January 4th, 2019

Daily Market Commentary


Canadian Headlines

·         Canadian stocks retreated, led by tech stocks after Apple Inc. cut its sales outlook, but avoided the deeper losses experienced south of the border. The S&P/TSX Composite Index fell 0.9 percent to 14,212.75, the most since the market’s Christmas Eve selloff, but that paled in comparison to the 2.5 percent drop on the S&P 500. Tech stocks were the biggest decliners, losing 4 percent. The sector took a drubbing along with Apple, which fell the most since 2013 after cutting its revenue outlook for the first time in almost two decades. In Canada, Shopify Inc. lost 6.5 percent.

·         Canada’s priciest housing markets saw their worst year for sales in at least a decade as higher borrowing costs and stricter mortgage rules hit home. Sales in the Toronto region fell 16 percent to 77,426 transactions in 2018 while the average price fell 4.3 percent to C$787,300 ($583,400), the Toronto Real Estate Board reported Friday. That’s the worst year for sales in Canada’s biggest city since 2008. In Vancouver, full-year sales fell 32 percent to 24,619, the lowest since 2000 and 25 percent below the 10-year average.

·         Idaho regulators rejected Hydro One Ltd.’s $3.4 billion takeover of Avista Corp, the second time state officials cited political risks in Ontario as grounds to nix the Canadian company’s effort to buy the U.S. utility. The Idaho Public Utilities Commission said “the management of Hydro One is subject to the province’s political pressure,” and the takeover would therefore be prohibited under Idaho law, according to a statement Thursday. The sale of Spokane, Washington-based Avista can’t proceed without approval from state regulators.

·         Canadian automobile sales fell 2.6 percent in 2018, marking the first annual drop since the last recession as higher borrowing costs kept some consumers sidelined. Last year’s decline follows a decade of strong spending on big-ticket items, and may signal consumption is finally slowing after the Bank of Canada’s five interest rate increases, which began in mid-2017. Auto sales are usually one of the first sectors to react to higher borrowing costs, according to central bank research.



World Headlines

·         European equities followed through with the Stoxx Europe 600 Index gaining as much as 1%, led by trade sensitive shares such as miners and autos. Oil companies also rallied after a jump in crude prices. WTI crude rose as much as 1.7%. Banks joined the top performers of the gauge as risk sentiment improved.

·         U.S. stock-index futures ticked higher Friday as vice ministers from the U.S. and China prepared to hold trade talks and the U.S. House of Representatives passed legislation in an effort to end a government shutdown. S&P 500 Index futures contracts expiring in March rose as much as 1.1 percent after the underlying gauge slumped 2.5 percent on Thursday. Futures contracts on the Dow Jones Industrial Average and Nasdaq 100 gained as much as 1.5 percent and 1.1 percent, respectively.

·         While news of a fresh round of face-to-face meetings between the U.S. and China starting next Monday and a stronger-than-expected China Caixin services PMI have given Hong Kong and Chinese shares the jolt they needed after a rough start to the year, Japan’s benchmark plunged as it played catch up after a four-day holiday. The division was clear: the regional gauge encompassing all major markets slipped 0.3 percent as of 4:31 p.m. in Hong Kong, while the MSCI Asia Pacific Index excluding Japan climbed 0.8 percent.

·         Brent crude headed for its biggest weekly gain since December 2016 as Saudi Arabia’s production cuts outweighed concerns over the health of the global economy. The global benchmark is on track for an 9.4 percent advance this week, ending three consecutive weeks of losses. Prices rallied as Saudi Arabia reduced output even before OPEC’s cuts deal went into effect this month. Yet fears over global oil demand persisted ahead of further trade negotiations between the U.S. and China, where the central bank lowered reserve requirements for lenders on Friday to support growth.

·         Gold is headed for a third weekly gain after turbulent equity markets sent investors hunting for haven assets amid global growth concerns. Futures breached $1,300 an ounce in New York and spot gold flirted with the level in early London trading, before dropping back as stocks in Europe and Asia recovered some of their losses ahead of fresh trade negotiations between the U.S. and China next week.

·         The euro-area economy is on a weak footing as it faces perilous uncertainties in 2019, from home-grown political difficulties to global stock-market turmoil and trade wars. The first significant batch of data released at the start of the year showed inflation was lower than expected in December and confirmed earlier reports that growth in manufacturing and services eased to the weakest since 2014.

·         China’s central bank acted to release cash into the economy to support growth, cutting the amount of cash lenders must hold as reserves by 1 percentage point. The required reserve ratio for banks will drop by 0.5 percentage point on January 15 and a further 0.5 percentage point on January 25, the People’s Bank of China said on its website. Medium-term Lending Facility loans maturing in the first quarter won’t be rolled over, and the amount of liquidity released will be able to offset the funding squeeze ahead of the Chinese New Year, it said.

·         Jerome Powell gave the U.S. economy a thumbs-up review last month. Since then, the Federal Reserve chairman has received several reasons to temper his assessment. On one hand, labor data are coming in strong and consumption figures look fine. On the other, the latest manufacturing, housing and market readings have given the central bank further reason to worry. That means when Powell speaks in Atlanta at 10:30 a.m. on Friday, he could justify a more cautious tone solely on the basis of observing the data-dependent approach he’s said the central bank will follow.

·         The moment wheat traders have been waiting for since the start of the season has finally come: U.S. grain is now the world’s cheapest. With shipments from Russia starting to slow and prices surging in the country, American wheat can now compete with supplies from the world’s top exporter. That’s fueling speculation U.S. shipments will start to pick up and that the nation may even supply Ethiopia in a tender this month. U.S. wheat is rarely more competitive Russian grain, but this year a drought that hit the Black Sea region and Europe helped shrink global supplies. That boosted expectations since very early in the season that American grain would finally be needed to meet global demand.

·         U.K. mortgage approvals dipped to a seven-month low in November and unsecured credit rose at its slowest annual pace for almost four years, the Bank of England said. The figures reflect weakening consumer confidence as fears mount that Britain could crash out of the European Union without a deal. House prices rose the least since 2013 last year, Nationwide Building Society said in a separate report Friday.

·         Apax Partners is in advanced talks to acquire a stake in Fractal Analytics Inc., a provider of machine learning and artificial intelligence services, people with knowledge of the matter said. Apax is discussing a deal, which could be valued at about $400 million, to buy stakes from existing shareholders, the people said, asking not to be identified because the information is private. The company is also discussing injecting fresh capital into Fractal, which would make Apax the majority shareholder, they said.

·         Hackers have released private data linked to Chancellor Angela Merkel and hundreds of other German politicians in the biggest data dump of its kind in the country. The information includes email addresses, mobile phone numbers, photos of IDs and personal chat transcripts, according to an initial review by Bloomberg News on Friday. The data were leaked over the past weeks via a Twitter account called “G0d” that identifies itself as based in Hamburg and describes itself using the words “security researching,” “artist” and “satire & irony.”

·         A New Year surge in the yen prompted an emergency meeting of Japanese government and Bank of Japan officials to reassure investors that senior policy makers were keeping a close eye on jittery markets. “We can’t tolerate speculative moves or any movements that can’t be justified by market fundamentals,” said Masatsugu Asakawa, the finance ministry’s top currency official, after Friday’s huddle — the third in barely two weeks. Japan will take appropriate action if needed, in line with the shared understanding of G-7 and G-20 agreements, he added, alluding to the ultimate tool of currency intervention to keep yen movements orderly.

·         KKR & Co. is investing $1 billion in aircraft lessor Altavair AirFinance in a bet that jet freighters will turn out to be a profit bright-spot amid global trade turmoil. The New York-based investment firm is acquiring a 50 percent stake in Altavair, which was formerly owned by Guggenheim Partners, along with six cargo aircraft. That initial commitment may be expanded by additional commercial aircraft purchases and leasing investments over the next several years, the companies said in a statement Thursday.

·         Amazon.com Inc. and Walmart Inc. find themselves on the same side for once. The bitter rivals have come together in India to lobby the government on regulations that threaten to dampen their expansion ambitions. Among other things, the giant retailers are asking for an extension on a Feb. 1 deadline for implementing those rules, according to people with knowledge of the matter. The newly tightened regulations threaten to pinch Amazon and Walmart’s Flipkart in one of the world’s fastest growing online commerce arenas, where both have invested billions of dollars. They require online marketplaces to treat all vendors equally, effectively barring foreign companies from featuring exclusive products on their platforms, owning inventory, and thus being able to influence pricing and offer huge discounts.

·         Bruce Buchanan was so elated with Donald Trump’s October vow to allow higher sales of corn-based ethanol that he carved a 60-acre thank you note in his Indiana cornfield. Now, though, the president’s actions have him worried. The government shutdown that Trump says could last “a long time” without funding for a border wall may hurt farmers by delaying the administration’s ability to steer through the approval for year-round sales of a 15 percent ethanol blend for gasoline before the summer begins. That’s up from 10 percent allowed now.

·         Eddie Lampert has filled in the blanks on his own $4.4 billion rescue bid for Sears, but a couple of key numbers were still missing less than a day before a key court deadline: How much did the liquidators offer? Two bids from breakup firms have been submitted, and if either one tops Lampert, Sears Holdings Corp. could turn out to be worth more dead than alive for its creditors. Those numbers hadn’t been publicly announced as of late Thursday. Lampert’s ESL Investments is offering to keep the bankrupt chain in business and up to 50,000 people employed. But it’s possible his plan won’t be deemed solid enough to qualify, all but assuring that the company will be shut down and sold off in pieces. The deadline for Sears to tell bidders if they’re still in the running is 4 p.m. New York time.

·         A few months ago, investors were struggling to comprehend just how much cash the largest oil companies were about to dump on them. Those mountains of money have now been reduced to mere hills. Before crude’s epic end-of-year slump, 2019 cash flow estimates for oil majors including Exxon Mobil Corp., Royal Dutch Shell Plc and BP Plc, were about 20 percent too low, according to Biraj Borkhataria, an analyst at RBC Capital Markets. Now he sees them being 20 percent to 30 percent too high. The seven largest European oil companies are expected to have free cash flow of $77 billion this year, according to Sanford C. Bernstein Ltd. analyst Oswald Clint. That’s the highest in at least a decade, but still a disappointment compared to some of the lofty estimates of last year.


*All sources from Bloomberg unless otherwise specified