Equities
Bay Street stock futures were slightly higher early Wednesday even as trade worries and declines by long-dated U.S. bond yields rattled world markets. Interest rates will be at the forefront in this country this morning as the Bank of Canada delivers its latest policy announcement. U.S. markets are closed - a day after the Dow dropped nearly 800 points on renewed concerns about U.S.-China trade - as the U.S. marks a national day of mourning for the passing of former President George H. W. Bush.
Overseas, world shares followed Wall Street’s lead falling to one-week lows with MSCI’s all-country index shedding about a half a percent. The latest drop after U.S. President Donald Trump raised the prospect of “major tariffs” on China just days after touting a break through meeting with Chinese leader Xi Jinping. Market sentiment was already on edge after the inversion of the U.S. bond yield curve raised concerns about future U.S. growth.
“The inversion in the US yield curve between two and five years has got people talking about recession risks which understandably weighed on stock markets,” OANDA analyst Craig Erlam said. “The timing of the inversion - coming the day before the US market closure as a national day of mourning takes place following the death of President George H.W Bush – likely exacerbated the move as investors worry about the risk of holding long positions.”
That, he added, spread through Asia and Europe overnight, although the sell off has been much less significant. “Still, more negativity at a time when markets have shown signs of recovery threatens the prospect of a Santa rally which, on Monday, was looking promising.”
Shortly after the Canadian markets open, investors will get the Bank of Canada’s decision on interest rates. Markets aren’t expecting an increase in the central bank’s final policy announcement of the year and some economists are now questioning whether a move early next year is likely given recent declines in crude prices and softness beneath the headline of last week’s third-quarter GDP report. Wednesday’s policy announcement is statement only with no news conference to follow although Bank of Canada Governor Stephen Poloz is scheduled to speak Thursday morning in Toronto.
In corporate news, Canadian Natural Resources Ltd. forecast a 2019 base budget of about $1-billion lower than last year. The company cited a lack of market access and “dysfunctional” government processes. Canadian Natural says it expects 2019′s base capital program to be about $3.7-billion. Early this week, Alberta announced a plan to cut crude production in a bid to curb market oversupply. The province plans to reduce production 325,000 barrels per day starting in January, amounting to an 8.7-per-cent cut.
Overseas, the pan-European STOXX 600 was down 0.72 per cent in morning trading with most sectors under water. Trade concerns pushed European material and construction stocks lower in early trading. In Britain, the FTSE 100 was down 1.07 percent. France’s CAC 40 fell 0.81 per cent and Germany’s DAX lost 0.75 per cent.
In Asia, the Shanghai Composite Index fell 0.61 per cent while Hong Kong’s Hang Seng lost 1.62 per cent. In Japan, the Nikkei fell 0.53 per cent.
Commodities
Crude prices were mixed early on with broad market declines and global economic fears weighing on sentiment a day before OPEC and its allies are set to meet to discuss a potential production cut. Brent crude was slightly lower at last check and had a range for the day of US$60.80 to US$62.21. West Texas Intermediate was little changed and had a range for the day of US$52.16 to US$53.45.
Crude prices rallied roughly 10 per cent Monday and Tuesday on early optimism over global trade following the weekend meeting between the U.S. and Chinese leaders. However, uncertainty over the details of the agreement and statements later by Mr. Trump about the possibility of future tariffs rattled the markets with prices losing about half of the week’s gains.
“The OPEC summit weeks are always exciting headline-wise, but for those looking for more confirmation of the global supply glut, as if we need a reminder,” OANDA’s Stephen Innes said in an evening note. “The American Petroleum Institute came in an unexpected 5.4 million barrels build again befuddling expectations for higher refining rates to produce a seasonal draw while stockpiles at the Cushing, Oklahoma delivery point for WTI futures increased 1.4 million barrels.”
He said, going into Thursday’s OPEC meeting in Vienna, producers are “still considerably apart” on a production cut. “OPEC is floating trial balloons suggesting all producers cut by 3.0-3.5 per cent from October production levels, with no exemptions. But again we’re back to uncertainty on both sides of the equation.”
In other commodities, gold prices pulled back from five-week highs as the U.S. dollar nudged higher. Spot gold was down 0.2 per cent at US$1,235.31 per ounce in morning trading in Europe, after touching its best level since Oct. 26 at US$1,241.86 an ounce on Tuesday. U.S. gold futures were down 0.5 per cent.
“Gold prices are a little lower on Wednesday, weighed down slightly by the U.S .dollar, as the yellow metal pushes against US$1,240 and eyes levels not reached since July,” Mr. Erlam said. "The momentum certainly appears to be with the bulls at the moment, especially if the dollar remains under pressure in the aftermath of the trade war truce."
He said he things “a move back towards US$1,260 and even US$1,280 is perfectly feasible in the coming weeks.”
Currencies and bonds
The Canadian dollar was lower ahead of the Bank of Canada rate decision weighed down by recent declines in crude prices and a slight move higher by the U.S. dollar against its global counterparts. The day range on the loonie so far is 75.22 US cents to 75.45 US cents.
The central bank’s rate decision is due at 10 a.m. (ET). The bank’s key rate is expected to hold at 1.75 per cent.
RBC chief currency strategist Adam Cole said weak internals for third-quarter GDP and lower oil prices have now left fourth-quarter growth tracking closer to 1 per cent that the Bank of Canada’s forecast of 2.3 per cent.
“Mandated oil production cuts in Alberta and the restart of U.S. refineries that had been closed for maintenance should allow WCS (Western Canada Select) oil price spreads to narrow further,” Mr. Cole said. “However, that helps less with global benchmark prices having also declined. With the cuts expected to weigh on GDP in [the first half of] 2019 and the overhang of the shutdown of the Oshawa car plant in late 2019, it should reinforce the Bank’s gradual approach to raising rates.”
Given those factors, Mr. Cole says, he expects the bank to reiterate that “the policy interest rate will need to rise to a neutral stance.”
In world currencies, the U.S. dollar index edged higher but the gains were capped by an inversion in part of the U.S. Treasury yield. On Tuesday, two-year yields rose above those for longer-dated five-year notes for the first time in 10 years. (An inverse yield curve is often seen as a predictor of lower interest rates down the road with longer-term bonds coming into demand, resulting in lower yields.)
The U.S. dollar index crept up 0.1 per cent to 97.103, cutting the week’s losses to 0.2 per cent. Reuters notes that the index is 0.6 per cent off a 17-month peak of 97.693 touched on Nov. 12. The U.S. dollar has been under pressure since Federal Reserve chair Jerome Powell said last week that interest rates appeared close to neutral levels, suggesting end to the hiking cycle was coming.
Stocks set to see action
National Bank of Canada raised its dividend by 3 cents or 5 per cent to 65 cents. The increase came as the bank reported adjusted earnings in the latest quarter of $1.53 a share, ahead of market forecasts which called for earnings of $1.52.
Retailer Roots reported profit of $2.8-million or 7 cents in the latest quarter, down from $5-million or 12 cents a year earlier. Adjusted income came in at 11 cents a share, down from 23 cents. Total sale fell 3 per cent to $87-million from $89.7-million a year ago. The retailer also cut its sales outlook for the fiscal year to between $358-million to $375-million from its previously stated target range of $410-million to $450-million. Adjusted net income is now seen coming in between $20-million and $24-million. Earlier targets had called for adjusted profit of $35-million to $40-mill.
Hudson’s Bay Co reported a wider third-quarter loss on Wednesday as depreciation and amortization expenses rose and joint venture losses increased. HBC reported a net loss from continuing operations of $124-million, or 52 cents a share, for the three months ended Nov. 3, compared with a loss of $116-million, or 64 cents, a year earlier. Including Hudson’s Bay’s European operations, which are in a joint venture with Austrian rival Signa Holding, the company posted a net loss of $164-million, or 69 cents a share, narrowing from $243-million, or $1.33 a share, a year earlier.
Takeda Pharmaceutical shareholders approved on Wednesday its US$59-billion takeover of London-listed Shire, creating a global powerhouse with a stronger drugs pipeline but one that is saddled with massive debt. Takeda will be joining the ranks of the world’s top 10 drug makers and gaining expertise in rare diseases through the deal, the biggest overseas acquisition by a Japanese company.
The United States Postal Service should have more flexibility to raise rates for packages, according to recommendations from a task force set up by President Donald Trump, a move that could hurt profits of Amazon.com Inc. and other large online retailers. The task force was announced in April to find ways to stem financial losses by the service, an independent agency within the federal government. Its creation followed criticism by Trump that the Postal Office provided too much service to Amazon for too little money. The Postal Service lost almost US$4-billion in fiscal 2018, which ended on Sept. 30, even as package deliveries rose.
More reading:
Why investors are suddenly so fearful again about bond yields
Wednesday’s small-cap stocks to watch
Economic news
(10 a.m. ET) Bank of Canada policy announcement.
(2 p.m. ET) Federal Reserve’s Beige Book is released.
With Reuters and The Canadian Press
Terry Weber