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U.S and Canadian stock markets, which fell sharply Thursday, appeared set to bounce back Friday after Beijing announced a new set of trade talks with Washington and that buoyed hopes for a trade deal and a boost to global growth.
However, after the U.S. issued a stronger-than-expected jobs report, stock futures pared their gains as that data raised concerns over the potential for higher interest rates.
Statistics Canada says the economy added 9,300 jobs in December and the unemployment rate held steady at 5.6 per cent. Economists had expected the addition of 5,500 jobs and an unemployment rate of 5.7 per cent, according to Thomson Reuters Eikon.
U.S. employers dramatically stepped up their hiring in December, adding 312,000 jobs in an encouraging display of strength for an economy in the midst of a trade war, slowing global growth and a partial shutdown of the federal government.
The Labor Department said Friday that the unemployment rate rose slightly to 3.9 per cent, but that reflected a surge in job seekers – a positive for growth. Average hourly pay improved 3.2 per cent from a year ago.
Markets sank Thursday after Apple cut its revenue forecast due to a sharp slowdown in sales in China, and that raised concerns about China’s economy, global growth and corporate earnings.
News that the United States and China would hold vice-ministerial level talks on Monday and Tuesday to resolve a trade dispute bought some respite to battered markets, with MSCI’s world stock index up a third of a per cent and U.S. stock futures pointing to a 1.3-per-cent-or-more gain.
“We’re not expecting a major breakthrough on Jan. 7-8,” said Edward Park, deputy chief investment officer at Brooks Macdonald.
“That said, where equity markets are in terms of valuations, if you look at the two core risks – U.S./China trade and the Fed – there’s room for markets to be positively surprised in both of those areas.”
Trade-related companies including Caterpillar and Boeing rose 2.9 per cent and 2 per cent, respectively, in premarket trading.
Global markets have had a rough start to 2019, hurt by a shock revenue warning from iPhone maker Apple and concerns about slowing global economic growth.
But on Friday, European markets tracked a cautious move higher in Asian stocks. Europe’s STOXX 600 index rose 0.8 per cent while Germany’s DAX jumped 1.8 per cent. Britain’s FTSE was up 1.4 per cent and France’s CAC gained 1.3 per cent.
In Asia, Shanghai blue chips rose 2.4 per cent, while Hong Kong’s Hang Seng gained 2.2 per cent.
There was also some positive economic news out of China as its services sector extended its solid expansion in December, a private survey showed on Friday, bucking a trend of downbeat economic data.
But Japan’s Nikkei skidded 2.3 per cent on its first trading day of the year, weighed by growth worries and the strength of the yen. It had been closed for a holiday break.
Commodities
Oil rose to around US$57 a barrel on Friday after China said it would hold trade talks with the United States and a survey showed China’s services sector expanded in December, while signs of lower crude supply also lent support.
The Organization of the Petroleum Exporting Countries cut crude output in December, a Reuters survey showed, and the American Petroleum Institute (API) reported a 4.5-million-barrel drop in crude inventories.
Brent crude, the global benchmark, was up US$1.25 to US$57.20 a barrel. U.S. crude oil was up 90 cents at US$47.99.
“Recent Chinese data is not confirming the doom-and-gloom trend,” said Olivier Jakob, oil analyst at Petromatrix. “And you’ve got OPEC cutting.”
Both oil benchmarks are on track for solid gains in the first week of 2019 trading despite rising concerns that the China-U.S. trade war will lead to a global economic slowdown.
Gold eased on profit-taking after prices hit a more than six-month high on Friday on concern about an economic slowdown, with the metal still on track for a third straight weekly rise.
Spot gold touched its highest since mid-June at US$1,298.42, but was down 0.2 per cent at US$1,291.31 per ounce.
U.S. gold futures were down 0.1 per cent at US$1,293.40 per ounce, having risen above US$1,300 earlier in the session.
“Gold is looking slightly overbought at the moment, so there’s a degree of caution,” said Ross Norman, chief executive at Sharps Pixley.
“Gold has done a lot of work already and we suspect that the market will now sit back and see what the data shows us [later Friday] .”
Currencies and bonds
The Canadian dollar edged higher but was still trading near the 74.4 U.S. cent level, with oil prices up 2.3 per cent.
The yen edged back from its recent surge on Friday on hopes U.S.-China trade talks would make some progress, but the Japanese currency remains well bid by investors fretting about a global economic slowdown.
The yen fell as much as 0.6 per cent against the dollar to 108.31 before recovering some of those losses to trade at 107.94.
The euro held above US$1.14. The single currency traded up 0.1 per cent at US$1.1410 while the dollar index, which measures the greenback against a basket of rivals, was 0.1 per cent lower at 96.189.
On the bond front, the risk of a U.S. economic downturn, or even a recession, has caused a tectonic shift in expectations for interest rates with investors now pricing in the possibility of a cut.
Investors will be looking for any clues from U.S. Federal Reserve Chair Jerome Powell, who is due to speak on Friday, as well as the latest jobs numbers.
While the Fed is still projecting two more hikes this year, the futures market implies the next move will be down with around a 40-per-cent probability of a move by year end.
The market is fully pricing in an easing to 2.00-2.25 per cent by May next year, from the current range of 2.25-2.50 per cent.
The mounting speculation sent yields on two-year U.S. Treasuries as low as 2.37 per cent, taking them under the effective federal funds rate for the first time since 2008. They were last trading at 2.43 per cent.
Three- and five-year yields were even lower, an inversion that has sometimes heralded recessions in the past.
Yields on 10-year benchmark paper dropped to 2.54 per cent overnight, a staggering turnaround from the highs of 3.25 per cent seen as recently as November.
Stocks to watch
A state regulator in Idaho dealt another blow to Hydro One Ltd.’s proposed $4.4-billion acquisition of Avista Corp., rejecting the deal because of a “lack of independence” between the Ontario utility and the provincial government. The decision, issued late on Thursday, follows a similar decision in early December by the regulator in Washington State. Hydro One has asked the Washington Utilities and Transportation Commission to reconsider that ruling.
An entity controlled by Hudson’s Bay Co. chairman Richard Baker will buy the stake owned by a unit of Ontario Teachers’ Pension Plan Board in the Canadian retailer, according to L&T B Cayman Inc., a top shareholder in Hudson’s Bay and a joint buyer. The purchase of about 18 million shares at $9.45 each by Baker’s entity Rupert of the Rhine LLC represents a premium of 28.6 per cent to HBC’s Thursday close, L&T B Cayman said on Thursday.
Tesla Inc. said on Friday it plans to start delivering Model 3 cars to customers in China in March, cementing a time frame that the U.S. electric vehicle (EV) maker’s chief executive, Elon Musk, tweeted about late last year.
Economic news
(8:30 a.m. ET) Canadian employment for December. Estimate is an increase of 0.1 per cent (or 20,000 jobs) with an unemployment rate of 5.7 per cent, rising from 5.6 per cent).
(8:30 a.m. ET) Canada's industrial product price index and raw materials price index for November. Estimates are declines of 0.5 per cent and 7.0 per cent, respectively, from October.
(8:30 a.m. ET) U.S. non-farm payrolls for December. Consensus is an increase of 180,000 jobs with an unemployment rate remaining at 3.7 per cent.
(9:45 a.m. ET) U.S. Markit services and composite PMI for December.
(10:15 a.m. ET) U.S. Fed Chair Jerome Powell joins a panel in Atlanta for the American Economic Association.
With reports from Reuters