December 12th, 2019

Daily Market Commentary

Canadian Headlines

  • Canada’s stock market is on pace for its biggest gain in a decade. But 2020 may be the year it stands above the pack. Despite an 18% climb so far in 2019 with 15 fresh records and $408 billion in market value added, the S&P/TSX Composite Index is in the middle of the pack compared with top-performing stock markets. Its American counterpart, the S&P 500, has risen 25% in a bull market that everyone thought was living on borrowed time. Even stocks in resource-heavy Australia and New Zealand have done better.
  • Companies, workers and lawmakers in three countries have spent the past year in limbo awaiting final touches on the U.S.-Mexico-Canada free-trade agreement. Now they have a better sense of who won — and who lost. The accord awaits a vote next week in the U.S. House of Representatives, where Democrats successfully wrung last-minute revisions to ensure its passage. The U.S. Senate plans to vote in 2020, while legislatures in Mexico and Canada will also have to ratify the updated agreement. While the so-called USMCA deal marks a political win for President Donald Trump as he seeks re-election, the overall benefit to U.S. GDP is small: a 0.35 % increase in the agreement’s sixth year, according to official U.S. estimates. Yet, like all trade deals, this one creates winners and losers in the business community. The countries’ political leaders, steel industries and online shoppers stand to benefit, while U.S. drug companies, Mexican businesses, Canadian dairy farmers come off second-best.

World Headlines

  • European shares gained slightly after the U.S. Federal Reserve indicated interest rates will remain unchanged, with investors now turning their eyes to the U.K. general election and global trade. The Stoxx Europe 600 Index rose 0.2% at 8:05 a.m. in London. Balfour Beatty Plc was the best performer, climbing around 4% after a profit update. In other news, DNB ASA said it will boost share buybacks. Most sectors gained, led by technology.
  • U.S. equity futures drifted alongside stocks in Europe on Thursday as investors count down to another major monetary policy decision. Treasuries were steady while euro-area bonds edged upward before the region’s central bank sets interest rates. Contracts on the S&P 500 index were slightly firmer a day after the underlying gauge rose for the first time this week in the wake of the Federal Reserve’s final policy gathering of the year. The yield on 10-year Treasuries fluctuated around 1.79% amid bets the bar will be high for any future U.S. rate hikes.
  • Earlier in the day, equities in Hong Kong and Seoul outperformed, while they slipped in Tokyo, Shanghai and Sydney. The Hong Kong dollar climbed into the stronger half of its trading band against the greenback for the first time since July. The Fed’s outlook was taken as mildly bullish on Wednesday for both Treasuries and stocks. Investors are now shifting their focus from Washington to Frankfurt, where Christine Lagarde will give her debut press conference as ECB President on Thursday. Lagarde has pledged a wide strategy review, and said that current monetary stimulus will remain in place.
  • Oil rebounded from the previous session’s loss, though the outlook remained clouded by rising U.S. stockpiles and concern that OPEC and its allies aren’t taking enough action to balance the market. Futures added 0.6% to trade near $59 a barrel. American gasoline inventoriessurged the most since January as demand slumped to a three-year low, and crude stockpiles unexpectedly increased, according to the U.S. Energy Information Administration. Deeper production cutbacks announced by OPEC and its partners last week won’t prevent a surplus in early 2020, the International Energy Agency said.
  • Gold held a gain as investors weighed the Federal Reserve’s signal that it would keep interest rates on hold through 2020. Palladium notched a fresh record. Comments from Fed Chairman Jerome Powell boosted bets that the bar for an increase in rates remains high as economic growth is steady without fueling inflation. In the first unanimous vote since May, central bank officials left rates unchanged at their gathering on Wednesday, following three consecutive cuts.
  • Chinese leaders who gathered in Beijing this week to chart a course for economic policy next year are used to doing so with precision, right down to the percentage point. At the confab — a byproduct of Communist central planning — President Xi Jinping’s government is setting targets for everything from GDP to inflation. This year, the trade war with the U.S. has thrown a spanner in their well-oiled machine. With a deadline for higher U.S. tariffs on Chinese goods just a few days away, the Communist Party apparatchiks are just as much in the dark about how the trade war will pan out as everyone else. But the wait for clarity might soon be over. There’s expected to be a closed-door meeting today at the White House to discuss how President Donald Trump, still apparently undecided, will proceed before more tariffs take effect Sunday.
  • Saudi Aramco shares jumped for a second day, with the oil giant’s value hitting the $2 trillion mark that alienated global investors and potentially making further share sales abroad more difficult. The stock climbed by the daily 10% limit to 38.7 riyals at the open in Riyadh before trimming gains. It was up 5.8% at 37.20 riyals at 1:54 p.m. local time in trading of 381 million shares, compared with 31.6 million for all of Wednesday.
  • Bangkok Bank Pcl snapped up a controlling stake in Indonesia’s PT Bank Permata for about $2.7 billion in the first major purchase of an overseas lender by a Thai bank. The purchase of a near 90% holding from Standard Chartered Plc and a local partner fits with Bangkok Bank’s strategy of transforming into a regional lender with a larger presence in Southeast Asian markets, according to a filing. Indonesia is a “highly attractive and fast growing market,” it said. Standard Chartered’s disposal of its stake, which will net about $500 million, comes as no surprise after the bank signaled in February that Permata is no longer core. The funds may be used to extend the emerging-markets lender’s share repurchase program, which has already returned $1 billion. Its shares climbed more than 2% in London.
  • Apple Inc.’s most-important product, and the supply chain that underpins its success, may be about to avert a margin-crushing threat. At least for a while. A 20-month trade war between the U.S. and China came to a head this week as a key deadline looms. This Sunday, 15% tariffs are due to kick in on the iPhone. Chinese officials expect U.S. President Donald Trump to delay the import duties, granting Apple a temporary reprieve. But negotiations have been fraught with missed deadlines and surprise about-faces.
  • India’s headline inflation surged to a more than three-year high, further narrowing the room for monetary easing after the central bank’s surprise pause on interest rates last week. Consumer prices rose 5.54% in November from a year earlier, the Statistics Ministry said in a statement on Thursday. This was faster than the 5.3% median estimate in a Bloomberg survey of 39 economists and the highest print since July 2016.
  • A major Chinese commodities trader became the biggest dollar bond defaulter among the nation’s state-owned companies in two decades, in a moment of reckoning for Beijing as it struggles to contain credit risk in a weakening economy. Tewoo Group Corp. announced results of its unprecedented debt restructuring, which saw a majority of its investors accepting heavy losses. This is expected to reshape investors’ perceptions about government-owned borrowers whose identity has for years offered a relatively strong sense of security.
  • Chinese President Xi Jinping plans to announce policies aimed at diversifying Macau’s economy beyond gaming, Reuters reported, in a nod of support as unrest continues to trouble neighboring Hong Kong. The policies include establishing a yuan-denominated stock exchange, accelerating a yuan settlement center which is currently being developed and allocating land for Macau, Reuters said, citing unidentified government officials and company executives. The measures were intended to mark the 20th anniversary of the former Portuguese colony’s return to Chinese rule, an event that will bring Xi to Macau, the report said.
  • JPMorgan Chase & Co. is recommending a risk-on investment allocation for 2020 as the global economy gathers momentum in the wake of the slowdown of recent months. Stocks are a common theme across the Wall Street giant’s top trades, including bets on Japanese banks, German equities and emerging markets, a note by strategists including Nikolaos Panigirtzoglou, Marko Kolanovic and John Normand showed Wednesday. The firm maintains an underweight position in bonds, particularly in high-grade corporate credit, and advised betting on gold to slide.
  • China Three Gorges Corp. is considering a revamp of its multibillion-dollar overseas asset portfolio, according to people familiar with the matter. The state-owned energy giant is working with advisers on setting up an entity to hold the international assets, said the people, who asked not to be identified as the discussions are private. Strategic investors could be brought into the new holding company, while the company might consider a listing of the unit or some of the assets at later stage, the people said. Deliberations are at a preliminary stage and there hasn’t been any final decision on the structure or valuations of any potential deal, the people said. A representative for China Three Gorges didn’t immediately respond to requests for a comment.
  • After a year in which semiconductor stocks defied conventional wisdom with a seemingly unstoppable rally in the face of gloomy fundamentals, analysts are loathe to go all in. With signs of a rebound in demand still scant, the key question for the new year is where chipmaker shares can go when they’re trading at the highest price to future earnings multiples in nearly a decade. Most analysts expect business to improve in 2020, aided by things like 5G technology and cloud infrastructure spending. But valuations are cause for concern, especially when accounting for lingering tariff uncertainty.
  • Apple Inc.’s digital wallet is expanding in Europe just as regulators crack down on the tech giant’s move into financial services. At issue is Apple’s role as a platform for other services. Spotify Technology SA already complained to antitrust regulators that Apple favors its own music service. Now banks and other payments providers say the company gives its Apple Pay service an unfair advantage by limiting access to a key component inside iPhones.
  • Senator Elizabeth Warren is overestimating the proceeds of her wealth tax by at least $1 trillion, according to a new study, raising questions about the Democratic presidential candidate’s plans to fund her sweeping proposals to reshape the U.S. economy. Warren’s wealth tax would raise between $2.3 trillion and $2.7 trillion over a decade, far short of the $3.75 trillion her campaign has said the levy on the accumulated wealth of millionaires and billionaires would raise in that period, according to new estimates from the Penn Wharton Budget Model. The estimate calls into question the Massachusetts senator’s frequent assertion that taxes on the wealthiest Americans would be sufficient to cover her plans for universal childcare, college tuition and erasing student debt, with about $1 trillion allocated toward paying for her $20.5 trillion Medicare for All health care plan.
  • The U.K. votes on Thursday to determine whether Prime Minister Boris Johnson gets the mandate he wants to “get Brexit done,” or Labour Party Leader Jeremy Corbyn replaces him in 10 Downing Street to pursue his “radical agenda” of wealth redistribution and nationalizations. British general elections are decided by separate races in 650 districts, with each assigned a seat in the House of Commons. Most won’t change hands: just 70 did in 2017, with 111 doing so two years earlier.

*All sources from Bloomberg unless otherwise specified