U.S. stocks are poised for a triple-digit drop at the start of trading Wednesday with investors cautious after U.S. President Donald Trump tempered optimism over progress made in trade talks with China.
Mr. Trump said on Tuesday he was not pleased with recent trade talks between the United States and China, souring the improved market sentiment following weekend comments from U.S. Treasury Secretary Steven Mnuchin that the “trade war” is “on hold.”
His remarks followed Beijing’s announcement that it would cut import tariffs for automobiles and car parts.
In Toronto, the TSX was set for a lower open as well although bank stocks could be poised for a rally after CIBC kicked off second-quarter bank results as it posted earnings that beat expectations, helped by a strong performance by all its businesses and expansion in the United States.
Trump also floated a plan to fine ZTE Corp, and shake up its management as his administration considered rolling back more severe penalties.
“The market probably became overly optimistic on Monday. The reality is the talks are still continuing as they haven’t made headway on various issues, including intellectual property,” said Norihiro Fujito, senior investment analyst at Mitsubishi UFJ Morgan Stanley Securities.
On Wall Street, the Dow fell 180 points or 0.72 per cent on Tuesday and the S&P 500 shed 0.31 per cent, losing steam after hitting a two-month high.
“People have realised the risk of trade war remains with us,” said Francois Savary, chief investment officer at Swiss wealth manager Prime Partners.
“Increase in trade was a major reason behind the synchronized global growth and if you blow this up you limit the opportunities for the world economy.”
Further weighing on prices of risk assets, Mr. Trump also said there was a “substantial chance” his summit with North Korean leader Kim Jong Un will not take place as planned on June 12 amid concerns that Kim is resistant to giving up his nuclear weapons.
“There are many uncertainties in the air, we still don’t know whether U.S.-North Korea summit is possible,” said Yasuo Sakuma at Libra Investments.
“Many investors are sitting on the sidelines. Personally, I haven’t done much trading over the past week, after the earnings season. The current price levels are not really attractive. I’m waiting for a 5 percent correction.”
MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.3 per cent, while Japan’s Nikkei lost 1.2 per cent to end at a 1-1/2-week low and the Shanghai Composite Index retreated 1.1 per cent.
Investors were also watching Turkey and Italy, with the former seemingly headed for a full-blown crisis as the currency plunged to new record lows. Italian borrowing costs resumed their rise back towards recent multi-month highs on fears an incoming coalition will sharply boost government spending.
In Europe, stocks were down sharply with Britain’s FTSE off 0.66 per cent, Germany’s DAX down 1.47 per cent and France’s CAC down 1.1 per cent.
Commodities
Oil fell on Wednesday, under pressure from a potential increase in OPEC crude output to cool the market’s recent rally and cover any shortfalls in supply from Iran and Venezuela.
Oil prices have gained nearly 20 per cent so far this year, with Brent briefly rising above US$80, driven primarily by coordinated supply cuts by the Organization of the Petroleum Exporting Countries and partners including Russia.
The price has also been affected by rising geopolitical tensions that could dent global output just as demand is set to hit 100 million barrels per day in the final quarter of this year, according to the International Energy Agency.
In addition, the United States plans to reimpose sanctions on major oil producer Iran, while an economic crisis has decimated Venezuela’s crude output.
Based on the prospect of a shortfall in supply relative to demand, investors had driven their bets on a sustained rise in the price of oil to record highs earlier this year.
But with so much uncertainty over how sanctions might affect Iranian supply, fund managers have cut their holdings of crude futures and options by more than 10 percent in the last seven weeks to the lowest level this year.
“It does seem like any move above US$80 attracts selling interest right now and that could potentially lead us to a period of consolidation, where I think US$77.50 or even US$75 might be in focus,” Saxo Bank senior manager Ole Hansen said.
“We still have the unquantifiable impact of U.S. sanctions against Iran.”
Gold prices rose on Wednesday on uncertainty about trade talks between the United States and China, which boosted the metal’s safe-haven appeal, but a firmer dollar kept a lid on gains.
But the dollar, in which gold and other commodities are priced, rose versus a basket of currencies , with investors awaiting minutes of the Federal Reserve’s latest policy meeting due later in the day.
“Normally in such a stronger dollar environment gold is trading lower but it’s not and this is indicating there is probably safe-haven flows supporting gold,” said Quantitative Commodity Research consultant Peter Fertig.
In other precious metals, silver inched up 0.1 per cent to US$16.54 an ounce and platinum was 0.6 per cent higher at US$908.20 an ounce. Palladium eased 0.5 per cent to US$986 an ounce.
Dollar
The Canadian dollar was at 77.51 cents US, down slightly as oil prices slid and the U.S. dollar rose.
The U.S. dollar edged higher versus a basket of currencies on Wednesday, with investors awaiting the minutes of the Federal Reserve’s last policy meeting for hints on the pace of further U.S. monetary tightening.
The dollar index, which measures the currency against a basket of six major peers, rose 0.1 per cent to 93.681. On Monday, the index set a five-month high of 94.058.
The increase marked a gain of more than 5 per cent from mid-April and was driven by generally upbeat U.S. economic data and expectations the Fed would raise interest rates at least two more times this year.
The yield on U.S. Treasurys were lower ahead of the release of the Fed minutes. The 10-year Treasury note yield was at 3.0284 per cent. The Canadian 10-year was at 2.449 per cent, down slightly.
Stocks to watch
Canadian Imperial Bank of Commerce on Wednesday reported second-quarter earnings that were ahead of market expectations, helped by a strong performance by all its businesses and expansion in the United States. CIBC acquired Chicago-based PrivateBancorp for $5-billion last June and has forecast the U.S. contribution to its earnings will nearly double in the next three years. Canada’s fifth biggest lender said earnings per share, excluding one-off items, totalled $2.95, compared with $2.64 a year earlier. Analysts had on average forecast earnings of $2.80 per s hare, Thomson Reuters I/B/E/S data showed.
Target, which is pushing through a costly period of transition, posted weaker-than-expected profits for the first quarter. While traffic growth in stores reached levels not seen in a decade and comparable-store sales jumped a solid 3 per cent, those bright spots were overshadowed by the profit numbers. Its shares tumbled 7 per cent in premarket trading.
Shares of Tiffany rose 8 per cent after the company’s first-quarter earnings handily beat analysts’ estimates on Wednesday, boosted by stronger sales of its high-end jewelry, leading the company to raise its annual sales and profit forecasts. Overall same-store sales on a constant currency basis rose 7 percent. Analysts on average had expected an increase of 2.7 per cent, according to Thomson Reuters I/B/E/S.
Lowe’s, which named a new CEO this week, is reporting weak profit and revenue numbers for its first quarter in which harsh winter weather cut into the traditional spring sales season. The company earned $988 million, or $1.19 per share, for the three months ended May 4. A year earlier the home improvement retailer earned $602 million, or 70 cents per share. That’s 3 cents shy of Wall Street expectations, according to a survey by Zacks Investment Research. Revenue rose to $17.36 billion from $16.86 billion, but also missed the mark. But its shares rose 1.2 per cent in premarket trading.
SNC-Lavalin Group Inc. has struck a $110-million agreement to settle class-action lawsuits related to allegations the engineering company misled investors about its activities in Libya. Montreal-based SNC-Lavalin said in a statement on Tuesday that it will pay $88-million to settle two court actions in Ontario and Quebec launched in 2012, as a corruption scandal enveloped the company.
Earnings Wednesday include: Atlantic Gold Co.; Dollar Tree Inc.; Falco Resources Ltd.; HP Inc.; Neptune Technologies & Bioressources Inc.; NetApp Inc.; Synopsys Inc.;
Economic news
(9:45 a.m. ET) U.S. PMI Composite Flash for May is revealed
(10 a.m. ET) U.S. new home sales for April are announced. The Street expects an annualized rate decline of 2.3 per cent.
(10:30 a.m. ET) EIA Petroleum Status Report is released
(2 p.m. ET) U.S. Fed minutes for May 1-2 meeting are released.