September 9th, 2019

Daily Market Commentary

Canadian Headlines

  • Friday the 13th could turn out to be Air Canada’s lucky day — that’s when S&P Dow Jones Indices will announce changes to the benchmark S&P/TSX 60 index. The betting favorite on trading desks is that the carrier will be among those added after a 72% rally this year. The index changes — important in the age of passive investing since they drive the composition of exchange traded funds — may turn out to be the biggest news in what’s expected to be a relatively quiet week. While Air Canada is seen as a winner, expect CannTrust Holdings Inc. to be among the losers after it fell beneath its listing price of C$2.50.

World Headlines

  • European shares started the week little changed, with a strong energy sector offsetting weakness in food and travel stocks. Brexit remains in focus after a turbulent week, with U.K. Prime Minister Boris Johnson sticking to his end-October deadline for an exit from the European Union. The Stoxx Europe 600 Index was up less than 0.1% as of 9:20 a.m. CET. The oil & gas gauge gained 0.9% and was the region’s top-performing sector after Saudi King Salman replaced the country’s energy minister with one of his sons. Total SA and BP Plc were among the risers. Among the biggest losers, Lloyds Banking Group Plc dropped 1.9% after it suspended a buyback.
  • U.S. stock-index futures climbed with equities in Asia as traders weighed a series of fresh stimulus moves expected from the world’s central banks. Shares fluctuated in Europe, where bonds slipped alongside Treasuries. Contracts on the three main U.S. stock gauges advanced after Federal Reserve Chairman Jerome Powell on Friday gave his last speech before the next policy meeting and cemented views for another interest-rate reduction.
  • Earlier in Asia, Japanese stocks led increases in the region. The Stoxx Europe 600 Index swung between modest losses and gains.
  • Oil rose for a fourth day after Saudi Arabia’s new energy minister signaled that OPEC and its allies will continue with production cuts as the group prepared to gather in Abu Dhabi. Futures added 0.9% after climbing 2.6% last week. Prince Abdulaziz bin Salman, appointed at the weekend after Saudi King Salman dismissed Khalid Al-Falih, said there will be no radical change in the policy of OPEC+, which has cut crude production this year to prevent a glut and shore up prices. The United Arab Emirates energy minister promised a push to get all members committed to curbs, but said there’s no recommendation to make deeper reductions.
  • Gold prices were steady near a two-week low. Sentiment is still leaning bullish as recent data points to strong demand for the metal. China’s central bank raised bullion holdings for a ninth month as the trade war supports the case for countries to diversify their reserves. Money managers pushed bullish bets on gold to a fresh all-time high in the week through Sept. 3, according to CFTC data dating back to 2006. The focus this week will shift to the European Central Bank’s policy meeting on Thursday, where officials are widely expected to consider cutting rates and quantitative easing.
  • The pound rallied to the highest since July after U.K. Prime Minister Boris Johnson emphasized he wanted to get a Brexit deal before next month’s deadline. Sterling led gains in the Group-of-10 after Johnson said at a press conference with his Irish counterpart Leo Varadkar that he would “overwhelmingly prefer” to get a deal by October. The currency had already been bolstered by better-than-expected data that eased concerns that the U.K. may be facing a pre-Brexit recession.
  • The U.K. economy grew at its fastest pace in six months in July, an unexpectedly strong performance that will allay fears Britain is facing a possible pre-Brexit recession. The economy recorded growth across the board, with the dominant services sector enjoying its best month this year. All else being equal, it will expand 0.4% in the third quarter even if output is unchanged in August and September, avoiding a second straight quarter of contraction.
  • Air France-KLM shares dropped the most in six months after the Franco-Dutch carrier said last-minute demand in the crucial summer season has been disappointing. “Close-in bookings in the peak travel period are weaker than foreseen in view of softening macro-economic environment,” the Paris-based airline said in a statement on its August figures Monday. The shares fell as much as 9.6%, the steepest decline since Feb. 27, after the carrier added seats faster than demand grew, leading to a drop in occupancy levels even as passenger numbers edged higher. The stock traded 8.3% lower at 9:07 euros as of 11:01 a.m. in Paris.
  • The S&P 500 made 13 all-time highs this year and, if the futures’ gain of 0.2% holds, the main gauge will finish the day just 1.2% away from a record. Small caps, however, face an entirely different circumstance, as the last time that index reached a record was one year and one week ago, on Aug. 31, 2018. They may finally be staging a turnaround. Investors put $1.5 billion into the iShares Russell 2000 exchange-traded fund last week in what was the biggest weekly inflow into the fund since October 2018. This comes after the largest ETF tracking the iShares Russell 2000 Index fell 4.9% in August, trailing the SPY ETF by 3.3 percentage points, the most in five months.
  • The moment usually comes during Greg Petras’s commute through the rolling hills and cornfields of southern Wisconsin. Somewhere between his home near Madison and the factory he runs on the edge of the small town of Brodhead, the news will turn to the trade wars and Donald Trump will again claim that China is bearing the cost of his tariffs. That’s when Petras loses it. “It’s just an outright lie, and he knows it,” says Petras, president of Kuhn North America, which employs some 600 people at its farm-equipment factory in Wisconsin. For Kuhn, Trump’s trade war has produced a toxic mix of rising costs and falling revenues. “You’re slamming your fist on the steering wheel and saying ‘Why would you tell people this?’”
  • Lloyds Banking Group Plc suspended its share buyback after a last-minute rush of compensation claims for mis-sold payment protection insurance, taking its total costs for the scandal to 21.8 billion pounds ($26.7 billion). Lloyds shares fell as much as 2.5% in London. The bank is making a further provision of between 1.2 billion pounds and 1.8 billion pounds in the third quarter after claims were as much as four times higher than expected, according to a statement Monday. The PPI scandal is the most expensive in history for U.K. banks, and while regulators had urged the public to seek redress for years through high-profile advertising campaigns, the surge before the August 29 cutoff caught lenders flat-footed. Last week, Royal Bank of Scotland Group Plc said it plans to set aside as much as 900 million pounds more for PPI, while CYBG Plc, the owner of the Virgin Money brand, plunged after adding to its provisions.
  • Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the second 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 $74.9 million in the week ended Sept. 6, compared with gains of $69.4 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $381.9 million.
  • Car sales in India suffered their biggest monthly drop on record, as the slump in the country’s auto sector shows no sign of letting up. Deliveries slid 41% in August from a year earlier to 115,957 units, while sales of passenger vehicles including SUVs fell 32%, according to datareleased by the Society of Indian Automobile Manufacturers on Monday. Truck and bus sales dropped 39%, and two-wheeler sales — a key indicator of demand in rural India — fell 22% to 1.5 million units.
  • Typhoon Faxai hit Japan on Monday, forcing closures at factories owned by Nissan Motor Co. and Sony Corp., and disrupting morning commutes for thousands of residents. The season’s 15th typhoon made landfall in Chiba prefecture early in the morning. Since then it has been downgraded to a Category 1 storm and was hovering near Iwaki in Fukushima prefecture, heading northeast at about 30 kilometers per hour as of 12:00 p.m. local time, according to the Japan Meteorological Agency.
  • Saudi Arabia held discussions with some of the kingdom’s wealthiest families about becoming anchor investors in Aramco’s mammoth stake sale, according to five people with knowledge of the talks. Saudi officials made initial contact with some top business families on behalf of the oil giant, the people said, asking not to be identified because the information is private. Aramco may hold more formal meetings as early as next week after banks have been hired for the sale, three of the people said. The kingdom is aiming to raise at least 1% to 2% of Aramco from these investors, according to one of the people. The amount each family invests will likely hinge on the company’s valuation, another person said.
  • The contraction in China’s trade in August underscored what economists were already saying about the government’s stimulus efforts: they’re not yet enough to put a floor under the slowing economy. Data released Sunday showed that exports decreased 1% in dollar terms from a year earlier last month, a period when companies could have been expected to try to increase cargoes to the U.S. ahead of higher tariffs that kicked in Sept. 1. Instead, a 16% contraction in shipments to the U.S. highlighted the damage that the trade war is doing.
  • Apple Inc. and manufacturing partner Foxconn violated a Chinese labor rule by using too many temporary staff in the world’s largest iPhone factory, the companies confirmed following a report that also alleged harsh working conditions. The claims came from China Labor Watch, which issued the report ahead of an Apple event on Tuesday to announce new iPhones. The non-profit advocacy group investigates conditions in Chinese factories, and says it has uncovered other alleged labor rights violations by Apple partners in the past.
  • Pacific Life Insurance Co. will sell the remaining 75.5% of its plane-leasing arm for $3 billion to Tokyo Century Corp. The sale of Aviation Capital Group, which owns about 500 aircraft including the best-selling Airbus SE A320 and Boeing Co. 737 jets, is expected to be completed in the fourth quarter, according to a statement on Monday. Tokyo Century first bought a 20% stake in the plane lessor, which lends planes to about 90 airlines in 45 countries, from Newport Beach, California-based Pacific Life in 2017 and then increased its stake to 24.5%.

*All sources from Bloomberg unless otherwise specified