June 5th, 2019

Daily Market Commentary

• Canadian Headlines
  • Canadian stocks rose after falling for five days, rebounding after Monday’s sell-off for some of the largest technology companies. The S&P/TSX Composite Index climbed 0.9% to 16,166.24. Health care stocks — led by cannabis companies — gained more than any other industry group, rising more than 5%. All sectors ended the day in the green. Meanwhile, the Bank of Canada is likely to join the U.S. Federal Reserve with an interest rate cut this year to deal with the fallout from rising trade tensions, according to trading in the swaps market. Investors are betting Canadian policy makers will follow an expected U.S. rate cut in September.
  • Mitsubishi Heavy Industries Ltd., which is building Japan’s first airliner since the 1960s, is in talks to buy Bombardier Inc.’s CRJ regional jet program to bolster its plane manufacturing ambitions. Still, no decision has been made, the Tokyo-based company said in a statement Wednesday after Air Current reported that the negotiations were at an advanced stage. Air Current said an agreement may be announced as early as the Paris Air Show, which starts June 17. Representatives at Bombardier, the second-largest maker of regional jets, couldn’t immediately comment.
  • Sherritt International Corp., whose executives were once known as Fidel Castro’s favorite capitalists, is paying the price for its close ties to the struggling Caribbean nation. The Canadian miner, which gets all its revenue from assets in Cuba, is being hit on multiple fronts by Donald Trump’s isolationism, plunging nickel prices and cost overruns. With the stock at 21 cents and its bonds trading at distressed levels, investors are starting to question the company’s viability.
  • The type of securities blamed for triggering a credit crisis in the U.S. a decade ago could now be part of the solution in Canada, where a cooling housing market is a key risk to its $1.7 trillion economy. The Bank of Canada is discussing ways to encourage a more robust market for residential mortgage-backed securities with potential investors. Only about C$1.5 billion ($1.1 billion) of Canadian uninsured mortgages have been pooled in RMBS deals, or about 0.1% of the country’s mortgage debt, according to rating company DBRS Ltd. No lender has widely marketed such a deal since September, when private lender MCAP sold C$254 million of the notes.
  • Toronto’s housing market came storming back in May. Sales in Canada‘s biggest city soared 19% from the same month a year earlier to 9,989 transactions, while prices rose, the Toronto Real Estate Board reported Wednesday. While a substantial jump, sales are picking up from a 15-year low last May, and are still below the 10-year average of about 10,300 for the month. May sales were the highest on a seasonally adjusted basis since December 2017, just before new stress tests came into place. The market took a deep dive after the government tightened mortgage lending rules in January 2018. While 2019 got off to a ‘sluggish’ start, sales picked up in the second quarter and the market continues to stabilize, according to the report.
  • Nokia Oyj is aiming to score a 5G win in Canada as Huawei Technologies Co. faces increased scrutiny over its move into the superfast network. The Finnish company is working with telcos including BCE Inc., Telus Corp. and Shaw Communications Inc., to demonstrate its 5G capability and get selected for a field trial, lab trial, or contract, according to Richard Herald, president of the Canada division. Rogers Communications Inc. has already chosen Ericsson AB as its partner for 5G.

   

• World Headlines
  • European stocks took a break on Wednesday after back-to-back gains, as losses in carmakers and banks held back a further leg up for the region’s benchmark. The Stoxx Europe 600 Index fell less than 0.1%, following Tuesday’s advance after Federal Reserve Chairman Jerome Powell signaled an openness to rate cuts if necessary over trade tensions. Travel and leisure was the best performing sector, up 0.8%, followed by technology at 0.7%. Among companies, aluminum producer Norsk Hydro ASA stood out, gaining as much as 6.8%, after delivering a surprise profit in the first quarter.
  • Futures on the S&P 500, Dow Industrials and Nasdaq all indicated gains at the New York open after the underlying S&P index climbed the most since January on Tuesday. That’s when Jerome Powell said the central bank is monitoring the trade war’s impact and would act appropriately to sustain the U.S. expansion.
  • Japan and Hong Kong, where stocks have been among the most oversold in the region, are leading the rebound. Markets in India, Singapore, Indonesia, Malaysia and the Philippines are shut Wednesday for holidays. For some market observers, Powell’s latest comments remind them somewhat of the Fed’s shift in tone around the turn of the year that spurred a first quarter rally in global stocks. Steven Leung, an executive director at Uob Kay Hian (Hong Kong) Limited, said while the situation has similarities — stocks had been under pressure before dovish Fed comments — the current market lacks a further catalyst for a sustained rebound.
  • Oil fell again on signs that U.S. crude inventories jumped last week, worrying investors that supplies are swelling at the same time a trade war threatens demand. Futures slipped as much as 1.3% in New York to trade under $53 a barrel, not far from the four-month low touched on Monday. The American Petroleum Institute reported U.S. crude stockpiles rose by 3.55 million barrels last week, according to people familiar with the data. That suggests government statistics due later Wednesday may show a bigger decline than the 2 million barrels analysts have predicted.
  • Gold climbed to the highest in more than three months after the Federal Reserve signaled an openness to cutting rates and as the U.S.-China trade war escalates, boosting haven demand. Fed Chairman Jay Powell also pledged Tuesday to keep a close watch on fallout from a deepening set of disputes between the U.S. and its largest trading partners. Rate cuts make a non-interest bearing asset like gold more attractive. In the latest salvos in the ongoing trade battle, China issued a travel advisory on the U.S. through the end of the year and its state planner said it’s closely studying proposals to establish rare-earth export controls. Meanwhile, the International Monetary Fund trimmed its forecast for economic growth for China, citing the trade war as the main factor.
  • Investments in fixed-income exchange-traded funds expanded more than fivefold in the past week. ETFs that invest in government bonds led the gain, while funds that focus on bank loans fell at a faster pace. Inflows to U.S.-listed bond ETFs totaled $8.88 billion in the week ended June 4, compared with $1.7 billion in the previous period, according to data compiled by Bloomberg. Government bond funds had $7.87 billion of gains, compared with $1.47 billion the previous week. Bank loan funds had outflows of $776 million, compared with outflows of $118 million a week earlier.
  • Gold’s safe-haven trade may have finally gotten its mojo back. While trade war jitters have caused a massive meltdown in equity markets, gold has reaped the benefit. Gold prices climbed above $1,300 an ounce on May 31, when President Donald Trump said he plans to impose a 5% tariff on all Mexican goods. Gold prices have continued to climb and the S&P/TSX Global Gold Sector Index has now added C$16.7 billion in market value ($12.5 billion) over the past three days, according to data compiled by Bloomberg.
  • The European Union’s executive arm took the first step toward disciplining Italy over its failure to rein in debt, setting up a clash with the government in Rome and paving the way for an initial penalty of as much as 3.5 billion euros ($4 billion). In a report published Wednesday, the European Commission said Italy hasn’t made sufficient progress in reducing its mountain of debt in line with the bloc’s fiscal rules, and that a disciplinary process is “warranted.” The step marks an escalation of the country’s budget tussle that roiled markets at the end of 2018 and is a warning for Italy’s populist leaders, particularly Deputy Premier Matteo Salvini who has vowed to change EU budget rules.
  • China fined Ford Motor Co.’s main joint venture in the country for antitrust violations, marking the latest action toward a U.S. company as tensions between the two nations escalate. Changan Ford Automobile Co. will be fined 162.8 million yuan ($23.6 million) for restricting retailers’ sale prices in the southwestern city of Chongqing since 2013, according to a statement on the State Administration for Market Regulation’s website. The fine amount is equivalent to 4% of Changan Ford’s annual sales in Chongqing.
  • The Federal Reserve’s top policy makers aren’t yet ready to cut interest rates, but worsening trade tensions are nudging them in that direction. In separate comments Tuesday, Fed Chair Jerome Powell and his No. 2, Richard Clarida, reassured nervous investors they’re watching closely for signs that disputes between the U.S. and its trading partners are denting the outlook for the world’s largest economy. Their remarks moved the Fed slightly closer to its first rate cut since 2008.
  • Beverly Hills City Council unanimously approved an ordinance to prohibit the sale of tobacco products in the California city. Under the ban, which will come into effect on Jan. 1, 2021, hotels may only sell to guests. All other businesses “shall stop selling tobacco products,” according to a statement on the City’s website. The ordinance includes a hardship exemption provision for retailers that demonstrate the ban would cause undue hardship. The regulation also includes a permanent exemption for existing cigar lounges and a City Council review of the impacts on tourism in three years.
  • Central banks are resuming their first-responder role as the world economy runs into trouble even if they lack the firepower they once had at their disposal. With Australia cutting interest rates on Tuesday for the first time in three years and India likely to follow on Thursday, monetary policy makers are again seeking to shore up weak growth and inflation. European Central Bank officials are poised this week to agree, at the very least, on generous terms for new long-term loans for banks.
  • The International Monetary Fund trimmed its forecasts for economic growth in China, and said the trade war with the U.S. is tilting the balance of risks to the downside. The world’s second-largest economy is forecast to expand by 6.2% this year and 6.0% in 2020, a 10th of a percentage point down from the previous estimate in both cases, the fund said at a briefing in Beijing Wednesday.
  • Britain’s dominant services industry expanded more than forecast in May, a survey showed, though that wasn’t enough to lift the overall economy out of stagnation. A Purchasing Managers Index for services increased to 51 in May, above the 50-mark that indicates expansion and a better reading than the 50.5 that economists expected. But other surveys this week showed contractions in construction and manufacturing, and retail sales in a slump.
  • France will back the proposed merger between Renault SA and Fiat Chrysler Automobiles NV, as long as it offers the state a range of guarantees on jobs, a board seat and local headquarters, said Finance Minister Bruno Le Maire. Renault’s directors are examining in detail a preliminary merger agreement hammered out over the past days, according to a person familiar with the matter who asked not to be identified discussing private matters. Obtaining a seat on the new entity’s board for the state, the carmaker’s most powerful shareholder, is a “tough point” in the talks, Le Maire said.
  • China Three Gorges Corp. is weighing a deal to gain control of EDP-Energias de Portugal SA’s Brazilian business, people with knowledge of the matter said. State-owned Three Gorges is considering merging its own Brazilian assets with EDP’s operations in the South American country, which are run through publicly-traded EDP-Energias do Brasil SA, according to the people. Three Gorges may seek a majority stake in the combined entity, the people said, asking not to be identified because the information is private.
  • Shares in Altice Europe NV fell as much as 7% after the sale of a stake in its Portuguese fiber network drew muted interest from potential buyers. Final offers valued the high-speed network at around 3 billion euros ($3.4 billion) to 4 billion euros, people familiar with the matter said. Altice Europe was seeking a valuation of at least 5 billion euros, Bloomberg News reported in February. Several suitors that expressed interest earlier in the process, including Brookfield Asset Management Inc., decided against submitting binding bids, said the people, who asked not to be identified as the matter is private.
  • T-Mobile US Inc. is working with Goldman Sachs Group Inc. to help sell assets as it seeks regulatory approval of its $26.5 billion merger with Sprint Corp., according to people familiar with the matter. Tapping Goldman Sachs shows that the companies are moving ahead with a sale of Sprint’s Boost prepaid brand, said the people, who asked to not be identified because the process is private. They agreed to sell Boost to win clearance from the Federal Communications Commission and are also considering offloading airwaves to appease the Justice Department.
  • Republican lawmakers eager to halt a new round of tariffs on Mexican goods next week have spent days urging the Trump administration to negotiate a solution with Mexico’s government. But President Donald Trump is making clear he has no intention of cutting a quick face-saving deal, warning on Twitter late Tuesday that he’s not “bluffing” in his threat to impose 5% tariffs on all imports from Mexico starting June 10.
  • Wells Fargo & Co. pledged $1 billion to support affordable housing initiatives as the scandal-tarnished bank embarks on a plan to spend 2% of its profits on philanthropy. The six-year commitment to housing announced Wednesday is part of a broader overhaul of the lender’s philanthropic strategy, which also will focus on supporting small businesses and helping consumers manage finances. The bank previously said it will donate a cut of after-tax earnings to a variety of causes starting in 2019, after pumping $444 million into 11,000 nonprofits last year.
  • Nissan Motor Co. is sending a message to partner Renault SA and Fiat Chrysler Automobiles NV about their plan to create the world’s third-biggest car company: Not so fast. When Renault’s board votes on the offer as soon as Wednesday, its two Nissan representatives likely will abstain, according to people familiar with the matter. Nissan believes there is a lack of precision and detail in the merger proposal by Fiat, and that makes the Japanese automaker uncomfortable, the people said, asking not to be identified because the information is private.

*All sources from Bloomberg unless otherwise specified