December 4th, 2018

Daily Market Commentary


Canadian Headlines

·         Canadian stocks gave up early gains on Monday, though still had a positive session with the S&P/Toronto Stock Exchange Composite Index gaining 0.5 percent. Energy and materials stocks led the rise, while health care stocks were among the biggest decliners. The energy sector advanced 2.3 percent, the most since June 22 as oil producers were given a lift on Alberta’s announcement the province will cut oil production next year.

·         Teck Resources Ltd. agreed to sell a 30 percent stake in its Quebrada Blanca copper project in northern Chile, one of the few big copper deals available in the market, for $1.2 billion to Sumitomo Corp. Sumitomo Metal Mining Co. and Sumitomo Corp. will get a 30 percent indirect interest in Compañia Minera Teck Quebrada Blanca S.A., which owns the Quebrada Blanca phase 2 project. Teck’s board approved the full construction, with first output targeted for 2021.

·         Bank of Montreal has long seen its U.S. loan growth slanted more toward businesses than individual consumers, a focus that helped the lender post record earnings in its fiscal fourth quarter. Net income for the quarter rose 38 percent to a record C$1.7 billion, or C$2.57 a share. Adjusted earnings were C$2.32 a share, beating the C$2.30 average estimate of 14 analysts in a Bloomberg survey.

·         The founder of yoga-apparel retailer Lululemon Athletica close to joining the Chinese investor group pursuing a takeover of Amer Sports Oyj, owner of brands including Wilson tennis rackets, people familiar with the matter said. Canadian billionaire Chip Wilson is in talks to take around a 20 percent stake as part of the consortium led by Anta Sports Products Ltd., according to the people. The buyer group and Helsinki-based Amer could announce a takeover agreement as soon as the next few weeks, the people said, asking not to be identified because the information is private. Shares of Amer climbed by the most in almost three months.

·         While Alberta’s plan to mandate OPEC-style production cuts already is boosting oil prices and shares, the revival of Canada’s resource nationalism adds another layer of risk for investors to consider. The removal of millions of barrels of crude from the market will help shareholders of smaller producers who are exempt from the cuts, like Bonterra Energy Corp., as well as larger producers such as Cenovus Energy Inc. and Canadian Natural Resources Ltd. that were being hammered by the supply glut.



World Headlines

·         European shares dropped and U.S. stock index futures pointed to a lower open as Monday’s optimism was replaced by renewed uncertainty. Investors had to resort to hunting for clues on any U.S.-China trade deal details after confusing signals. Oil rallied for a second day ahead of Thursday’s OPEC meeting in Vienna to decide on 2019 oil production.

·         U.S. equity futures dropped and European shares tracked declines in Asia as investors reined in their optimism over any breakthrough in the trade war. Treasuries gained and the dollar retreated. Contracts on the S&P 500, Dow Jones and Nasdaq indexes all pointed to U.S. shares giving up a chunk of Monday’s gains at the New York open.

·         After a seven-day rally, investors in the Japanese stock market opted to take profits, wiping out $133 billion in market value on the benchmark index. The yen spiked amid ongoing uncertainty surrounding U.S.-China trade negotiations. The Topix index slumped 2.4 percent Tuesday, the most in about six weeks, with electronics makers and banks as the biggest drags. The yen strengthened to a two-week high against the dollar.

·         Oil pared gains after Saudi Oil Minister Khalid Al-Falih said it’s too early to say if OPEC and its partners will cut production when they meet for talks later this week. Brent moved toward $63 a barrel after Al-Falih also said it’s still uncertain what size of cut might be needed by the market. Crude rose Monday after an agreement between Saudi Arabian Crown Prince Mohammed bin Salman and Russian President Vladimir Putin over the weekend raised the possibility of an output accord.

·         Gold advances, set for the fourth gain in five sessions, as Goldman Sachs Group Inc. says it remains bullish on the outlook for 2019, and investors weigh prospects for a pause U.S. interest rate rises next year and the next steps in U.S.-China trade battle. Palladium trades near a record. Goldman based its outlook on late-cycle demand and central-bank buying, according to a note. On Monday, a section of the U.S. Treasuries yield curve inverted for the first time in more than a decade, signalling investors may be anticipating the imminent end of the Federal Reserve’s tightening cycle.

·         China’s government isn’t yet able to formulate its response to the summit on trade with U.S. President Donald Trump as senior officials are still out of the country with President Xi Jinping. Bureaucrats from various ministries in Beijing are awaiting the return of Xi and his entourage of senior officials to China before they are able to comment or take action, according to three officials who were briefed but declined to be named as the matter isn’t public.

·         The U.K. should be allowed to reverse Brexit, according to an advisory opinion from the European Union’s top court that will fuel the campaign to thwart the divorce. The opinion, which isn’t binding, comes at a crucial moment for Prime Minister Theresa May who’s trying to convince Parliament to back the deal she brought back from Brussels but faces opposition on all sides. The advice will embolden those who are fighting to reverse Brexit — a campaign that’s gathering momentum. But May could also use it to her advantage as the country heads into uncharted Brexit territory. The possibility that the U.K. can go back on its decision will be alarming to Brexit hardliners and could encourage them to grudgingly support May’s much-maligned roadmap for how the country should quit the bloc.

·         Secretary of State Michael Pompeo plans to use a gathering of NATO leaders on Tuesday to ramp up pressure on Russia over what the U.S. has long said is Moscow’s failure to comply with a 1987 treaty on nuclear weapons. The U.S. wants to “stay in sync” with American allies over how to address Russia’s non-compliance, according to a senior State Department official who spoke to reporters en route to Brussels on Monday for the conference.

·         If Congress approves a national public-works program next year that Democratic and Republican leaders are proposing, President Donald Trump’s trade war could inflate the price tag, costing taxpayers and construction companies many millions of dollars. A three-quarter-mile stretch of Detroit’s Lower Rouge River illustrates the problem. Known as the Old Channel, it was contaminated from decades of industrial-waste discharges. To clean the waterway, workers are installing a 2,500-foot-long, sheet-pile bulkhead wall to support the riverbanks. Once that’s built, polluted river sediment and debris will be removed starting early next year.

·         French President Emmanuel Macron’s government reversed course and suspended a planned fuel-tax hike that had sent as many as 300,000 protesters into the streets for three weeks in sometimes violent clashes. Prime Minister Edouard Philippe announced the decision after detailing the plan in his regular Tuesday morning meeting with governing party lawmakers.

·         Three days after Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman sent crude prices surging with an agreement to extend cooperation on oil, the kingdom’s top energy official made clear that the terms of a deal remain unresolved. In an interview with Bloomberg, Saudi Energy Minister Khalid Al-Falih said he saw an oversupplied market, but cautioned that all the members of the OPEC+ group, which includes allies such as Russia and Kazakhstan, needed to come together for a cut to go ahead.

·         Ukraine said Russia had partially restored access to its ports on the Azov Sea following months of disruption and a week after its navy was fired on by its neighbor. As of Monday, ships were allowed to move in both directions through the Kerch Strait separating the Azov and Black Seas, according to Ukrainian Infrastructure Minister Volodymyr Omelyan. Russia is still stopping vessels to inspect them, he said Tuesday in a statement on the ministry’s website.

·         The real winner from the trade thaw between the U.S. and China is proving to be the yuan. The currency rose 0.66 percent to 6.8403 per dollar at 5:34 p.m., taking its two-day gain to 1.7 percent, the biggest since at least 2007. Bonds rallied, with the yield on 10-year government debt falling to its lowest level since April 2017, amid speculation the stronger currency will give policy makers room to ease monetary policy. The benchmark Shanghai stock gauge added 0.4 percent at the close.

·         Corporate treasury departments in India have become so concerned about credit risk they’re increasingly parking their cash in securities maturing overnight. Assets with overnight funds soared to 123 billion rupees ($1.8 billion) last month, from 39 billion rupees in September, as companies chose safety over returns in the wake of a rare debt default, data from Morningstar Investment Adviser India Pvt. show. Strong demand has seen five firms, including Reliance Nippon Life Asset Management Ltd., lining up offerings.

·         Amid the fallout of the General Electric Co. debacle, a delicate but crucial social contract between shareholders, bondholders and Corporate America is being quietly redrawn. For a decade since the financial crisis, U.S. companies have piled up debt to fund generous equity buybacks, helping supercharge a fourfold jump in the S&P 500 Index in the process. But as scrutiny on company financial health mounts, creditors are seeking to wrestle back control and curb these balance-sheet-be-damned maneuvers.

·         Daimler AG has raised the prospect of boosting its stake in a joint venture with Chinese partner BAIC Motor Corp., according to people familiar with the discussions, as the luxury-car maker seeks to gain more control over its operations in the world’s largest car market. Daimler expressed an interest in increasing its holding to at least 65 percent from 49 percent, one of the people said, asking not to be identified as the deliberations are confidential. The discussions with state-owned BAIC are exploratory and the two carmakers may fail to to reach an agreement, the people said.

·         Apple Inc. is experimenting with iPhone marketing strategies it rarely uses — such as discount promotions via generous device buyback terms — to help goose sales of its flagship product. Company executives moved some marketing staff from other projects to work on bolstering sales of the latest handsets in October, about a month after the iPhone XS went on sale and in the days around the launch of the iPhone XR, according to a person familiar with the situation. This person described it as a “fire drill,” and a possible admission that the devices may have been selling below some expectations. The person asked not to be identified discussing private strategy changes.

·         Unilever’s departing Chief Executive Officer Paul Polman, in a major push into India that may be his last deal, agreed to pay about $1 billion more than his closest rival for GlaxoSmithKline Plc’s consumer business in the country, according to people familiar with the matter. The Anglo-Dutch conglomerate agreed to pay 3.3 billion euros ($3.8 billion) in cash and stock from its Indian subsidiary to take control of the consumer business, including malted milk drink Horlicks. Nestle SA’s offer was lower, but was all cash, the people said, asking not to be identified because the details aren’t public. One of Polman’s last acts as CEO will be attending a capital markets day in India with the rest of his executive team this week.

·         Music-streaming service Spotify Technology SA saw its market value jump $779 million as China’s Tencent Music Entertainment Group kicked off its long-awaited U.S. initial public offering. Spotify owns 8.9 percent of the company, whose largest shareholder is Tencent Holdings Ltd. with 59 percent, according to its IPO filing Monday. Spotify closed up 3.2 percent to $140.68 a share on the same day, giving it a market value of $25.5 billion.

*All sources from Bloomberg unless otherwise specified