Equity Markets
U.S. stock futures were modestly positive early Thursday as concerns over the United States' future in NAFTA sideswiped world markets. On this side of the border, Bay Street futures were also mostly unchanged with trade worries near the top of the agenda although continued gains in oil prices offered some solace to investors.
World stocks measured by MSCI's world index were lower in early going, threatening to result in the first-two day losing streak of the year. Bond markets bounced after China dismissed earlier reports that it would slow or halt the purchase of U.S. Treasuries. The Canadian dollar, meanwhile, was trading lower on trade concerns although above the weakest levels seen overnight.
Overnight, Reuters, citing Mexican sources, reported that Mexico would leave the NAFTA negotiating table if U.S. President Donald Trump decides to trigger a six-month process to withdraw from the deal. In response to concerns about the possibility of a U.S. withdrawal from the pact, the White House has said that Mr. Trump's position has not change.
"U.S. equity markets are currently eyeing a flat open on Thursday, with caution clearly evident as investors recover from Wednesday's brief sell-off and await the start of earnings season on Friday," OANDA senior market analylst Craig Erlam said.
"Markets may also be experiencing something of a hangover from Wednesday, when U.S. stocks, Treasuries and the dollar all sold off on reports that China is considering cutting purchases of Treasuries. China is a huge buyer of U.S. debt and so, should the reports turn out to be correct, one would expect yields on U.S. debt to rise, which is why we saw such a knee jerk reaction."
He said China's subsequent denial of the report has prompted some unwinding of earlier moves, although investors remain on edge. He noted that yields had already been rising in the 24 hours preceding the report as a result of the Bank of Japan buying fewer government bonds, sparking speculation that stimulus is being withdrawn.
"There appears to be some jitters in bond markets right now with some people calling the end of the bull market, citing stronger economic growth and central banks unwinding their crisis-era policy measures and raising interest rates," Mr. Erlam said. " This seems a sensible conclusion under the circumstances and it will be interesting to see how orderly the return to higher yields is."
On the corporate front, Canadian investors get earnings from Shaw Communications, Jean Coutu and Postmedia.
Shaw Communications said first-quarter revenue rose 2.7 per cent to $1.25-billion. Quarterly earnings per share came in at 22 cents. Analysts had been expecting earnings of 29 cents in the quarter. The company also confirmed that it remains on trac to meet its fiscal 2018 guidance.
Jean Coutu Group, meanwhile, reported profit of $42.1-million or 23 cents in the latest quarter, down from $51.2-million or 28 cents a year earlier. Revenue fell to $758.9-million from $763.7-million. A deal to sell Coutu to Metro Inc. is expected to close in March.
After the markets closed Wednesday, Cogeco Communications posted higher profit and revenue in the first quarter on gains in its Internet business. Montreal-based Cogeco said earnings in the quarter were $76.5-million, or $1.55 per share, up from $75-million, or $1.53 per share, in the same period last year. Revenue rose to $553.6-million. Cogeco also raised its dividend by 10.5 per cent to 47.5 cents a share.
On Wall Street, investors get weekly jobless claims figures. The U.S. Labor Department said initial claims for state unemployment rose by 11,000 to a seasonally adjusted 261,000 last week. Claims have now risen for four straight weeks. The week's bigger news for U.S. investors comes Friday when JP Morgan Chase and Wells Fargo report results, unofficially launching earnings season.
In Europe, markets were mixed with Britain's FTSE trading a hair above break even at last check. Germany's DAX was down 0.18 per cent. France's CAC 40 was mostly flat. The pan-European Stoxx 600 was down slightly with telecoms and retail shares struggling.
In Asia, markets finished mostly lower. Japan's Nikkei fell 0.33 per cent to 23,710.43. Hong Kong's Hang Seng was up 0.15 per cent. The Shanghai composite index advanced a modest 0.11 per cent.
Outside world stocks, bitcoin also took a hit, dropping more than 10 per cent after South Korea - one of its top markets - said it was looking at banning trading.
Commodities
The rally in crude prices continued in early going with a drop in U.S. inventories helping underpin recent gains. Brent crude was trading higher with a day range of $69 (U.S.) a barrel to $69.62. During the early part of the session, Brent managed its best intraday level since spring 2015. West Texas Intermediate also pushed higher and was trading near the upper end of the day range of $63.43 to $64.08.
The gains came after the U.S. Energy Information Administration reported that crude stocks fell by nearly 5 million barrels last week to 419.5 million barrels. The agency also said U.S. production fell by 290,000 barrels a day to 9.5 million. Markets have been on edge over the possibility of rising U.S. production offsetting OPEC's efforts to balance the markets.
"Brent crude is knocking on the door of levels not seen since 2015, as the rally continues to defy the naysayers," IG chief market analyst Chris Beauchamp said. " But OPEC's fears about U.S. shale storming back in and ruining the party are entirely justified. Soon perhaps, we'll have to talk about a need to boost output to keep market share, which would at least help consumers around the globe manage their petrol spend."
Reuters reported Thursday that UAE oil minister and current OPEC President Suhail al-Mazrouei said he expects the market to balance in 2018 and that the producer group is committed to its supply reduction pact until the end of this year. OPEC and non-OPEC producers launched production cuts last year and plan to keep them in place through the rest of 2018.
In other commodities, gold prices neared four-month highs. A pause in the global equity rally was seen as playing in gold's favour early Thursday. Spot gold was higher. Gold futures for February delivery were also up.
Silver prices were higher after falling to the lowest level in about two weeks on Wednesday.
Currencies and bonds
Trade worries continued to take a toll on the loonie ahead of the North American open. The loonie was lower at last check and was trading in a day range of 79.43 cents (U.S.) to 79.82 cents. Questions about the future of NAFTA slammed the dollar hard on Wednesday, with the loonie touching its worst level of the year. Concerns centre on whether the U.S. will launch the process to begin withdrawing from the agreement. The White House has said President Donald Trump's position on NAFTA hasn't changed, but traders aren't necessarily taking that as a positive sign for the pact.
"No change in Trump's position on NAFTA still means he's not a fan – and that's the risk investors should be mindful of when it comes to the loonie," Bipan Rai, executive director of macro strategy for CIBC Capital Markets, told The Globe's Michael Babad.
"There's been lots of complacency on NAFTA in regards to the way the loonie has been trading for several months and we expect the associated premium to start rising into the next round of negotiations in Montreal. I don't think today's headlines will affect BoC thinking next week, but the C$ market should (finally) start taking notice and cheapen once the Bank meeting is out of the way."
He noted, however, that NAFTA termination "isn't exactly bullish (for the U.S. dollar) on trade-weighted basis either. Our preferred method of expressing loonie weakness would be to buy the (euro) and the (Japanese yen) against it."
Sue Trinh, RBC's head of Asia FX strategy, noted that the probability of the Bank of Canada hiking interest rates in its decision next week fell to 73 per cent in the wake of the NAFTA headlines. Earlier in the week, the probability of a rate increase was pegged at 88 per cent.
"While the BoC is apt to surprise, we don't think the headlines are enough to derail a hike next week," she said. "That being said, we doubt the BoC will deliver forward guidance to support the 80 plus basis points of hikes priced in for 2018."
In world currencies, the U.S. dollar recouped some losses as China rejected suggestions that it would slow or halt the purchase of U.S. Treasuries. The initial report had resulted in the greenback posting its biggest one-day decline in a month. Against a basket of world currencies, the U.S. dollar was trading higher at last check. The U.S. dollar was mostly flat against the euro.
In bonds, the yield on the U.S. 10-year note was lower at 2.54 per cent. The yield on the 30-year note was also lower at 2.884 per cent.
Stocks set to see action
Delta Air Lines Inc. on Thursday reported an 8-per-cent drop in its fourth-quarter profit and forecast total unit revenue, a closely watched performance metric, to increase 2.5-4.5 per cent in the first quarter of 2018. The U.S. No. 2 carrier's net income fell to $572-million, or 80 cents per share, in the quarter ended Dec. 31, from $622-million, or 84 cents per share, a year earlier. On an adjusted basis, Delta earned 96 cents per share. Total operating revenue rose 8.3 per cent to $10.25-billion. Its shares rose 3.6 per cent in premarket trading.
Britain's biggest retailer Tesco missed forecasts for Christmas trading as strong food sales were undermined by weak demand for general goods such as DVDs and computer games. Market research this week had identified Tesco as a festive winner, but the supermarket group said a fall in general merchandise sales and the collapse of a key tobacco supplier cast a shadow over a record week of trading before Dec. 25, according to Reuters. The company, which has a 28 per cent share of the British grocery market, reported a 1.9-per-cent rise in like-for-like revenue in the six weeks to Jan. 6. However, analysts had expected a rise of between 2.4 and 3.2 per cent.
Shaw Communications said first-quarter revenue rose 2.7 per cent to $1.25-billion. Quarterly earnings per share came in at 22 cents. Analysts had been expecting earnings of 29 cents in the quarter. The company also confirmed that it remains on trac to meet its fiscal 2018 guidance.
Jean Coutu Group reported profit of $42.1-million or 23 cents in the latest quarter, down from $51.2-million or 28 cents a year earlier. Revenue fell to $758.9-million from $763.7-million. Coutu said the decline was mostly the result of a lower contribution from its Pro Doc operation and the timing of shipments compared to the year before. Coutu shareholders have approved the sale of the retailer to Metro Inc. The agreement, which still needs approval from the Competition Bureau, is expected to close in March.
Wal-Mart Stores Inc. said on Thursday it would raise entry-level wages for hourly employees to $11 an hour as it benefits from the biggest overhaul of the U.S. tax code in 30 years. The world's largest retailer said the increase would take effect in February and that it would also expand maternity and parental leave benefits and offer a one-time cash bonus of up to $1,000. The increase will benefit more than 1 million U.S. hourly workers. Wal-Mart shares were up 0.6 per cent in premarket trading.
Software maker SS&C Technologies Holdings Inc. said on Thursday it will acquire DST Systems Inc. in a $5.4-billion deal, as it seeks to expand its footprint in financial technology software through its largest deal to date. DST shares rose 5 per cent in premarket trading and SS&C shares gained 3.8 per cent.
Xerox shares jumped 6.5 per cent after the Wall Street Journal reported the copier maker was in talks for a deal with Japanese camera maker Fujifilm Holdings that could include a change in control of Xerox.
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Economic News
The European Central Bank should revisit its communication stance in early 2018 and gradually adjust its language to reflect improved growth prospects, minutes from the bank's December meeting showed. An adjustment to the central bank's policy message would likely be interpreted by the markets as a signal that it is getting ready wind down its bond-buying program.
"The language, pertaining to various dimension of the monetary policy stance and forward guidance could be revisited early in the coming year," the minutes said. "The view was widely shared that... communication would need to evolve gradually, without a change in sequencing."
U.S. initial claims for state unemployment benefits rose 11,000 to a seasonally adjusted 261,000 last week, the highest level since late September, the Labor Department said on Thursday. Claims have now risen for four straight weeks.
With files from Reuters and The Canadian Press