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An early rally by Canadian stocks faded on Monday after Canada joined the United States and Mexico in a new trade agreement, suggesting that any relief over averting an all-out trade war has given way to sober reflection over what the deal means for key Canadian exporters.

Though trade-sensitive railways stocks and auto parts manufacturers rallied early in the day, they pared their gains as the day progressed, leaving them shy of their year-to-date highs.

For sure, the tentative agreement to revamp the North American free-trade agreement, now renamed the United States-Mexico-Canada Agreement, or USMCA, removes a key threat that had weighed on the stocks for much of this year. Concerns about tariffs and interruptions to exports, which would have pummeled corporate profits and economic activity, have eased.

But Canadian concessions in the new deal – giving U.S. companies limited access to Canada’s supply-managed dairy system and raising the value of goods that can be bought online and brought across the border duty-free -- tilt some aspects in favour of the United States, leaving investors to ponder whether Canadian-based companies will face tougher competition ahead.

“No, the new deal isn’t as favorable to Canada as old NAFTA, but it certainly is not as bad as either no deal, or even some of the harsher concerns,” Ian de Verteuil, an analyst at CIBC World Markets, said in a note.

The stock market reflected some of this upside-downside calculation. The broader S&P/TSX composite index, which jumped more than 100 points at the start of trading, surrendered most of the gains by the afternoon. It closed at 16,104.43, up 31.29 points or 0.2 per cent.

The S&P 500, the U.S. benchmark index, did considerably better. It closed at 2924.59, up 10.61 points or 0.4 per cent.

The Canadian dollar was more consistent. It rose to a four-month high above 78 cents against the U.S. dollar, as economists noted one certainty that the trade agreement will deliver: It paves the way for the Bank of Canada to raise its key interest rate later this year amid strong economic activity.

Bond yields took this as a given. The yield on the five-year Government of Canada bond rose to a seven-year high above 2.4 per cent.

Within the stock market, the trade agreement anointed winners – but mostly in what could be called relief rallies, given that some of these rising stocks had suffered from trade-related concerns earlier this year.

The automotive sector was a clear early winner, as the threat of debilitating tariffs and interrupted trade networks eased. Among Canadian parts makers, Magna International Inc. rose 2.2 per cent and Linamar Corp. rose 6.3 per cent. But Magna’s share price is more than 18 per cent off its high in June, amid concerns about weaker car sales and rising borrowing costs.

Similarly, expectations that the trade agreement will soon ease existing tariffs on Canadian-exported steel and aluminum lifted Canada’s Stelco Holdings Inc. by 4.8 per cent and Russel Metals Inc. rose 3.2 per cent. But Stelco shares are nearly flat for the year, while Russel is down about 14 per cent from its highs in February.

“We still expect the U.S. to ultimately lift its tariffs in exchange of a quota system that would place stricter limits on exports into the U.S. That’s good news for Russel Metals, to the extent the recent uncertainty around NAFTA has acted as a significant drag on the stock,” Frederic Bastien, an analyst at Raymond James, said in a note.

Canadian National Railway Co., which generates sales moving goods across borders, rose 1 per cent; Canadian Pacific Railway Ltd. rose 1.4 per cent.

Canadian banks, a number of which have substantial U.S. operations, gained ground in early trading, reflecting renewed optimism in economic activity and normalized trade. However, these early gains vanished by midday as investors weighed the benefits of higher interest rates against the possibility of slowing loan growth.

Royal Bank of Canada was relatively flat while Toronto-Dominion Bank fell 0.2 per cent.

Global dairy processor Saputo Inc., whose chief executive has opposed Canada’s protected dairy system, rose 5.7 per cent, as the new trade deal improves the Canadian company’s ability to expand into international markets. Yet, the shares are still down about 10 per cent since July.

Although Canada that will allow consumers to buy a higher value of goods online without paying duties, posing a potential threat to Canadian retailers, stocks were mixed: Hudson’s Bay Co. fell 2.6 per cent while Canadian Tire Corp. rose 0.2 per cent.

The backdrop to the new trade deal includes surging corporate profits. Companies in the S&P 500 are on track for second quarter profit growth of 24.9 per cent, year-over-year, according to Thomson Reuters I/B/E/S. In Canada, companies in the S&P/TSX composite index are reporting profit growth of 14.5 per cent so far.

This may be complicating an analysis of whether the trade deal is good for Canadian companies – or if it merely lifts a source of anxiety.

U.S. markets

The Dow and S&P 500 began the fourth quarter on a positive note on Monday, after a last-minute deal to salvage NAFTA as a trilateral pact helped ease trade worries, although major indexes finished off their session highs.

Industrial stocks, and more specifically auto and rail-related shares rose. Ford Motor Co gained 0.8 per cent, while General Motors Co advanced 1.6 per ent. Among railroads, Kansas City Southern rose 2.9 per cent.

The industrial sector, sensitive to trade developments in recent months, was up 0.9 per cent, its best day in five weeks.

“It is good news not only for NAFTA and North America in general but a lot of market participants are really viewing this as a positive for future negotiations, especially with China,” said Lindsey Bell, investment strategist at CFRA Research in New York.

“It is short on detail but the market seemingly doesn’t care, I am definitely interested in seeing exactly what the details are.”

The biggest boost to the industrials, however, was General Electric Co, which rose 7.1 per cent and was set for its best day in three-and-a-half years after replacing Chief Executive John Flannery with board member Larry Culp, who, investors hope can transform the company’s portfolio more quickly.

The Dow Jones Industrial Average rose 192.9 points, or 0.73 per cent, to 26,651.21, the S&P 500 gained 10.61 points, or 0.36 per cent, to 2,924.59 and the Nasdaq Composite dropped 9.05 points, or 0.11 per cent, to 8,037.30.

October is traditionally one of the tougher months for the S&P, although LPL Financial’s senior market strategist Ryan Detrick points out the S&P 500 has averaged a 3.3-per-cent return during October in midterm election years.

Aside from industrials, the materials and energy sectors also rose more than 1 per cent. Energy stocks got a boost as crude oil prices hit their highest level since 2014 on a combination of the new trade agreement and U.S. sanctions on Iran.

Small-cap stocks were under pressure, with the Russell 2000 off 1.39 percent. Smaller names had been seen as more immune to trade pressures and the index is now off nearly 4 per cent from its Aug. 31 high.

The defensive real estate and utilities sectors led the decliners.

Still gains, faded late in the session and the Nasdaq was negative, weighed down by declines in Facebook Inc off 1.2 per cent and Intel Corp, down 1.8 per cent.

Tesla Inc shares soared 17.3 per cent as signs it had met targets for quarterly production numbers added to relief at Chief Executive Elon Musk’s settling a lawsuit with regulators that could have forced him out.

Oil futures jumped more than $2 a barrel Monday, rising to levels not seen since November 2014, as U.S. sanctions on Iran loom and a North American trade deal fosters growth.

Brent futures settled at $84.98 a barrel, up $2.25, or 2.7 per cent. In post-settlement trade, the contract continued to strengthen, rising to $85.45 a barrel, the first trade above $85 since November 2014. U.S. light crude futures were up $2.05 a barrel at $75.30, the highest since November 2014.

The United States and Canada forged a deal on Sunday to salvage the North American Free Trade Agreement (NAFTA), a trilateral pact with Mexico.

Phil Flynn, an analyst at Price Futures Group in Chicago, said the NAFTA deal would boost oil prices because it “increases the growth prospects not only for Canada and the U.S., but for North America as a whole.”

Investors have loaded up on options that give the holder the right to buy Brent at $90 by the end of October. Open interest in call options at $90 has risen by nearly 12,000 lots in the past week to 38,000 lots, or 38 million barrels.

With a file from Reuters

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