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Equities

Canada’s main stock index opened flat on Monday as a new week of trading looks to be shaped by a number of factors, including growth in Chinese exports, updates on two fronts of U.S. trade and ongoing expectations from investors of an interest rate cut.

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Leading Canadian corporate news is Hudson’s Bay Co.'s executive chairman Richard Baker spearheading a group that is making a $9.45-a-share cash offer to take the retailer private. Toronto-based HBC, which owns its namesake and luxury chain Saks Fifth Avenue, also has a deal to sell the roughly half of its European operations that it still owns to its partner overseas for about $1.5-billion. The proposed transaction represents a premium of 48 per cent to HBC’s closing share price on Friday and a premium of 39 per cent to its 20-day average closing price, the company said in a statement on Monday. The stock opened up nearly 45 per cent on Monday.

At 9:36 a.m. ET, the Toronto Stock Exchange’s S&P/TSX Composite index was down 13.31 points, or 0.08 per cent, at 16,217.65. Seven of the index’s 11 major sectors were lower, led by a 1.2 per cent drop in the materials sector.

The Dow Jones Industrial Average rose 106.28 points, or 0.41 per cent, at the open to 26,090.22. The S&P 500 opened higher by 12.49 points, or 0.43 per cent, at 2,885.83. The Nasdaq Composite gained 56.77 points, or 0.73 per cent, to 7,798.87 at the opening bell.

China’s exports unexpectedly returned to growth in May despite higher U.S. tariffs, but imports fell the most in nearly three years in a further sign of weak domestic demand that could prompt Beijing to step up stimulus measures. Some analysts suspected Chinese exporters may have rushed out shipments to the United States to avoid new tariffs on US$300-billion of goods that President Donald Trump is threatening to impose.

But immediate tensions have mostly eased on the China front, and stocks are reacting positively in turn. U.S. Treasury Secretary Steve Mnuchin, in Japan for G20 meetings, signaled that a decision on higher tariffs for Chinese goods will come after President Donald Trump meets with China’s Xi Jinping later this month.

The dire U.S. tariffs on Mexico expected to take hold today were dropped Friday night when President Donald Trump took to Twitter to announce that they were “indefinitely suspended” after the two countries signed a deal on border security. “For now, markets are reacting with relief that the U.S. has not opened up yet another front to their trade war,” writes Joshua Mahony, Senior Market Analyst at IG, in a note. “However, this whole debacle also highlights the worrying fact that Trump sees tariffs as an appropriate tool to utilize in any situation where he feels the U.S. has been slighted in some way.”

Much of last week’s market activity was characterized by increasing expectations of a cut to U.S. interest rates. With trade tensions adding gloom to outlook and bond yields dropping, the Federal Reserve indicated that it would act as necessary to maintain stability. The stock market’s reaction to hopes of an interest rate cut was positive despite what it spells for economic outlook. Friday’s disappointing jobs report out of the U.S. added weight to concerns that could see the Fed take a rate cut seriously sooner rather than later.

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Adding to the optimism on Wall Street is the agreed merger between United Technologies Corp. and U.S. defense contractor Raytheon. The two plan to create a new aerospace company worth more than US $120 billion, in what would be the industry’s biggest ever merger. The deal would reshape the competitive landscape by forming a conglomerate which spans commercial aviation and defense equipment. United Technologies provides primarily commercial plane makers with electronics, communications and other equipment, whereas Raytheon mainly supplies the U.S. government with military aircraft and missile equipment. The deal is expected to close in the first half of 2020, following the previously announced spin-off of United Technologies’ Carrier air conditioning and Otis elevator businesses. President Trump expressed concern this morning that the merger may take away competition. At last check Raytheon shares were up around 1 per cent and United Technologies were down over 1 per cent.

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Across the pond, European stock markets are up today, with London’s FTSE nearing 0.6 per cent and Paris’ CAC above 0.3 per cent. This comes despite disappointing economic data out of the U.K., where the GDP estimate for April showed negative growth of 0.4 per cent, the worst monthly contraction since 2016. There is tumult in the U.K. with the future of Brexit unclear after Theresa May’s resignation as prime minister and with Euroskeptic Boris Johnson likely to become the country’s next leader. Some companies are already making their bets, and this economic news comes on the back of a recent decline in British manufacturing punctuated by automaker Ford closing its plant in Wales.

Asian markets are healthy and high today following positive signs of U.S. deescalation on two trade war fronts. Tokyo’s NIKKEI is up 1.2 per cent, Shanghai nearing 0.9 per cent, and South Korea’s HSI hovering above 2.25 per cent.

Monday signals the end of meetings for the G20 finance ministers and central bankers who met in Japan over the weekend. Talks centred on key risks associated with trade and geopolitics, as well as a pledge on taxes that will hit digital giants. In their communique, the group of ministers agree to compile common rules to close loopholes used by global tech giants to reduce their corporate taxes. Facebook, Google, Amazon and other large technology companies face criticism for reducing their tax bills by booking profits in low-tax countries regardless of the location of the end customer. Such practices are seen by many as unfair. The new rules would mean higher tax burdens for large multinational companies but would also make it harder for countries such as Ireland to attract foreign direct investment with the promise of ultra-low corporate tax rates.

Canadian companies posting earnings today include hot beverage retailer David’s Tea and mining company Eastmain Resources.

Commodities

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Crude prices were relatively steady with tight supply and investor relief over an end to the trade dispute between the United States and Mexico being offset by continuing concerns over tensions between the U.S. and China.

The day range on Brent so far is US$63.10 to US$64.10 while the range on West Texas Intermediate is $53.96 to US$54.84.

On Friday, U.S. President Donald Trump called off a plan to slap tariffs on imports from Mexico over concerns about how that country handles immigration.

"Oil prices have been given a lift in recent days, with various factors feeding into the gains," OANDA analyst Craig Erlam said. "Whether that’s the improved overall risk appetite in the markets, US/Mexico developments or an acknowledgement from the Saudi oil minister that an extension to the output cut is almost guaranteed, the news is bullish for oil prices."

Mr. Erlam noted that crude prices needed some good news “having fallen more than 15 per cent over the course of a couple weeks.”

Meanwhile, Saudi Energy Minister Khalid al-Falih said on Monday that Russia was the only oil exporter still undecided on the need to extend the output deal.

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Mr. Erlam said recent price declines likely contributed to Saudi Arabia’s recent suggestions that an extension of product limits was likely, considering Russia appeared less than enthusiastic about the prospect not long ago.

"Price is a major factor in this and the rapid decline may have quickly changed that," he said.

Gold prices, meanwhile, dropped after hitting their best levels in more than a year last week on news of a Mexico-U.S. agreement.

Spot gold was down 1 per cent at US$1,327.32 per ounce, as of 0725 GMT. In the previous session, the bullion hit its highest since April 19, 2018 at US$1,348.08 an ounce. U.S. gold futures also fell 1 per cent, to US$1,332.10 an ounce.

“Talks between the U.S. and Mexico seem to have smoothened out already and the (gold) market seems to have lost its safe-haven appeal a little bit,” said Ronald Leung, chief dealer at Lee Cheong Gold Dealers in Hong Kong.

Currencies

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The Canadian dollar was little changed as its U.S. counterpart rallied against the yen and the euro. Early Monday, the loonie was sitting close to the low end of the day range of 75.31 US cents to 75.60 US cents.

The economic calendar in Canada is relatively light this week with the key highlight being Thursday’s release of the first-quarter national balance sheet accounts. Elsa Lignos, RBC’s global head of FX strategy, says disposable income growth roughly matched credit growth in the quarter, so the report should see a debt-to-personal-disposable-income growth no worse than in the final quarter of last year.

"The long-term story doesn’t change (it’s a well-known vulnerability for Canada’s economy), but any small improvement would be welcome," she said in a note.

On global exchange markets, the big weekend news was the announcement that tariffs by the United States against Mexican imports had been shelved.

On Monday, the Mexican peso jumped more than 2 per cent on those headlines. The U.S. dollar, which has been hit by speculation that the U.S. Federal Reserve could cut interest rates soon, also recovered somewhat.

The U.S. dollar index was up 0.3 per cent to 96.824.

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"Reading through the details, Mexico basically re-committed to existing promises (and maintained its own red line of rejecting safe third-country status) – aka Trump blinked," Ms. Lignos said. "The reaction in Asia has been positive."

She also noted that Fed fund futures have mostly erased the move seen after Friday's weaker-than-expected May U.S. employment figures. The market rationale is that the better the news on trade, the less the Federal Reserve has to do on interest rates, she said.

In bonds, U.S. yields moved higher on the Mexico-U.S. trade news. The yield on the U.S. 10-year note was up at 2.145 per cent.The yield on the 30-year note was also higher at 2.627 per cent.

More company news

Drug maker Insys Therapeutics Inc said on Monday it filed for Chapter 11 bankruptcy protection, a week after agreeing to pay US$225-million to settle a U.S. probe into bribes the company paid to doctors for prescribing a powerful opioid medication.

China’s Fosun Tourism has made a preliminary approach to Thomas Cook to buy its tour operator business, sending shares in the struggling British travel group higher. Thomas Cook said in a statement on Monday it was in talks with the Hong Kong-listed Fosun, its biggest shareholder, about the operations. It said there could be no certainty that the approach would result in a formal offer.

The Globe’s Bill Curry reports Facebook Canada is launching a new searchable advertising database Monday that will provide a detailed look at how much money political parties and interest groups are spending on Facebook and Instagram to reach target audiences in the run-up to the 2019 election. It is also announcing new steps that advertisers will have to go through in order to confirm their identity and prove they are based in Canada.

Salesforce.com Inc said it would buy data analytics platform Tableau Software in an all-stock deal valued at US$15.7-billion. Tableau shareholders will get 1.103 Salesforce shares, valuing the offer at US$177.88 per share, which represents a premium of 42 per cent to Tableau’s Friday closing price.

Starbucks and environmental charity Hubbub are launching a trial program to lend passengers at Britain’s Gatwick Airport reusable cups while waiting for their flights in hopes of cutting down on waste. The one-month pilot program will give passengers at Britain’s second-largest airport the option of borrowing the cup — rather than using a paper one — and disposing of it before getting on their flights at “Cup Check-In” points. Cups will then be washed and sterilized and returned to Starbucks for re-circulation.

Economic news

Canada Mortgage and Housing Corp. said the seasonally adjusted rate of housing starts fell 13.3 per cent in May to 202,337 from 233,410. Urban starts were down 14.4 per cent, the agency said.

Statistics Canada says the value of building permits in April hit a record $9.3-billion, although the increase was almost entirely the result of a planned change in development costs in Vancouver.

With Reuters and The Canadian Press

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