Colin Cieszynski
The Before the Bell report is compiled by editors of The Globe and Mail and is updated throughout the morning to reflect latest developments. Colin Cieszynski, Chartered Financial Analyst and Chartered Market Technician, is chief market strategist with CMC Markets.
Trading this week is off to a mixed start, as traders assess the implications of Friday's weak nonfarm payrolls, a number of Brexit polls showing the Leave side starting to pull away, and prepare for today's comments from Fed Chair Janet Yellen.
European trading this morning finds the FTSE up 0.9 per cent and outperforming its continental peers, where the Dax is basically flat. U.S. index futures are flat to slightly higher after Friday's roller-coaster ride that saw U.S. stocks claw back most of their early losses. Commodity trading finds crude oil up nearly 1.0 per cent today, with Brent sitting on $50 once again and WTI trading above $49. Commodity gains are broad based with copper rising 0.5 per cent, and corn and wheat gaining 1.5 per cent.
Canadian gold stocks staged major rallies on Friday, outpacing the price of gold to the upside, and could be vulnerable today with gold levelling off. Base metal miners could benefit from the rising copper price while energy producers could attract support with crude hovering near $50.
Friday's nonfarm payrolls report, which showed jobs only increasing by 38,000, sparked an initially big knee-jerk reaction from traders who sent the U.S. dollar and stocks lower and gold higher on speculation that this could keep the Fed from raising interest rates in June or July, as the central bank had previously been hinting.
Friday afternoon and into today, however, the initial flight to defensive havens has been fading. U.S. stocks have regained all their early losses and remain supported. The U.S. dollar has stabilized at a lower level and has started to rebound today, while the Japanese yen and gold are starting to drop back.
There has been a lot of speculation from FOMC members in recent weeks about the potential for a U.S. interest rate increase in June or July. Today, Ms. Yellen gets the last word before the blackout starts heading into next week's FOMC meeting. While she appears likely to take a neutral stance again, traders will be looking to see if she shifts to dovish from neutral in response to the payrolls.
There are three ways the shockingly low nonfarm payrolls can be interpreted:
-As a sign that the US economy is slowing and the Fed should wait for more data before raising interest rates, as was suggested by Fed governor Lael Brainard, a known dove in her speech on Friday.
-Considering that there was no warning about a low payroll figure through the month from jobless claims or ADP payrolls, and with the unemployment rate falling to 4.7 per cent from 4.9 per cent, the payroll data could be an outlier with the potential to be revised back upward. Over the weekend, Cleveland Fed President Loretta Mester indicated one data point doesn't change her thinking on gradual rate increases.
-A slowing in job growth could also be a sign that the U.S. is nearing full employment. Boston Fed President Eric Rosengren indicated the 4.7 per cent unemployment rate has reached his estimate of full employment. He also suggested, however, that while he supports rate hikes over time, it remains to be seen if the May payrolls are an anomaly or the start of labour market slowing.
Where Ms. Yellen lands on this divide could have a significant impact on trading in the U.S. dollar and stocks through the week, as the big June meeting approaches. It also will be interesting to see if she makes any comments on whether the Brexit vote may influence their decision.
In early May, several FOMC speakers had suggested that they could hold off raising interest rates in June, as their meeting is being held just a few day ahead of the U.K. Brexit referendum. After it was pointed out to them that letting events in Mother England influence their decision making could be seen as giving up U.S. independence, Fed members changed their tune for a couple of weeks and downplayed the influence of Brexit on their thinking.
Today's trading in U.K. markets in reaction to a series of polls showing the Leave side pulling out in front and gaining momentum indicates that the Street appears to have already priced in the potential for a Brexit at current levels. The British pound continues to come under pressure following polls favouring Leave, but each drop is getting smaller and shorter before support comes in. Meanwhile, the FTSE outperforming continental indices today on all the news favouring Leave momentum suggests that some traders could be thinking that the prospects for the U.K. should the Leave win may be brighter than the prospects for an EU without the UK. It's also possible the Street could be seeing this as getting the vote over with and moving on, regardless of the result as a potential positive. Either way, it's becoming clear that fear of a Brexit in the markets continues to fade away.
Now, here is a closer look at what's going on this morning.
MARKET DATA:
Futures
Dow +0.14 per cent; S&P 500 +0.10 per cent; Nasdaq: +0.13 per cent; TSX 60 +0.25 per cent
Equities
Japan's Nikkei -0.37 per cent
Shanghai composite index -0.15 per cent
Hong Kong's Hang Seng +0.40 per cent
Germany's DAX +0.01 per cent
London's FTSE +0.94 per cent
France's CAC 40 -0.12 per cent
Commodities
WTI crude oil (Nymex July) +1.03 per cent at $49.12 (U.S.) a barrel
Gold (Comex Aug) +0.08 per cent at $1,243.80 (U.S.) an ounce
Copper (Comex July) +0.69 per cent at $2.12 (U.S.) a pound
Currencies
Canadian dollar -0.01 at 77.26 cents (U.S.)
U.S. dollar index +0.23 at 94.26
Bonds
Canada 10-year bond yield +0.023 at 1.201 per cent
KEY ECONOMIC RELEASES
(12:30 p.m. ET) U.S. Fed chair Janet Yellen speaks to the World Affairs Council of Philadelphia on economic outlook and monetary policy
KEY STOCKS TO WATCH
Earnings include: Caseys General Stores Inc.; Thor Industries Inc.; United Natural Foods Inc.
Wal-Mart's shares were up 1 percent at $71.58 in the premarket after Jefferies upgraded the stock to "buy".
Devon Energy Corp., the energy producer that's targeted $3 billion of asset sales to fund drilling and lower debt, agreed to sell fields in Texas and Oklahoma and a royalty interest in the northern Midland Basin for almost $1 billion to undisclosed buyers.
Also see: Monday's small-cap stocks to watch
With files from wire services