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.
It's a reversal day. What a difference a day can make. On Monday, panic selling characterized global markets and today, North American futures are indicating a strong opening for equity markets. Futures for the major U.S. indexes are surging more than 3.5 per cent.
What is driving European markets and soon-to-open North American markets higher? Overnight, China made moves to stem the losses by cutting interest rates -- the fifth time since November -- and reduced bank reserve requirements to help prop up its stumbling economy. People's Bank of China once again cut interest rates by 0.25 per cent to 4.6 per cent. The required reserve ratio was also lowered by 50 basis points. European markets have reacted positively to these actions and North American futures are indicating that markets will open sharply higher.
European leaders tried to quell investor concerns, with German Chancellor Angela Merkel stating, "I am convinced that China will do everything possible to stabilize its economic situation. China is an important partner to the European Union and we are in close contact with them." The French President, François Hollande, remarked, "I am sure that China will find the right response to overcome its economic difficulties which every economy has to face from time to time."
As well, there is opportunistic buying taking place from long-term investors. The market selloff has been broad based and created many buying opportunities. In the S&P 500 Index, reportedly 41 per cent of stocks are in bear market territory, with declines of 20 per cent or more from earlier highs. As well, 89 per cent of stocks are reportedly in correction territory, with declines of 10 per cent or more from recent highs. This should be of no surprise to investors but leading the weakness are the energy and materials sectors, which are both in bear market territory.
In terms of valuations, the S&P/TSX composite index is now trading at a price-to-earnings (p/e) ratio of 14.7 times the forward 12-month consensus estimate. This is at a discount to its three-year historical average of 15.1 times, and relatively in line with the five- and 10-year historical averages of 14.5 times. For U.S. markets, the S&P 500 Index is trading at a forward p/e multiple of 15.4 times, its three- and five-year averages are 15.3 and 14.2 times, respectively. In summary, valuations are reasonable relative to historical levels.
For now, the focus has shifted back to steadily improving European and U.S. economic conditions as well as fundamentals. German August IFO Business Climate index was better than expected at 108.3 compared to expectations of 107.6.
Major European markets are up strongly, reversing Monday's losses, with gains accelerating as the trading day goes on. The German and French markets are up over 4 per cent and London's FTSE is up over 3 per cent.
In the Pacific Rim, markets were mixed. Hong Kong's Hang Seng Index gained 0.7 per cent, while the Shanghai Stock Exchange composite index collapsed by 7.6 per cent and the Shenzhen Stock Exchange composite index charged lower by 7.1 per cent. Japan's Nikkei 225 was also down by 4 per cent.
On the commodity front, the price of oil is stabilizing and back up today, rising into the $39 (U.S.) level, just sitting below resistance of $40. Gold prices are off slightly this morning. Global mining stocks are rebounding in overseas markets with BHP Billiton, Rio Tinto, and Glencore all in positive territory.
Here is the bottom line: For now, fear has been replace by opportunistic buying. And the volatility is likely not over and will remain with us in the near-term. However, this volatility presents a buying opportunity for investors and I recommend investors take a staggered approach to buying on the market dips.
Watch for the following U.S. economic data due out today, new home sales, consumer confidence, and S&P/Case-Shiller Home Price Index data, and on Thursday morning U.S. second quarter GDP. There are no economic reports out of Canada today.
Now, here is a closer look at major markets and news.
MARKET DATA:
Futures
S&P 500 +3.31 per cent; Dow +3.32 per cent; Nasdaq: +3.75 per cent
Equities
Hong Kong's Hang Seng +0.72 per cent
Shanghai composite index -7.63 per cent
Japan's Nikkei -3.96 per cent
London's FTSE 100 +3.17 per cent
Germany's DAX +3.87 per cent
France's CAC 40 +4.21 per cent
Stoxx 600 +4.09 per cent
Commodities
WTI crude oil (Nymex Oct) +2.48 per cent at $39.19 (U.S.) a barrel
Gold (Comex Dec) -0.38 per cent at $1,149.20 (U.S.) an ounce
Copper (Comex Dec) +1.33 per cent at $2.28 (U.S.) a pound
Currencies
Canadian dollar at 75.83 (U.S.), +0.58
U.S. dollar index +0.67 at 93.99
Bonds
U.S. 10-year Treasury yield 1.997 per cent, -0.0570
ECONOMIC INDICATORS:
Germany real GDP
(9 a.m. ET) U.S. S&P Case-Shiller Home Price Index for June. Consensus is an increase of 0.1 per cent from May and 5.1 per cent year over year.
(10 a.m. ET) U.S. new home sales for July. Consensus is an annualized rate increase of 512,000 or 6.2 per cent
(10 a.m. ET) U.S. Conference Board consumer confidence index for August. Consensus is 93.1 per cent, up from 90.9 in July.
STOCKS TO WATCH:
Bank of Montreal reported that its profits rose 6 per cent in the third quarter, suggesting that much of the turmoil sweeping through the Canadian and global economies has yet to affect bank results. BMO, the first of Canada'a big banks to report its results this week, said that its net earnings during the quarter were $1.19-billion or $1.80 a share. After accounting for some extraordinary items, adjusted earnings were $1.86 a share, handily topping analysts' expectations of $1.73 a share.
Best Buy Co. reported a better-than-expected 12-per-cent increase profit in its second quarter, as sales of large-screen TVs and phones continued to drive sales growth. This comes on the back of cost cutting, and the company said it wants to cut another $400-million (U.S.) in costs in the next three years as it closes the Future Shop chain to focus on the Best Buy brand. For the second quarter ended Aug. 1, the company posted earnings of $164 million, or 46 cents a share and revenues of $8.53-billion. Excluding restructuring charges and other items, per-share earnings grew to 49 cents from 42 cents a year earlier. Analysts expected 34 cents a share in earnings and $8.29-billion in revenue.
Canadian oil and gas producer Encana Corp. said it will sell its Haynesville natural gas assets in northern Louisiana for $850-million (U.S.) to GEP Haynesville LLC. Encana also said it will reduce its gathering and midstream investments by about $480-million on an undiscounted basis by 2020. Encana said it will use the cash from the sale to reduce its debt and strengthen its balance sheet.
U.S. homebuilder, Toll Brothers reported third-quarter earnings well below the Street's expectations. Earnings came in at 36 cents (U.S.) per share versus the consensus forecast of 50 cents per share.
Children's Place Inc. posted a worse-than-expected decline in sales for its second quarter amid currency headwinds, while its loss widened in line with forecasts.
Monsanto raised its offer for Syngenta.
Earnings include: Bank of Montreal; Best Buy Co Inc; Childrens Place Inc; Heico Corp; Jack Henry & Associates Inc; Solera Holdings Inc; Toll Brothers Inc; Valspar Corp
ANALYST ACTIONS:
Macquarie upgraded Bank of America to "neutral" from "underperform." Bernstein also upgraded the stock to "outperform" from "market perform," with a price target of $19 (U.S.), saying the shares are attractive given the recent selloff. Keefe, Bruyette and Woods also upgraded the stock to "outperform."
Argus downgraded AGL Resources Inc. to "hold" from "buy."
Topeka Capital upgraded DreamWorks Animation to "hold" from "sell" with a price target of $18 (U.S.), up from $17.
Wells Fargo upgraded Apple to "outperform" from "market perform" with a price target of $125 (U.S.) to $135, as analyst Maynard Um said the shares have "over-corrected."
QUOTE OF THE DAY:
"Let us not look back in anger, nor forward in fear, but around in awareness" James Thurber
Jennifer Dowty