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Before the Bell: TSX, Wall Street futures firm on trade hopes; Bay Street weighs bank earnings

Equities

U.S. stock futures edged higher on Tuesday while world shares managed their best showing in six months as attention turns to Canada’s next move after the United States and Mexico reached a sweeping deal to overhaul the North America free-trade agreement. On Bay Street, TSX futures were also higher as oil prices steadied and a pair of the country’s biggest banks topped market forecasts with their latest results.

Overnight, MSCI’s all-world share index added to Monday’s gains, climbing 0.15 per cent on optimism that events in Washington on Monday bode well for global trade.

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“Any trade deal is good for capital markets; even yesterday’s U.S/Mexico “non-ratified” trade announcement has been able to push U.S stocks to new records, G10 currencies and commodities to multiweek highs,” OANDA analyst Dean Popplewell said.

“However, even the most bullish of investors should take heed about overreacting to what also might be the latest in an extended back-and-forth between the U.S. and its trade partners.”

Foreign Minister Chrystia Freeland cut short a European trip this week and was headed to Washington on Tuesday. The U.S. is pressing Canada to hammer out an agreement by Friday or risk getting shut out. Speaking on CNBC on Tuesday, U.S. Treasury Secretary Steve Mnuchin said he thought a deal could be reached with Canada this week. “The U.S. market and the Canadian markets are very intertwined,” he said. “It’s important for them to get this deal and it’s important for us to get this deal.”

Bank of Montreal economist Sal Guatieri noted that the loonie has firmed since Monday’s deal was announced but also said the Canadian dollar will remain on defensive until this country signs on the dotted line.

“A non-deal would send the loonie skidding lower given the potential damage—both known and unknown—to the auto industry and economy.” he said. “A non-deal would also quash any chance of a Bank of Canada rate hike next week.” The market is pricing in a one-in-five chance of a rate hike on Sept. 5.

Outside trade, Canadian investors got the next round of bank earnings ahead of the North American open. Bank of Nova Scotia reported first, hiking its dividend by 3 cents to 85 cents. Excluding items, the bank reported earnings per share of $1.76, up from $1.68 a year earlier. Analysts had been looking for earnings by that measure of about $1.75. Net earnings in the latest quarter were $1.55 a share, down from $1.66 a year earlier. Return on equity was 13.1 per cent, compared to 14.8 per cent last year.

Bank of Montreal also reported better-than-expected profit. The bank reported adjusted earnings of $2.36 a share in the latest quarter. Analysts had been looking for earnings of $2.26. BMO’s dividend remained unchanged.

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On Wall Street, earnings were due from electronics retailer Best Buy and jeweller Tiffany & Co.

Overseas, the pan-European STOXX 600 was up 0.22 per cent in morning trading, helped by trade news out of Washington. European auto stocks continued to rally after posting their best gains in a month on Monday. German auto makers are particularly sensitive to trade news because they rely on the sale of Mexican assembled cars into the U.S. market. Britain’s FTSE 100 rose 0.40 per cent. Germany’s DAX advanced 0.13 per cent and France’s CAC 40 was up 0.21 per cent.

“Progress on trade talks is welcome for all concerned, since it shows that the Donald can be persuaded if the right approach is used,” Chris Beauchamp, IG’s chief market analyst, said. "Trade negotiators around the globe will be studying the US/Mexico talks for tips on how to get on the president’s good side. "

In Asia, markets were mostly higher in the wake of Wall Street’s solid gains during the previous session. Japan’s Nikkei edged up 0.06 per cent. Hong Kong’s Hang Seng rose 0.28 per cent. The Shanghai Composite Index ended down 0.10 per cent.

Commodities

Crude prices were higher in early going on signs of tighter supply from OPEC and non-OPEC producers. Brent crude touched its best level since early July overnight and has a range for the day so far of US$76.05 to US$76.87. West Texas Intermediate was also higher and had a range of US$68.64 to US$69.20.

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On Monday, OPEC’s monitoring committee said oil producers participating in a supply reduction pact cut output by 9 per cent more than required, suggesting supply will fall short of demand in coming months, underpinning prices.

“We were of the view earlier that we are expecting prices to edge a bit lower over the rest of this year, but I struggle to see that. I see the market remaining well supported, with potential shocks to the upside, depending on what we get from Iran,” ING commodities strategist Warren Patterson told Reuters.

“Looking at the spreads, it is starting to appear that the market (balance) is somewhat tightening.”

Investors will also begin getting U.S. inventory figures with the afternoon release of data from the American Petroleum Institute. The more official Energy Information Administration report is due Wednesday and OANDA’s Mr. Popplewell says markets are expecting to see U.S. crude stocks rise this week as some refineries go into maintenance.

In other commodities, gold prices were steady as the U.S. dollar slid. Spot gold was up modestly after touching a two-week high on Monday. U.S. gold futures were also positive.

“The big elephant in the room is China. The trade escalation with China will play favorably into the U.S. dollar as a risk aversion trade,” said Stephen Innes, Asia-Pacific trading head at OANDA in Singapore. “The market is still a little bit nervous overall when it comes to buying into the weaker U.S. dollar narrative.”

Currencies and bonds

The Canadian dollar continued to climb as investors remained upbeat on the possibility of a positive resolution to NAFTA talks. The loonie was trading comfortably above 77 US cents ahead of the North American open after hitting a two-month higher during Monday’s session. At last check, the loonie was sitting near the top end of the day range of 77.03 US cents to 77.30 US cents.

In a note, Bank of Nova Scotia economists called Monday’s events in Washington as “fundamentally positive” for the U.S., Mexico and Canada. “It [the agreement between Mexico and the United States] should significantly reduce market-pricing of NAFTA risks,” Scotiabank said.

“The apparent resolution of major U.S. demands for tighter rules of origin on tariff-free trade in North American automobiles addresses the most important sticking points in the negotiations. Canada should find it relatively simple to join the US-Mexico consensus on automobiles,” the bank said.

However, Scotiabank also noted that it might be more difficult for Canada to sign up to other understandings in the agreement, but pressure for Canada to join quickly could also give it more leverage. “Discussions on a trilateral deal could nevertheless well extend beyond the end of this week and miss the US Congress’ procedural deadline for signature of a revised NAFTA deal under the current Mexican administration,” Scotia also noted.

In other currencies, the U.S. dollar was near a one-month low against a basket of world currencies. The U.S. dollar index hit its lowest level since Aug. 2 at 94.68 in early Asian trading. Traders suggested that the dollar lost altitude after advances in NAFTA talks because investors then drawn toward riskier assets.

“The deal provides the impression that the U.S. President is less interested in causing a row at the moment but is making an effort to come home with constructive results from the theaters of trade war,” Esther Reichelt, an FX strategist at Commerzbank, said.

In bonds, U.S. 10-year Treasury yields were slightly higher at 2.853 per cent. The yield on the 30-year note was also higher at 3.005 per cent.

Stocks set to see action

Tiffany & Co topped quarterly same-store estimates as the retailer sold more jewellery in the Americas and Asia-Pacific regions. On a constant currency basis, same-store sales rose 7 per cent. Analysts on average had expected an increase of 5.73 per cent, according to Thomson Reuters I/B/E/S. The company’s net earnings rose to US$144.7-million, or $1.17 per share, in the second quarter ended July 31, from US$115-million, or 92 US cents per share, a year earlier. Tiffany shares were up nearly 3 per cent in premarket trading.

An Ontario court has ruled in favour of the Canadian arm of Tesla Inc. in its petition that it had been treated unfairly in the provincial government’s cancellation of an electric vehicle rebate program. Ontario Superior Court judge Frederick L. Myers said the decision to exclude Tesla from a grace period for the program’s wind-down was arbitrary and had singled out Tesla for harm.

Nestlé and Starbucks said on Tuesday they had concluded their licensing deal for the Swiss food giant to market the U.S. coffee maker’s packaged coffees and teas around the world. The US$7.15-billion deal grants Nestlé perpetual rights to sell Starbucks products such as Starbucks, Seattle’s Best Coffee and TeavanaTM/MC outside of the U.S. company’s coffee shops, and will result in about 500 Starbucks employees shifting to Nestlé.

Best Buy Co Inc on reported online sales that decelerated for a second quarter in a row. Best Buy shares fell roughly 7 per cent in premarket trading. The U.S. consumer electronic retailer said domestic online sales rose 10.1 per cent in its second quarter. That compared with 12 per cent in the first quarter and 31.2 per cent in the same period a year ago. The U.S. consumer electronics retailer said on Tuesday that same-store sales, or stores open at least a year, rose 6.2 per cent in the quarter, ended Aug. 4, versus analysts’ estimates of a 3.8 per cent rise. Net income rose to US$244-million, or 86 US cents per share, in the quarter, from US$209-million, or 67 US cents per share, a year earlier. Excluding charges, Best Buy earned 91 US cents per share. Analysts expected 83 US cents, according to Thomson Reuters I/B/E/S.

More reading:

Tuesday’s Insider Report: Companies insiders are buying and selling

Tuesday’s analyst upgrades and downgrades

Economic news

Britain’s finance ministry denied a newspaper report on Tuesday that the government had asked Bank of England Governor Mark Carney to stay on for an extra year beyond his scheduled departure in June 2019. “We don’t recognize their reporting at all,” a Treasury spokeswoman said when asked about the article in the Evening Standard newspaper.

U.S. home prices climbed 6.3 per cent in June from a year earlier. The S&P CoreLogic Case-Shiller 20-city home price index rose at a slightly slower pace than the 6.5 per cent annual gain in May from a year earlier. But home values are increasing at more than double the pace of average wage growth, The Associated Press reports.

(10 a.m. ET) U.S. Conference Board Consumer Confidence. Consensus is 126.5.

With Reuters and The Canadian Press

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