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Before the Bell: TSX, Wall Street futures weaker as China concerns offset NAFTA hopes; loonie slides on GDP

Equities

U.S. stock futures were lower early Thursday as world markets pared recent gains amid optimism over the possibility of a NAFTA agreement by Friday but lingering concern about the U.S.-China trade relationship. TSX futures were also just south of break even with Toronto-Dominion earnings, a reading on second-quarter GDP growth and a court ruling on Trans Mountain pipeline all playing out during the trading day.

World stocks took a break from a recent rally overnight, with a weaker start in Europe pulling MSCI’s all-country world index from five-month highs.

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“Global trade angst weighed on financial markets overnight… worries about the down-to-the wire Canada-U.S. talks, a disorderly Brexit and escalating US-China trade war,” Bank of Montreal deputy chief economist Michael Gregory said in the bank’s early note.

"After hitting some record highs yesterday, U.S. and Canadian stock futures are down, amid uniformly lower European and mostly lower Asia/Pacific bourses. Treasury yields are mixed but little changed.

Indications are that Canada and the United States are working toward a Friday agreement on a new NAFTA pact after the U.S. struck a deal with Mexico early in the week. However, concerns linger in the market over the trade relationship with China. U.S. tariffs on another US$200-billion in Chinese imports are scheduled to take effect next month after the end of a consultation period in early September.

On Bay Street, bank earnings wrap up with results from Toronto-Dominion Bank. The bank reported adjusted profit of $1.66, topping analysts' forecasts of $1.63.

Yoga-wear maker Lululemon Inc. also reports after the markets close. Analysts polled by Zacks are expecting earnings per share of 49 US cents.

Ahead of the start of trading, Statistics Canada reported that Canada’s second-quarter GDP rose at an annual rate of 2.9 per cent. That figure was just shy of the 3 per cent growth rate markets had been expecting. However, at least some economists had expected an upside surprise during the period, which came after disappointing growth of 1.3 per cent in the first three months of the year. Economists have suggested it would take a major upside surprise on second-quarter GDP to trigger an interest rate hike by the Bank of Canada at its September policy meeting. The loonie fell in the wake of the report.

After the markets open, a Federal Court of Appeal is expected to release a ruling on whether the federal government adequately consulted First Nations on the Trans Mountain pipeline expansion. The case pulls together roughly two dozen lawsuits and asks for the National Energy Board’s review of Kinder Morgan Canada’s project to be overturned. Either way, the decision will likely be appealed to the Supreme Court. Following Thursday’s ruling, Kinder Morgan shareholders vote on the proposed sale of the project to the government of Canada for $4.5-billion.

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On Wall Street, Campbell Soup Co. shares were down more than 4 per cent in premarket trading after the company said it would sell its international businesses and its Fresh refrigerated-foods unit. The decision comes after a strategic review of operations and follows pressure from hedge fund investors to sell the entire company.

Overseas, the pan-European STOXX 600 was down 0.56 per cent in early trading with most major sectors in the red on continued trade tensions between the United States and China. Britain’s FTSE 100 was down 0.76 per cent. Germany’s DAX lost 1.01 per cent. France’s CAC 40 slid 0.43 per cent.

In Asia, markets were broadly weaker. Japan’s Nikkei edged up 0.09 per cent. Hong Kong’s Hang Seng fell 0.89 per cent and the Shanghai Composite Indiex dropped 1.14 per cent.

Commodities

Crude prices were higher on a drop in U.S inventories and continued expectations that supply from Iran and Venezuela will continue to decline. Brent crude was closing in on the top end of its day range of US$77.18 to US$77.54 at last check. Brent crude has risen about 10 per cent over the last two weeks on expectations that the global market will tighten further. West Texas Intermediate was also higher although off the best levels seen overnight. The range for the day so far is US$69.55 to US$69.87.

On Wednesday, the U.S. Energy Information Administration bolstered market sentiment, reporting that crude inventories fell by 2.6 million barrels last week to 405.79 million barrels. The drop was greater than that forecast by analysts. Production, meanwhile, remained essentially unchanged from the previous week’s record of 11 million barrels a day.

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Reuters reports that an expectation that Iranian crude exports will likely fall to just over 2 million barrels a day in August, from April’s peak of 3.1 million barrels is also playing into Thursday’s price movement. U.S. sanctions on Iranian crude are set to go into effect in November. Production has also been declining in Venezuela.

The Organization of the Petroleum Exporting Countries, in which Iran is the third-biggest producer, will discuss in December whether it can compensate for a sudden drop in Iranian supply after sanctions start in November, the head of Iraq’s state oil marketer SOMO, Alaa al-Yasiri, said on Wednesday.

“As Iranian oil exports are lost to the market, Venezuelan production continues to decline, Angola struggles to maintain output and Libya is subject to episodic outages,” BNP Paribas global oil strategist Harry Tchilinguirian told Reuters Global Oil Forum.

“The path of least resistance (for prices), at least in our view, is up.”

Elsewhere, gold prices slid on a slightly firmer U.S. dollar. Spot gold was down 0.3 per cent at US$1,202.96 an ounce in morning trading in Europe, while U.S. gold futures shed 0.2 per cent to US$1,209 an ounce.

Currencies and bonds

The Canadian dollar lost altitude after Statistics Canada said the country’s economy grew at annual rate of 2.9 per cent in the second quarter, just shy of the 3-per-cent rate economists had been expecting. Statscan also said growth in the final month of the quarter was essentially unchanged. Thursday’s report was unlikely to change the market expectation that the Bank of Canada would hold steady at its September policy meeting. Following the release of the report, the loonie dipped to the lower end of the day’s range of 77.12 US cents to 77.50 US cents.

“The in-line GDP figures, and flat June, are enough reason for the Bank of Canada to wait until October to hike again, particularly if we don’t get a clear and favourable outcome to NAFTA and the tariffs on steel/aluminum are left in place,” CIBC Capital Markets chief economist Avery Shenfeld said.

In other currencies, the U.S. dollar fell for a fifth straight day against a basket of world currencies as easing concerns about global trade helped boost the appeal of riskier assets. Early Thursday, the U.S. dollar index held close to a one-month low of 94.52.

In bonds, the yield on the 10-year U.S. note was higher at 2.886. The yield on the 30-year note was also up at 3.027 per cent.

Stocks set to see action

BRP Inc. raised its financial guidance as it reported a second-quarter profit of $41-million. The maker of Ski-Doo snowmobiles and Sea-Doo personal watercraft says it now expects its normalized earnings per diluted share for the year to increase 30 to 35 per cent compared with the previous year. That’s up from an earlier prediction for growth of 24 to 30 per cent. Revenue is now expected to grow 12 to 16 per cent compared with earlier guidance for growth of 6 to 10 per cent.

Dollar General Corp’s quarterly same-store sales topped analysts’ estimates as customers spent more on apparel and daily-use items at its stores. Same-store sales rose 3.7 per cent in the second quarter ended Aug. 3, above the 2.83 per cent increase estimated by analysts on average, according to Thomson Reuters I/B/E/S. Shares of the discount store operator, up 38 per cent in the past year, were slightly lower in premarket trading.

Brown-Forman Corp. reported higher first-quarter net income Wednesday, fueled partly by strong overseas sales aimed at softening the short-term impact from tariffs. But the spirits company best known for its Jack Daniel’s Tennessee Whiskey brand cautioned it’s bracing for a period of uncertainty from trade disputes in some key markets. Sales surged in its top European markets due to inventory stockpiling as the company and its customers braced for the effects of tariffs imposed in the European Union that targeted American whiskey and other U.S. products.

The U.S. Food and Drug Administration on Thursday approved Bayer AG’s drug for the treatment of hemophilia A, a rare genetic disorder in which the blood does not clot normally, the company said in a statement. The injectable drug, marketed under the name Jivi, has been approved for previously treated patients and adolescents aged 12 years or older.

The Globe’s Susan Krashinsky Robertson reports Facebook Inc. will begin charging sales tax next year to some Canadian businesses who buy advertising on the platform, as well as on its photo-sharing service Instagram. The move, a global shift that will see Facebook report advertising revenue in each country where the spending occurs, was first announced last December. It comes amid criticism that the company does not pay enough tax in some of its largest markets.

Abercrombie & Fitch Co missed quarterly same-store sales estimates, hurt by lower-than-expected sales at its namesake line of teenage apparel and Hollister brand of surfwear. The company said sales at established stores rose 3 per cent in the quarter. Analysts on average had expected 3.7 per cent increase, according to Thomson Reuters I/B/E/S. Shares were down more than 9 per cent in the premarket.

Resolute Forest Products Inc. has signed a deal to sell its recycled bleached kraft pulp mill in Fairmont, W. Va. for US$55-million. The company says ND Paper LLC, a subsidiary of Nine Dragons Paper (Holdings) Ltd., has agreed to buy the mill. Nine Dragons has nine paper mills in Asia as well as two U.S.-based facilities.

More reading:

Thursday’s small-cap stocks to watch

Economic news

Second-quarter GDP grew at an annual rate of 2.9 per cent, Statistics Canada says. Economists had been expecting growth of about 3 per cent.

Initial claims for U.S. state unemployment benefits increased 3,000 to a seasonally adjusted 213,000 for the week ended Aug. 25, the U.S. Labor Department said.

The Commerce Department said U.S. consumer spending rose 0.4 per cent last month after advancing by the same margin in June.

With Reuters and The Canadian Press

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