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 morning to you. Chinese markets sank overnight after officials failed to regain investor confidence, choosing not to announce further stimulus measures as had been widely expected. European markets are shrugging off the weakness in Chinese markets, attempting to stabilize, and this stability is making its way to North American markets. Meanwhile, the price of oil has slipped further, down over 1 per cent to below $33.
We are headed into week two of what could be another bumpy ride for investors with Chinese trade data out later this week, the price of oil yet to find support, and with the U.S. fourth-quarter earnings season kicking off today.
As we look at North American futures, for now, markets are expected to open moderately higher, a welcome respite after the worst start to a new year in history for major U.S. indexes. In the U.S., Dow futures are higher by 63 points or 0.4 per cent, S&P 500 futures are ahead by 10 points or 0.5 per cent, and Nasdaq futures are indicating a higher opening by 0.5 per cent. In Canada, S&P/TSX 60 index futures are higher by 5 points.
Let's have a look now at how markets did in the Pacific Rim overnight. While the People's Bank of China set the yuan mid-point higher for a second consecutive day, investors had hoped further stimulus measure would be announced. Government officials have room to cut rates and lower the reserve require ratio further. Inflation data released over the weekend showed deflationary pressures persist. The December consumer price index came in at 1.6 per cent year-over-year, up from 1.5 per cent last month. However, the producer price index shows persistent deflationary pressures, declining 5.9 per cent year-over-year, unchanged from the prior month. When investors failed to hear about further stimulus measures being taken, the markets sold off – hard. The Shanghai composite and Shenzhen composite fell 5.3 per cent and 6.6 per cent, respectively. The Hang Seng lost 2.8 per cent. The negative sentiment spilled over to other major Asian markets. The Korean KOSPI declined 1.2 per cent. The Australian ASX 200 also lost 1.2 per cent. The Toyko Stock Exchange observed a holiday closure and will reopen tomorrow.
Major European markets are attempting to stabilize, shrugging off the Chinse market weakness. There were no major economic releases. In Germany, the DAX is up by 0.6 per cent. The U.K. FTSE is up 0.1 per cent. The French CAC is up 0.5 per cent.
Here's the bottom line: Markets are attempting to stabilize as investors try to shift their focus away from Chinese market volatility to earnings. Today marks the unofficial start to the U.S. fourth-quarter earnings season, with Alcoa reporting results after the bell.
Another challenging quarter is anticipated for companies. According to a FactSet report, earnings for the fourth-quarter are expected to decline 5 per cent. If we are headed for another quarter of negative earnings, this would be the third consecutive quarter of earnings declines, something investors have not seen since 2009. Once again, careful stock selection will be extremely important during this potential minefield of earnings reports.
What may also be providing some support to markets today is that on a valuation basis, the S&P/TSX composite index is now trading at a forward price-to-earnings multiple of 14 times the 2016 consensus estimate, below its historical multiples. The three-year forward P/E multiple is 16 times, and the five-year forward multiple is 15 times.
However, the S&P 500 is still trading at a slight premium on a forward P/E basis to is historical average. The S&P 500 index is trading at a P/E multiple of 15.5 times, compared to its three-year averages of over 16 times
Now, here is a closer look at key market data, and corporate and economic news.
MARKET DATA:
Futures
S&P 500 +0.5 per cent; Dow +0.4 per cent; Nasdaq: +0.5 per cent
Equities
Hong Kong's Hang Seng -2.76 per cent
Shanghai composite index -5.33 per cent
Japan's Nikkei 225 HOLIDAY CLOSURE
London's FTSE +0.1 per cent
Germany's DAX +0.6 per cent
France's CAC 40 +0.5 per cent
Commodities
WTI crude oil (Nymex Feb) -1.2 per cent at $32.75 (U.S.) a barrel
Gold (Comex Feb) +0.4 per cent at $1,102.70 (U.S.) an ounce
Copper (Comex Mar) -2.2 per cent at $1.98 (U.S.) a pound
Currencies
Canadian dollar +0.0026 at 70.83 cents (U.S.)
Euro -0.0031 at 1.0897 (U.S.)
Bonds
U.S. 2-year Treasury yield 0.94 per cent
U.S. 10-year Treasury yield 2.137 per cent
KEY ECONOMIC RELEASES
Canada housing starts came in at 173,000 in December vs. 212,000 in November. Economists estimated 200,000.
10:00 a.m. (EST) U.S. Federal Reserve Labor Market Conditions Index for December. Estimate is unchanged from previous month.
10:30 a.m. (EST) Bank of Canada Outlook Survey and Senior Loan Officer Survey for fourth quarter.
CORPORATE EARNINGS RELEASES
United States
19 companies in the S&P 500 index are scheduled to report earnings this week.
Alcoa will released fourth-quarter results after the closing bell.
Global Payments will release second quarter fiscal 2016 results.
Canada
No companies in the S&P/TSX composite index are expected to report financial results today.
OTHER CORPORATE NEWS
Drugmaker Shire Plc clinched its six-month pursuit of Baxalta International Inc on Monday by agreeing a $32 billion cash and stock offer that will make it one of the world's leading rare disease specialists.
ANALYSTS' ACTIONS
Canadian Tire (CTC.A). The analyst at RBC Capital Markets revised her recommendation to an "outperform" from "top pick", and reduced the stock's price target to $146 from $165.
Russel Metals (RUS). The analyst at RBC Capital Markets is maintaining her "underperform" recommendation, but reduced the stock's price target to $15 from $17.
Interfor (IFP). The analyst at RBC Capital Markets is maintaining his "outperform" recommendation but trimmed his target price to $15 from $17.
QUOTE OF THE DAY
"As you get older, the questions come down to about two or three. How long? And what do I do with the time I've got left?" - David Bowie
Jennifer Dowty