as a slew of upbeat corporate earnings helped temper concerns about the global economy. The improved risk-on sentiment weighed on gold prices, which edged lower. Platinum, used heavily in the European car sector, rose a third day as stocks in the region advanced. Platinum’s gains are also partly technically driven after prices established support around $875-$885 an ounce, according to ABN Amro strategist Georgette Boele. Gold hovered close to $1,490 an ounce as investors await several monetary policy decisions from central banks on Thursday, including from the European Central Bank.
• Germany’s manufacturing slump is taking a harsher toll on the jobs market, adding to pressure on the government to respond with fiscal stimulus. IHS Markit’s measure of manufacturing and services rose marginally in October, but still signals the slump has extended into the fourth quarter. Factories remain the weak spot, with employment in industry falling the most in almost 10 years.
• Risky corporate loans are gradually piling up on the books of some of the world’s largest banks. Underwriters that agree to provide funds for buyouts are rarely forced to come up with the cash themselves, instead offloading the exposure to investors before deals close. Yet lenders including Barclays Plc and Deutsche Bank AG have been left holding at least $1.5 billion of leveraged loans that they’ve struggled to sell over the past several months, according to people with knowledge of the matter.
• Twitter Inc. reported quarterly revenue and gave a sales forecast that fell far short of Wall Street’s estimates, saying privacy issues involving its advertising business will continue to weigh on its performance. The shares plunged. Third-quarter sales increased 8.6% to $823.7 million, well short of the $876 million analysts estimated. Sales in the period ending in December will be $940 million to $1.01 billion, the San Francisco-based company said Thursday in a statement. Analysts projected $1.06 billion.
• China aims to buy at least $20 billion of agricultural products in a year if it signs a partial trade deal with the U.S., and would consider boosting purchases further in future rounds of talks, people familiar with the matter said. The $20 billion would take its imports of U.S. farm goods back to around the level in 2017, before the U.S. began imposing tariffs. In the second year of a potential final deal when all punitive tariffs are removed, those purchases could rise to $40-$50 billion, said the people, who asked not to be named discussing the private talks. The people did not say when the first year would start or when China would start counting agricultural imports toward the $20 billion.
• India’s top court ordered eight telecom carriers, including Bharti Airtel Ltd. and Vodafone Idea Ltd., to pay the government as much as 920 billion rupees ($13 billion) in past dues, dealing a blow to the businesses already struggling to make profits and pare debt. The Supreme Court, in a ruling read out by a two-judge bench headed by Justice Arun Mishra, said it will decide on the timeline for payments. Thursday’s decision possibly puts an end to the two-decades-old legal dispute over airwaves fees owed to the government. The operators have disputed for years over how authorities calculate their annual adjusted gross revenue, a share of which is paid as license and spectrum fees. With the ruling, the court upheld the government’s method, while rejecting the companies’ plea to exclude revenue from non-telecommunications businesses.
• Elon Musk flipped the script on those who doubted Tesla Inc. could return to profitability and meet aggressive timelines, delivering positive earnings few saw coming and declaring he’s ahead of schedule on a new plant and product. The electric-car maker earned $1.86 a share in the third quarter, exceeding the most optimistic projection by a wide margin and beating the consensus estimate for a 24-cent loss. On top of that, Musk peppered investors with positive updates: Tesla’s new factory in China is already starting production, the Model Y crossover will launch months earlier than expected next year and the long languishing energy business is showing signs of life.
• To avoid a recession in the U.S. in 2020, households need to keep spending, peace needs to break out in global trade wars, and investors can’t get spooked—by the U.S. presidential election or anything else. It would also help if policymakers in Europe and China did their part to shore up growth, even though the tools they have to do so are limited. It’s likely that all these things will happen. That’s why Bloomberg Economics is forecasting that the U.S. economy will grow 2% in 2020 as the record-length expansion turns 11 years old in June. It’s also why election models focused solely on the strength of the domestic economy are predicting a win for Donald Trump in November. After all, real incomes are rising, and unemployment is at a 50-year low.
• Amazon.com Inc.’s big spending ways will be in the spotlight on Thursday afternoon when the company reports third-quarter earnings. The e-commerce giant is investing heavily in initiatives like one-day shipping, and the effect of that spending on operating profits will be key in determining whether a miss in the second-quarter was a one-off event. That’s of particular interest to investors who had grown accustomed to Amazon beating estimates for the profitability metric after doing so for seven-consecutive quarters.
• Coal power generators in Europe face 6.6 billion euros ($7.3 billion) of losses this year as plunging renewable energy costs and cheap natural gas cut use of the dirtiest plants to a record low. Almost 80% of lignite and hard coal-fired generators will be unprofitable this year, a hit the industry is unlikely to survive without government help, according to a report from Carbon Tracker. The research group pushing for lower greenhouse gas emissions calls for a continent-wide phaseout of the most polluting fossil fuel by 2030.
• Mario Draghi’s tenure as president of the European Central Bank has been undeniably successful — saying he saved the euro from collapse isn’t much of a stretch. However, inflation continues to languish well below target. And with monetary policy reaching the limits of its efficacy, we expect him to make a final plea today for help from Europe’s governments.
• All the action in China’s markets is now in government bonds, where a sudden sell-off this month contrasts with subdued moves elsewhere. One contrarian says it won’t last. The yield on benchmark 10-year sovereign debt is up 20 basis points since a three-year low on Sept. 6, ranking it among the worst performers in Asia. Meanwhile, stocks have turned the least volatile since early 2018, while the previously wild yuan has traded around 7.08 per dollar for almost two weeks.
• The Bank of Japan is currently considering refraining from extra stimulus at its October meeting but will look for a fresh way to show its continued readiness to take action, according to people familiar with the matter. BOJ officials point to the relative calm in financial markets and the lack of a clear deterioration in risks to prices as reasons for holding back on moving the central bank’s biggest policy levers, the people said. Officials have yet to see the global slowdown taking a toll on demand at home and view momentum toward 2% inflation as maintained, according to the people.
• India is considering tax relief for individuals as it looks at measures to accelerate consumer demand and boost economic growth, people with direct knowledge of the matter said. Prime Minister Narendra Modi’s government is mulling a proposal to hike the taxable income limits, especially the 1 million rupee slab, which attracts a 30% rate at present, the people said, asking not to be identified as the discussions are private. The move will be accompanied by scrapping some tax breaks, including the one offered on house rent payments and interest earned on some bank deposits.
• Saudi Aramco is exploring ways to reward loyal investors in its initial public offering to ensure the record share sale isn’t followed by a wave of selling, people with knowledge of the matter said. One potential measure that Aramco has discussed with Saudi regulators is whether it could offer bonus shares to retail stock buyers who keep their holdings for six months, one of the people said. Aramco is looking to reduce market volatility after it begins trading as well as provide a benefit to mom-and-pop buyers who expect a windfall from local listings, the people said, asking not to be identified because the information is private.
• India’s top court ordered several telecom carriers, including Bharti Airtel Ltd., Vodafone Idea Ltd. and many defunct ones, to pay the government as much as 920 billion rupees ($13 billion) in past dues, dealing a blow to the businesses already struggling to make profits and pare debt. The Supreme Court, in a ruling read out by a two-judge bench headed by Justice Arun Mishra, said it will decide on the timeline for payments. Thursday’s decision possibly puts an end to the two-decades-old legal dispute over airwaves fees owed to the government.
• 3M Co. cut its profit and sales forecasts as the global industrial downturn continued to pummel the manufacturer. The shares fell in early trading. Adjusted earnings will be $8.99 to $9.09 per share in 2019, down from a previous expectation of as much as $9.75, the company said Thursday in a statement. Wall Street had predicted profit of $9.31, according to the average of analysts’ estimates compiled by Bloomberg before the announcement.

*All sources from Bloomberg unless otherwise specified