U.S. stock futures pulled back early Tuesday as optimism over the China-U.S. trade truce gave way to questions over the details of the agreement. On Bay Street, TSX futures followed the global pattern and were a touch weaker even with crude prices continuing to climb and an above-forecast profit from Bank of Montreal.
Doubt about whether the weekend agreement between U.S. President Donald Trump and Chinese leader Xi Jinping could resolve underlying trade concerns hit world stocks overnight with MSCI’s all-country index sliding 0.1 per cent. Markets in Japan finished down sharply and European bourses started the trading day on a weak note.
“The initial relief rally was never going to last, investors need more detail now in order for that risk on sentiment to survive,” Jasper Lawler, head of research with London Capital Group, said in a morning note. “So far that detail has not been coming through and investors have more questions than answers. Once again, we find ourselves on that familiar territory of trading sentiment fluctuations stemming from trade war headlines.”
Confusion over the agreement emerged after White House economic adviser Larry Kudlow told reporters that the 90-day truce period would begin Jan. 1, although another White House official was quoted as saying that the period began Dec. 1. Reuters also reports that none of the commitments that the U.S. said China had made, including cutting auto tariffs, were made in writing and specific details had yet to be completed.
However, OANDA analyst Craig Erlam said the day’s declines could have more to do with market jitters over the inversion of the short end of the U.S. yield curve than developments on the trade front. (An inverse yield curve is often seen as a predictor of lower interest rates down the road with longer-term bonds coming into demand, resulting in lower yields.)
“An inverted yield curve is often associated with the anticipation of a recession which may be why investors are nervous about it but I’m not convinced this is what’s going on,” Mr. Erlam said. “The Fed has been tightening policy at a decent rate and if the economy starts to slow then it makes sense that it may cut rates a little to provide some support.”
That, he said, would imply lower levels of growth “which naturally is a drag on stocks and may therefore explain some of the selling today.”
On Bay Street, Bank of Montreal delivered its latest results along with a dividend hike. The bank is increasing its dividend to $1 from 96 cents. BMO also reported adjusted profit per share of $2.32, up from $1.94 a year ago. The latest results topped analysts forecasts which called for a number closer to $2.29, according to IBES data from Refinitiv.
On Wall Street, Apple Inc. shares were down nearly 2 per cent in premarket trading after HSBC cut the stock to hold from buy. HSBC also reduced its 12-month price target to US$200 from US$205.
Overseas, the pan-European STOXX 600 was down 0.33 per cent. Europe’s auto sector, which is particularly sensitive to trade news, was among the weakest performers. Britain’s FTSE 100 fell 0.51 per cent. Germany’s DAX lost 0.59 per cent and France’s CAC slid 0.48 per cent.
In Asia, Japan’s Nikkei sank 2.39 per cent. Hong Kong’s Hang Seng, which had been negative ahead of the close, managed to finish up 0.29 per cent. The Shanghai Composite Index gained 0.42 per cent. Markets in South Korea and Australia finished the day in the red.
Crude prices added to the previous session’s solid gains on continued expectations that OPEC and its allies will settle on a production cut at Thursday’s meeting in Vienna. Alberta’s move to limit production starting in the new year also added to market sentiment.
Ahead of the North American open, Brent and West Texas Intermediate were both up by more than 2 per cent. Both rose by more than 4 per cent on Monday. Tuesday’s day range on Brent so far is US$61.69. The range on WTI is US$53.03 to US$54.55.
“Oil is rallying again today as we get closer to the OPEC+ meeting, at which a possible production cut will be discussed,” Mr. Erlam said. “There has been some confusion about who is supporting the cut and how much will be agreed, with reports even this morning that the decision could be delayed if Russia doesn’t agree to cut substantially.”
He said the report suggests the group is working toward a 1.3 million barrel a day cut to offset oversupply. “A failure to get this agreement over the line could really hit oil prices and threaten the temporary floor they’ve found around US$58 and US$50 in Brent and WTI, respectively,” he said, also noting that Qatar’s decision to exit OPEC after 57 years suggests “that the cohesion that made the last cut so successful is weakening.”
In other commodities, gold prices touched a five-week high supported by a weaker U.S. dollar. Early in the session, spot gold touched a peak of US$1,241.10, the highest since Oct. 26. Elsewhere, palladium managed a record high and was just a few dollars short of parity with gold. During Tuesday’s session, palladium hit a record of US$1,235. It is up about 48 per cent since August, according to Reuters.
Currencies and bonds
The Canadian dollar was higher ahead of the start of trading as its U.S. counterpart continued to lose altitude against world currencies. The day range on the loonie was 75.75 US cents to 75.96 US cents. Gains in crude prices continue to support the loonie. The key event for the currency on the immediate horizon is the Bank of Canada’s decision on interest rates, set for Wednesday morning.
“Tomorrow’s BoC interest rate decision will be the first of a series of key data releases this week, with RBC and consensus expecting no change in policy at the statement only meeting,” Elsa Lignos, global head of FX strategy for Royal Bank, said.
While the markets aren’t expecting a rate hike on Wednesday, economists continue to debate the possibility of an increase in January. Wednesday’s policy statement will be of key interest for that reason as will remarks by Bank of Canada Governor Stephen Poloz, who is scheduled to speak on Thursday.
Ahead of the BoC decision, a report by TD Bank economists suggests that the decision by Alberta to temporarily cut production could delay the next rate increase. “Monetary policy ‘should’ look through a temporary shock, but a risk management framework implies staying on the sidelines through the January meeting, as well,” the report said, noting “there is little to be lost” by taking a wait-and-see approach.
In world currencies, the U.S. dollar index fell to its lowest level since Nov. 22 with a decline in U.S. Treasury yields pressuring the greenback.
Overnight, U.S. yields fell with two-year yields climbing above the five-year notes for the the first time in more than a decade, Reuters reports.
Stocks set to see action
Cannabis company Aphria Inc. said Tuesday it “unequivocally” stands behind its Latin America operations, after a short-seller report raised questions about a recent deal in the region. “Since closing this important strategic acquisition in September, we have made considerable progress supporting and building out our operations on the ground in Latin America and the Caribbean,” Aphria CEO Vic Neufeld said in a statement. “We have nearly 100 employees across the region dedicated to advancing the company’s business interests, including cultivation, processing, research and development, partnerships and continued expansion.” Aphria’s U.S.-listed shares were down 11 per cent in premarket trading before being halted pending news. The company’s stock sank on Monday in the wake of the short-seller report.
Cannabis producer Cronos Group Inc. says it is in talks regarding a potential investment by Marlboro-maker Altria Group Inc. Cronos Group cautioned that no agreement has been reached and there could be no assurance the talks will lead to a deal. U.S. listed shares of Cronos were up 10 per cent in premarket trading.
Canadian mining company Teck Resources Ltd said on Tuesday it has agreed to sell a 30-per-cent stake in its Quebrada Blanca copper mine expansion in northern Chile to Japan’s Sumitomo for $1.2-billion. Sumitomo Metal Mining and Sumitomo Corporation will pay an $800-million earn-in contribution and $400-million matching contribution, below the $2-billion mark Teck had targeted to help develop the second phase of the mine.
Enbridge Inc. has struck a deal to sell its New Brunswick gas unit to Algonquin Power & Utilities Corp.'s Liberty Utilities subsidiary for $331-million. The deal is expected to close next year. “This is a great franchise with a complement of dedicated and hard-working employees. The sale aligns with Enbridge’s priority of focusing on expanding and growing its business in core markets,” Cynthia Hansen, executive vice president, utilities and power operations of Enbridge, said in a statement. “Enbridge will work with Liberty Utilities to ensure a safe and orderly transition of business’ operations.”
British supermarket group Sainsbury’s proposed takeover of rival Asda would not be cleared by the competition regulator without the need for “extensive remedies” if precedent is followed, according to market leader Tesco. The combination of No. 2 player Sainsbury’s and No. 3 Asda, which is owned by Walmart, could overtake Tesco. In its submission to the Competition and Markets Authority (CMA), which is probing the deal, Tesco also questioned the economics of the 7.3 billion pounds ($9.4-billion) transaction, saying it provided few direct customer benefits.
Apple Inc’s biggest iPhone assembler, Foxconn, is considering setting up a factory in Vietnam to mitigate any impact of an ongoing trade war between the United States and China, Vietnamese state media reported. The report comes after several executives interviewed by Reuters last week singled out Vietnam and neighboring Thailand as preferred destinations should they need to shelter operations from the trade war, braving hurdles such a lack of skilled labor and inadequate infrastructure.
Visa and Mastercard have offered to cut merchants’ charges for non-EU credit and debit cards by at least 40 per cent to end an EU antitrust investigation, part of a decades-long crackdown by the European Commission against such fees. The EU competition enforcer said interchange fees in which the merchant’s bank pays a charge to the cardholder’s bank, which then subsequently passes on the cost to the merchant, result in higher consumer prices.
Dollar General Corp cut its full-year profit and sales forecasts on Tuesday and warned that proposed tariffs on Chinese imports could begin to have a greater impact on its business and customers, sending its shares down 7 percent. The company topped estimates for the third quarter when excluding a 5-cent per share impact from hurricanes Florence and Michael, but it said the fallout had increased costs and would continue to do so.
Statistics Canada said labour productivity rose 0.3 per cent in the third quarter after a 0.7-per-cent increase in the prior three-month period.
With Reuters and The Canadian Press