January 24th, 2018

 

Daily Market Commentary

 

Canadian Headlines

• Canadian stocks rose after trading in the red for much of the day, as the materials sector turned positive along with gold prices. The S&P/TSX Composite Index added 10 points or 0.1 percent to 16,357.55 after earlier falling as much as 0.6 percent. Materials shares rose 0.7 percent, with Kinross Gold Corp. up 5.4 percent and Barrick Gold Corp. gaining 2.3 percent.
• The U.S., Canada and Mexico kicked off a crucial round of Nafta negotiations with little sign of progress on the critical issue of automobiles. As the latest session of North American Free Trade Agreement talks get underway in Montreal, observers say progress must be made to keep U.S. President Donald Trump from following through on his threat to withdraw. Yet Canada and Mexico aren’t arriving with a specific proposal to counter U.S. demands on the auto sector, suggesting a breakthrough is unlikely on one of the foremost disputes in the 24-year-old deal.
• Financial statements from marijuana producers can look strikingly rosy, with a quirk of accounting regularly leading to gross margins of more than 100 percent. But a closer look reveals a mishmash of management assumptions that could deflate those margins if the bud sells for less than estimated — or gets attacked by mold. In Canada, where 84 listed marijuana stocks have surged to a value of about C$36.9 billion ($29.7 billion) ahead of recreational legalization in July, companies abide by International Financial Reporting Standards. The guidelines favor a fair-value model used by the agricultural industry, which requires companies to place a value on plants while they’re still in the ground.
• Canadian National Railway Co. said it will spend a record C$3.2 billion ($2.6 billion) on expanding and modernizing its network to overcome capacity shortages that are weighing on profit. Adjusted annual earnings per share in 2018 will be C$5.25 to $5.40, up from last year’s C$4.99 a share, Canadian National said Tuesday in a statement. That’s less than the C$5.54 average analyst estimate compiled by Bloomberg.

 

 

World Headlines

• European stocks are little changed as investors assess mixed earnings reports. Suez slumps after its profit forecast misses estimates, while Novartis gains after projecting a return to growth. The Stoxx 600 falls less than 0.1%, with investors also awaiting Thursday’s ECB rate decision. Utilities post the worst performance among industry groups, dragged down by a record plunge in Suez shares.
• There was no respite for the dollar on Wednesday, with the greenback extending the decline that’s taken it to the lowest level in three years. U.S. stock futures advanced as European equities nudged higher, and gold added to recent gains. The dollar slid against almost all its major peers, taking its losing streak to three days as U.S. Treasury Secretary Steven Mnuchin said the decline provides a boost to the American economy through trade.
• Asian stocks declined after three consecutive days of record-high closes, as a technology selloff weighed on equity gauges in Japan and Taiwan. The MSCI Asia Pacific Index fell 0.1 percent to 186.20 as of 4:26 p.m. in Hong Kong, with Taiwan Semiconductor Manufacturing Co. the biggest overall drag on the regional benchmark. JPMorgan Chase & Co. lowered its outlook for Apple Inc. suppliers in Asia on weak orders for the iPhone X.
• Oil’s advance slowed after prices hit a new three-year high amid signs that U.S. crude stockpiles increased last week. Futures were little changed in New York after closing on Tuesday at the highest level since December 2014. Industry data signaled inventories rose by 4.76 million barrels last week, which will be the first gain in 10 weeks if confirmed by a government report on Wednesday. The Energy Information Administration is forecast to show supplies slid by 2 million barrels.
• Gold climbs for fifth day as investors add to purchases through exchange-traded funds, with dollar continuing slump to three-year low.
• General Electric Co. is seeing growth in its oilfield equipment and health-care operations, giving the beleaguered manufacturer a measure of stability during a volatile stretch. A week after management shocked investors with a huge charge related to a mostly forgotten insurance business, GE said it topped its own expectations for fourth-quarter cash flow. The company also stuck by the 2018 profit forecast some analysts predicted would be cut.
• Qualcomm Inc. was fined 997 million euros ($1.2 billion) by the European Union for paying Apple Inc. to shun rival chips in its iPhones. The largest maker of chips that help run smartphones “paid billions of U.S. dollars to a key customer, Apple, so that it would not buy from rivals,” EU Competition Commissioner Margrethe Vestager said in an emailed statement on Wednesday. “This meant that no rival could effectively challenge Qualcomm in this market, no matter how good their products were.”
• China will introduce more reform measures to open up its economy this year, according to Liu He, the top financial and economic adviser to President Xi Jinping. “Some measures will exceed the expectations of the international community,” Liu said Wednesday at the World Economic Forum’s annual meeting in Davos, Switzerland. “Opening up is not only important for China, but also for the whole world,” he said, adding that a fresh reform push was also a celebration of the 40th anniversary of the nation’s shift away from a closed Communist system.
• The U.K. labor market displayed unexpected resilience in the three months through November as employment jumped and wage growth ticked higher. The number of people in work rose 102,000 to a record high, confounding market expectations that employment would fall. Basic pay growth quickened to 2.4 percent, the highest in almost a year, though it still lags well behind the rate of inflation.
• Fortunately for Comcast Corp., cord-cutters still need a fast internet connection. The nation’s biggest cable provider lost video subscribers for the third straight quarter, but 350,000 customers signed up for broadband service. That helped the company top sales and earnings estimates for the final three months of 2017. Underscoring its growing dependence on high-speed internet service for growth, Comcast is boosting web speeds and rolling out new features that let customers personalize their home Wi-Fi networks, allowing them to pause access during dinner or bedtime.
• Britain will stay closely aligned to the European Union’s regulatory regime after it leaves the bloc but wants the freedom to go its own way if it chooses in future, Brexit Secretary David Davis has said. During negotiations with the EU, the U.K. will aim to secure the power to diverge from the bloc’s rules on financial services and other trade issues, Davis told a panel of lawmakers in London on Wednesday. Still, it will be up to parliament and the government to decide later “whether or not” this power is used, he said.
• It’s a simple proposition. Higher interest rates make a currency more attractive, so it should appreciate. But it doesn’t always work that way. The dollar is now trading around its weakest in three years, at the same time as benchmark U.S. Treasury yields are around their highest in three and a half years. The broken link can be seen most easily when looking at the dollar against the yen, as in the chart below.
• Wall Street watchdogs appointed by President Donald Trump are evaluating a specific proposal for easing the Volcker Rule, one of the financial industry’s most-hated restrictions because it put shackles on bank trading after the 2008 financial crisis. A key agency that’s taken a lead in revising Volcker — the Office of the Comptroller of the Currency — recently circulated a blueprint to other regulators for making the rule more friendly to banks, said two people familiar with the matter. The draft relies heavily on June recommendations issued by the Treasury Department, which wants to give firms more leeway to trade and soften constraints on their ability to invest in private-equity and hedge funds.
• Starbucks Corp. plans to spend $250 million on new employee benefits, including a pay boost for domestic workers, in the wake of the federal tax overhaul. The coffee chain will increase pay for its 150,000 U.S. hourly and salaried employees in April, following its regular annual raise earlier this month. It’s also taking its paid-sick time benefit national, allowing workers to save up time off to use for themselves or family, Seattle-based Starbucks said on Wednesday.
• Japan’s financial regulator is in no hurry to follow the U.S. and enable the listing of futures contracts linked to cryptocurrencies, according to a senior Financial Services Agency official with direct knowledge of the matter. The FSA has had internal discussions and currently sees no need for law changes required to allow such products, the official said, asking not to be identified in accordance with the agency’s policy. It may consider such a move in the future if demand for settling transactions increases and a need for hedging tools emerges, the official added.
• New York state lawmakers could punch a $50.6 billion hole in the federal government’s budget by revamping their state income tax. If California followed the same approach, its legislature could keep $66.8 billion out of the U.S. Treasury. And in New Jersey, state lawmakers could hold back $12.5 billion more. Their plans face obstacles, and not every state is pursuing the same strategy. But five Democratic-leaning states that are exploring ways to change their tax laws could remove roughly $154 billion from federal coffers over the next eight years.
• Steinhoff International Holdings NV’s quest for cash has yielded about $1.1 billion from asset sales as the embattled retailer struggles to stay afloat. The question is whether the relatively small steps it’s taken can forestall more radical ones. Since revelations last month of accounting irregularities, Steinhoff sold the company jet, shed stakeholdings and sought to refinance debt to free up funds. It even ended its sponsorship of the rugby team at Stellenbosch University, the alma mater of former Chief Executive Officer Markus Jooste.
• India said it plans to inject 881 billion rupees ($14 billion) of fresh capital into state-run banks as the government looks to help the lenders meet looming Basel norms without hurting a nascent recovery in credit growth. The biggest chunk of this money — 106 billion rupees — will go to IDBI Bank, whose bad-loan ratio was 25 percent, more than double that of the overall industry. State Bank of India, the nation’s biggest lender by assets, will get 88 billion rupees in the year through March 31 while Punjab National Bank will take 55 billion rupees, Rajiv Kumar, banking secretary at India’s Finance Ministry, said at a briefing on Wednesday.
• Strains are spreading in China’s $15 trillion shadow banking industry as investors pull back from the debt-like savings products that helped drive leverage to dangerous levels. Most affected are some $3.8 trillion of so-called trust products, until now the fastest-growing shadow banking segment and a popular way for debt-ridden property developers and local governments to raise funds from millions of ordinary Chinese. In recent weeks, at least two of the products have been forced to delay payments as the market started to freeze up, making it harder to refinance maturing issues with new ones.
• India plans to raise 50 billion rupees ($780 million) by April, its first tranche of fundraising in the new fiscal year, as Asia’s third largest economy aims to upgrade its strained highways. State-owned National Highways Authority of India will sell rupee-denominated bonds at 8 percent, Transport Minister Nitin Gadkari said in an interview in New Delhi on Tuesday. The authority may eventually raise as much as 10 trillion rupees, he said.
• Luye Life Sciences Group Ltd., run by acquisitive Chinese entrepreneur Liu Dianbo, is considering a Singapore initial public offering of its health-care services arm that could raise as much as $500 million, people with knowledge of the matter said. The company’s Luye Medical Group unit plans to evaluate proposals from investment banks as soon as next month, according to the people. The Singapore-based company aims to sell shares later this year, the people said, asking not to be identified as the discussions are private.

 

 

*All sources from Bloomberg unless otherwise specified