U.S. stock futures sank early Thursday mirroring moves on world markets overnight as the arrest of Huawei chief financial officer Meng Wanzhou in Canada cast further doubt on the state of trade relations between the the United States and China. Adding to the negative sentiment, crude prices dropped on signals that OPEC would cut production by less than the market had been expecting. On Bay Street, futures were also down.
Dow futures were down by roughly 400 points ahead of the North American open. Futures on the tech-heavy Nasdaq were down by more than 2 per cent.
On Wednesday, Canada arrested the Huawei CFO, who now faces extradition to the United states on suspicion that she violated U.S. trade sanctions with Iran. The move roiled world markets, coming amid already rocky trade relations between Washington and Beijing.
“Stocks have sold-off severely this morning as traders are worried that US-China relations have deteriorated,” David Madden, markets analyst with CMC Markets U.K., said. “US-China relations were on the mend after the G20 summit over the weekend, and now the arrest might have thrown a spanner in the works," he said.
Asian markets sank overnight with the Shanghai Composite Index falling 1.68 per cent and Hong Kong’s Hang Seng ending down 2.47 per cent. Tech shares took a beating in the region with the Hang Seng’s IT hardware index falling 3.5 per cent after going as low as 4 per cent during the trading day. While Huawei isn’t listed, China’s second-biggest telecom equipment maker ZTE Corp. saw its shares fall 9 per cent. Elsewhere in the region, Japan’s Nikkei lost 1.91 per cent.
In Europe, shares fell to a two-year low following Asia’s lead. The pan-European STOXX 600 was down 2.33 per cent in morning trading with most major sectors in the red. Auto stocks - which are particularly sensitive to shifts in trade - were among the biggest losers. Britain’s FTSE fell 2.58 per cent. Germany’s DAX lost 2.44 per cent. France’s CAC 40 fell 2.31 per cent.
Beyond the Huawei developments, sinking crude prices were also adding to negative sentiment. OPEC and its allies meet Thursday in Vienna and early signs suggest the cartel could cut production by 1 million barrels a day next year, less than the market had been expecting. The markets had been hoping for a cut as big as 1.4 million barrels a day. But heading into the meeting Saudi energy minister Khalid al-Falih said the group would be content with a cut of just 1 million barrels a day. Crude prices lost as much as 5 per cent on the news.
On the corporate front, Ontario Hydro Ltd. stock will be in the spotlight once the TSX opens after Washington State regulators rejected the company’s $4.4-billion bid to buy Avista Corp., citing possible political interference by the Ontario government as a key reason.
“Provincial government interference in Hydro One’s affairs, the risk of which has been shown by events to be significant, could result in direct or indirect harm to Avista if it were acquired by Hydro One, as proposed,” the Washington Utilities and Transportation Commission (UTC) said in a statement. “This, in turn, could diminish Avista’s ability to continue providing safe and reliable electrical and natural gas service to its customers in Washington.”
On Wall Street, Facebook Inc. shares were down more than 3 per cent in premarket trading on news that the social media giant gave a host of large firms - including Royal Bank of Canada - preferential access to users' data. The news came after the head of a British Parliamentary investigation released hundreds of Facebook’s internal e-mails which he said showed that Facebook entered into “whitelisting” agreements with companies including RBC, Netflix, AirBnB and Lyft that gave them access to friends data in return for online advertising.
Crude prices sank as much as 5 per cent on signs that an OPEC production cut may not be as deep as the markets had been anticipating. The producers are meeting in Vienna and the markets were looking for a cut of as much as 1.4 million barrels a day to address market oversupply. But heading into the meeting, signals from the Saudi energy minister suggested group members would be satisfied with a cut of 1 million barrels a day.
At last check, oil prices had pared some early losses but were still deep in the red. The day range on Brent so far is US$59.36 to US$61.97. The range on West Texas Intermediate is US$50.23 to US$53.30. Brent and WTI prices have fallen about 30 per cent in the current quarter.
“The Saudi oil minister might think a one million barrel per day cut in output would be ‘sufficient’, but the market thinks otherwise, and oil prices look set for further declines,” Chris Beauchamp, chief market analyst with IG, said. “Barring some kind of surprise, OPEC looks to be heading towards a cut that fails to assuage concerns about oversupply, but at least it might avoid the ire of the president.”
Excess market supply has haunted the market in recent months. million bpd. Oil output from the world’s top producers - OPEC, Russia and the United States - has risen by a 3.3 million bpd since the end of last year. OPEC’s production has increased by 4.1 per cent since mid-2018 to 33.31 million barrels a day.
In addition to OPEC news, markets also get the latest weekly crude inventory numbers after trading starts.
In other commodities, gold prices were down slightly but still near a five-week high as a rout in stocks pushes investors toward safer holdings. Spot gold was down 0.1 per cent at US$1,236.23 per ounce by midmorning in Europe, while U.S. gold futures were 0.1 per cent lower at US$1,241.50 per ounce.
“Gold prices continue to fare well on trade war fears, and despite pulling back from yesterday highs, price action remains resounding bid with familiar points of irritation, trade, Fed, Brexit, Italy, global growth coming to a head,” OANDA analyst Stephen Innes said.
Currencies and bonds
The Canadian dollar was weaker - hovering around the mid-74-US-cent mark - after hitting its lowest level against the U.S. dollar in a year-and-a-half on dovish comments from the Bank of Canada that pared expectations for future rate hikes. The day range on the loonie so far is 74.39 US cents to 74.87 US cents.
On Wednesday, the Bank of Canada held its key rate steady but also pointed to a number of negative factors now faced by the Canadian economy, including the steep price discount on Canadian crude. Bank of Canada Governor Stephen Poloz is scheduled to speak in Toronto early Thursday and could elaborate further on the bank’s thinking.
"After weakening 0.8 per cent yesterday on the dovish BoC policy statement, the Canadian dollar is off another 0.6 per cent to 18-month lows of $1.343 (US$0.745)," Bandk of Montreal senior economist Sal Guatieri said. "According to the overnight index swaps market, the odds of a January rate hike slid from around 60 per cent before the statement to about 36 per cent."
He also noted that the 10-year Canada bond yield dropped five basis points yesterday to 2.12 and is now barely above levels at the start of the year "despite three rate hikes from the BoC this year."
“The spread with 2-year rates has collapsed to just 8 basis points from 36 basis points on Jan. 1, and the gap with 3-month rates has more than halved to 45 basis points,” he said. “The 10s/2s spread is the thinnest since before the last recession, while the 10s/3-month spread is the narrowest in more than two years, when the nation avoided a downturn but grew just 1.1 per cent in 2016 due to the oil price shock.”
The loonie was little changed after Statistics Canada reported that the country’s trade balance grew to $1.2-billion in October from $891-million the month before. The agency said the increase came as exports fell 1.2 per cent, outpacing a decline in imports of 0.6 per cent.
“Good news on the Canadian economy has been rare recently, and the widening of the trade deficit in October to $1.2-billion continued that trend,” CIBC economist Andrew Grantham said. “However, the details did highlight some positives.”
He said the decline in exports was driven by lower prices, particularly in the energy sector. In terms of volumes, exports were actually up 1 per cent, advancing in seven of 11 categories he noted. Imports, meanwhile, were essentially flat in volume terms.
“So despite the downside miss on the headline, this is a solid first indicator for manufacturing shipments and monthly GDP, and as such should have limited market reaction today,” Mr. Grantham said.
On world currency markets, the U.S. dollar and the yen both rose after the arrest of Huawei’s CFO triggered renewed concerns about trade between the U.S. and China. Against a basket of six world currencies, the dollar advanced 0.2 per cent to 97.202. The U.S. has fallen 0.4 per cent this week but is only half a per cent off a 17-month peak of 97.693 touched on Nov. 12, according to Reuters. The yen, another safe-haven currency, rose 0.4 per cent.
In bonds, yields on top-rated German government bonds held near six-month lows on Thursday, after the Huawei arrest. Italy’s bond market, usually vulnerable to a selloff in other risk assets, held steady on signs that Rome is likely to make changes to its controversial 2019 budget and head off a showdown with the EU, Reuters reports.
Stocks set to see action
Bombardier Inc says it expects to deliver 150 to 155 business aircraft in 2019. The company said the growth will be driven by the entry-into-service of its global 7500 aircraft, which is sold out through 2021. Bombardier also expects to deliver two new longer-range variants of its large-cabin business jets, the Global 6500 and 5500, at the end of next year, at a time when demand for corporate planes is recovering.
Dollarama Inc reported a 2.7-per-cent increase in quarterly profit. The Montreal-based retailer’s net income rose to $133.5-million, or 41 cents per share, in the third quarter ended Oct. 28, from $130.1-million, or 38 cents per share, a year earlier. Total sales rose to $864.3-million from $810.6-million.
The Federal Reserve has rejected Wells Fargo & Co’s plans to prevent further consumer abuses and told the scandal-plagued lender it needs stronger checks on management, according to three people with knowledge of the discussions. The concerns raised by the Fed, which have not been previously reported, are likely to increase the time it takes the central bank to lift an asset cap it imposed on Wells Fargo in February following a string of sales practices scandals. The bank must draw-up a robust plan to improve its governance and risk management controls before the Fed will lift the cap and in February Wells Fargo CEO Tim Sloan said the bank was “on the fast track” to meeting those conditions.
The U.S. Justice Department goes before an appeals court on Thursday to urge a three-judge panel to overturn a lower court ruling and order wireless carrier AT&T Inc to undo its US$85.4-billion purchase of entertainment company Time Warner, one of the largest media mergers ever. The deal was seen as a turning point for an industry upended by companies like Netflix Inc and Alphabet Inc’s Google, which go directly to consumers online rather than via pay TV providers like AT&T’s DirecTV.
Ride-hailing company Lyft Inc on Thursday confidentially filed a statement with the U.S. Securities and Exchange Commission for an initial public offering. It did not specify the number of shares it was selling or the price range for the offering. The IPO is expected to commence after the SEC completes its review process, Lyft said
Statistics Canada says Canada’s trade deficit widened to $1.2-billion in October as exports fell 1.2 per cent while imports slid 0.6 per cent.
The U.S. Commerce Department says the trade gap in that country rose to US$55.5-billion in October, the fifth consecutive increase and the highest since October 2008.
U.S. weekly jobless claims fell by 4,000 to 231,000.
The Globe’s Barrie McKenna reports Bank of Canada Governor Stephen Poloz said in a speech Thursday in Toronto that the hit to Canada’s economy from the recent oil price drop is likely to be smaller than when crude plunged in 2015. That’s because the oil and gas sector’s contribution to the economy has been cut nearly in half since 2014 – to 3.5 per cent of GDP from 6 per cent. “Given the consolidation that has taken place in the energy sector since 2014, the net effects of lower oil prices on the Canadian economy as a whole, dollar for dollar, should be smaller than they were in 2015,” Mr. Poloz explained in a speech Thursday in Toronto.
With Reuters and The Canadian Press