September 18th, 2019
Daily Market Commentary
- Canadian stocks reached a record, rising for a sixth straight session — the longest advance since June — as gold held its gains and crude oil sank on contradicting reports about when Saudi Arabia will restore lost production. The S&P/TSX Composite rose 0.5% to 16,835. Materials led eight of eleven sectors higher while pot shares underperformed. CannTrust Holdings Inc., the beleaguered pot company that’s lost 75% of its value after breaching regulations, had its license suspended by the Canadian government.
- While President Donald Trump has tweeted about the U.S. stock market more than 30 times this year, his Canadian counterpart Justin Trudeau hasn’t mentioned stocks once on his Twitter feed, even as indexes in both countries hit record highs. Trump has used the words “stock market” and “Dow” on Twitter and sprinkled “Nasdaq” and “S&P” references to comment on equities, according to data compiled by Bloomberg. By contrast, Trudeau hasn’t tweeted “stock” or “TSX” all year – not even this week as a rally in gold and oil stocks pushed the main equity gauge to a fresh all-time high. The S&P 500 Index in the U.S. has climbed about 20% in 2019, extending its bull run for almost its 11th year. Canada’s S&P/TSX Composite Index isn’t far behind with an 18% surge, on pace for its best year since 2016. In U.S. dollar terms, Canadian stocks have outperformed this year, though they’ve trailed U.S. equities since 2015.
- Canada’s S&P/TSX Composite Index may be breaking records this year as gold and oil prices soar, but it’s not losing its calm. The country’s S&P/TSX 60 Volatility Index, or VIXC, has averaged about 10.2 on a daily basis through Tuesday, compared with the 15.9 for the Cboe Volatility Index, or VIX, tracking expected swings in the U.S. market. That marks the biggest difference in the ratio between the so-called fear gauges since at least 2009, according to data compiled by Bloomberg.
- European equities retreated at the open as automakers fell following this year’s biggest monthly drop in car sales and as traders await the U.S. Federal Reserve’s meeting. The Stoxx Europe 600 Index was down as much as 0.2%. The Stoxx 600 Automobiles & Parts Index dropped 0.5% as European car registrations fell sharply in August, deepening the woes of an industry battling sluggish demand in key markets. Luxury-goods company Compagnie Financiere Richemont SA tumbled 2.1% after being cut to sell at UBS Group AG.
- Bonds rallied globally while stocks drifted as investors marked time until the Federal Reserve concludes its policy meeting Wednesday, with officials expected to cut interest rates again and possibly move further to calm overnight lending markets. The dollar strengthened. Contracts on the S&P 500 Index nudged lower as Fedex shares tumbled in pre-market trading after the company slashed its profit outlook, blaming a global economy weakened by trade tensions.
- Japanese stocks dropped, with the Topix index snapping an eight-day rally, before a Federal Reserve policy meeting that is widely expected to result in an interest rate cut. Energy explorers and producers fell after oil prices retreated as Saudi Arabia restarted a plant that was damaged in a weekend attack. Electric appliance makers slid. The U.S. central bank is broadly expected to cut rates by 25 basis points today, after the New York Fed injected billions in cash to quell a surge in short-term rates on Tuesday. The Bank of Japan will conclude a two-day policy meeting Thursday. The Nikkei 225 Stock Average dropped, halting its 10-day winning streak. A technical indicator known as the 14-day relative strength index was 76 for the Topix and 74 for the Nikkei 225 on Tuesday, above the level of 70 that indicates gains may have been too fast.
- Oil stabilized on signs Saudi Arabia is quickly restoring production following a debilitating weekend attack, after two tumultuous days in which it surged the most on record and then pared almost half of that gain. Brent slid on Wednesday, having tumbled the previous day as Saudi Aramco said it had revived 41% of capacity at a key crude-processing complex days after a devastating aerial attack that wrecked vital equipment and rockedworld energy markets. The global crude benchmark was back to about $64 a barrel after jumping to near $72 in reaction to the disruptions.
- Gold futures gained a second day after trading near the narrowest range in nearly a month ahead of the Federal Reserve’s key interest rate decision Wednesday. Prices traded within a roughly $14 range Tuesday as investors stayed on the sidelines, waiting for clues on monetary policy that could affect the appeal of the non-interest bearing precious metal. The Fed is widely expected to cut rates by a quarter-point with the option for further easing. Futures rallied at the start of the week as the strike on Saudi Arabia’s crude production fanned demand for havens.
- U.K. inflation fell to its lowest rate since the end of 2016, driven down by the price of computer games and clothing. Consumer prices rose 1.7% in August from a year earlier, down from 2.1% in July and well below the Bank of England’s 2% target, Office for National Statistics figures published Wednesday show. Core inflation slowed to 1.5%.
- Huawei Technologies Co. is offering up its most valuable 5G secrets and $1.5 billion to software developers, courting the global tech community at a time the U.S. is heightening scrutiny of the Chinese giant. China’s largest technology company aims to ramp up investment in its developer program over the next five years, Deputy Chairman Ken Hu told attendees at an annual conference. That effort is gaining urgency with Huawei in danger of losing access to American circuity and code, including the Google software it needs to run the world’s No. 2 mobile device business. Huawei is accelerating its outreach after the Trump administration imposed sanctions on the sale of U.S. technology, encouraging allies to cut ties with a Chinese company it accuses of aiding Beijing in espionage. In response, Huawei offered to sell a license to its vaunted fifth-generation wireless technology — needed to drive future modern economies — to create a viable competitor and prove its gear is free of security loopholes.
- President Hassan Rouhani said Iran is not looking for a war in the Gulf following weekend strikes on Saudi Arabia’s biggest oil installation, as the Islamic Republic sent a cable to Washington formally denying any role. The attacks raised the specter of a broader war in the Gulf as any military retaliation by the Saudis and their U.S. ally could draw in Iranian proxy groups around the region, and provoke a dramatic spike in oil prices at a vulnerable time for the world economy. The Iranian appeals come hours before Saudi Arabia unveils what it says is evidence of Iran’s involvement in the attack, which shook crude markets and slashed output at OPEC’s largest producer. U.S. Secretary of State Michael Pompeo is also due to arrive in the kingdom on Wednesday.
- FedEx Corp.’s cut to its fiscal 2020 earnings-per-share forecast prompted at least three Wall Street firms to downgrade the stock, saying the U.S. delivery company is facing strategy issues in addition to challenges from trade wars. Shares of FedEx were down 11% in premarket trading Wednesday after the profit warning, which it blamed on a weakening global economy “driven by increasing trade tensions and policy uncertainty.” Christian Wetherbee, an analyst at Citigroup Inc., called the outlook cut “drastic.”
- Orsted A/S, the world’s biggest offshore wind-park operator, has agreed to sell a number of assets tied to its former business model in a deal that lets it focus on renewable energy. The company is selling its power distribution business, Radius, and two other units for 21.3 billion kroner ($3.15 billion), it said on Wednesday. SEAS-NVE, a Danish energy company which already owns about 10% of Orsted, is the buyer. The deal is expected to close in the first half of next year, with Orsted guiding it will book a divestment gain of about 11-12 billion kroner.
- Turkey took its boldest step yet to clean up the growing pile of bad debt held by banks. The Banking Regulation and Supervision Agency, or BDDK, told lenders for the first time to reclassify 46 billion liras ($8.1 billion) of loans as non-performing by the end of the year and set aside enough provisions to cover them, it said in a statement late Tuesday. The reclassification of the loans, mostly to construction and energy firms, will bring the industry’s non-performing loan ratio to 6.3% this year, slightly higher than the watchdog’s December prediction of 6%. It also reduces banks’ capital adequacy ratio to 17.7% from 18.2%, the regulator said.
- If General Motors Co.’s negotiations with the United Auto Workers are any indication, Detroit’s automakers may not have a prayer in their effort to rein in rising health-care costs. As GM was nearing the expiration of its labor contract with the union last week, the carmaker sought to have hourly workers pay 15% of their health-care costs, according to people familiar with the talks. But by the time the company presented the UAW with a deadline offer, GM walked back the proposal and called for keeping contributions steady at about 4%, said the people, who asked not to be identified discussing private discussions. The quick cave on health costs still wasn’t enough to ward off a walkout by 46,000 GM employees. The episode is a bad omen for Fiat Chrysler Automobiles NV and Ford Motor Co., since the UAW typically tries to pattern contracts reached with Detroit carmakers after one another. Ford is expecting the insurance bill covering its 56,000 hourly workers to exceed $1 billion for the first time next year, Bloomberg News reported in March.
- Institutional investors with more than $16 trillion in assets under management, including Europe’s biggest asset manager Amundi SA, called on companies to implement anti-deforestation policies for their supply chains and report extensively on how they tackle the issue. The 230 investors, which also include BP Paribas SA and the California Public Employees’ Retirement System, signed a common statement in reaction to the fires that are raging in the Amazon. The initiative, coordinated by non-profit groups PRI and Ceres, is part of growing international pressure on Brazil to deal with the increase in blazes in the Amazon rainforest.
- Mark Carney may be asked to extend his term as Bank of England governor again if the U.K.’s exit from the European Union is delayed, according to the Financial Times. The prospect of an election in coming months is making the imminent naming of a successor less and less likely, meaning the former Bank of Canada chief could be asked to stay on beyond his current departure date of Jan. 31, the newspaper reported, citing unidentified government officials.
- India became the latest country to ban electronic cigarettes as concern grows worldwide over health risks associated with the smokeless nicotine devices popular with teenagers. The Indian government will ban the production and sales of e-cigarettes, it announced after a cabinet meeting Wednesday. Originally touted as a safer alternative to wean people off cigarettes, the e-cigarettes have come under widespread attack in America, especially for its appeal among young people. India’s decision shows that the industry is coming under scrutiny in other countries too, after the recent outbreak of a mysterious lung disease linked to vaping that has killed six people in the U.S. and afflicted hundreds of others.
- Toyota Motor Corp. and one of its top suppliers will invest a combined $791 million in Texas to build next-generation pickups as part of a drive to boost output in the U.S. and ease trade tensions with the Trump administration. The announcement Toyota is plugging $391 million into its San Antonio truck factory comes six months after the automaker pledged to shell out an additional $3 billion on its U.S. operations by 2021, a move seen as an effort to head off threatened U.S. tariffs on vehicles imported from Japan. That was on top of an earlier $10 billion pledge Toyota made shortly before President Donald Trump took office.
- Investors betting yields on long-term bonds will rise may have helped fuel the recent surge in money market rates, according to Coutts & Company Chief Investment Officer Alan Higgins. So-called 2s10s steepeners, where investors buy two-year U.S. Treasuries and sell 10-year notes, have become a popular macro trade among banks and some hedge funds, said Higgins. Most of these trades are funded through the repo market.
- Adobe Inc. shares fell in pre-market trading on Wednesday, after the software company reported third-quarter results that beat expectations but gave an outlook that fell short of Wall Street estimates. The tepid guidance was largely related to slower sales growth for Adobe’s marketing products, which offset strong results in its Digital Media business in the quarter. While at least two firms trimmed their price targets, the general takeaway was largely positive. Morgan Stanley wrote the results were “strong where it matters,” while Bernstein called the company “a unique investment opportunity” and inched its own target higher.
- Nissan Motor Co. is seeking to sell a wholly owned subsidiary that distributes vehicle parts and materials in a deal that may be valued at about $1 billion, as the struggling Japanese automaker seeks to slim down, people familiar with the matter said. The company has invited private equity and trading firms to bid for 100% of Nissan Trading Co., according to the people, who asked not to be identified because the information isn’t public. The buyer may be selected by as early as October, according to the people. The target valuation includes assumed debt, they said.
- This week’s volatile moves in U.S. money markets raise the odds that the Federal Reserve will start expanding its balance sheet, just weeks after it stopped running down its portfolio of bond holdings. That’s the take of some Fed watchers ahead of the central bank’s policy announcement on Wednesday, when the Fed’s Open Market Committee is forecast to lower its benchmark interest rate. Any move to resume balance-sheet expansion, however, would probably be entirely separate from a policy-based move to lower borrowing costs. Instead, it has everything to do with the mechanics of the financial system. The surge in money-market rates Monday and Tuesday could be a symptom that banks lack sufficient reserves — in other words, there’s just not enough cash in the system to prevent spikes in short-term rates caused by a confluence of certain transactions.
*All sources from Bloomberg unless otherwise specified