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 Wednesday morning to you.
Markets are set for a slight comeback today, but not enough to offset Tuesday's losses with North American futures in positive territory. In the U.S. , Dow futures are up nearly 100 points, indicating a triple-digit open for the index. S&P futures are up 10 points, and Nasdaq futures are up 25 points. S&P/TSX 60 Index futures are slightly higher, up nearly 3 points.
Overnight, Asian equity markets delivered muted returns. The Hong Kong Hang Seng index declined 1.2 per cent, the Shanghai Stock Exchange composite index was down just 0.2 per cent, and the Shenzhen Stock Exchange composite index fell 2 per cent. In Japan, the Nikkei 225 shed 70 points or 0.4 per cent. In China, the Shanghai Stock Exchange will be closed for the next two trading sessions, re-opening on Monday in honour of the 70th anniversary of the Second World War Victory Day holiday.
Major European markets are relatively quiet. The German DAX, French CAC, and United Kingdom's FTSE are all up marginally, less than half a per cent.
TSX futures are indicating that the S&P/TSX composite index will be relatively flat today. There are no Canadian economic releases today. This stability may be welcomed by investors after a volatile start to the month on Monday. The S&P/TSX composite index declined 2.7 per cent on Tuesday, with a broad-based selloff as Chinese economic growth concerns drove global equity markets lower. The S&P/TSX composite index closed down 377 points with some 93 per cent of stocks - 230 names - in the index down. All 10 sectors were in negative territory led by declines in the energy, health care, and the utilities sectors. Eight of the 10 sectors had declines of over 2 per cent. The best performing sector was the relatively defensive consumer staples sector. There were only 17 stocks in the index that closed in positive territory.
Large caps took the brunt of the losses. The S&P/TSX 60 Index was down 2.8 per cent, the S&P/TSX Small Cap Index was down 2.2 per cent, and the S&P/TSX Venture composite index was down 2 per cent.
Other than cash, investors found some shelter from the market meltdown in trusts. The S&P/TSX Income Trust index was down 1.2 per cent. The S&P/TSX Capped REIT Index declined 0.9 per cent. Indeed, defensive investments with yields may be places for investors to find some refuge in this volatile market.
This morning, on the commodity front, gold is relatively flat, just below $1,140 (U.S.) an ounce and the price of oil is modestly lower, and is hovering in the $44 (U.S.) to $45 range. On Tuesday, the American Petroleum Institute reported crude oil supplies increased 7.6 million barrels for the week ending Aug. 28, higher than expectations –- a bearish report. Watch for the weekly oil inventory data from the U.S. Energy Information Association out later this morning at 10:30 a.m. (EST).
The VIX Index, which measures fear in the marketplace, climbed slightly to over 31 on Tuesday, but is nowhere near the panic that we saw in the market last Monday, when the VIX index spiked over 53.
Basically, buyers are staying out of this market and many investors are on holidays this week. The market volatility will likely persist for the next few weeks. Keep in mind that institutional fund managers may have to sell investments in order to raise money to cover mutual fund redemptions.
Global economic data is concerning. According to a Reuters report, International Monetary Fund Managing Director Christine Lagarde, indicated that global growth is anticipated to moderate and will likely be weaker than anticipated in July. In other words, expect a future negative revision to current IMF's global 2015 growth forecast of 3.3 per cent.
On a valuation basis, the S&P/TSX composite index is trading at a price-to-earnings multiple of 14.2 times the 2016 consensus estimate, slightly above its three year average of 13.9 times. So there may be further downside, but the majority of the losses have likely been realized.
Technically, the S&P/TSX composite index is not yet at oversold levels. Support levels for the index are at 13,300, near 13,100, and then the low from Aug. 24 of 13,052. This suggests that further downside may also be limited.
Auto sales remain a bright spot. According to DesRosiers Automotive Consultants' monthly sales report, vehicles sales in Canada increased 2.2 per cent year-over-year, driven by strength in the truck segment, with sales jumping 10 per cent year-over-year. In the U.S., vehicle sales were also solid in August rising to a seasonally adjusted annualized rate of 17.8 million, up from 17.3 million last year, according to Autodata Corp. Of the Big 3 U.S. automakers, Ford posted the strongest sales last month, with growth of 5.6 per cent year-over-year. The improving labour market, low interest rates, and falling gasoline prices continue to provide support to the automotive industry.
Here is the bottom line: It is impossible to know just when the bottom has been reached, but I would argue that we are getting close to a bottom. For that reason, I recommend taking a staggered approach to buying on the pullbacks, accumulating positions of stocks with solid company and industry fundamentals.
Laurentian Bank's third quarter adjusted earnings per share came in at $1.48, which beat estimates of $1.43.
On Thursday, watch for comments from the President of the European Central Bank, Mario Draghi, when he announces the ECB interest rate decision. While no change is anticipated, of note will be potential comments on international developments and indications about further quantitave easing measures, which could have implications for the currency market.
On Friday, the U.S. non-farm payroll data will be a key report to watch for insights into whether or not the U.S. Federal Reserve will raise interest rates this month. This report could create further market volatility.
Now, here is a closer look at major markets and news.
MARKET DATA:
Futures
S&P 500 +0.70 per cent; Dow +0.73 per cent; Nasdaq: +0.73 per cent
Equities
Hong Kong's Hang Seng -1.18 per cent
Shanghai composite index -0.21 per cent
Japan's Nikkei -0.39 per cent
London's FTSE 100 +0.01 per cent
Germany's DAX +0.21 per cent
France's CAC 40 +0.22 per cent
Stoxx 600 +0.03 per cent
Commodities
WTI crude oil (Nymex Oct) -2.27 per cent at $44.38 (U.S.) a barrel
Gold (Comex Dec) -0.07 per cent at $1,139.00 (U.S.) an ounce
Copper (Comex Dec) +0.07 per cent at $2.30 (U.S.) a pound
Currencies
Canadian dollar at 75.39 (U.S.), -0.06
U.S. dollar index +0.29 at 95.74
Bonds
U.S. 10-year Treasury yield 2.1720 per cent, -0.0280
ECONOMIC INDICATORS:
The euro area reports its July producer price index..
U.S. reports the ADP national employment report for August. The number came in at 190,000, versus expectations for 200,000 jobs.
U.S. non-farm productivity was solid at 3.3 per cent in the second quarter, ahead of expectations of 2.8 per cent. This strong productivity figure is a positive indicator for U.S. economic growth; however, investors have to keep in mind that this figure can be very volatile. Unit labour costs declined 1.4 per cent, below expectations of a decline of 1.2 per cent.
(9:45 a.m. ET) U.S. reports the New York ISM for August.
(10:00 a.m. ET) U.S. reports July factory orders. Consensus is for a 0.7-per-cent increase.
(2:00 p.m. ET) The Fed releases the Beige Book on economic activity.
STOCKS TO WATCH:
Canadian department store chain Sears Canada Inc. reported a quarterly profit, helped by lower costs and a one-time gain on sale of properties. The company reported a profit of $13.5-million, or 13 cents per share, in the second quarter ended Aug. 1, compared with a loss of $21.3-million, or 21 cents per share, a year earlier.
A mistake by Air Canada in offering a package of flights at just 10 per cent of the value has triggered a proposed class-action lawsuit by customers who thought they got an amazing deal. Court documents, filed in both Quebec and British Columbia, stated the flight pass was offered between Aug. 25 and Aug. 28 at just under $800, but customers were told days later the cost of 10 one-way business-class flights in the western U.S. or Canada was actually $8,000.
Truck and engine maker Navistar reported its 12th quarterly loss in a row due to restructuring and higher warranty costs.
Ambarella reported adjusted quarterly profit of 88 cents (U.S.) per share, beating estimates of 80 cents, while revenue was also above forecasts. However, shares of the maker of video processing chips are under pressure, following a report warning of possible risks to GoPro's third quarter results. Ambarella is one of GoPro's key suppliers.
Tax preparation firm H&R Block posted a loss of 35 cents per share, 5 cents less than analysts had anticipated. Revenue beat estimates, and the company announced a $3.5-billion stock buyback program.
Earnings include: Canadian Western Bank, Five Below Inc., SeaChange International Inc., Laurentian Bank of Canada, Navistar International Corp., Oxford Industries Inc., TransGaming Inc., Vivendi.
ANALYST ACTIONS:
Deutsche Bank maintained a Hold rating on Ambarella and lowered its price target to $85 (U.S.) from $100. The company reported solid second quarter earnings but its guidance was disappointing, analyst Ross Seymore said. Pacific Crest maintained its "overweight" rating on Ambarella with a price target of $123.
Imperial Capital reiterated its "outperform" rating on American Airlines after a strong quarter, but cut the price target to $65 (U.S.) from $73.
Piper Jaffray analyst Sean Naughton reiterated an "overweight" rating and $91 (U.S.) price target on Target, saying upcoming Star Wars merchandise releases and special Target in-store events could be a catalyst for continued toy sale momentum.
Hasbro was upgraded by Piper Jaffray to "overweight" from "neutral," following a recent pullback and expected benefits from the upcoming introduction of new Star Wars-themed toys.
Morgan Stanley upgraded General Mills' shares to "equal weight" from "underweight," citing a more aggressive managing of costs.
AT&T was upgraded to "buy" from "neutral" at Citigroup due to the recent pullback and potential upside from the company's recent acquisition of DirecTV.
QUOTE OF THE DAY:
"When you lose something in your life, stop thinking it's a loss for you… it is a gift you have been given so you can get on the right path to where you are meant to go, not to where you think you should have gone." Suze Orman
Jennifer Dowty