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Equities

U.S. stock futures were mixed early Monday as European markets failed to follow through on Asia’s gains as the latest trade talks between the United States and China kick off this week. On Bay Street, futures were lower even as crude prices advanced.

MSCI’s all-country index, which tracks shares in 47 countries, advanced to its best level in more than two weeks. Asian markets finished higher but major markets in Europe slipped after a steady start to trade the red as the morning progressed.

“European markets have failed to follow their Asian counterparts, as the bullish surge sparked on Friday comes to a halt," IG senior market against Joshua Mahony said. "All eyes have been and will remain on the U.S., with Friday’s Fed and payrolls focus shifting onto US-China trade talks today."

He noted that, while the Fed dot plot laid out a slower path of rate hikes, Friday’s announcement from Fed chair Jerome Powell that markets could see a pause come into effect helped drive stocks up and the U.S. dollar down.

On Friday, a report showed that U.S. non-farm payrolls rose by 312,000 last month while wages grew at an annual rate of 3.2 per cent.

For the markets, the day’s key event will be the resumption of U.S.-China trade talks. U.S. officials meet with their counterparts in Beijing this week. It’s the first face-to-face meeting since U.S. president Donald Trump and China’s President Xi Jinping agreed in December to a 90-day truce in the trade war.

Ahead of this week’s talks, Mr. Trump said: “I think China wants to get it resolved. Their economy’s not doing well. I think that gives them a great incentive to negotiate.”

Overseas, European markets gave back early gains with the pan-European STOXX 600 falling 0.36 per cent after starting the day in the black. Britain’s FTSE 100 fell 0.52 per cent. Germany’s DAX lost 0.37 per cent and France’s CAC 40 fell 0.35 per cent.

Asian markets, however, posted solid gains ahead of the latest round of trade talks. Japan’s Nikkei jumped 2.44 per cent, while the broader Topix gained 1.34 per cent. Hong Kong’s Hang Seng rose 0.82 per cent. The Shanghai Composite Index advanced 0.72 per cent.

Commodities

Crude prices continued to rally off December lows underpinned by an effort by OPEC and its allies to cut production levels. Brent crude was higher and has a day range so far of US$57.30 to US$58.90. West Texas Intermediate was also up with a range of US$49.11 to US$49.47.

Reuters reports that oil has risen about 12 per cent since last Monday, its biggest week-on-week rally in two years.

“Oil prices have rallied overnight on hopes that talks in Beijing can resolve a trade war between the U.S and China, while supply cuts by OPEC+ is also supporting crude," OANDA analyst Dean Popplewell said. "However, expect gains to be capped by U.S supply numbers,”

“This relief rally is being supported by market expectations that Sino-U.S trade talks, beginning today in Beijing, would lead to an easing in tensions between the world’s two largest economies.”

Mr. Popplewell noted that, because of record U.S. crude production, U.S. stockpiles are climbing. Last week, figures from the Energy Information Administration showed that oil inventories rose by 7,000 barrels to 441.42 million barrels, more than 5 million above their five-year average.

Gold prices, meanwhile, advanced early Monday as market expectations that the Fed could stop raising rates tempered the U.S. dollar. Spot gold was up about 0.5 per cent at US$1,291.47 per ounce as of 1106 GMT. U.S. gold futures gained 0.6 percent to $1,292.90 per ounce.

Fed chair Jerome Powell said Friday that the bank would be more sensitive to downside risks in the market and added that it was “prepared to shift the stance of policy” if needed. The U.S. dollar fell in the wake of those comments as traders bet that the Fed was signalling its intention to hold rates in coming months.

“Ahead of the U.S open, gold is rallying this morning, helped by a weaker U.S dollar on expectations that the Fed may ‘apply the brakes’ on further rate hikes, although an improved investor risk appetite should limit gains for the safe haven metal,” Mr. Popplewell said.

Currencies and bonds

The Canadian dollar was modestly higher as investors await the Bank of Canada’s next rate announcement and monetary policy report on Wednesday. The day range on the loonie so far is 74.69 US cents to 74.93 US cents.

RBC chief currency strategist Adam Cole says that bank is in line with consensus, seeing no change in rates this week.

“Financial market developments have been huge in the month since the December confab, with 2-, 5- and 10-year [bond] yields all about 30 basis points lower in the broad global risk-off move,” Mr. Cole said. “Governor [Stephen] Poloz & Co. were noticeably more dovish at the December meeting and associated economic progress report, highlighting risks from lower oil prices and the possibility of an output gap re-emerging due in part to GDP revisions and softer Q3 GDP details.”

He also said near-term growth looks to be soft but RBC expects GDP growth later to be at or above potential with the year seeing a 1.7-per-cent annual grwoth rate. "Combined with underlying inflation remaining around 2 per cent, this should be enough to see two hikes later this year. International trade data are also due this week (tomorrow). "

On global currency markets, the U.S. dollar fell for the third straight day. The U.S. dollar index declined a quarter of a per cent to 95.92, near a 2-1/2 month low hit last week.

In bonds, the yield on the U.S. 10-year note was little changed at 2.643 per cent. The yield on the 30-year note was slightly lower at 2.937 per cent.

Stocks set to see action

Suncor Energy Inc says it expects total upstream production to rise by about 13 per cent in the fourth quarter of 2018, helped by higher output from its Syncrude joint venture. The company expects total upstream production of 831,000 barrels of oil equivalent per day (boe/d), up from 736,400 boe/d in the fourth quarter of 2017.

Eli Lilly and Co said it would buy Loxo Oncology Inc for about US$8-billion in cash. The offer of US$235 per share in cash represents a premium of about 68 per cent to Loxo’s Friday close. In November, a Loxo drug found to be effective against a wide variety of cancers driven by a single, rare genetic mutation won U.S. approval.

Tesla Inc broke ground on Monday for its Shanghai Gigafactory where it plans to begin making its Model 3 electric vehicles (EV) by year-end, a first step in localizing production in the world’s largest auto market. At a ceremony at the site of the plant on the outskirts of Shanghai, Chief Executive Elon Musk joined the city’s mayor and other local government officials to formally begin construction of a factory that Tesla has said will cost around $2-billion.

More reading:

Monday’s small-cap stocks to watch

Economic news

(10 a.m. ET) Canada releases the December Ivey purchasing manager’s index. The Conference Board releases its Consumer Confidence Index.

(10 a.m. ET) U.S. ISM non-manufacturing index for December is released.

(10 a.m. ET) U.S. November factory orders (which will likely be delayed by the U.S. government shutdown). Estimates are for an increase of 0.4 per cent.

With Reuters and the Canadian Press

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