Jennifer Dowty
Jennifer Dowty, Chartered Financial Analyst, writes exclusively for Globe Unlimited subscribers. The Before the Bell report is updated throughout the premarket to reflect latest developments.
North American futures are sharply lower today, pointing to another day of losses in equity markets, as worries continue to escalate over developments in China. Futures for the major indexes are approaching losses of nearly 1 per cent.
On Tuesday, major North American markets, in particular those in the U.S., took a nosedive on news of China devaluing its currency. However, by the end of the day, the S&P/TSX composite index was down just 51 points or 0.36 per cent. Safe havens for investors were stocks in the utilities, health care and consumer staples sectors. The energy sector was not the worst performer in the S&P/TSX composite index on Tuesday, even with the slide in oil prices. It was the telecom, industrials, and financials sectors that were the leading laggards.
The People's Bank of China devalued its currency again Tuesday night, for a second consecutive day. The current situation in China is a global concern and it is not going away any time soon. With this intervention by Chinese authorities, the question is just how bad is the economic situation in China? How deep will the economic slowdown be and how long will it last?
The economic data points are weaker than expected. On Monday, investors shrugged off the terrible economic import/export data out of China, a mistake in my opinion. China also reported weak July auto sales, down 7.1 per cent year-over-year, the largest drop in over two years, and Money Supply M2 increased 13.3 per cent year-over-year in July with China authorities pumping cash into the system. Manufacturing activity is contracting, with the July Manufacturing Purchasing Managers' Index at 47.8, down from 49.4 in the previous month. Overnight, July Industrial Production was reported to have increased 6.0 per cent, below expectations of 6.6 per cent and the prior reading of 6.8 per cent.
Another reason for concern is that major multinational corporations reported declining Chinese sales this earnings season and expressed near-term caution for future sales growth in the region.
The Chinese economy is a key reason why I have been recommending investors use rallies in stocks to take some profits off the table, as I see the S&P/TSX composite index possibly retesting the 14,000 level in the near term, which would be down three per cent from current levels. The VIX Index, a measure of fear in the markets, is just below 14, a relatively low reading, which is evidence that investors are not panicking, but we are in store for some near-term volatility and weakness in the markets.
Additional implications lie with the U.S. dollar and whether or not the U.S. Federal Reserve delays increasing interest rates. Chinese authorities continue to take actions aimed to control the slide in its economic growth. Atlanta Fed President, Dennis Lockhart, made recent hawkish comments stating that it would, "Take a significant deterioration in the economic picture for me to support a delay in lifting interest rates past September." Then you have Stanley Fischer, the Federal Reserve's vice chairman, taking a dovish stance, highlighting the risk of raising rates when inflation is very low.
Does China's currency devaluation change the path for the U.S. Federal Reserve? It is still unclear. What is clear is that the U.S. Fed Chair, Janet Yellen, has indicated that any action to raise rates is data dependent and she indicated that the Committee will assess and take into account "international developments". So watch for the U.S. June JOLTS job opening report due out this morning at 10 a.m. (EST), and the U.S. retail sales report due out on Thursday for indications to the health of the U.S. economy.
Another important data point to watch for today is the weekly oil inventory report from the U.S. Energy Information Administration due out at 10:30 (ET), as this could add further volatility to the price of oil.
Turning to earnings, we are roughly third-quarters of the way through this earnings with 181 companies in the S&P/TSX composite index that have now reported earnings since July 20. In terms of earnings surprises, 41 per cent of companies have reported better-than-expected sales, 49 per cent have beat earnings estimates. In terms of growth, sales have, on average, declined by 16 per cent year-over-year, and earnings have fallen, on average, by 22 per cent year-over-year.
Today, 14 companies in the S&P/TSX composite index are expected to report earnings, those being CAE, ATS Automation Tooling Systems, TORC Oil & Gas, Air Canada, Alamos Gold, Metro, Computer Modelling Group, Russel Metals, Great Canadian Gaming, Chemtrade Logistics Income Fund, Granite REIT, Element Financial, Intertain Group, and Painted Pony Petroleum. For the balance of the week, 19 companies report on Thursday, and two on Friday.
Major European markets are down with the German and French markets down over two per cent and the London FTSE down just over one per cent. Stocks with Chinese exposure are experiencing steep declines in their stock prices. For instance, European car manufacturers such as BMW, Daimler, Renault, and Volkwagen, for which Chinese sales are an important growth component are down sharply in trading action today. Global mining companies, Anglo American, BHP Billiton, Glencore, and Rio Tinto are also lower today on concerns over China and global resource demand.
Asian markets are also weaker: the Shanghai Stock Exchange composite index closed down 1.1 per cent, and the Shenzhen Stock Exchange composite index declined 1.5 per cent. Japan's Nikkei 225, was down 1.6 per cent.
The bottom line: Volatility remains high and markets, at least in the near-term, are headed lower. I remain cautious but I am not calling for a doomsday scenario.
Now, here is a look at major markets and news.
MARKET DATA:
Futures
S&P 500 -0.9 per cent; Dow -0.9 per cent; Nasdaq: -0.9 per cent
Equities
Hong Kong's Hang Seng -2.38 per cent
Shanghai composite index -1.07 per cent
Japan's Nikkei -1.58 per cent
London's FTSE 100 -1.13 per cent
Germany's DAX -2.17 per cent
France's CAC 40 -2.12 per cent
Stoxx 600 -1.93 per cent
Commodities
WTI crude oil (Nymex Sep) +1.28 per cent at $43.63 (U.S.) a barrel
Gold (Comex Dec) +0.79 per cent at $1,116.10 (U.S.) an ounce
Copper (Comex Sep) -0.26 per cent at $2.33 (U.S.) a pound
Currencies
Canadian dollar at 77.05 (U.S.), +0.0080
U.S. dollar index -0.8260 at 96.46
Bonds
U.S. 10-year Treasury yield 2.11 per cent, -0.03
ECONOMIC INDICATORS:
Teranet said Canada July home prices were up 1.2 per cent from June vs estimates for a 0.7 per cent rise.
STOCKS TO WATCH:
Air Canada reported a surge in second- quarter profit that met analyst estimates, aided by deeper cost savings and a decline in jet-fuel prices. Earnings excluding one-time items jumped from 47 cents a share to 85 cents, matching the average estimate of analysts in a Bloomberg survey. Sales of $3.41 billion compared with a $3.45 billion estimate. The company said on Wednesday it now expects adjusted cost per available seat mile to dip 1-2 per cent in 2015, lower than the 1.5-2.5 per cent decline it forecast in May.
Alibaba Group Holding Ltd. will buy back as much as $4 billion of stock as it tries to revive a share price battered by concerns about the slowing Chinese economy less than a year after going public. The e-commerce operator will buy the shares over a two-year period, mainly to offset dilutions such as from its compensation programs. Wednesday's announcement came as the company posted first-quarter sales that rose at the slowest pace in at least three years and posted transaction volumes that missed estimates. Shares fell more than 6 percent in pre-market trading.
Metro Inc's quarterly profit rose 13 percent as new fresh foods products boosted the company's same-store sales. The company's same-store sales rose 4.3 percent in the third quarter ended July 4. Net income rose to $163.5 million, or 64 Canadian cents per share, from $144.5 million, or 54 Canadian cents per share, a year earlier. Revenue increased 6 percent to $3.84 billion. The results beat expectations.
Other earnings today include: Abercrombie & Fitch Co.; ATS Automation Tooling Systems Inc; CAE Inc.; Canadian Energy Services & Technology Corp; Cisco Systems Inc.; Element Financial Corp; Great Canadian Gaming Corp; Holloway Lodging Corp; Morguard Corp; News Corp.; Petrowest Corp; Peyto Exploration & Development Corp; Russel Metals Inc; SilverCrest Mines Inc; SolarEdge Tech Inc.; SunOpta Inc; TORC Oil & Gas Ltd; Total Energy Services Inc; Touchstone Exploration Inc; Yellow Pages Ltd
ANALYST ACTIONS:
Canaccord Genuity upgraded Veresen to "buy" from "hold" and maintained a $15 (Canadian) price target.
Raymond James upgraded Aecon Group to "strong buy" from "outperform" and maintained a $17.50 (Canadian) price target.
Desjardins Securities downgraded Alderon Iron Ore to "sell" with a lowered price target of 10 cents (Canadian).
QUOTE OF THE DAY:
"Pessimists may be right in the end, but an optimist has a much better time getting there." - Samuel R. Allen, CEO of Deere
Jennifer Dowty