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Inside the Market Before the Bell: TSX, Wall Street set to open higher, buoyed by Powell comments, NAFTA progress

The Toronto stock market and Wall Street were poised to open higher Monday after recent comments from U.S. Federal Reserve Chair Jerome Powell reassured investors that rates wouldn’t rise too quickly and Mexico and the U.S. were closing in on a NAFTA deal.

Mr. Powell said Friday that he sees “further, gradual” rate hikes ahead. At the Jackson Hole symposium on Friday, he affirmed that the U.S. central bank was sticking with its strategy of gradual rate hikes to protect economic growth and that sparked a rally in stocks that gathered pace as a new week swung into gear.

On Friday, the S&P 500 index and Nasdaq Composite hit record highs, following Mr. Powell’s comments. The gains cemented the S&P’s longest-running bull market, as defined by some investors.

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Helping to brighten the mood, U.S. and Mexican trade negotiators are seen as close to reaching a common position on the North American Free Trade Agreement (NAFTA), with Mexican Economy Minister Ildefonso Guajardo saying on Sunday talks have “continued to make progress”.

The talks will resume on Monday and a positive outcome is expected to ease concerns about an escalation in global trade tensions.

“The (NAFTA) talks add to the sense that while the U.S. is still bogged down in its trade conflict with China, it is perhaps more willing to compromise elsewhere such as with Mexico and the EU,” said Ulrich Leuchtmann, head of FX and emerging market research at Commerzbank in Frankfurt.

“It’s decreasing the risk of a global trade war.”

Shares in Tesla sank nearly 4 per cent in premarket trading after CEO Elon Musk announced Friday that his plan to take the electric car maker private was off.

In Europe, a stronger-than-expected German business sentiment survey added to the upbeat mood, with stock markets in Paris and Frankfurt up 0.4 per cent each . British markets were closed for a public holiday.

Investors were also relieved to see an easing of the trade war between China and the U.S.

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Overseas, a strengthening in the Chinese yuan, one causality of heightened trade tensions, also boosted sentiment in world markets.

The yuan hit a 2-1/2-week high versus the U.S. dollar after China’s central bank revived a “counter-cyclical factor” in its daily fixing to support the currency, arresting a record 10-week slide that has rattled global markets and irritated Washington.

The announcement was seen as the latest signal from the People’s Bank of China that is not comfortable with further depreciation in the yuan which could spark capital outflows from the cooling economy.

A firmer tone in the currency helped lift Chinese shares to two-week highs, with the Shanghai Composite index closing up 1.9 per cent.

The move also raised hopes that a yuan recovery could boost companies with significant dollar-denominated costs, such as airlines. China Southern Airlines gained 4.5 per cent and Air China rose 3.25 per cent.

“China just seems to be stabilizing its currency and we’re getting used to that fact now, so we’re not looking at an ever-weaker CNY, which could raise issues,” said Robert Carnell, chief economist and head of research, Asia-Pacific at ING, adding that “it reduces the scope for outflows.”

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MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.1 per cent and Japan’s blue-chip Nikkei closed at a 10-week high. That left the MSCI All-Country World index, which tracks shares in 47 countries, at its highest level since Aug. 9.

Commodities

Oil prices fell on Monday on concerns the U.S.-China trade dispute will erode global economic growth, and ahead of a conference call between members of a committee monitoring an OPEC and non-OPEC deal on output cuts.

Trading activity was limited due to a public holiday in Britain, traders said.

“Falling U.S. rig counts and last week’s decline in U.S. inventories are supporting oil prices amid a protracted U.S.-China trade war that could dampen global growth and weigh on oil demand,” said Stephen Innes, head of trading for Asia-Pacific at futures brokerage OANDA in Singapore.

U.S. energy companies cut nine oil drilling rigs last week, taking the total to 860, the biggest reduction since May 2016, energy services firm Baker Hughes said on Friday.

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Gold inched lower on Monday as the dollar recovered slightly, but losses were curbed by short-covering after the metal gained nearly 2 percent in the last session amid market perception of a dovish stance on interest rates by the U.S. Federal Reserve.

Spot gold had climbed 1.7 per cent on Friday in its biggest one-day percentage gain since May 2017.

“Gold faces headwinds from the fact that the dollar rally, old though it may be, is still alive, although facing threats from domestic political uncertainty,” said Nicholas Frappell, general manager at Australia-based ABC Bullion.

Currencies and bonds

The Canadian dollar was down slightly as commodity prices slipped. It was trading near the 76.5 cent US level.

The U.S. dollar steadied on Monday as risk sentiment improved following reassuring Federal Reserve comments and signs U.S. and Mexican negotiators were homing in on a common position on the North American Free Trade Agreement (NAFTA).

At a symposium at Jackson Hole, Wyoming, Fed chair Jerome Powell on Friday emphasized the central bank’s push to raise interest rates despite President Donald Trump’s criticism of higher borrowing costs.

The Treasury yield curve reached its flattest level since 2007 – a factor seen as reducing support for the dollar – in the wake of Powell’s speech.

His comments did little to change market expectations for rate hikes in September and December and disappointed some dollar bulls hoping for a more hawkish message.

“Some in the market were wrongfooted because they thought the Fed might shift towards an auto-pilot mode (approach to rate hikes) as it did in 2004. Obviously, Powell prefers a gradual approach,” said Ulrich Leuchtmann, head of FX and emerging market research at Commerzbank AG in Frankfurt.

“The return of risk appetite is negative for the dollar and its safe-haven appeal.”

Stocks to watch

Premarket trading in Tesla shares in the U.S. on Monday pointed to a 3 per cent drop when U.S. markets open as investors reacted to Chief Executive Elon Musk’s decision to abandon plans to take the luxury electric car maker private. Musk said in a blog post late on Friday that consultations done with the help of Goldman Sachs and Morgan Stanley had shown most of Tesla’s existing shareholders opposed the deal he proposed on Twitter three weeks ago to widespread shock on Wall Street.

Shares of Apple Inc. were up in premarket trading after reports that it plans to launch three new phones soon that keep the edge-to-edge screen design of last year’s flagship, according to people familiar with the matter. The devices will boast a wider range of prices, features and sizes to increase their appeal, said the people, who asked not to be identified discussing unannounced products.

Pfizer rose nearly 1 per cent after saying its rare-heart disease drug reduced the risk of death by around 30 per cent, boosting the prospects of what could be a billion-dollar-a-year drug.

Chipotle Mexican Grill slipped 2 per cent after Wedbush downgraded its rating on the burrito chain’s shares.

The head of Germany’s anti-trust office said he would have to review any plans to merge department store groups Kaufhof, owned by Canada’s Hudson’s Bay Company, and competitor Karstadt, owned by Austrian investor Rene Benko.

Twelve unarmed security contract workers at Tahoe Resources Inc.’s Guatemalan unit were abducted late on Friday and held for hours before being released, the gold- and silver-mining company said.

Economic news

No major U.S. or Canadian economic reports scheduled.

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