Briefing highlights
- Three potential flashpoints
- Philip Morris, Altria call off merger
- Juul Labs CEO steps down
- Stocks, loonie, oil at a glance
- What analysts are saying
- Required Reading
Potential flashpoints
There are three potential market-roiling flashpoints looming in the fourth quarter, as JPMorgan Chase sees it.
And the bank believes markets may not be ready for “possible escalations” where crude, the U.S.-China trade war and Brexit are concerned.
Iran’s impact on the oil market has escalated of late. The trade war is always just a Donald Trump tweet away from escalation. And Brexit seems to escalate by the day.
“Investors should be more suspect about markets’ readiness for possible escalations in Q4’s three geopolitical flashpoints of Iran, the trade war and Brexit,” said John Normand, JPMorgan’s head of cross-asset fundamental strategy.
Here are Mr. Normand’s flashpoints:
A ‘durable oil price spike’
“Except when oil markets are exceptionally loose (as in 2014-16), it has always been worth considering the wildcard of a supply-driven price rise because this dynamic has preceded every U.S. recession,” Mr. Normand said.
JPMorgan’s economists, Mr. Normand noted, estimated that a six-week “outage” from the recent hit to Saudi oil production could have shaved about 0.5 per cent from global economic growth. That would rise to 0.8 per cent for a three-month outage.
“The odds of such a prolonged outage are conjectural,” Mr. Normand said, but he cited the fact that crude prices are now at the “low end” of the trading range that has prevailed over the last three years despite supply issues that include big losses in Iranian exports and Venezuelan production.
This comes amid “equally impressive gains” in U.S. production, along with slower increases in demand.
“Thus, timing and level are critical when hedging a discrete event,” Mr. Normand said.
“Second, the U.S. appears unwilling to take direct military action against Iran, given both President Trump’s demonstrated preference for sanctions over force, plus Congressional opposition to military involvement in what it considers a third-party conflict amongst Saudi Arabia, Iran and Yemen,” he added.
“Thus, reprisal would need to be Saudi-led.”
At play here are, of course, oil prices, energy stocks and Russia’s ruble.
Further tariffs in the U.S.-China spat
“Despite goodwill gestures between the U.S. and China over the past two weeks and a widespread presumption that President Trump is twitching for even a weak deal ahead of 2020 elections, an escalation scenario is easy to envision,” Mr. Normand said.
“China, perhaps preferring to negotiate with a Democrat more likely to honour an agreement, might concede too little in negotiations, thereby triggering another U.S. tariff hike this fall.”
Potentially affected are China-related stocks, copper, metals and mining equities, the yuan and the Australian dollar.
U.S. Treasury Secretary Steven Mnuchin buoyed markets when he said on Monday that talks involving top U.S. and Chinese officials would resume in two weeks.
Of course, as IG senior market analyst Joshua Mahony noted, “while stocks are likely to rise in anticipation of a deal, the sense of déjà vu also brings skepticism over whether such a deal is there to be made.”
And, indeed, President Donald Trump angered the Chinese with comments at the UN Tuesday, driving down markets that had been hopeful for a resolution of the trade dispute.
A ‘hard Brexit after early elections’
There’s not much of an optimistic scenario here.
“To us, the most likely path in coming months is the following: No new agreement following the Oct. 17-18 EU leaders summit, and a request for a three-month extension and an early election in November or December,” Mr. Normand said.
“Voting intentions and our economists’ mapping to Parliament seats suggests a Conservative majority, which is why the election outcome can catalyze hard Brexit fears.”
This has affected, and could further affect, the pound, London’s FTSE 100 stock index and other assets.
Read more
- Ian McGugan: The three threats investors must now face
- Paul Waldie: British Supreme Court rules PM Boris Johnson’s decision to suspend Parliament was illegal
- Where are we at with Brexit? An ongoing guide
- World shares gain as U.S. says China trade talks to resume
- Oil prices rise as Saudi supply risks come into focus
Philip Morris, Altria call off merger, Juul CEO steps down
Today brings a big shakeup in the world of tobacco and vaping.
First, Philip Morris International Inc. and Altria Group Inc. called off talks to merge, agreeing instead to aim their focus on the launch of IQOS, a heated tobacco product, in the U.S.
“While we believed the creation of a new merged company had the potential to create incremental revenue and cost synergies, we could not reach agreement,” Altria chief executive officer Howard Willard said in a statement.
At the same time, Juul Labs announced a top-level move with the resignation of CEO and co-founder Kevin Burns, who will be replaced by K.C. Crosthwaite.
Mr. Crosthwaite is chief strategy and growth officer at Altria, which owns 35 per cent of Juul, a major e-cigarette company in the U.S.
Juul also announced it is halting all advertising in the U.S. and “refraining from lobbying” the U.S. government.
“In his new role, Crosthwaite and the entire Juul Labs leadership team will continue a broad review of the company’s practices and policies to ensure alignment with its aim of responsible leadership within the industry,” the company said.
Read more
Markets at a glance
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This is yet another challenge to a president who has by and large been keen to target an elevated stock market over the years
— Joshua Mahony, IG
What analysts are saying
“Impeachment is a multi-step, multi-month process. The House passing articles of impeachment does not remove a sitting president; this is decided by the (Republican-controlled) Senate. So even if a removal is not the base case, this means months of uncertainty and distraction around the U.S. macro and policy outlook. In our [foreign exchange] strategy, we have been defensive for a considerable time, which translates to a constructive view on safe anti-cyclical beneficiaries, including the dollar. A worse and more uncertain global outlook reinforces this defensive stance, but may mean a narrow dollar discount that favours safe currency alternatives like [Japan’s yen, the Swiss franc], and gold as the asset currency of choice against high-beta shorts.” Daniel Hui, global foreign exchange strategist, JPMorgan Chase
“The U.S.-China trade talks have taken markets around in circles over the years, and markets are growing increasingly skeptical over an eventual conclusion. From a U.S. perspective, we are seeing the focus shift towards the impeachment process launched by Nancy Pelosi yesterday, drawing some of his attention away from China relations. This process is likely to come to nothing, yet this is yet another challenge to a president who has by and large been keen to target an elevated stock market over the years.” Joshua Mahony, senior market analyst, IG
“House Speaker Nancy Pelosi launched impeachment proceedings against President Trump, while Boris Johnson returns to London to re-engage with Speaker Bercow, who will doubtless make the PM’s life (even) more difficult. The winners are bond owners. Their market was helped by weaker equities and by U.S. data, which saw the Richmond Fed index drop back close to cycle lows, while the Conference Board’s consumer confidence index fell too. Political uncertainty and correcting equity markets add to the mix.” Kit Juckes, global fixed income strategist, Société Générale
“Nonetheless the [Trump] allegations, along with a sharp dive in U.S. consumer confidence for September has raised concerns that the U.S. economy may well be about to catch a Q4 pre-Christmas chill, in the process causing the U.S. dollar to fall back and U.S. yields to slide towards their lowest levels in nearly two weeks.” Michael Hewson, chief analyst, CMC Markets
“Gold is likely to see strong demand as U.S. political risks rise and consumer confidence plummets. Americans are not immune to the global slowdown and we will likely see the coming months show a further deterioration in household spending and the labour market, warranting the Fed to commit to an easing cycle.” Edward Moya, senior market analyst, Oanda
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Ticker
Body of banker found
From The Associated Press: Estonian police have found the body of the former head of Danske Bank in Estonia who was at the centre of a US$220-billion money laundering scandal and had disappeared two days ago.
Best Buy targets $50-billion in revenue
From Reuters: Best Buy Co. is aiming to rake in revenue of US$50-billion in 2025 as it adds new products and bolsters investments as part of the second phase of its growth plan.
1 per cent see fast income growth
From The Canadian Press: The incomes of Canada’s top 1 per cent grew at a faster pace than everyone else in 2017 - and, over all, they saw their taxes edge down, says a new study.
CEO of eBay steps down
From Reuters: EBay Inc. replaced chief executive officer Devin Wenig with finance head Scott Schenkel on an interim basis and said it continued to explore options for its businesses.
Mario setback
From Reuters: Nintendo Co.’s hotly awaited mobile title Mario Kart Tour launched on Wednesday with many users complaining server overload meant they were unable to play the game - seen as a major test of the Kyoto-based company’s mobile ambitions.
Required Reading
B.C. light on cannabis sales
British Columbia had the lowest sales of legal cannabis of any province on a per-capita basis in July, nine months after legalization, as its sluggish rollout of retail stores failed to deflate the province’s long-standing black market. Matt Lundy reports.
Stelco plunges
Stelco Inc. abandoned an attempt to raise US$300-million in the bond market despite offering a 9-per-cent interest rate, in a sign of growing pessimism about the steel industry as global economic expansion slows, Tim Kiladze writes. Its stock sank 11.9 per cent Tuesday, the first day of trading after the Canadian steelmaker cancelled the bond sale late Monday, to close at $9.41.
Shopify sells off
Shopify Inc.’s extraordinary rally this year is sputtering amid a stretched valuation, a recent share-offering and a broader reappraisal of strong growth stocks. The share price slumped 6 per cent on Tuesday, marking its biggest one-day decline in three months. David Berman reports.