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.
Good Thursday morning to you.
As the saying goes, "In like a lion and out like a lamb" just may define how this week ends up. Today, North American futures are pointing to a strong opening for equity markets. The S&P/TSX 60 index futures are solidly higher. Better-than expected earnings out of TD Bank and CIBC should give a lift to financial stocks and crude oil futures are flirting near the $40 (U.S.) level, which should provide support for the energy sector. In the U.S., the S&P500, Nasdaq and Dow futures are all up strongly. Dow futures are pointing to a triple-digit gain at the opening bell as markets look to extend Wednesday's impressive 600-point rally.
U.S. second quarter GDP came out at 3.7 per cent, well above expectations of 3.2 per cent. Personal consumption was 3.1 per cent, in-line with forecasts. The positive data confirms that the U.S. economy continues to slowly strengthen leaving the U.S. Federal Reserve in a dilemma. Clearly, the strengthening U.S. economy warrants a liftoff in interest rates. However, challenging international economic growth conditions are key considerations for the Fed. The need for balancing domestic and international conditions is keeping economists and investors guessing as to when the Fed will raise rates. U.S. futures continue to strengthen and the markets look positioned to open sharply higher.
Major European markets are up today, posting solid gains with the German, French, and London markets presently up over two per cent, and steadily climbing higher as we work our way through the trading day. Second-quarter GDP out of Europe's fourth largest economy, Spain, was solid at 3.1 per cent as European economies continue to slowly recover and show growth.
The rally is broad based and even global mining stocks such BHP Billiton and Glencore are participating in the market rally. For short-term investors, there is likely some room for commodity stocks to rally higher as many stocks were deeply oversold. However, as a fundamental investor, while the commodity stocks are bouncing back, I would not be adding positions in these names. Rather, I would be using the market strength to unload resource stock positions, and be investing on dips in growth stocks and high dividend paying stocks with solid fundamentals.
Asian markets staged solid rebounds today. In China, the Shanghai Stock Exchange composite index broke its five-day losing streak, rising 5.3 per cent. The Shanghai index is back above the key 3,000 level. The Shenzhen Stock Exchange composite index followed suit with a 3.3-per-cent gain. There are reports out speculating that the Chinese government stepped into the market, buying large cap stocks to support the market and that these strong gains may be artificial. This just confirms that while markets are recovering, investor conviction may be weak, making markets vulnerable to further volatility. In the days ahead, China Manufacturing Purchasing Managers' Index for August will be released, with expectations of 49.7, the July reading was 50.
On Wednesday, some of the strength that we saw in markets came from rising expectations that the U.S. Federal Reserve will delay raising interest rates. On Wednesday, the President of the New York Federal Reserve, William Dudley, said that, "From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago. But normalization could become more compelling by the time of the meeting as we get additional information on how the U.S. economy is performing."
William Dudley went on to say that, "The slowdown in China and the sharp fall in commodity prices are increasing the strains on many emerging market economies and this could lead to a slower global growth rate and less demand for U.S. goods and services."
The majority of economists have now shifted their opinions as to when the Fed will raise rates. Now, most economists are not expecting rates to be raised next month. This sent the Dow Jones Industrial Average up over 600 points on Wednesday and the S&P/TSX composite index rallied over 200 points, or 1.8 per cent, with nearly three-quarters of the stocks in the index climbing higher.
On the commodity front, West Texas Intermediate oil futures are hovering around the $40 (U.S.) level, while gold prices are stable. Again, for commodities I would be using the strength in energy stocks, and metals stocks as opportunities to exit positions. Many senior management officials in the energy sector or with exposure to energy have cautious near-term outlooks for the price of oil. AMEC Foster Wheeler reported earnings today and the CEO, Samir Brikho, believes oil prices will remain depressed stating, "I think it is going to be lower for longer."
Here is the bottom line. We have greater clarity on two key issues now that we did not have one week ago. China, for now, has renewed confidence that measures will be taken to support the economy, as evidenced by the People's Bank of China making the unusual move of cutting interest rates mid-week, rather than waiting to act on Friday night or over the weekend, which is typically when actions are announced. In addition, New York Fed President William Dudley's comments have reduced expectations of an interest rate hike in September, sending equity markets higher. The additional clarity has driven the market recovery.
I still believe that the majority of losses have been seen in equity markets. Today, watch for second-quarter U.S. GDP released at 8:30 a.m. (EST) as this data may provide additional support to the market. On Saturday, watch for the speech from Stanley Fischer, the Federal Reserve's vice chairman, at the Jackson Hole conference for additional confirmation that the Fed will delay raising interest rates, which could extend the market rally and cause markets to exit the month on a positive note.
However, I would caution investors not to get too complacent. While the majority of losses may have been realized, further volatility can be expected, and the market recovery will likely not be a straight line up.
Now, here is a closer look at major markets and news.
MARKET DATA:
Futures
S&P 500 +0.81 per cent; Dow +0.88 per cent; Nasdaq: +1.13 per cent
Equities
Hong Kong's Hang Seng +3.60 per cent
Shanghai composite index +5.35 per cent
Japan's Nikkei +1.07 per cent
London's FTSE 100 +2.22 per cent
Germany's DAX +2.74 per cent
France's CAC 40 +2.55 per cent
Stoxx 600 +2.53 per cent
Commodities
WTI crude oil (Nymex Oct) +4.15 per cent at $40.21 (U.S.) a barrel
Gold (Comex Dec) +0.12 per cent at $1,125.90 (U.S.) an ounce
Copper (Comex Dec) +1.59 per cent at $2.27 (U.S.) a pound
Currencies
Canadian dollar at 75.72 (U.S.), -0.51
U.S. dollar index +0.27 at 95.37
Bonds
U.S. 10-year Treasury yield 2.1628 per cent, -0.009
ECONOMIC INDICATORS:
(8:30 a.m. ET) Canada survey of employment, payrolls and hours for June
(8:30 a.m. ET) U.S. initial jobless claims for week of Aug. 22. Estimate is a 275,000, a decline of 2,000 from the previous week
(8:30 a.m. ET) U.S. real GDP preliminary reading for second quarter. Consensus is an annualized rate increase of 3.2 per cent. For GDP deflator, consensus is an increase of 2.0 per cent.
(10 a.m. ET) U.S. pending home sales for July, Consensus is an increase of 1.5 per cent from June.
STOCKS TO WATCH:
Toronto-Dominion Bank said that its profits in the third quarter rose to nearly $2.3-billion, up 8 per cent from last year, making it the fifth big Canadian bank to report results that exceeded the cautious expectations among analysts heading into the quarter. After making some adjustments, earnings were $1.20 a share, modestly ahead of the $1.18 a share that analysts had forecast.
Canadian Imperial Bank of Commerce said that its profit in the third quarter rose to $978-million, up more than 6 per cent from last year. The bank also raised its dividend by 3 cents a share, to $1.12, marking the fourth consecutive quarterly hike. Adjusted earnings were $2.45 a share, well ahead of analysts' expectations for $2.31 a share.
Monsanto has abandoned its efforts to acquire Syngenta after the sweetened deal was rejected.
J.M. Smucker Co. reported a better-than-expected quarterly profit as cuts in prices of its coffee brands helped sales in its U.S. coffee business to rise for the first time in 11 quarters. The company's net income rose to $136.4 million, or $1.14 per share, in the first quarter ended July 31, from $116 million, or $1.14 per share, a year earlier. Excluding items, it earned $1.32 per share, above the average analyst estimate of $1.23, according to Thomson Reuters I/B/E/S.
Dollar General Corp., the No.2 U.S. discount retailer by store count, reported a better-than-expected rise in quarterly profit, helped by strong demand for candy, snacks and tobacco products. The company's net income rose 12.4 percent to $282.3 million, or 95 cents per share, in the second quarter ended July 31. Analysts on average had expected a profit 94 cents per share, according to Thomson Reuters I/B/E/S. Dollar General's sales rose 7.9 percent to $5.10 billion, slightly below analysts' estimate of $5.14 billion.
Luxury jeweller Tiffany & Co. said profit would decline in for the full year and reported lower-than-expected sales for the second quarter as a strong dollar discouraged tourist spending in the United States and reduced the value of overseas sales. Tiffany's total revenue fell 0.2 percent to $990.5 million in the quarter ended July 31, missing the average analyst estimate of $1 billion, according to Thomson Reuters I/B/E/S. Excluding currency effects, revenue rose 7 percent. Net income fell 15.4 percent to $104.9 million, or 81 cents per share. Excluding items, Tiffany earned 86 cents per share, while analysts had expected 91 cents. The company said it expects net earnings to decline 2 percent to 5 percent for the full year.
Earnings include: Aeropostale Inc; Autodesk Inc; Books-A-Million Inc; GameStop Corp; Michaels Companies Inc; Patterson Companies Inc; Splunk Inc; Tiffany & Co;
ANALYST ACTIONS:
Stifel upgraded Marten Transport Ltd. to "buy" from "hold."
Pacific Crest reaffirmed its "overweight" rating on LinkedIn with a price target of $250 (U.S.).
Jefferies reiterated a "buy" rating on Best Buy, and raised its price target to $50 (U.S.) from $49.
QUOTE OF THE DAY:
"Wisdom begins in wonder." Socrates
With files from Reuters
Jennifer Dowty