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U.S. stock futures fell sharply early Thursday as hawkish comments from Federal Reserve chairman Jerome Powell raised the spectre of higher U.S. interest rates, pushing U.S. Treasury yields to their highest levels since mid-2011. On Bay Street, futures were weaker as crude prices held near four-year highs even as OPEC hinted that a production increase was possible.

On Wednesday, Mr. Powell said the U.S. economic outlook is “remarkably positive” and suggested that interest rates could rise above neutral.

“Powell’s comments that he was very happy with the U.S. economy, and that he could see the current expansion continue for some time, appears to raise the prospect that not only could we see another rate rise in December, but we could well see at least three more in 2019,” Michael Hewson, chief market analyst with CMC Markets U.K., said.

"In particular his remarks that we’re a “long way” from neutral have raised the prospect that rates could go quite a bit higher in the next few months, particularly since he went on to state that interest rates were ‘still accommodative’ even if they aren’t ‘extremely accommodative’. "

Those comments combined with a record reading on growth in the U.S. services sector helped push the yield on the 10-year Treasury to 3.2325 per cent. Reuters notes that yields saw their steepest gains overnight since the surprise outcome of the 2016 U.S. presidential election.

In corporate news, Apple Inc. and Inc. shares were down in premarket trading following a Bloomberg report that a tiny microchip inserted during the manufacturing process may have left the companies open to surveillance by the Chinese government. Both Apple and Amazon have disputed the reports with Apple saying it found “absolutely no evidence” to support claims made in the story.

Shares of book seller Barnes & Noble inc. shot up more than 25 per cent in premarket trading after the company said it was weighing its options after several parties - including founder-chairman Leonard Riggio - expressed interest in buying the retailer. Barnes & Noble has struggled in recent years, hit by the rise of online retail behemoth Amazon. In the wake of the latest news, Barnes & Noble also said it had adopted a shareholder rights plan to fend off hostile bids.

In earnings, Costco Wholesale Corp. reports results after the close of trading. Constellation Brands releases its latest results ahead of the open.

On Bay Street, results are due from retailer Aritzia Inc. after the end of the trading day.

Also, CP Rail raised its 2018 guidance, citing a strong third quarter and solid outlook for the rest of the year. The rail company says it now expects adjusted earnings per share growth of 20 per cent, up from earlier guidance of low-double-digit growth. CP also said it expects to report adjusted profit in the third quarter of $4.10 a share. Analysts had been forecasting earnings by that measure of $3.64 for the three-month period.

Overseas, European markets started the day on the back foot following Mr. Powell’s hawkish assessment of the U.S. economy and the path to higher borrowing costs. The pan-European STOXX 600 was down by 0.79 per cent. London’s FTSE 100 was off 1.07 per cent in morning trading. Germany’s DAX fell 0.23 per cent and France’s CAC 40 lost 1.01 per cent.

In Asia, Japan’s Nikkei fell 0.56 per cent. Hong Kong’s Hang Seng fell 1.73 per cent. Markets in China were closed.


Oil prices continued to sit near four-year highs ahead of U.S. sanctions on Iranian crude, although suggestions from OPEC that future production hikes are possible put a ceiling on price movements. Brent crude was down slightly in early going and held near the midpoint of the day range of US$85.76 to US$86.43. On Wednesday, Brent touched US$86.74, its highest level since late 2014. West Texas Intermediate was also down a touch although it held not far off the upper end of the day’s range of US$75.99 to US$76.47.

On Thursday, Saudi Energy Minister Khalid al-Falih said OPEC was able to raise output by 1.3 million barrels a day, but offered no signal that the cartel would follow through on an increase. Reuters has reported that Saudi Arabia and Russia struck a private deal in September to hike crude output before consulting other producers including OPEC members.

“I’m desperately trying not to be unabashedly bullish,” OANDA’s Stephen Innes said. "But Brent remains firm and unshakable no matter what’s thrown at it. Whether a vast U.S. inventory builds, or Saudi and Russia supply, the markets stay unwavering and singularly focused on Iran sanction and the ambiguity of OPEC’s amplitude to increase production quickly enough to offset any Iran supply loss."

In a report issued Wednesday, the U.S. Energy Information Administration said U.S. crude inventories spiked by 8 million barrels last week. That was four times analysts' expectations and the most in a week since March 2017.

In other commodities, gold prices held steady as the U.S. dollar advanced on the latest Fed comments. Spot gold was up 0.1 per cent at US$1,198.06 an ounce in early trading, after falling 0.5 per cent on Wednesday. Prices moved in a narrow range of US$1,195.36 and US$1,199.01 on Thursday.

“Gold has been surprisingly resilient to [U.S.} dollar strength over the last couple of weeks which some have attributed to Italy-related safe haven flows,” OANDA analyst Craig Erlam said. "It has not been the safe haven of choice in recent months though during periods of stress, with Treasuries and therefore the greenback instead being favoured, which has in turn weighed on the yellow metal as it’s priced in dollars."

He said it’s possible the euro-specific nature of the Italian issues have driven support for gold recently, “but even if that’s the case, if we continue to see the dollar perform well, it’s going to limit its upside potential.”

Silver and platinum prices were also higher.

Currencies and bonds

The Canadian dollar was little changed overnight, moving within a fairly narrow range ahead of Friday’s September employment figures. The day range for the loonie is 77.59 US cents to 77.73 US cents, with the currency holding near the midpoint.

Sue Trinh, RBC’s head of Asia FX Strategy, noted that the loonie has stabilized versus the the U.S. dollar after Monday’s gains after Canada and the United States struck a tentative deal on the proposed USMCA trade agreement.

“We look for more consolidation of Monday’s move through tomorrow, when Canadian employment and international merchandise trade data is due,” she said.

RBC is expecting a net gain in hiring in September of about 5,000 positions following August’s decline of 51,600 jobs. The jobless rate is seen dipping to 5.9 per cent from the previous month’s 6 per cent.

“The limited rebound is in part explainable by the August drop being preceded by the 54,100 surge in July,” RBC assistant chief economist Paul Ferley said. “However, our monitoring for September also reflects the expectation of a 30,000 drop in the education component that is anticipated to offset a 36,500 jump in this component in July with the August number indicating a further add of 5,400.”

In other currencies, the U.S. dollar was trading near a six-week high on bets that interest rates will continue to rise. The dollar index, which weighs the greenback against a selection of world currencies, was up 0.2 per cent to 96.1, its highest since Aug. 20 and nearing a 2018 high of 96.99 hit in mid-August in early trading.

U.S. bond yields, meanwhile, jumped overnight. At last check, the yield on the 10-year note was higher at 3.217 per cent. The yield on the 30-year note was also higher at 3.381 per cent.

“The overnight session was void of top tier data but the major focus was on the relentless grind higher in [U.S. Treasury] yields – the 10-year yield has now spiked to 3.18 per cent, up 12 basis points since the Friday close, on a combination of strong U.S. data and hawkish Fed commentary,” Ms. Trinh said.

Stocks set to see action

Constellation Brands Inc reported second-quarter sales above Wall Street estimates, driven by demand for its Corona and Modelo beers during the summer. Net income attributable to the company rose to US$1.15-billion, or US$5.87 per share, in the three months ended Aug. 31, from US$501.6-million, or US$2.49 per share, a year earlier. Shares were up 3 per cent in premarket trading.

Danske Bank faces a criminal investigation by the U.S. Department of Justice over a 200 billion euro (US$230-billion) money laundering scandal involving its Estonian branch, increasing long-held investor fears. Denmark’s largest bank said on Thursday that it had “received requests for information from the U.S. Department of Justice (DOJ) in connection with a criminal investigation relating to the bank’s Estonian branch”. Shares were down 3 per cent in Europe.

Eli Lilly and Co said on data from a mid-stage trial of its experimental diabetes drug showed clinically meaningful blood sugar reduction and weight loss in people with type 2 diabetes. Data from the six-month study showed that the drug significantly reduced blood sugar levels by up to 2.4 per cent and an average weight reduction of up to 12.7 per cent, Lilly said in a statement.

Facebook’s lead regulator in the European Union, the Irish Data Protection Commissioner (DPC), on Wednesday began an investigation into a massive cyberattack on the social networking site disclosed by the company last week. Facebook said on Friday that hackers had stolen login codes that allowed them to access nearly 50 million Facebook accounts, its worst-ever security breach given the unprecedented level of potential access. “In particular, the investigation will examine Facebook’s compliance with its obligation under the General Data Protection Regulation (GDPR) to implement appropriate technical and organizational measures to ensure the security and safeguarding of the personal data it processes,” the DPC said in a statement.

Toyota Motor Corp and SoftBank Group Corp are teaming up to develop self-driving car services, signalling deepening alliances between top automaker and tech firms as the global race to develop autonomous cars intensifies. Japan’s biggest automaker and its most influential tech firm will jointly develop a platform to operate self-driving vehicles which can be used as mobile shops, hospitals and other services as they envision a future in which fewer people drive their own vehicles.

Canadian cannabis company Tilray Inc.'s U.S. listed shares were down about 4 per cent in premarket trading after it announced a proposed private placement of $400-million of convertible senior notes. Tilray said it plans to use the proceeds for working capital, future acquisitions and general corporate purposes as well as to repay the $9.1-million existing mortgage related to its facility in Nanaimo, B.C.

Arrowhead Pharmaceuticals Inc said on Johnson & Johnson would develop and market its gene-silencing Hepatitis B treatment and buy a minor stake in a deal that could be potentially worth more than US$3.7-billion, sending its shares surging 20 per cent. Under the deal, J&J’s Janssen Pharmaceuticals unit will obtain a worldwide license for Arrowhead’s ARO-HBV drug and an option to collaborate on up to three new RNA interference (RNAi) drugs, which use gene-silencing technology.

More reading:

The latest addition to the Dow is worth a look

Thursday’s small-cap stocks to watch

Economic news

Initial claims for U.S. unemployment benefits fell by 8,000 to a seasonally adjusted 207,000 last week, according to the U.S. Labor Department. Economists had expected a reading closer to 213,000 claims.

(10 a.m. ET) Canada's Ivey PMI for September.

(10 a.m. ET) U.S. factory orders for August. Consensus is an increase of 1.5 per cent from July.

With Reuters and The Canadian Press

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