Canada’s main stock index opened lower this morning, dragged down by a global sell-off of technology shares and a gloomy economic outlook that has investors turning to safe haven bets like bonds and bullion. Rate cuts from central banks look likely with bond yields grinding down internationally, and the markets continue to feel geopolitical pressure from U.S.-Iran and U.S.-China tensions. The fallout of the attacks on two oil tankers in the Gulf of Oman yesterday, which the U.S. is blaming on Iran, is adding to investor worries, as is poor data out of China today that underscores what’s at stake in the simmering trade war with the U.S.
At 9:50 a.m. ET, the Toronto Stock Exchange’s S&P/TSX composite index was down 27.84 points, or 0.17%, at 16,211.42.
South of the border saw a similar open dragged down by technology stocks. At 9:57 a.m. ET on Wall Street, the Dow Jones Industrial Average was down 99.94 points, or 0.38%, at 26,006.83, the S&P 500 was down 10.68 points, or 0.37%, at 2,880.96 and the Nasdaq Composite was down 50.39 points, or 0.64%, at 7,786.74.
Broadcom Inc. warned late Thursday of a broad slowdown in chip demand, blaming a trade conflict between the U.S. and China and export restrictions on Huawei. The chip maker cut its revenue forecast for the year by 8 per cent. Shares of the San Jose, California-based company were down almost 8 per cent at the open and the remarks dragged down stocks of other chipmakers, including Qualcomm, Texas Instruments and Skyworks Solutions.
“We’ll see a very sharp impact simply because (there are) no purchases allowed and there’s no obvious substitution in place,” Chief Executive Officer Hock Tan told a conference call with analysts in relation to the Huawei ban.
Economic fears are increasing as investors turn to bonds and gold to protect themselves from what may be to come. The benchmark U.S. 10-year Treasury has dipped to 2.06 per cent and bond markets price in a 28-per-cent chance of a rate cut next week when the Federal Reserve meets, followed by a sure bet at the end of July.
Yesterday’s poor economic data out of Australia and falling bond yields were absorbed by Asian markets that are betting on a rate cut down under, in what could be seen as a bellwether for similar economies. Bond futures imply a 66-per-cent probability the Reserve Bank of Australia will follow up its recent quarter-point easing with another in July. If not, a reduction to 1 per cent is considered certain by August. Markets were also raising bets of a rate cut by the Reserve Bank of New Zealand. As for 10-year German Bunds, considered among the safest assets in the world, their yields are at record lows. For the first time, bond yields in Spain have fallen below 0.5 per cent.
Meanwhile safe haven bullion is at a 14-month high.
While oil prices jumped yesterday at the news of two attacks in the Gulf of Oman, the markets are feeling some pressure today as tensions ratchet up between the U.S. and Iran. The U.S. blames Iran for the attacks, which occur only a month after four other tankers were damaged by mines in the region, a global choke point for oil. Iran denies any involvement.
“Equities have been on a good run the last couple of weeks, ever since the Fed assured investors that it wasn’t just going to sit back and watch the economy slow before its eyes," Craig Erlam, a senior market analyst at OANDA, wrote in a note. “The rally has slowed paused this week, with the latest heightened geopolitical risks naturally weighing on risk appetite, albeit without dragging too heavily on stocks.”
Data from Beijing painted a fairly gloomy picture of the world’s second largest economy as the trade war with the United States starts to bite. May industrial output growth slowed to a more than 17-year low, well below expectations, while fixed-asset investment also fell short of forecasts. Expectations for more stimulus in China are growing.
“Declining fixed asset investment and industrial production out of China this morning highlights the continued weakness that will continue to drag growth lower," wrote Josh Mahony, senior market analyst at IG, in a note. "The one bright spot came from the retail sales figure, which highlights a clear growth in domestic demand in the face of falling international business.”
All eyes are on U.S. president Donald Trump and Chinese president Xi Jinping’s planned meeting later this month at the G20 in Japan. For better or worse for markets, that meeting promises developments on the U.S.-China trade relationship, which threatens to escalate into a trade war that has the potential to push the global economy into recession.
Asian markets are mixed today, with Tokyo’s Nikkei up 0.4 per cent and the Shanghai Composite Index is down near 1 per cent. Hong Kong’s Hang Seng is down 0.65 per cent amid ongoing political tensions there over a controversial planned extradition law with China that has seen thousands take to the streets in protest. Reuters reports that some Hong Kong tycoons have started moving personal wealth offshore as concern deepens over the plan to allow extraditions of suspects to face trial in China, according to financial advisers, bankers and lawyers familiar with such transactions.
In Europe, London’s FTSE was down over 0.6 per cent, Frankfurt’s DAX down over 0.8 per cent, and Paris’ CAC dipped around 0.5 per cent.
Oil prices fell today after yesterday’s rally on the news of attacks on two tankers in the Gulf of Oman. The day range on Brent is US$60.74 to US$62.02 a barrel, with West Texas Intermediate holding a range of US$51.70 to US$52.70 a barrel.
The U.S. is blaming Iran for yesterday’s attacks near the Strait of Hormuz on the Norwegian-owned Front Altair and Japanese-owned Kokuka Courageous. Iran said today that it was alarming and wrong of the U.S. to put the blame on Tehran for the two attacks, which occurred in one of the world’s most vital shipping routes for oil. Both vessels were adrift in the Gulf of Oman today after their crews abandoned ship.
“Two opposite forces are in game for oil traders: the global economic slowdown and rising stockpiles pressure the oil prices downwards, while the ongoing tensions in the Middle East push the prices upwards," wrote Ipek Ozkardeskaya, a senior market analyst at London Capital Group, in a note.
"But the wider picture suggests that the rising expectations of a Federal Reserve rate cut, the U.S. sanctions on Iranian oil and an OPEC+ announcement to at least extend the oil production cuts beyond June could eventually give a short relief to the bulls, reversing some of the 8.5 per cent drop in net long WTI positions since the beginning of this year,” Ms. Ozkardeskaya wrote.
Gold jumped more than 1 per cent today, surpassing the key US$1,350 level for the first time since April last year, on the back of the weak economic data out of China and political concerns in the Middle East. Spot gold was up 0.8 per cent to US$1,353.06 per ounce, while U.S. gold futures were up 1 per cent to US$1,357.20 per ounce. But analysts aren’t sure this bullion rally will hold.
“I’m not convinced the risk aversion will hold though so this may rely on the dollar coming under further pressure, which wouldn’t come as a surprise after it fell to its lowest level since March last week," Mr. Erlam wrote. "We’ve seen a recovery since then but that already looks to be running out of steam, which could see its resolve tested.”
Copper prices fell today after top consumer China’s weak manufacturing and investment data. U.S. Copper futures were down almost 0.6 per cent to US$264.10 per pound. Earlier this month, prices of the metal used widely in the power and construction industries fell to a five-month low.
Currencies and bonds
The Canadian dollar is down around 0.12 per cent to a one-week low against the U.S. dollar today, hovering just below the U.S. 75-cent mark. The day range on the loonie is 74.93 U.S. cents to 75.05 U.S. cents.
“The [recent] surge in oil prices could translate into a stronger loonie only if the price correction becomes sustainable," Ms. Ozkardeskaya wrote.
The U.S. dollar gained today and is on track for its biggest weekly rise in three weeks with the release of positive U.S. retail sales data, but the yen and Swiss franc gained against the greenback amid the rising tensions between the U.S. and Iran.
The euro is down around 0.15 per cent against the U.S. dollar, at US$1.1258.
Sterling is unsettled amidst questions of the U.K.'s political future. The campaign is underway for the next leader of the Conservative Party, who will take over from Theresa May as the country’s next prime minister and have to deal with a looming hard exit from the European Union this coming October. Euroskeptic Boris Johnson won the support of 114 Tory MPs in the first round of voting yesterday, beating Jeremy Hunt’s second-place outcome of 43 votes. The pound was down almost 0.3 per cent against the greenback, at US$1.2639.
Bonds yields around the world are down, notably the 10-year U.S. Treasury and 10-year German Bund, both benchmarks and strong safe haven bets.
More company news
Volkswagen aims to raise up to 1.9 billion euros (US$2.1-billion) by listing truck unit Traton, it said today, scaling back earlier ambitions to list up to a quarter of the unit by opting to float a 10 per cent stake. The German carmaker said in a statement that the offering would be priced at 27 to 33 euros per share, which Jefferies analysts said valued Traton at a slight discount to industry peers but at a premium to Swedish competitor Volvo.
Shared office space manager WeWork Cos is exploring a deal to take majority control of its affiliate WeWork India ahead of the New York-based company’s plans to go public, Bloomberg reported, citing people familiar with the matter.
Rolls-Royce Holdings Plc confirmed it received a preliminary and conditional indication of interest from Spain’s Indra Sistemas SA for a majority stake in the British engine maker’s Spanish business ITP Aero.
Slovenia has received bids for its third largest bank, Abanka, from U.S. investment fund Apollo and Hungarian bank OTP, daily newspaper Delo reported.
Greenpeace activists climbed back on a BP drilling rig today to keep it from heading to an oilfield in the British North Sea, hours after police removed protesters who had boarded the vessel days earlier. On Thursday night police removed and arrested two Greenpeace activists who had spent over 70 hours blocking the rig from leaving Cromarty Firth, north of Inverness, Scotland, Greenpeace said in a statement.
U.S. retail sales increased in May and sales for April were revised higher, suggesting a pick-up in consumer spending that could ease fears the economy was slowing down sharply in the second quarter. The Commerce Department said this morning that retail sales rose 0.5 per cent last month, coming in slightly below analysts’ estimates of 0.6 per cent growth, as households bought more motor vehicles and a variety of other goods. Sales at electronics stores jumped 1.1 per cent and rose 0.7 per cent at auto dealers. Sales in a category that includes mostly online rose 1.4 per cent.
(8:30 a.m. ET) Canada reports April new motor vehicle sales.
(9:15 a.m. ET) U.S. reports May industrial production and capacity utilization.
With files from Reuters and the Associated Press.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.