December 12th, 2018

Daily Market Commentary


Canadian Headlines

  • Canadian stocks fell 0.4 percent on Tuesday, extending a four-day rout, in their losing losing streak since mid-November. The S&P/Toronto Stock Exchange Composite Index failed to stage a comeback despite a late-session spike in pot stocks after the New York Post reported that New York Governor Andrew Cuomo will introduce a plan for legalizing recreational marijuana. Health care and consumer staples sectors led gains helped by pot stocks and earnings from North West Co., which topped the highest analyst estimate. Some beaten-down energy stocks caught a bid as oil advanced. Miners also gained as metal prices climbed on trade optimism between U.S. and China.
  • Alberta’s government is seeking expressions of interest for adding crude-refining capacity as the oil-rich province works to extract more value from its resources. The province will accept submissions until Feb. 8 and will consider greenfield projects and expansions at existing sites. At this point, the government is only seeking a sense of the projects companies are considering and isn’t yet ready to say how it would support those plans.
  • The detention of a former Canadian diplomat by China’s spy agency signaled an escalation in the feud between the two nations, raising new questions about the safety of foreigners doing business in China. The former diplomat, Michael Kovrig, was detained by a branch of China’s Ministry of State Security during a visit to Beijing on Monday, his employer, the International Crisis Group, said in a statement. The Brussels-based non-profit said Wednesday it has received no information from Kovrig since his detention and was working to secure consular access to verify his health and safety.
  • Huawei Technologies Co. Chief Financial Officer Meng Wanzhouwas granted bail by a Canadian court, allowing the executive to stay in her Vancouver home as she awaits a possible extradition to the U.S. over fraud charges. Justice William Ehrcke of the British Columbia Supreme Court agreed to release Meng on the condition she post bail of C$10 million ($7.5 million), including at least C$7 million in cash, and submit five people who would act as “sureties” — guarantors to ensure she complies with the bail terms who would lose the cash or other assets they put up if she were to flee.



World Headlines

  • European shares rose at the open, adding to the strong gains on Tuesday, as investors welcome renewed optimism on the U.S.-China trade war. British shares rose amid news that Prime Minister Theresa May is set to face a vote of no confidence in her leadership. The Stoxx Europe 600 was 0.3 percent up, lead by gains in technology shares, while retailers stocks dropped dragged down by Inditex SA, which fell 5 percent after reporting weak quarterly sales. Italian shares rose after a report that Deputy Prime Minister Matteo Salvini may seek to hold early elections in March, while U.K.’s FTSE 100 jumped 0.4 percent on new political turmoil.
  • Political risks were front and center in U.S. stock markets Tuesday. The S&P 500 Index and Dow Jones Industrial Average ended the session little changed, albeit in the red, after the day’s strong start reversed amid President Donald Trump’s threat to shut down the government over border-wall funding. The equity benchmarks saw gains as big as 1.4 percent and 1.5 percent, respectively, and losses as deep as 0.6 percent and 0.8 percent. The Nasdaq Composite Index was the bright spot, closing up 0.2 percent on the strength of technology bellwethers Microsoft Corp. and Alphabet Inc.
  • Japan’s Topix index rallied from an 18-month low as trade war concerns eased after China signaled it may cut auto tariffs and Huawei Technologies Co.’s chief financial officer was granted bail by a Canadian court. Electronics and automakers provided the biggest boosts to the benchmark gauge, as all industry groups advanced. Toyota Motor Corp. and other carmakers climbed after China was said to move toward lowering tariffs on imported U.S.-made cars to 15 percent from the current 40 percent. President Donald Trump said a decision on whether to impose auto tariffs on Japan and the European Union will depend on how trade discussions go with them, according to a Reuters report.
  • Oil extended an advance after a U.S. industry report signaled a bigger-than-expected draw in nationwide crude inventories and as trade tensions eased between the world’s two largest economies. Futures in New York added as much as 2.2 percent after climbing 1.3 percent Tuesday. U.S. stockpiles fell by more than 10 million barrels last week, the industry-funded American Petroleum Institute was said to report before government data that’s forecast to show a smaller drop Wednesday. Meanwhile, trade tensions receded as China moved to lower duties on U.S. vehicle imports.
  • Palladium climbed to another record, surpassing gold once again. The yellow metal has traded in a narrow range this week despite increased bullish sentiment. Holdings of gold-backed exchange-traded funds rose to a fresh 4-month high as investors seek a haven amid global uncertainty spanning trade wars to Brexit. It’s a different, yet equally bullish story in palladium-backed ETFs, which are near their lowest in more than 9 years as a shortage of near-term supplies results in metal being withdrawn.
  • The Federal Reserve is piling up unrealized losses on its $4.1 trillion bond portfolio, raising questions about its finances at a politically dicey moment for the independent central bank. The Fed had losses of $66.5 billion on its securities holdings on Sept. 30, if it marked them to market, according to its latest quarterly financial report. That dwarfed its $39.1 billion in capital, effectively leaving it with a negative net worth on that basis, a sure sign of financial frailty if it were an ordinary company. The Fed, of course, is not a normal bank and does not mark its holdings to market. As a result, officials play down the significance of the theoretical losses and say they won’t affect the ability of what they call “a unique non-profit entity’’ to carry out monetary policy or remit profits to the Treasury Department. Case in point: the Fed handed over $51.6 billion to the Treasury in the first nine months of the year.
  • Apple Inc.’s suppliers will consider shifting iPhone production away from China should tariffs on U.S. imports skyrocket, but the U.S. company plans to sit tight for now, people familiar with the company’s thinking said. The tech giant’s suppliers intend to stick with the existing model even if the U.S. levies a 10 percent import tariff on smartphones, the people said, asking not to be identified talking about a private matter. But it will have to reassess the situation should U.S. President Donald Trump decide on a more punitive 25 percent, the people said.
  • Turkey will start a new military operation against U.S.-backed Kurdish militants in northern Syria within a few days, President Recep Tayyip Erdogan said on Wednesday, a move that could again escalate tensions with Washington. Turkish shares and the lira fell after the announcement. Turkey has repeatedly threatened over recent months to extend its offensive against the YPG Kurdish militia east of the Euphrates River. The fighters, which receive support from the U.S. in their joint fight against Islamic State jihadists in Syria, are seen by Ankara as an affiliate of the pro-autonomy PKK movement, a designated terrorist group.
  • President Donald Trump said he would intervene in U.S. efforts to extradite Huawei Technologies Co. executive Meng Wanzhou if it helped him win a trade deal with China. “If I think it’s good for what will be certainly the largest trade deal ever made, which is a very important thing — what’s good for national security — I would certainly intervene, if I thought it was necessary,” Trump said Tuesday in an interview with Reuters. Meng was arrested earlier this month at the request of U.S. authorities, who allege she conspired to defraud banks to unwittingly violate U.S. sanctions by clearing transactions linked to Iran. On Tuesday, she was granted a $7.5 million bail by a Canadian court, allowing the Huawei chief financial officer to return to her Vancouver home as extradition proceedings continue.
  • An Oval Office confrontation between Donald Trump and the top two Democrats in Congress has set Washington on course for a partial government shutdown next week, as the president hardened demands for border wall funding and vowed to take responsibility for the impasse. The sit-down on Tuesday with Senate Democratic leader Chuck Schumer and House Democratic leader Nancy Pelosi quickly devolved into acrimony — highlighting the gulf between Democrats and Trump over must-pass U.S. spending legislation while putting a possible compromise further out of reach.
  • State-owned China National Petroleum Corp. has suspended investment in Iran’s South Pars natural gas project in response to U.S. pressure, Reuters reported, citing Chinese energy executives it didn’t identify. The freeze followed four rounds of talks in Beijing with U.S. officials, who urged the state-owned oil and gas giant not to extend financing to Iran, according to the report. CNPC earlier this year took control of the South Pars Phase 11 development from France’s Total SA, which backed out under pressure from American sanctions on the Islamic republic.
  • Theresa May will face a vote of confidence in her leadership of the Conservative Party as the embattled U.K. prime minister warned the rebels who want her out that they will be putting Brexit at risk. Tory members of Parliament will vote on Wednesday evening on whether they have confidence in May. If she loses, a leadership contest is launched. May said a leadership challenge would delay Brexit, or even risk it being canceled altogether. She urged lawmakers to think of the “national interest” and deliver the divorce that people voted for in 2016. “It is now within our grasp,” she said. “Weeks spent tearing ourselves apart will only create more division.”
  • America’s shale boom could be about to spare the world’s oil tanker owners from a typical OPEC ravaging. The producer group and allies decided on Dec. 7 to restrict output from the start of next year by about 1.2 million barrels a day, adding to deeper cuts two years earlier. Under normal circumstances, that would be a dire turn of events for owners who see cargoes cut almost overnight. But shipping analysts are predicting that, this time, the rise of U.S. shale may well shield shippers. “OPEC+ is reducing their output as U.S. is increasing theirs, hence the overall limited effect for tanker volumes,” said Frode Morkedal, managing director of equity research at Clarksons Platou, an investment banking unit of the world’s biggest shipbroker.
  • ABB Ltd. and Hitachi Ltd. confirmed they’re in talks about a deal over power grids after a report by Nikkei that the Japanese conglomerate is preparing to buy the business for as much as 800 billion yen ($7 billion). ABB said it’s in discussions with Hitachi to expand and re-define an existing strategic power grid partnership between the two companies that dates to 2014, according to a statement Wednesday from the Swiss engineering firm. Hitachi made a similar statement. Nikkei reported that the board of the Tokyo-based company confirmed plans to move forward with a transaction and that the two companies will soon conduct a final assessment of the unit and may reach an agreement as early as this week.
  • Tencent Music Entertainment Group and existing investors raised about $1.1 billion after pricing a U.S. initial public offering at the bottom of a marketed range, succumbing to the same global market turbulence that’s sapped enthusiasm for stock debuts. China’s largest music-streaming service, which is backed by Tencent Holdings Ltd., and current holders sold 82 million American depositary shares at $13 apiece, according to a statement. The shares were offered at $13 to $15 each. Tencent Music opted to price lower after initially guiding fund managers that orders were coming in around the midpoint of the marketed range.
  • China is nearing a long-mooted megamerger of China National Chemical Corp. and Sinochem Group after top executives completed preparatory work for the deal, people with knowledge of the matter said. Significant issues around how the companies will be combined have largely been resolved, according to the people, who asked not to be identified because the information is private. A deal is ready to be announced as soon as the coming weeks, the people said. The merger, in the works for at least two years, would change the landscape of the nation’s chemicals industry and add to a wave of consolidations aimed at shaking up China’s vast state-owned sector. The planned combination would produce an oil-to-chemicals giant with more than $100 billion of assets.


*All sources from Bloomberg unless otherwise specified