October 28th, 2019

Daily Market Commentary

Canadian Headlines

• October has been a busy month for Canada: a federal election, the first anniversary of legalized weed, easing U.S.-China trade tensions and earnings announcements are trickling in. But the stock market seems to have ignored all that. With 18 trading sessions out of the way in October, the S&P/TSX Composite Index has barely moved from the end of September with nine up and nine down days. Volatility is at a three-month low and trading volume is on track for the lowest level since July 2017. That’s in contrast to the U.S., where the S&P 500 is hovering near its record high.
• When the Canadian and U.S. central banks announce policy decisions on Oct. 30, traders are betting that the divergent decisions will allow the loonie to blunt the dollar’s status as the highest yielding Group-of-10 currency. Futures traders are pricing in almost no probability of a rate cut at the Bank of Canada meeting, while predicting a quarter point reduction from the Federal Reserve. The U.S. central bank has already cut rates twice this year compared to the BOC, which has yet to cut rates since 2015.

World Headlines

• European shares opened slightly lower Monday, weighed down by corporate earnings as Europe’s biggest bank, HSBC Holdings Plc, missed analyst estimates. The Stoxx 600 Index was 0.1% lower at 8:10 a.m. in London, with the food and banking sectors among the groups falling the most. HSBC shares dropped 3.3% after the lender’s results fell short of expectations and it cut a profitability goal. LVMH rose 1% up after the French luxury goods group confirmed it has held talks to buy jeweler Tiffany & Co.
• U.S. index futures climbed while stocks in Europe struggled for traction at the start of a week in which big corporate earnings continue to roll in and the Federal Reserve is expected to cut interest rates. Treasuries dropped, pushing the 10-year yield to a six-week high.
• An Asia-Pacific equities benchmark rose toward its fifth gain in six sessions, as shares increased in Shanghai, with blockchain-related stocks climbing after Chinese President Xi Jinping hailed the technology.
• Oil was steady after the biggest weekly advance in more than a month on signs of progress in the prolonged U.S.-China trade spat. Futures were little changed in New York after capping a 5.4% weekly gain on Friday. The U.S. said it was close to finalizing the first phase of a trade deal with China, while Beijing said parts of the text for that agreement are “basically completed.” Money managers boosted their net-long positions on West Texas Intermediate crude for the first time since mid-September.
• Gold was little changed after the U.S. and China both said they are close to finalizing sections of the first phase of a trade deal, while weaker-than-expected American data reinforces expectations the Federal Reserve will cut borrowing costs this week. China said parts of the text for the first phase of a trade deal with the U.S. are “basically completed” as the two sides reached a consensus in areas including standards used by agricultural regulators.
• The European Union agreed to grant the U.K. a three-month Brexit delay to Jan. 31, removing the risk of a damaging no-deal split on Thursday as the British government tries to end the impasse in Parliament. Prime Minister Boris Johnson is pushing a vote in the House of Commons on Monday to trigger an early general election, saying it’s the only way to resolve the deadlock that has stopped the U.K. ratifying his divorce deal with Brussels and prolonged the uncertainty for businesses as Brexit drags on.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the third straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $798.3 million in the week ended Oct. 25, compared with gains of $325.1 million in the previous week, according to data compiled by Bloomberg. This was the biggest weekly inflow since Feb. 22. So far this year, inflows have totalled $1.17 billion.
• PG&E Corp. has begun restoring electricity to the almost 3 million Californians who lost power this weekend in the state’s largest deliberate blackout ever. Any respite, however, may be short. As the bankrupt utility began inspecting power lines for damage from wind storms sweeping through the northern part of the state, it warned that another round of gusts could spur more shutdowns Tuesday. Much of the region remained in the dark as of Sunday evening, including in the San Francisco Bay Area, and some customers who lost electricity may not see their power restored from the initial outage until later the week.
• Microsoft Corp. shares surged after the company scored a major victory in securing a milestone, $10 billion Pentagon contract for cloud computing services. But the contract — unthinkable for Microsoft even a year ago — will likely come at a cost, legal and internal. Amazon.com Inc., the market leader in cloud services, is considering a challenge to the award of the contract to Microsoft’s much smaller Azure business, citing President Donald Trump’s interference in the bidding process, according to a person familiar with the matter. Amazon had been widely considered the front-runner because of its superior size and previous cloud contract with the Central Intelligence Agency.
• HSBC Holdings Plc embarked on its biggest overhaul in years after profit missed estimates, warning that it will pare back underperforming operations in the face of slowing economic growth and geopolitical uncertainty. The bank, which makes almost 90% of its profit in Asia and employs 240,000 people, walked away from a key profitability target and said write-offs are likely for some of its European business and technology spending. For acting Chief Executive Officer Noel Quinn, who took over in August following the ouster of John Flint, the review is his chance to put his stamp on the sprawling lender. Cuts at the investment bank have already begun.
• German Chancellor Angela Merkel’s government is about to unveil plans for a cloud service to allow European companies to avoid storing data with U.S. or Asian rivals such as Amazon.com Inc. or Alibaba Group Holding Ltd. Economy Minister Peter Altmaier will reveal the service — named Gaia-X after a Greek goddess symbolizing Earth — at a tech conference Tuesday in Dortmund, Germany. He has worked on the project with officials from companies including SAP SE, Deutsche Telekom AG and Deutsche Bank AG, according to a strategy paper by the Economy Ministry obtained by Bloomberg News.
• Days before production starts on Volkswagen AG’s cornerstone electric vehicle, the German manufacturer is stepping up a campaign to more than double the market value and gain investor recognition for the industry’s most ambitious technology push. In an internal newsletter sent last week, Chief Financial Officer Frank Witter prodded managers to get behind a goal to reach a valuation of 200 billion euros ($221 billion), arguing that a higher stock price will help VW keep pace with rivals and strengthen its hand in negotiations with future partners. Witter’s message confirms a goal reported earlier this month by Bloomberg.
• Most economists expect the Bank of Japan to stand pat this week after continued signs of resilience in the economy and stability in markets cooled speculation that the central bank will ease in October. Some 59% of 46 economists expect stimulus to remain unchanged at the end of a two-day meeting Thursday, though an increasing number think the bank will lower its negative interest rate in the near-term, according to a Bloomberg survey this month. The poll showed that more than 70% of analysts expect more easing by January next year, compared with less than two-thirds a month ago.
• President-elect Alberto Fernandez will discuss the transition of power in Argentina with the defeated incumbent, Mauricio Macri, after an election in which voters opted for left-wing populism over pro-market policies to combat the country’s economic crisis. Fernandez, a political insider who has never held national office, is due to meet with Macri first thing Monday morning after sweeping to power in Sunday’s presidential election with 48% of the vote to Macri’s 40%, enough to avoid a runoff.
• AT&T Inc. shares rose after the company won plaudits from Elliott Management Corp. with a three-year plan to do much of what the activist shareholder has pressed for, including separating its chairman and chief executive officer roles. AT&T said Monday it would reach earnings of $4.50 to $4.80 a share by 2022, compared with analysts’ current estimate of $3.39 a share for that year. The telecom giant also pledged to make no more major acquisitions soon and said it would separate its chairman and CEO roles after Randall Stephenson, who holds both positions, departs sometime after 2020.
• JPMorgan Chase & Co.’s new Manhattan headquarters is meant to be an ode to both the company and the city — a monumental glass-and-steel tower that says the nation’s largest bank grew up here. But New York may be losing its luster. Despite more than two centuries of history in a city synonymous with the global financial industry, JPMorgan is quietly shrinking its workforce there. The bank’s been building up its presence in other locations and is now considering relocating several thousand New York-based employees out of the area to help rein in costs ahead of a possible economic downturn, according to people with knowledge of the bank’s strategy.
• LVMH said it has held discussions with jeweler Tiffany & Co. on a deal that would expand the Louis Vuitton owner’s reach into the luxury business and could be Chairman Bernard Arnault’s biggest ever takeover. The French luxury conglomerate confirmed the talks after Bloomberg reported earlier that LVMH has offered about $14.5 billion, or $120 a share, which would be 22% more than the Oct. 25 closing price. Tiffany sharessurged to $117.50 in U.S. premarket trading.
• Prologis Inc. is buying Liberty Property Trust in an all-stock transaction valued at $9.7 billion, extending its reach in markets such as Chicago, Houston and Southern California. Including debt, the deal is valued at $12.6 billion, the companies said in a statement. The transaction gives Liberty stakeholders 0.675 Prologis share for each Liberty share they own, a premium of about 21% based on Friday’s closing prices.
• Sasol Ltd. named a new chief executive officer to replace co-CEOs Bongani Nqwababa and Stephen Cornell as the company seeks to draw a line under the disastrous development of an almost-$13 billion chemicals plant in the U.S. The delays and massive cost overruns at the Lake Charles chemical project in Louisiana have tarnished the whole company, Sasol said. Sasol’s shares rose 8.1% by 9:20 a.m. in Johannesburg on Monday. South Africa’s biggest company by sales has tumbled this year and twice delayed reporting full-year results ahead of an investigation into what went wrong at the plant. The company reported adjusted earnings that missed analyst estimates.
• President Donald Trump scored one of the biggest successes of his presidency with the killing of an Islamic State leader, yet the battlefield victory isn’t likely to blunt the momentum of Democrats moving closer to impeaching him. The inquiry led by three House committees resumes Monday with another slate of witnesses, even as the country absorbs Trump’s dramatic announcement of the death of Islamic State commander Abu Bakr al-Baghdadi, who was cornered in a tunnel by U.S. forces.
• Walgreens Boots Alliance Inc., which operates thousands of U.S. drugstores, said it will try and cut another $300 million from its annual costs as it expects growth to flatten in the 2020 fiscal year. The pharmacy chain raised its 2022 annual savings target to $1.8 billion, up for $1.5 billion. Adjusted earnings per share will be “roughly flat” in fiscal 2020, Walgreens said.

*All sources from Bloomberg unless otherwise specified