August 22nd, 2019

Daily Market Commentary

Canadian Headlines

• Canada’s equities benchmark gained, propelled by financial stocks, despite an earnings miss by Canada’s largest bank. The S&P/TSX Composite Index gained 0.6% to 16,309.23. Energy stocks rose 1% after the oil-rich province of Alberta extended its output cuts by a year to December 2020, a move that could help support Canadian crude prices. Financials also gained, adding 0.6%. Royal Bank of Canada rose 0.6% despite reporting fiscal third-quarter earnings that missed estimates. It did, however, see improvements in expenses and provisions, two areas of concern for investors.
• Canadian Imperial Bank of Commerce is seeing an uptick in bad loans, providing validation to short-seller concerns that credit conditions are worsening. Investors and analysts have been watching for signs of deteriorating loans since short sellers earlier this year said that CIBC and other banks are ill-prepared for worsening credit conditions. CIBC’s soured-loan provisions totaled C$291 million ($219 million) in the fiscal third quarter, compared with C$255 million in the previous three months and up 21% from a year earlier.
• Capital keeps marching out of Canada’s oil industry, with Kinder Morgan Inc.’s sale of its remaining holdings in the country on Wednesday adding to more than $30 billion of foreign-company divestitures in the past three years. Pembina Pipeline Corp., based in Calgary, is snapping up Kinder’s Canadian assets and a cross-border pipeline in a $3.3 billion deal. For Houston-based Kinder, the deal completes an exit from a country that has frustrated more than a few companies — from ConocoPhillips and Royal Dutch Shell Plc to Marathon Oil Corp. The drumbeat of exits, rare for such a stable oil-producing country, adds an extra layer of gloom for an industry that accounts for about a fifth of Canada’s exports. The energy sector — centered around Alberta’s oil sands — has struggled to rebound since the 2014 crash in global oil prices, with capital spending declining for five straight years and job cuts pushing the province’s unemployment rate above 6%. Alberta is forecast to post the slowest growth of any region in Canada this year.
• It makes up almost 6% of Canada’s stock market and is the best-performing sector this year. That’s right: technology stocks have climbed a massive 59% in 2019 — more than double the next-best industry group on the S&P/TSX Composite Index. In fact, tech’s share of the benchmark index has grown at the fastest rate among all sectors in the past four years, according to data compiled by Bloomberg.

World Headlines

• The Stoxx Europe 600 Index also fell along with the euro following mixed PMI data across the continent. Earlier in Asia, Hong Kong shares saw the biggest drop while China edged higher and Japan closed flat. Treasuries were steady, and European sovereign bonds mostly declined after the regional manufacturing and services data.
• U.S. equity futures slipped with stocks as traders parsed European economic data and awaited an address by the Federal Reserve chief on Friday. The dollar climbed with oil futures, while gold dipped. Contracts on the three main U.S. equity indexes turned modestly lower after fluctuating earlier in the session. Trading activity in the U.S. has been light this week ahead of Fed Chairman Jerome Powell’s address on Friday at the annual Jackson Hole gathering. Traders are looking forward to Powell’s speech tomorrow while digesting the diverse views from Fed officials found in the previous meeting’s minutes, which highlight the difficult choices they face before the next policy decision in September.
• Japanese stocks closed barely in the green as investor focus shifted to what Federal Reserve Chairman Jerome Powell might say about monetary policy at the Jackson Hole conference on Friday. The chemical and auto groups were the biggest boosts to the Topix index, while electronics and precision instrument makers dropped. U.S. equities rose Wednesday following better-than-expected results from retailers Target Corp.and Lowe’s Cos. A report showed sales of previously owned U.S. homes increased in July to a five-month high.
• Oil steadied after its first drop this week as attention turned from expanding American fuel stockpiles to the prospects for monetary easing as the world’s top central bankers gather in Jackson Hole, Wyoming. Futures added 0.4% to trade near $56 a barrel in New York. Investors anticipate another rate cut at the Federal Reserve’s Sept. 17-18 meeting and will be closely watching Chair Jerome Powell’s speech Friday at the annual policy retreat. Prices declined on Wednesday, spurred by a surprise jump in U.S. diesel and gasoline inventories.
• Gold fell for a second day to trade below $1,500 as investors await a key address by Federal Reserve Chairman Jerome Powell at the annual Jackson Hole gathering on Friday. Investors are also digesting minutes from the central bank’s July 30-31 meeting that showed that Fed officials viewed their first interest-rate cut in more than a decade as insurance against too-low inflation and the risk of a deeper slump in business investment. Inflows into gold exchange-traded funds hit 1,000 tons since holdings bottomed in 2016 after a prolonged unwind in the wake of the global financial crisis.
• German manufacturers are reinforcing concern that Europe’s largest economy is headed into a recession. A nationwide gauge showed orders at factories and services companies are dropping at the fastest pace in six years, and more companies now expect output to fall than rise over the next 12 months. That’s the first time that’s happened since 2014, according to the Purchasing Managers’ Index from IHS Markit.
• European Central Bank officials expressed concern at their latest policy meeting that some observers doubted their ability to restore price stability, prompting the Governing Council to plan for potential fresh monetary stimulus. Council members broadly agreed that a downward trend in inflation expectations was a cause for concern, and that the euro area’s economic slowdown was likely to be more protracted than expected. While external factors such as trade tensions were driving a contraction in manufacturing, that could be a leading indicator for the services sector, according to the account of the July 24-25 session. Prospects for global trade “remained poor.”
• Federal Reserve officials viewed their interest-rate cut last month as insurance against headwinds from the trade war and low inflation — reasons that look even sharper as they move toward their meeting in September. Minutes of the Federal Open Market Committee’s July 30-31 meeting released Wednesday in Washington laid out the reasons for the quarter percentage-point cut, highlighting risks to the outlook even though the U.S. economy, for now, is performing well. Investors fully expect another rate cut at the Fed’s Sept. 17-18 meeting and further easing this year. A big clue could come from Chairman Jerome Powell when he speaks on Friday at the Kansas City Fed’s annual policy retreat in Jackson Hole, Wyoming.
• Amazon.com Inc., criticized for wielding too much power over third-party merchants on its marketplace, said it will spend some $15 billion this year to help them boost sales. The sum, which Amazon hasn’t previously disclosed, includes spending on the portions of the company’s warehouse network dedicated to storing and shipping seller items, and salaries for the engineers, managers and support staff who work on teams geared toward Amazon’s thousands of third-party sellers. It also includes the cost of developing new services, such as a dashboard that helps sellers decide what new products to carry, and a revamped training program. Nicholas Denissen, a vice president, declined to say how the company’s anticipated $15 billion in spending had changed from 2018 or what portion of Amazon’s companywide expenses it represents. “I would say it’s a lot of money,” he said.
• Russia is once again producing more oil than it pledged to under the OPEC+ deal as the impact of the Druzhba contamination crisis fades. The country’s average daily oil output was about 1.545 million tons between August 1 and 21, according to calculations based on the Energy Ministry’s CDU-TEK statistics, seen by Bloomberg. This equates to about 11.327 million barrels a day, using the standard 7.33 barrels-per-ton conversion ratio, and is the highest since February. So far, Russia’s crude production in August is about 91,000 barrels a day below the country’s output in October 2018. That’s compared to the 228,000-barrel a day cut it pledged under the agreement with the Organization of Petroleum Exporting Countries and its allies.
• A Zurich-based fintech firm whose investors include Josef Ackermann has raised additional money to value the company at more than $1 billion as it prepares to expand outside its main market of Germany. Numbrs Personal Finance raised $40 million to bring the total capital invested to almost $200 million, Chief Executive Officer Martin Saidler said in an interview. Numbrs offers an app that enables users to manage their existing bank accounts in one place and to buy financial products.
• Indonesia unexpectedly cut interest rates for a second straight month to spur an economy facing increasing risks from a global slowdown and intensifying trade war. Bank Indonesia lowered its seven-day reverse repurchase rate by 25 basis points to 5.5% on Thursday, a move predicted by only 13 of the 34 economists surveyed by Bloomberg. The majority expected the bank to keep policy unchanged after it lowered rates for the first time in almost two years in July.
• Tokyo is about to get another mound of capitalism. Mori Building Co. is spending 580 billion yen ($5.4 billion) on a new, 20-acre hub of commerce in the city’s core. Similar in size to New York’s Rockefeller Center, the complex will have shops, restaurants, 213,900 square meters of office space, 1,400 residences, a world-class hotel, an international school and the city’s biggest food court.
• Hong Kong stocks are poised for their worst quarter since 2015 and corporate earnings are unlikely to save them. After a sell-off erased more than $600 billion from the city’s equities, attractive valuations stood as a potential bright spot. But those multiples don’t look so good when analysts keep slashing their profit forecasts for 2019. Their call for an average 19% slump in operating income would be the biggest contraction for Hang Seng Index companies since the global financial crisis, data compiled by Bloomberg show.
• Gold’s faring extremely well as a haven asset, with inflows into exchange-traded funds hitting 1,000 tons since holdings bottomed in early 2016 after a prolonged unwind in the wake of the global financial crisis. Total known ETF holdings expanded to 2,424.9 tons on Wednesday, the highest since 2013, following inflows over the past three years and a continued build-up in 2019, according to data compiled by Bloomberg. Current assets are about 1,000 tons higher than the post financial crisis nadir of 1,425.1 tons.
• Societe Generale SA is considering options for its Lyxor asset-management business, which oversees about 151 billion euros ($167 billion), as the company accelerates asset disposals, according to people familiar with the matter. The French bank is weighing alternatives for the unit, including a sale or merger, amid heavy competition in the asset-management industry, the people said, asking not to be identified because the deliberations are private. No final decisions have been made and France’s third-largest bank may still decide to retain the business, they said.
• Apple Inc. is readying a clutch of new hardware for the coming weeks and months, including “Pro” iPhones, upgrades to iPads and its largest laptop in years. The Cupertino, California-based technology giant is planning to announce three new iPhones at an event next month, according to people familiar with the situation. The handsets will likely go on sale in September, contributing to fiscal fourth-quarter sales. But the real test will come in the crucial holiday season. That’s when the company is banking on a combination of new hardware, software and services to drive revenue higher, following a huge miss at the end of last year.
• South Korea said it would withdraw from an intelligence-sharing agreement with Japan, extending their feud over trade measures and historical grievances into security cooperation. South Korea will file a notice to withdraw from the three-year-old framework for exchanging classified military information with its neighbor, Deputy National Security Director Kim You-geun said. The move came despite the urging of U.S. officials including President Donald Trump for the two allies to work together amid shared security challenges from China and North Korea.
• Mexico’s consumer prices unexpectedly fell in early August, sending the annual rate to its lowest level since 2016 and increasing chances the central bank will cut interest rates for a second straight time next month. Consumer prices decreased 0.08% from the previous two weeks, surprising all economists in a Bloomberg survey, the national statistics agency reported Thursday. Prices rose 3.29% from a year earlier, down from 3.72% in the second half of July. The median estimate of economists surveyed by Bloomberg was for a 3.50% increase. The central bank targets inflation at 3%.
• HSBC Holdings Plc, the bank that shook up its senior leadership this month, is considering a bid for Asian operations being sold by Aviva Plc as it seeks ways to diversify its business in the region, people with knowledge of the matter said. London-based HSBC is in the early stages of weighing an offer for at least part of Aviva’s Asian business, the people said, asking not to be identified because the information is private. A deal would help HSBC bolster its insurance presence in Singapore and other parts of Southeast Asia, the people said.

*All sources from Bloomberg unless otherwise specified