December 18th, 2018

Daily Market Commentary

 

Canadian Headlines

• Canadian stocks fell to their lowest close since September 2016 with every sector in the red, as crude prices settled below $50 a barrel for the first time in 14 months. The S&P/TSX Composite Index lost 1.6 percent to 14,362.65. Health-care stocks led the retreat, losing 4.6 percent as pot shares retreated amid a broader risk-off mood. Aurora Cannabis Inc. fell 5.5 percent. The energy sector slid 2.3 percent to the lowest since February 2016 as West Texas Intermediate prices fell 2.6 percent amid rising U.S. inventories. Cenovus Energy Inc. lost 4 percent while Canadian Natural Resources Ltd. fell 3.3 percent.

 

 

World Headlines

• European shares traded lower on Tuesday, following declines in Asia and the U.S., with uncertainty and the U.K. Parliament’s vote on Brexit set to be prolonged into next year. The Stoxx Europe 600 Index fell 0.5 percent. The worst-performing sector in early trading was oil and gas, down 1.4 percent, followed by technology. European software stocks, including SAP SE, got some good news overnight from the U.S., as Oracle Corp. and Red Hat Inc. surprised positively with their respective updates.
• U.S. equity futures appeared to stabilize on Tuesday while shares in Europe pared a drop as investor nerves steadied after yet another rout in American stocks a day earlier. Treasuries, gold and the Japanese yen advanced amid a cautious mood. There seems to be little that can halt the sell-off in equities just now, so investors are increasingly pinning their hopes on the U.S. Federal Reserve taking a dovish turn this week. While a rate hike is widely expected, historically the central bank has rarely raised borrowing costs during such market turmoil. President Donald Trump has ramped up his criticism of policy makers, tweeting that “it is incredible” the Fed was even considering another rate rise.
• March e-mini contracts on the S&P 500 were little changed as of 3:08 p.m. in Tokyo after rising as much as 0.5 percent earlier on Tuesday. The morning climb in stock-index futures came after a rout in the U.S. sent the S&P 500 Index to a more than one-year low. The MSCI Asia Pacific was down 1.1 percent. Stock markets in Asia extended declines after Xi’s speech marking the 40th anniversary of China’s reform disappointed investors that had been expecting economic stimulus or further opening up, said Francis Lun, Chief Executive Officer at Geo Securities Ltd.
• Oil sank to another one-year low in New York as a sell-off in equities worsened crude market sentiments already soured by signs of plentiful American supplies. Futures in New York slipped as much as 4.1 percent after closing below $50 on Monday for the first time since October 2017. The U.S government expects shale-oil production to surge, potentially swelling already-abundant inventories. Equities across Europe and Asia slid after a speech by Chinese President Xi Jinping offered no new reforms to stimulate the world’s second-biggest economy.
• Gold steady after a sell-off in equities, bolstering demand for havens, while investors awaited the Federal Reserve’s final policy-setting meeting of the year and clues on its path in 2019. The Fed’s been facing push back before this week’s expected rate increase, with President Donald Trump tweeting on Monday it was “incredible” the bank was considering a hike given low inflation and a strong dollar.
• Congressional Republicans were handed the gift they said they wanted when a Texas judge invalidated Obamacare late last week. Yet few now seem willing to open it. After spending the eight years since the law passed promising — and failing — to repeal the Affordable Care Act, Republicans are no closer to crafting a politically viable alternative to the law, which has gained favor with voters and has transformed the nation’s health-care system.
• The warning signs of 2019 are lighting up for the U.K. economy as Brexit comes to a head. Retailers are complaining about an abysmal holiday season, house prices are weakening, businesses are holding back investment and the swooning pound is fueling inflation. With just a few months until the March 29 deadline to exit the world’s biggest trading bloc, there’s no clarity on whether Britain will crash out of the European Union without a divorce deal.
• The Federal Reserve’s latest strategy to control its key interest rate may already be reaching its limits. Officials are widely predicted to lift their main target range Wednesday, with a slight twist. The Fed is expected to increase one of the rates it uses to help guide the top of the policy band by a bit less, echoing a similar action taken in June. It’s part of an effort to keep in check the rising fed effective rate. The benchmark has been drifting toward the upper end of the main range for much of 2018 as a combination of surging Treasury-bill supply and the central bank’s balance-sheet unwind have driven U.S. money-market rates higher.
• President Donald Trump’s administration is stepping up pressure on Germany over security concerns tied to China’s Huawei Technologies Co. as Chancellor Angela Merkel’s government prepares an auction for ultrafast 5G wireless networks. A U.S. delegation met on Friday with German counterparts in the Foreign Ministry in Berlin to discuss risks posed by the Chinese company, according to people with knowledge of the talks who asked not to be identified because the matter is private. The American officials used the closed-door talks to raise their concerns about Huawei’s role in expanding Germany’s 5G network. The auction is scheduled for next year.
• The Big Four accounting firms may have to split their operations into separate U.K. business units as part of a sweeping overhaul of the industry proposed by regulators that stopped short of the measures sought by some critics. The Competition and Markets Authority said audit work should be split from the much larger consulting business at an operational level, but held off on recommending a full structural breakup or a cap on auditor’s market share. A further report said the U.K. needed a tough new watchdog to prevent the failings of the past.
• Royal Dutch Shell Plc’s negotiations to buy Endeavor Energy Resources LP underscore the growing clout of Big Oil in the Permian Basin after BP Plc, Exxon Mobil Corp. and Chevron Corp. ramped up investments in the prolific U.S. shale play. Shell is in talks to acquire Endeavor for about $8 billion, people familiar with the matter said Monday. The Anglo-Dutch oil giant has every reason to push ahead since it has lagged behind other operators in the Texas shale fields, and was outbid this year on $10.5 billion of assets that would’ve helped it compete.
• British Airways will restart direct flights from London Heathrow airport to Islamabad from June after halting them a decade ago as security in Pakistan deteriorated. The reopening of the route by the airline owned by IAG SA is “a reflection of the great improvements in the security situation in Pakistan in recent years,” Thomas Drew, the British High Commissioner to Pakistan, said Tuesday on Twitter. Militant violence across Pakistan has drastically declined in recent years since the army decimated insurgent groups that launched domestic attacks across the country. The renewed security drive came after more than 100 children were killed by the Pakistani Taliban in a 2014 school massacre in the northern city of Peshawar, prompting widespread horror and outrage.
• China’s stimulus policies may not be enough to jump-start profit growth at the nation’s corporations, raising the prospects of more debt defaults next year, analysts say. The world’s second-largest economy is expected to expand 6.2 percent in 2019 from 6.6 percent this year. Profits among industrial companies grew the least in seven months in October. The data don’t bode well for corporations’ ability to service their debts in 2019 after a record year of local bond failures in 2018.
• Japan’s budget for the fiscal year starting in April 2019 will top 100 trillion yen ($890 billion) for the first time, highlighting the government’s struggle to curb spending in the developed world’s most indebted nation. The budget will increase 3.8 percent to about 101.5 trillion yen, according to a draft budget document obtained by Bloomberg News. Almost a third of that spending will be paid for with debt issuance, although the amount of bonds issued will decline for a seventh straight year. A raft of measures to offset the economic impact on domestic demand of a sales tax hike next year also form a large part of the extra spending.
• Facebook Inc., reeling from criticism about Russian influence campaigns on its platform, now faces calls for changes to its top management from a collection of 31 civil rights groups. Organizations including Muslim Advocates, MoveOn, the Southern Poverty Law Center and the National LGBTQ Task Force, co-signed a letter asking Chief Executive Officer Mark Zuckerberg to step down from his role as board chairman. It also requested that Chief Operating Officer Sheryl Sandberg leave the board entirely. The groups are calling for three new directors to be added, representing their diverse user base, and the dismissal of policy executives Joel Kaplan and Kevin Martin.
• T-Mobile US Inc. won U.S. national security approval for its takeover of Sprint Corp., one of the regulatory conditions needed before the two wireless carriers can combine. The Committee on Foreign Investment in the U.S., or Cfius, has approved the proposed transaction, the companies said in a joint statement Dec. 17. The approval moves the No. 3 and No. 4 wireless providers in the U.S. closer to consummating their $26.5 billion tie-up in a bid to better compete against industry leaders AT&T Inc. and Verizon Communications Inc. Their focus now shifts to securing approval from the Federal Communications Commission and the Justice Department’s antitrust division.
• Hiroto Saikawa, the Nissan CEO who’s been thrust into global prominence since the arrest of Carlos Ghosn, is getting his first chance to explain the Japanese carmaker’s corporate-governance challenges to its alliance partners face-to-face. The chief executive officer is traveling to Amsterdam for a meeting starting Tuesday of Nissan Motor Co., Renault SA and Mitsubishi Motors Corp., according to a person familiar with the plan, who asked not to be identified as the information isn’t public. The last time the carmakers met — soon after car titan Ghosn’s arrest and ouster as Nissan’s chairman in November — Saikawa, 65, chose to attend the gathering by video.
• Italy’s populist government is planning to slash its growth forecast for next year as it fights to persuade the European Union that its spending plans and budget projections are credible. Italy will reduce its GDP outlook for 2019 to 0.9 percent or 1 percent from 1.5 percent, according to a Treasury official, who asked not to be identified because the change is not public yet. The coalition in Rome is trying to convince the EU’s budget inspectors that its 2019 spending plan will really deliver a deficit of around 2 percent of GDP as it has forecast. Analysis by the European Commission last month suggested that the deficit would actually be close to 3 percent.
• Bank stocks underperformed the broader market in 2018, besieged by disappointing loan growth, tougher competition for lending, the need to pay more for deposits, and worries about an economic slowdown and deteriorating credit. The big question for next year is whether they’ve fallen far enough. Some analysts cut recommendations on bank shares in mid-December, with analysts at firms including Keefe Bruyette & Woods Inc., Morgan Stanley and Atlantic Equities giving dour outlooks. Goldman Sachs Group Inc. shares have been hit particularly hard by concern about a Malaysian debt scandal, losing 34 percent this year through mid-day trading on Monday.
• The European Union stepped up pressure on Britain to approve its Brexit deal by ruling out the prospect of piecemeal negotiations on aspects of the divorce to avoid the U.K. crashing out without an agreement. If the U.K. Parliament fails to ratify the withdrawal treaty before the country’s scheduled leaving date of March 29, the EU won’t seek a “managed no-deal,” according to an EU official. Instead, it will take unilateral steps to protect its interests, putting in place a bare minimum of emergency measures, and only if the U.K. reciprocates with its own actions, the person said. Some of the plans are due to be published later this week.
• Investors in U.S. homebuilders are holding their breath heading into the New Year as experts predict softening demand in 2019, mainly driven by higher borrowing costs. Gradual interest rate hikes by the Federal Reserve helped slow the housing market in the second half, with weakness starting over the summer and becoming more pronounced in the fall. Confidence among U.S. homebuilders has plummeted to the lowest level since 2015, signaling that the industry’s struggles are intensifying, data released Monday showed. To lure buyers, homebuilders are cutting prices. This is adding to margin pressures in an industry that’s yet to see any meaningful relief in development costs or prices for building materials, financing and labor, according to a report from Wells Fargo.

 

*All sources from Bloomberg unless otherwise specified