U.S. and Canadian stocks are set to decline Monday as a rebound in oil prices and concerns over rising tensions between Western countries and Saudi Arabia piled on to the ongoing worries about interest rates, trade wars and growth rates that sank global stocks last week.
Retailers could see repercussions after Sears filed for Chapter 11 bankruptcy protection Monday, buckling under its massive debt load and staggering losses. Edward Lampert has stepped down as CEO but will remain chairman of the board. In recent weeks, Mr. Lampert has been pushing for a debt restructuring and offering to buy some of Sears’ key assets, like Kenmore, through his hedge fund as a $134-million debt repayment came due on Monday. Mr. Lampert personally owns 31 per cent of the company’s shares, while his hedge fund has an 18.5-per-cent stake, according to FactSet.
Earnings will continue in earnest in the U.S. this week, and on Monday Bank of America Corp reported a better-than-expected rise in quarterly profit as the second-largest U.S. lender reined in costs, while higher interest rates and loan growth helped offset lower bond trading revenue. Its shares rose 0.2 per cent in premarket trading as its earnings beat analysts' estimates.
Investors are concerned about the fallout relating to the disappearance of journalist Jamal Khashoggi. Diplomatic tensions have flared over the disappearance of Mr. Khashoggi, a critic of Riyadh’s policies. U.S. President Donald Trump has threatened “severe punishment” if it turns out that prominent Saudi dissident Mr. Khashoggi, a U.S. resident and Washington Post columnist, was killed while visiting his country’s consulate in Istanbul. Many company executives have canceled plans to attend a Saudi investor conference later this month.
On Friday, U.S. and Canadian stocks closed higher but were down sharply for the week as investors fretted over rising interest rates.
World markets sank in trading Monday. Asia had seen Japan’s Nikkei and China’s main bourses take fresh tumbles on trade and currency jitters and Europe’s STOXX 600 dipped to a new 22-month low in early trading as the gloom refused to lift.
Japan’s Nikkei slumped 1.8 per cent on Monday, with car maker shares hitting 13-month lows after Washington said it would seek a provision about currency manipulation in future trade deals with Japan.
MSCI’s broadest index of Asia-Pacific shares outside Japan also fell 1 per cent overnight as Shanghai ended down 1.5 per cent and just off a four-year low.
Brtitain’s FTSE was up 0.05 per cent, Germany’s DAX add 0.3 per cent and France’s CAC was off 0.26 per cent.
“I don’t think there is really any appetite to dive back in (to stocks) and the Saudi situation is just another ball for investors to have to juggle,” said CMC Markets’ senior analyst Michael Hewson.
“If the trend we saw last week continues, it is going to be very hard for Europe to rally... The outlook remains very uncertain,” Hewson added.
In London commodities trading, oil prices were pushing up again amid the Saudi tensions. Investors suspect the latest developments could undermine the leadership of Crown Prince Mohammed bin Salman and has the potential to eventually destabilize the oil-rich kingdom.
The official Saudi Press Agency (SPA) quoted an unnamed official on Sunday as saying there would be retaliation in the oil market if the West moves to punish the Kingdom.
“The Kingdom also affirms that if it receives any action, it will respond with greater action, and that the Kingdom’s economy has an influential and vital role in the global economy,” the official added, without elaborating.
“People had thought the Saudis would make up for the fall in Iran’s output. If they are starting to use oil as their weapon, that will be a whole new chapter,” said Kazuhiko Fuji, senior fellow at Research Institute of Economy, Trade and Industry, a think-tank affiliated with the Japanese government.
Commodities
Oil prices rose on Monday as tension over the disappearance of a prominent Saudi journalist stoked supply worries, although concerns over the long-term demand outlook dragged on sentiment.
Brent crude oil jumped $1.49 a barrel to a high of US$81.92 before slipping to US$81.13, up 70 cents. U.S. crude was last up 40 cents at US$71.74.
“Growing tensions over the disappearance of journalist Jamal Khashoggi at the Saudi consulate in Istanbul has proved supportive for oil prices,” said ING commodities strategist Warren Patterson.
Saudi has threatened to take action via oil if there’s any retaliation. Analysts said, however, that it was difficult to imagine Saudi Arabia taking action that would hit world oil supply.
“So far the oil market is withstanding the verbal war and though prices are slightly higher ... they are a good US$5 below the peak last week,” said Fiona Cincotta, analyst at City Index.
Exerting downward pressure on prices, Friday’s monthly report from the International Energy Agency said the market looked “adequately supplied for now” and cut its forecasts for world oil demand growth this year and next.
Gold rose more than 1 per cent on Monday to its highest in about 2-1/2 months as investors sought refuge after a slide in European equities compounded jitters on global stock markets.
Spot gold was up 1.1 per cent at US$1,231.45 an ounce, having touched their highest since July 26 at US$1,233.26. U.S. gold futures rose 1.1 per cent to US$1,235.
“Gold has now got a stronger tailwind from a flight to safety from risky assets,” said Quantitative Commodity Research analyst Peter Fertig. “Gold’s next moves will depend on how long this sell-off continues.”
Currencies and bonds
Rising oil and gold prices supported the loonie, which was trading slightly higher but was below the 77-cent US mark.
The yen hit a one-month high and the Swiss franc rallied on Monday as rising geopolitical tension and further falls in equity markets left investors skittish at the start of the week.
The yen rose as much as half a per cent to 111.62, its strongest since Sept. 13. The Swiss franc, which investors also tend to buy when markets are in flux, rose 0.4 per cent against the euro to 1.1423 francs and 0.6 per cent versus the dollar to 0.9853 francs.
Valentin Marinov, head of currency strategy at Credit Agricole, said a “constellation of political risks” was weighing on sentiment and supporting yen and franc buying.
Chancellor Angela Merkel’s conservative Bavarian allies suffered a humbling election defeat seeing their worst election result since 1950 on Sunday, in a setback that raised tensions within the country’s crisis-prone national government.
The euro, however, was little fazed. It rose 0.3 per cent to US$1.1592 against the dollar as the greenback sold off against a basket of currencies.
The U.S. 10-year Treasury yield was at 3.161 per cent, up slightly, while the Canadian 10-year bond yield was at 2.482 per cent, down slightly.
Stocks to watch
Bank of America Corp reported a better-than-expected rise in quarterly profit on Monday as the second-largest U.S. lender reined in costs, while higher interest rates and loan growth helped offset lower bond trading revenue. Excluding items, the bank earned 67 cents per share, beating the average analyst estimate of 62 cents per share, according to I/B/E/S data from Refinitiv. Total interest income - the difference between what a lender earns on loans and pays on deposits - rose 6.4 percent to $11.87 billion. Total deposits rose nearly 5 percent to $1.35 trillion. It shares gained 0.2 per cent in premarket trading.
Canopy Growth Corp. has signed a deal to buy Ebbu Inc., a Colorado-based hemp researcher, in a stock-and-cash deal worth more than $425-million. Under the agreement, Canopy will pay $25 million in cash and issue 6,221,210 shares to Ebbu. The company will also pay up to an additional $100 million if certain scientific-related milestones are achieved within two years of the deal closing. It shares rose 2.6 per cent in premarket trading.
Earnings include: Bank of America Corp.; Rio Tinto ADR; The Charles Schwab Corp.; Total S.A.
More reading: Monday’s small-cap stocks to watch
Economic news
(8:30 a.m. ET) Canadian new motor vehicle sales for August.
(8:30 a.m. ET) U.S. retail sales for September. The Street expects an increase of 0.7 per cent from August (or 0.4 per cent excluding automobiles).
(8:30 a.m. ET) U.S. Empire State Manufacturing Index for October. The Street expects a reading of 20.5, up from 19.9 in September.
(8:30 a.m. ET) Canada’s existing home sales and average prices for September. Analyst estimates are year-over-year declines of 6.5 per cent and 1.0 per cent, respectively.
(10 a.m. ET) U.S. business inventories for August. Consensus is an increase of 0.5 per cent from July.
(10:30 a.m. ET) Bank of Canada's Business Outlook Survey for Q3.
(2 p.m. ET) U.S. budget balance for September.
With files from Reuters, The Canadian Press