August 27th, 2019

Daily Market Commentary

Canadian Headlines

  • Canadian stocks closed higher, following U.S. shares up after optimistic remarks from French and U.S. leaders about developments in the Sino-American trade war. The S&P/TSX Composite Index climbed 0.4% to 16,098.79. Shopify Inc. advanced 3.1%, leading information technology stocks higher. Consumer discretionary and staples also rose. On the commodities front, gold erased gains after U.S. President Donald Trump said China wants to make a deal on trade, while oil dropped amid conflicting signals about the prospect for a thaw in trade talks.
  • Bank of Nova Scotia is benefiting from its sharpened focus on Latin America. Scotiabank has announced exits from 20 countries and redeployed about C$7 billion of capital in the past four years to focus on key areas such as Mexico, Peru, Chile and Colombia, bringing its international presence down to 34 countries. Still, Scotiabank’s international banking division earned C$902 million ($681 million), up 90% from a year ago to mark the biggest profit gain among the lender’s three main segments. That helped the company beat analysts’ estimates.
  • Bank of Montreal’s Canadian retail bank has finally taken back the spotlight from its U.S. counterpart as the company missed earnings estimates. The lender’s U.S. personal-and-commercial banking division, which includes Chicago-based BMO Harris Bank, has increased profit at a faster pace than its Canadian retail bank since the beginning of fiscal 2018. That ended in the fiscal third quarter, with earnings growth in the U.S. division rising 1.1% from a year earlier, matching the expansion at the company’s Canadian retail bank.
  • Teck Resources reports electrical equipment failure affecting one of four rectifiers used in the zinc refinery in Trail, British Columbia. Repairs expected to take up to 20 weeks. During this time, refined zinc metal production at Trail will be limited to three of the four cell houses

World Headlines

  • European stocks dropped as U.S.-China trade tensions remained clouded with uncertainty and data showed a collapse in German exports. The Stoxx Europe 600 fell 0.2% as of 8:06 a.m. in London, even after the S&P 500 staged a solid rebound in the prior session. The FTSE 100 fell 0.4%, as U.K. markets re-opened after a holiday on Monday. The DAX slipped 0.3%.
  • U.S. equity futures drifted Tuesday while stocks climbed in Europe as investors digested the ever-evolving China-trade narrative. Treasuries nudged higher while the dollar dipped. Contracts on the three main U.S. indexes fluctuated in the hours after U.S. President Donald Trump left the G-7 summit taking a softer tone toward China.
  • In Asia, shares climbed broadly except for Hong Kong. Italy’s sovereign bonds advanced as two political parties struggled to form a coalition to avoid early elections. Britain’s pound rose as the opposition Labour party stepped up efforts to stave off a no-deal Brexit. Japan’s Topix index rebounded a day after dipping to its lowest in more than seven months as investors weighed the latest remarks from President Donald Trump on the U.S.-China trade dispute.
  • Oil rose after four days of losses as President Donald Trump gave mixed signals on resolving the trade dispute between the U.S. and China. Futures in New York increased as much as 1.3% after falling 4.8% over the previous four sessions. Trump struck a more conciliatory tone at the Group of Seven meeting in France, praising the willingness of China’s top trade negotiator, Vice Premier Liu He, to find a solution to the dispute. However, he didn’t indicate he planned to back down in the prolonged dispute. Equity markets retreated on Tuesday.
  • Gold climbed following a roller-coaster ride on Monday as investors weigh the state-of-play in the trade war, including the possibility of more tariffs within days. President Donald Trump left the G-7 summit taking a softer tone toward Beijing just days after spooking financial markets with another escalation in their drawn-out trade war. Still, Trump also made it clear that he wasn’t abandoning his rough-and-tumble tactics to force a trade agreement on Asia’s top economy.
  • Japan signaled it wanted to lay to rest the threat of new auto tariffs before agreeing to a final trade deal with U.S. President Donald Trump, after he left the door open for slapping levies on the nearly $50 billion sector. Trump said he was not considering imposing punitive duties “at this moment,” after he and Prime Minister Shinzo Abe over the weekend announced an agreement-in-principle on trade, which they aimed to formalize in late September. The U.S. president kept the tariff threat alive by saying he could still impose the levies at a later date.
  • A collapse in exports pushed Europe’s largest economy to the brink of recession in the second quarter. In a sign that an increasingly hostile trade war between the U.S. and China is at least partially to blame for Germany’s deepening manufacturing malaise, shipments abroad declined 1.3%, the most in more than six years. That led to a contraction in total economic output — the second over the past year.
  • Norway’s wealth fund proposed overhauling how its holdings are placed across the globe, calling for a shift away from Europe in a move that would allow it to boost its U.S. holdings by as much $100 billion and take a larger chunk of the biggest technology companies. In a letter sent to the Finance Ministry released on Tuesday, the $1 trillion fund said that its holdings “should be adjusted further towards float-adjusted market weights by increasing the weight of equities in North America and reducing the weight of equities in European developed markets.” The response comes after the ministry last year asked the fund to review the geographical weighting that had been in place since 2012. The ministry on Tuesday said it would present its response in the “spring of 2020” and that any changes would be implemented gradually.
  • OPEC and its allies expect to deplete the global surplus in oil stockpiles sharply as demand holds up and the coalition cuts production by far more than initially planned. Saudi Arabia, Russia and other producers in the OPEC+ alliance have slashed crude output this year to shrink the glut amid faltering economic growth and soaring U.S. shale output. Results have been mixed, with oil prices down more than 20% from this year’s peak, trading at about $59 a barrel in London. In response, the Saudis have reduced output by far more than pledged under the terms of the deal, and the coalition’s overall implementation rate last month was 59% above target, according to a statement posted on its website on Tuesday. That means the alliance cut supplies by about 1.9 million barrels a day.
  • President Donald Trump left the G-7 summit on Monday taking a softer tone toward China, just days after spooking financial markets with another escalation in their trade war. Yet amid all the soothing words, Trump made it clear that he wasn’t abandoning his rough and tumble tactics to force a trade deal on China. After spending a weekend listening to fellow Group of Seven leaders urging him to ease tensions with China, Trump pointed to recent calls and an amiable speech by China’s top negotiator as signs Beijing wanted a deal. He shrugged off, however, the uncertainty his trade war has caused and showed no signs of backing down in an increasingly bitter trade dispute that’s chipping away at global economic growth and sending world markets tumbling.
  • India is considering pruning its budget borrowings after Reserve Bank of India agreed to pay a record 1.76 trillion rupees ($24 billion) to the government, people with knowledge of the matter said. The government has not taken a final decision yet but is keen on lowering the budget gap by utilizing the funds, the people said asking not to be identified as the matter isn’t public. Finance Ministry spokesman Rajesh Malhotra was not immediately available for a comment. The other option is a stimulus package where the government boosts spending, which isn’t preferred, the people said. That’s because the finance ministry thinks there isn’t enough fiscal space to make a stimulus effective as the federal budget had already accounted for 900 billion rupee inflow from the central bank, they said.
  • A plunge in fuel oil margins driven by impending environmental rules for shipping is beginning to take its toll on heavier grades of crude. The value of sludgier varieties of oil, typically used to make dirty products such as fuel oil to power ships, is eroding before the standards that take effect in January. International Maritime Organization rules, known as IMO 2020, will mandate the use of cleaner alternatives like gasoil or very low-sulfur fuel oil. IMO 2020 has spurred a plunge in profit margins from turning Dubai crude into fuel oil in Asia from a premium of $5.47 at the end of July to a discount of $10.16 on Aug. 14. That’s translating into waning demand for viscous oil, with Iraq selling an October-loading shipment of Basrah Heavy, a heavy-sour grade, on Wednesday at a premium of only a third of the last sale a week earlier.
  • Helios Towers Plc, one of sub-Saharan Africa’s largest mobile-phone tower operators, and French glass bottle maker Verallia are gearing up to kick off their initial public offerings in the next few weeks as Europe’s equity markets return from vacation. Helios is preparing to launch its London IPO as early as September and could seek a valuation of as much as $3 billion, people familiar with the matter said, asking not to be identified because the information is private. The company is working simultaneously on listings in London and Johannesburg, though the U.K. portion of the deal may proceed first, the people said.
  • American companies still have work to do in slimming inventories even after making some headway in the second quarter, indicating that further efforts to trim bloated stockpiles could weigh on the economy. The value of unsold durable goods at U.S. factories increased 0.4% in July from the prior month — the 11th straight rise — after a 0.3% advance a month earlier, Commerce Department data showed Monday. The report also showed shipments of non-defense capital goods excluding aircraft, a proxy for business spending on equipment used to calculate quarterly gross domestic product, slumped by the most since October 2016. Inventories of all durable goods would last 1.68 months, the longest since November 2016.
  • China rolled out a series of guidelines to encourage consumption, led by support for the flagging auto market. The measures include exploring ways to gradually loosen or remove car purchase limits and support new-energy vehicle purchases in some areas, the State Council, or cabinet, said on its website on Tuesday. Other steps include incentives to build more gas stations in rural areas and removing hurdles to invest in fuel wholesale and storage businesses. For automakers, the move provides some relief with the industry reeling from a slump that’s dragged on for more than a year. More broadly, China is stepping up targeted stimulus measures to support the economy, which has been slowing due to the effects of weak domestic demand and a worsening dispute over trade with the U.S.
  • China declined to confirm phone calls with the U.S. that President Donald Trump claimed happened over the weekend, during which Trump said China indicated it wanted to work toward a trade deal. “I’m not aware of that,” Chinese Foreign Ministry spokesman Geng Shuang said at a regular briefing in Beijing on Tuesday. “Regretfully the U.S. has announced its decision to add new tariffs on Chinese products. Such maximum pressure will hurt both sides and is not constructive at all.” On Monday, Trump said the prospects for a deal with China are better now than at any time since negotiations began last year, even as a top state-media editor in Beijing questioned his version of events. Tensions between the world’s two biggest economies have escalated in recent days after both sides announced new tariffs on each other’s goods and Trump called for American companies to leave China.

*All sources from Bloomberg unless otherwise specified