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 Tuesday morning to you. It is going to be a painful day in the markets and some of Monday's gains will be given back. North American futures are lower - with S&P 500 futures down nearly 1 per cent just ahead of the bell - signalling that it's going to be a negative opening for equity markets both in Canada and in the U.S.
China made a surprise devaluation of the yuan overnight, increasing unease about the health of the world's second-largest economy. It's also pushed the dollar higher, making greenback-denominated commodities more costly for buyers using other currencies. The yuan fell to its lowest against the dollar in almost three years following what the country's central bank described as a "one-off depreciation." The move by China could complicate any pending hike in interest rates by the U.S. Federal Reserve.
China also reported weak July auto sales, down 7.1 per cent year-over-year, the largest drop in over two years, and Money Supply M2 was up 13.3 per cent year-over-year in July with China injecting cash into the system. Chinese stocks were mixed with exporters standing to benefit from the lower currency. The Shanghai Stock Exchange composite index closed relatively flat.
All major North American markets rallied over one per cent on Monday. In the S&P/TSX composite index, 188 stocks closed higher, 54 were down, and five were unchanged. Leadership was in the Materials and Energy sectors. Investors rotated out of stock winners and into oversold commodity stocks. The leading laggards were 2015 stock leaders such as Concordia Healthcare, Valeant Pharmaceutical, Cott, and Gildan Activewear. To me, this rotation is not a trade I recommend investors play. I recommend staying invested in stocks with strong industry and company fundamentals.
Turning to earnings, 173 companies in the S&P/TSX composite index have now reported results since July 20. In terms of earnings surprises, 41 per cent of companies have reported better-than-expected sales, and 49 per cent have beat earnings estimates. In terms of growth, sales have, on average, declined by 16 per cent year-over-year, and earnings have fallen, on average, by 22 per cent year-over-year.
Today, six companies in the S&P/TSX composite index are expected to report earnings: First Majestic Silver, Emera, Pason Systems, Silver Wheaton, Tahoe Resources, and RONA. For the balance of the week, 12 companies will be reporting on Wednesday, 19 on Thursday, and two on Friday.
Major European markets are down with the German, French, and London markets all sharply lower today. The German and French markets are down over one per cent, and the London market is down just under one per cent. One exception is the Greek market on the news of continued progress in finalizing a bailout package. Reports suggest that Greece and its creditors have reached an agreement on terms for a bailout deal, which just needs to be finalized. Greece and its lenders have reportedly agreed on a budget deficit target of 0.25 per cent of gross domestic product for 2015, with a budget surplus forecast in 2016. Greece appears on track to make its Aug. 20 payment to the European Central Bank. The Athens Stock Exchange composite index is up approximately two per cent, and has rallied approximately five per cent since the market reopened at the beginning of August.
Japan has restarted one of its nuclear reactors for the first time since the 2011 Fukushima nuclear disaster. The nuclear power plant will operate on a test run with plans to provide power commercially next month. 25 nuclear power plants have applied for reactivation in Japan. Uranium stocks rallied Monday on the news.
Elsewhere, the Indian government has introduced a good and services tax bill to the upper house of parliament that still need to be passed. And Russian second-quarter GDP declined 4.6 per cent year-over-year, relatively in-line with the expected decline of 4.5 per cent.
The bottom line: Monday's rotation out of stock leaders and into beaten down commodity stocks I don't believe is a prudent investment strategy. I just don't see resource stocks having the fundamentals to warrant a recovery just quite yet. What I do recommend: sell your winners and take some profits off the table on rallies, as I believe negative news from China is not over and the countdown is on for the U.S. Federal Reserve to raise interest rates.
Now, here is a look at major markets and news.
MARKET DATA:
Futures
S&P 500 -0.8 per cent; Dow -1.0 per cent; Nasdaq: -0.6 per cent
Equities
Hong Kong's Hang Seng -0.09 per cent
Shanghai composite index -0.01 per cent
Japan's Nikkei -0.42 per cent
London's FTSE 100 -0.85 per cent
Germany's DAX -2.24 per cent
France's CAC 40 -1.62 per cent
Stoxx 600 -1.46 per cent
Commodities
WTI crude oil (Nymex Sep) -3.07 per cent at $43.58 (U.S.) a barrel
Gold (Comex Dec) +0.21 per cent at $1,106.50 (U.S.) an ounce
Copper (Comex Sep) -3.33 per cent at $2.32 (U.S.) a pound
Currencies
Canadian dollar at 76.42 (U.S.), -0.0042
U.S. dollar index +0.0140 at 97.17
Bonds
U.S. 10-year Treasury yield 2.18 per cent, -0.05
ECONOMIC INDICATORS:
Canada housing starts were 193,000 in July vs. the Street estimated 195,000.
(10 a.m. ET) U.S. wholesale inventories for June. Estimate is an increase of 0.4 per cent from May.
STOCKS TO WATCH:
Rona reported Q2 adjusted EPS 46 cents, matching Street estimates.
Home Capital Group Inc. announced an agreement to acquire CFF Bank from MonCana Capital Corp., a wholly owned subsidiary of Canadian First Financial Group, for roughly $15-million in cash. It is not expected to have a material impact on earnings.
Google shares rose 6 per cent in the premarket after the company announced a surprise overhaul of its operating structure late Monday.
Symantec shares rose 7 per cent after the antivirus maker said it would sell its data storage business, Veritas, for $8-billion (U.S.) in cash to a group led by Carlyle Group LP.
Terex shares rose 27 per cent after the U.S. cranes and mining equipment maker and Finnish rival Konecranes agreed to an all-share merger.
Fairfax Financial Holdings Limited ("Fairfax") (TSX:FFH)(TSX:FFH.U) announces that it has made certain modifications to its previously-announced multiple voting share proposal in response to discussions with certain significant institutional shareholders of Fairfax, which are designed to provide additional minority shareholder protections. Those shareholders, as well as other significant institutional shareholders, have advised that they now intend to vote in favour of the proposal.
Earnings today include: AGT Food and Ingredients Inc; Aura Minerals Inc; Cara Operations Ltd; Chinook Energy Inc; Computer Sciences Corp.; Emera Inc; First Majestic Silver Corp.; Fossil Grp Inc.; Inogen Inc.; Ivanhoe Mines Ltd; Northern Blizzard Resources Inc; Rocky Mountain Dealerships Inc; Rona Inc.; Silver Wheaton Corp.; Solium Capital Inc; Spectral Medical Inc; Symantec Corp.; TerraVest Capital Inc; Tribune Publishing Co; Trimac Transportation Ltd
ANALYST ACTIONS:
Raymond James downgraded Canadian National Railway to "market perform" from "outperform" and maintained an $85 (Canadian) price target. It cited strong share price appreciation and continued traffic weakness for the downgrade.
Raymond James downgraded True North Apartment REIT to "underperform" from "market perform". It does not have a price target on the stock
Canaccord Genuity upgraded InnVest REIT to "buy" from "hold" and maintained a $5.65 (Canadian) target price.
Desjardins Securities upgraded Vermilion Energy to "buy" from "hold", saying the market sell-off represents an attractive entry point. The price target is $56 (Canadian).
QUOTE OF THE DAY:
"Risk more than other think is safe. Dream more than other think is practical." - Howard Schultz, CEO of Starbucks
Jennifer Dowty