U.S. and Canadian stock futures are poised for a comeback Monday as a big tech deal boosted sentiment although that was tempered as concerns about corporate earnings and global growth prospects continued to weigh on the markets.
Tech stocks are likely to see action in trading Monday after IBM announced it would acquire Red Hat in a deal that’s valued at US$34-billion. It’s IBM’s biggest acquisition ever. IBM shares were down nearly 5 per cent in premarket trading but Red Hat shares jumped 50 per cent.
Data showed that U.S. consumer spending rose for a seventh straight month in September, but income recorded its smallest gain in more than a year amid moderate wage growth, suggesting the current pace of spending was unlikely to be sustained.
The Commerce Department said on Monday consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.4 per cent last month as households bought more motor vehicles and spent more on health care.
On Friday, the Dow closed down nearly 300 points, the S&P 500 was briefly in correction territory, and the TSX fell 35 points after a see-saw week that saw sharp declines and gains in the market based on economic news and corporate earnings results.
Again, earnings will likely move the markets Monday with earnings expected from Mondelez International, First Quantum Minerals, and Waste Connections Inc.
Concern over China’s slowing economy kept world stocks under pressure on Monday although European shares climbed thanks to encouraging earnings reports and relief that Italy dodged a ratings downgrade.
The euro, however, fell to a session low after a senior party source said German Chancellor Angela Merkel would not seek re-election as party chairwoman after bruising losses for her Christian Democrats in a regional election in Hesse.
Germany’s DAX was up nearly 2 per cent, London’s FTSE gained 1.5 per cent and France’s CAC added 0.3 per cent. The Stoxx 600 was up 1.2 per cent.
HSBC led a rally in banking stocks after strong results and its shares rose 6.2 per cent in premarket trading in New York.
Italy’s FTSE MIB led the market with a 2.5-per-cent gain after Italian bond yields fell sharply to a one-week low following Standard & Poor’s decision to leave Italy’s sovereign rating unchanged, sparking relief there was no ratings downgrade. This also boosted Italian bank stocks.
Despite gains on Monday, investors remained wary of betting the farm on a turnaround in risk.
“The only way I can summarize the core sentiment among the European investors I met is something like ‘pretty grim,’” wrote Erik Nielsen, group chief economist at UniCredit, in a note to clients.
The MSCI world equity index, tracking shares in 47 countries, managed a 0.1-per-cent gain. The index is down 9.3 per cent so far this month and has shed US$6.7-trillion in market capitalization since its January peak.
Overnight losses in Asia were largely led by China’s blue-chip index which tumbled more than 3 per cent. Japan’s Nikkei fell 0.2 per cent and the Shanghai index was off 2.2 per cent.
Chinese data underscored worries of a cooling economy as profit growth at its industrial firms slowed for the fifth consecutive month in September due to ebbing sales of raw materials and manufactured goods.
Commodities
Oil prices fell on Monday, as concern over the global economy put crude on track for its biggest monthly decline since mid-2016.
Brent crude oil futures were down 34 cents at US$77.28 a barrel, while U.S. crude futures fell by 30 cents to US$67.29.
Even with U.S. sanctions on Iranian exports due to come into force in under a week, oil has lost nearly 7 per cent in value this month, the largest percentage decline since July 2016.
Industrial commodities such as crude and copper have been rattled by hefty losses in global equities due to concern over corporate earnings, fears over economic growth amid escalating trade tensions, and a stronger dollar.
“It is often said that when stock markets sneeze, commodities catch a cold. This adage was on full display last week as a global rout on equity gauges dragged the energy complex lower,” PVM Oil Associates strategist Stephen Brennock said.
“Adding a further tailwind to the prevailing selling pressures are mounting concerns of a budding oversupply. Saudi Arabia and Russia are leading efforts to keep oil markets well supplied at the same time as the demand outlook darkens ... The Iranian factor has been put on the back burner and bullish blood will continue to be spilled in the oil market.”
Fund managers have cut their bullish positions in crude futures and options for four weeks in a row to their lowest since July, 2017, as the demand outlook grows more uncertain.
In precious metals, banks and brokerages have cut their average gold price forecasts for this year and 2019 after the metal slumped to 19-month lows in August, but they still expect prices to stage a modest recovery, a Reuters poll showed on Monday.
Spot gold will average US$1,273 an ounce in 2018 and US$1,300 in 2019, according to the poll of 39 analysts and traders conducted this month. That compares with predictions in a similar poll three months ago of US$1,301 for this year and US$1,325 for next year.
On Monday, gold prices edged lower as the U.S. dollar strengthened. Spot gold was down 0.2 per cent at US$1,230.68 an ounce. U.S. gold futures were down slightly at US$1,232.70.
Gold has suffered a torrid few months, with prices falling from a high of US$1,366.07 in January to as low as US$1,159.96 in August as a strengthening U.S. dollar made gold pricier for buyers with other currencies and rising stock markets and U.S. interest rates offered better returns.
But it has clawed back to around US$1,235 an ounce as sharp falls on global stock markets in recent weeks revived interest in bullion as a safe place to park assets.
“Gold prices are still below where their fundamentals justify, especially if the current shift in risk appetite is sustained,” said Christopher Louney at Royal Bank of Canada (RBC).
Economic and political risks are looming larger, which should benefit gold, said ETF Securities analyst Nitesh Shah.
“There is no shortage of geopolitical concerns ... Italy’s indebtedness and lack of a viable budget, uncertainty around Brexit negotiations, uncertainty around U.S. policy following U.S. Midterm elections are some of the risks,” he said.
Currencies and bonds
The Canadian dollar was trading slightly higher on Monday, at the 76.4 cents US mark.
“It is a busy week for Canadian data and given last week’s Bank of Canada meeting, the Canadian dollar should be more sensitive than usual to upside surprises,” said RBC in a note.
This week there is August gross domestic product data as well as employment figures for October. Economists expect a slight gain in month-over-month GDP growth and no change in employment figures, RBC said in a note.
“The BoC has made every meeting live and while the chances of a December hike right now are not high (about 25 per cent), that should rise substantially if key data (like wages, GDP and employment) beat expectations. Technically, although USD/CAD breached the important trendline at $1.3113 (76.26 cents US) on Friday, the pair did not sustain the move higher and failed to close above it. The USD/CAD is currently testing initial resistance at $1.3110 (76.27 cents US). Above there resistance is at $1.3226 (75.60 cents US) and $1.3290 (75.24 cents US). Support is at $1.3073 (76.49 cents US) (the 100 day moving average), $1.3033 (76.72 cents US), and $1.2917 (77.41 cents US) (the 200dma).”
The dollar rose towards a 10-week high against a basket of other currencies on Monday as concerns about global growth pervaded markets.
World stocks have sold off in October, beset by worries over corporate earnings and geopolitical uncertainty.
That has lifted the dollar – a currency that typically outperforms in risk-off periods – but the currency has strengthened only moderately.
“This likely reflects a number of factors, including long dollar positioning and, by the end of this week, some modest repricing of Federal Reserve expectations,” said Zach Pandl, co-head of foreign exchange at Goldman Sachs.
The dollar index rose 0.2 per cent to 96.517 after gaining 0.7 per cent last week when it hit a 10-month high.
The U.S. 10-year Treasury yield was at 3.1 per cent, up slightly. The Canadian 10-year bond yield was up at 2.414 per cent.
Stocks to watch
Baillie Gifford & Co., one of the top shareholders of Tesla Inc., has said it would be willing to inject more cash into the electric carmaker, the Times reported. Telsa shares in New York rose 2.9 per cent in premarket trading.
Mortgage company Home Capital Group Inc. has officially branded its post-crisis era “Home 2.0,” but some employees just call it “the comeback.” Fifteen months after Yousry Bissada took over as chief executive officer, it’s still a work in progress. The most visible scars from a crisis that pushed Home Capital to the brink of insolvency last year are beginning to fade. The bunker mentality that weighed on many employees – the ones who didn’t leave – has eased, and the alternative lender is turning a profit while gradually refilling its mortgage-business pipeline.
Bank of Nova Scotia has hired four people for its metals business in New York after losing six traders and salesmen who defected to rival Canadian lender Bank of Montreal last month, sources said. The move signals that Scotiabank, whose Mocatta metals arm has for years been the world’s biggest lender to the physical precious metals industry, is committed to the business despite a restructuring that has seen staff exit the bank in droves.
Goldman Sachs upgraded Ford Motor Co. to “buy” from “neutral,” with a US$12 price target as it expected a 40-per-cent return for the stock, including its dividend, as its restructuring plan takes hold. Its shares rose 4 per cent in premarket trading. General Motors Co. also gained 4.9 per cent after Bloomberg reported China was planning to cut the tax levied on car purchases by half.
Earnings include: Agellan Commercial REIT; Capital Power Corp.; First Quantum Minerals Ltd.; PrairieSky Royalty Ltd.; Victoria Gold Corp.; Waste Connections Inc.
Other reading: Monday’s Insider Report: CEO invests $300,000, buying on the dip
Monday’s small-cap stocks to watch
Economic news
U.S. consumer spending rose for a seventh straight month in September, but income recorded its smallest gain in more than a year amid moderate wage growth, suggesting the current pace of spending was unlikely to be sustained.
The Commerce Department said on Monday consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.4 per cent last month as households bought more motor vehicles and spent more on health care.
Data for August was revised up to show spending advancing 0.5 per cent instead of the previously reported 0.3 percent gain.
Economists polled by Reuters had forecast consumer spending increasing 0.4 percent in September. When adjusted for inflation, consumer spending rose 0.3 per cent. The so-called real consumer spending climbed 0.4 per cent in August.
Prices continued to rise steadily in September. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components rose 0.2 per cent after being flat in August.
That left the year-on-year increase in the core PCE price index at 2.0 per cent for a fifth straight month. Consensus was for an increase of 0.1 per cent from August and 2.0 per cent year over year.
The core PCE index is the Federal Reserve’s preferred inflation measure. It hit the U.S. central bank’s 2 per cent inflation target in March for the first time since April 2012.
(10:30 a.m. ET) U.S. Dallas Fed Manufacturing Activity Index for October.
With files from Reuters