U.S. and Canadian stock markets are set to fall at the open Wednesday as rising bond yields and interest rates continue to keep investors on edge.
On Tuesday, the benchmark 10-year Treasury notched a fresh seven-year high but eased back by the end of the day. The 30-year bond also hit its highest point since 2014.
Pipeline stocks could get hit today after an Enbridge pipeline ruptured in Prince George, B.C., sparking a massive blaze and forcing about 100 members of a First Nation community in northern B.C. to evacuate their homes. This comes just days after a fire at the Irving Oil refinery in New Brunswick.
Investors will also be watching oil prices as Hurricane Michael heads towards Florida’s Gulf Coast and has shut nearly 40 per cent of crude output in the U.S. Gulf of Mexico. Concerns about Iran sanctions have left oil prices with more volatility, says BP’s CEO.
World stocks inched off eight-week lows on Wednesday as U.S. long-dated borrowing costs held below multi-year peaks, though market gains were checked by fears for global economic growth and the possibility of an Italy-EU clash over budget spending.
The effects of the global bond selloff that took U.S. 10-year bond yields to seven-year highs this week were exacerbated by economic growth concerns stemming from trade conflicts and $80-per-barrel oil, with the International Monetary Fund cutting its world GDP forecasts for the first time in two years.
The IMF’s estimates for the United States and China were both reduced, with the fund predicting the countries would feel the brunt of their trade war next year. It also slashed its expectations for emerging markets for 2019.
“We are at some sort of critical moment, a crossroads, for bond and equity markets,” said Marie Owens Thomsen, global head of economic research at Indosuez Wealth Management, noting that while U.S. 10-year yields at 2 per cent unequivocally favoured equity investment, this was not so above 3 per cent.
“This January we took out the 2-per-cent (yield) handle and now we are wondering if we are permanently taking out the 3-per-cent handle as well. That makes the climate for equities much more challenging,” Owens Thomsen added.
MSCI’s world equity index rose 0.14 per cent after four days in the red. However, while Japan’s Nikkei and MSCI’s Asia-Pacific index outside Japan rose 0.2-0.3 per cent, European shares slipped 0.2 per cent, undermined by more bellicose rhetoric from Italian politicians.
Commodities
Oil prices slipped on Wednesday after the IMF lowered its global growth forecasts, but markets were supported as Hurricane Michael moved towards Florida, causing the shutdown of nearly 40 per cent of U.S. Gulf of Mexico crude production.
Brent crude was down 20 cents at US$84.80 a barrel after a 1.3-per-cent gain on Tuesday. U.S. light crude was down 15 cents at US$74.81.
“Oil prices have stabilized for the moment - between a real and a metaphorical storm,” said Fiona Cincotta, senior market analyst at City Index.
“Hurricane Michael is powering ahead toward the Gulf of Mexico but it now seems likely to miss the main production areas there. On the other hand, Iran sanctions are only weeks away.”
The International Monetary Fund cut its global economic growth forecasts for 2018 and 2019 on Tuesday, raising concerns that demand for oil may also slump.
Gold fell on Wednesday as rebounding stock markets cooled the metal’s appeal and the bearish outlook was bolstered by dollar strength and a bullish U.S. interest rate outlook.
Spot gold shed 0.2 per cent to stand US$1,187.26 per ounce, moving largely within a narrow $4 range during most of the Asian session.
The metal attracted some interest as world stocks hit eight-week lows in the previous session, but bullion pulled back as shares staged a mild rebound on Wednesday.
“Gold has been pretty resilient to rising bond yields for the past couple of weeks. But, looks like it is starting to come under pressure from rising yields as well as a strong dollar,” ETF Securities analyst Nitesh Shah said.
Rising U.S. government bond yields can weigh on gold, as they make Treasuries attractive to investors seeking assets that earn a return as opposed to non-yielding bullion, which costs money to store and insure.
Gold has fallen over 13 per cent since hitting a peak in April, with investors opting for the greenback, as the U.S.-China trade war unfolded and due to rising U.S. interest rates.
“Gold prices will struggle to rebound over the remainder of 2018,” said Sabrin Chowdhury, commodities analyst at Fitch Solutions.
“Strong U.S. economic growth, concurrent monetary policy normalization by the Federal Reserve and a strong dollar will all limit the attractiveness of holding gold as an investment.”
Currencies and bonds
The Canadian dollar was sliding but was staying above the 77-cent US range as oil prices edged lower amid concern over supply and demand issues.
Rising Treasury yields and concern about the sustainability of Italy’s public finances after the ruling parties proposed a budget criticized by the European Union and have fueled another rally in the dollar in recent sessions, sending the greenback to a 1 1/2-month high on Tuesday.
That rally paused in European trading on Wednesday, although analysts said it was likely to prove a temporary reprieve for the euro.
Investors are betting that rising inflation pressures will keep the Federal Reserve, which unlike the European Central Bank is hiking rates, firmly focused on tighter policy, even as U.S. President Donald Trump took aim at policy makers’ hawkish inclinations.
“If U.S. yields rise at the same time and the market prices in a slightly more aggressive Fed next year, that automatically means that EUR/USD will head south,” said Commerzbank analyst Antje Praefcke.
“That means that short-term the dollar will continue to remain bid. The euro has lost its shine and therefore has too little to offer at present.”
On Wednesday, the dollar index was largely unchanged at 95.692, not far off 96.163 reached during the previous session -- its highest level since Aug. 20.
The euro hovered around US$1.1486 having briefly pushed past US$1.15 in Asian trading hours.
Stocks to watch
Toronto-based GFL Environmental Inc. has signed a deal to buy Waste Industries in an agreement that values the U.S. company at about $3.65-billion. The deal will more than double GFL’s footprint in the United States. Waste Industries provides non-hazardous solid waste collection, transfer, recycling and disposal services in the southeastern United States. GFL, which is privately owned, has operations across Canada and in Michigan.
Japan’s SoftBank Group Corp. is in discussions to buy a majority stake in U.S. shared office space provider WeWork Cos, a source said, potentially doubling down on one of its biggest bets on a loss-making startup. Pricing and other details have yet to be firmed up, the source said, adding that it was not a done deal.
Debt-laden retailer Sears Holdings Corp. has hired advisers to prepare for a possible bankruptcy that could come ahead of a debt payment due next week, the Wall Street Journal reported on Tuesday, citing sources. M-III Partners LLC, a boutique advisory firm, has been working on the potential filing in the past few weeks and Sears continues to discuss other options and could still avert an in-court restructuring, the newspaper said, citing people familiar with the situation. Sears, which has been losing money for years, has $134-million in debt due on Monday. Its shares fell more than 30 per cent in premarket trading.
Google has appealed a record $5-billion antitrust fine by European Union authorities, who say the tech giant abused the dominance of its Android operating system to stifle competitors. A spokesman for the company, Al Verney, confirmed Wednesday that the company has filed its legal challenge with the General Court of the EU, the bloc’s second highest court. Its shares slipped 0.3 per cent in premarket trading.
William Ackman said on Tuesday his hedge fund Pershing Square Capital Management has taken a roughly US$900-million position in Starbucks Corp. as he sees a chance for the world’s biggest coffee chain to reignite growth even as it struggles with stagnant sales in its home market. Mr. Ackman revealed the position at Grant’s Fall 2018 Conference and said he had been building the stake in the Seattle-based company over the past 90 days. His fund now owns 15 million shares, said people who heard him speak. Its shares rose 0.4 per cent in premarket trading.
Parkland Fuel Corp, a Canada-based marketer of petroleum products, said on Wednesday it would buy a 75-per-cent stake in privately held SOL Investments Ltd. and its units for $1.57-billion. The deal gives Parkland access to 526 retail gas stations, expanding its presence in the U.S. Gulf and Atlantic coasts, the company said. Desjardins raised its target price on Parkland to $47 from $46.
International Paper raised its quarterly dividend to 50 cents a share from 47.5 cents, a 5.3 per cent increase. It also announced a US$2-billion share buyback plan. Its shares edged higher in premarket trading.
PPG Industries rose 3.3 percent after Nelson Peltz’s Trian Fund disclosed a stake in the chemicals maker, which tumbled 10 percent on Tuesday after cutting its current-quarter forecast.
Nio jumped 9.9 per cent after Tesla’s second-biggest shareholder, Baillie Gifford & Co, disclosed a stake in the Chinese electric carmaker. Tesla was up 1 per cent.
Earnings set to be released today include: MTY Food Group Inc., Fastenal.
More reading: Wednesday’s small-cap stocks to watch
Economic news
(8:30 a.m. ET) Canadian building permits for August. Estimate is an increase of 2.0 per cent from July.
U.S. wholesale prices rose a mild 0.2 per cent last month, held down by lower food and energy prices, suggesting that inflation remains in check despite the economy’s robust growth.
The Labor Department says its producer price index — which measures inflation before it reaches consumers — rose 2.6 per cent compared with a year earlier, the smallest increase since January. Wholesale prices rose in September after two months of flat or declining readings. The consensus was for an increase of 0.2 per cent from August and 2.8 per cent year-over-year.
(10 a.m. ET) U.S. wholesale inventories for August. Analyst estimate is an increase of 0.8 per cent from July.