U.S. and Canadian stocks are set to start the day in the red Wednesday, taking a breather after a strong 500-point rally on the Dow on Tuesday that was led higher by better than expected earnings from big U.S. companies.
In Canada, marijuana stocks could take centre stage as the drug becomes legal across the country, an historic milestone marking the end of prohibition in the country as Canada becomes the first industrialized nation to legalize recreational cannabis. However, a shortage of cannabis could stymie some people’s attempts to buy the drug in the coming weeks. In New York, one of the largest cannabis companies, Canopy Growth, saw its drop 1.9 per cent in premarket trading.
Corporate earnings will again be on investors' minds as a slew of reports are expected. Netflix set the scene for the FAANG group of stocks as it reported stronger than expected results after the bell Tuesday. Its shares soared in after-market trading and are up 11 per cent in premarket trading. Shares of Apple are up 0.5 per cent, and Facebook is up 0.6 per cent. Stock in Alphabet could get hit after Google’s YouTube reported an outage late Tuesday.
However, shares of IBM fell 4.5 per cent in premarket trading after the company’s quarterly revenue fell more than expected, pointing to a bumpy recovery for the member of the Dow Jones Industrial Average.
U.S. President Donald Trump is again attacking the U.S. Federal Reserve and overnight described the central bank as “his biggest threat” as it was “going too fast” as yields continue to edge higher. He may have additional comments after the Fed releases its latest meeting minutes Wednesday afternoon.
While many investors are skeptical the recent volatility is over, they also hope another strong quarter of corporate profits will calm nerves jangled by trade tensions and rising bond yields. Third-quarter earnings for S&P 500 companies are seen growing 21.8 per cent, according to I/B/E/S Refinitiv.
“There are negative risks in the short term, but on the positive side we have good earnings and data from the United States,” said Christoph Barraud, an economist at Paris-based brokerage Market Securities.
“Last week’s correction was extreme, a lot of people became short (the market) so this is a bit of normalization.”
Barraud said the out-performance of U.S. equities was likely to continue.
“People want to put money where there is best visibility ... In the U.S., you have growth visibility, strong earnings (as well as) buybacks and dividends ... So the U.S. is still attractive compared to peers,” he said.
Forecast-beating U.S. company earnings improved the mood on world equity markets on Wednesday, as Asian and European shares put aside concerns on global growth and trade and took their cue from Wall Street’s best one-day rise in eight months on Tuesday.
A pan-European equity index rose 0.15 per cent to a one-week high. Earlier, MSCI’s ex-Japan share index added 0.6 per cent while Japan’s Nikkei jumped 1.3 per cent. MSCI’s global equity index touched a one-week high . The 47-country benchmark rose a quarter per cent after enjoying its biggest one-day gain since mid-2016 on Tuesday, with a rise of 1.7 per cent. China’s Shanghai index was up 0.6 per cent and Hong Kong’s Hang Seng was up 0.07 per cent.
Britain’s FTSE was up 0.2 per cent, but Germany’s DAX was off 0.3 per cent and France’s CAC was down 0.08 per cent.
Commodities
Oil prices steadied after three days of gains on Wednesday after industry data showed a surprise decline in U.S. crude inventories and tension over the disappearance of a prominent Saudi journalist stoked supply worries.
Brent crude was down 10 cents at US$81.31 a barrel, after gaining US$1.15 in the previous three sessions. The global benchmark, which hit a two-week low last week as equity markets dropped, is trading around US$5 below a four-year high of US$86.74 reached on Oct. 3. U.S. light crude oil was down 20 cents at US$72.02.
“Numbers from the American Petroleum Institute surprised the market (on Tuesday), with U.S. crude oil inventories declining by 2.13 million barrels over the last week, compared to expectations of a stock build,” said ING commodities strategist Warren Patterson.
A Reuters survey ahead of the API data had estimated crude stocks rose about 2.2 million barrels.
Gold rose on Wednesday, rebounding from a key support level with technical momentum proving more influential than a stronger dollar and rallying stock markets.
Spot gold was up 0.2 per cent at US$1,226.54 per ounce. U.S. gold futures were down 0.1 per cent at US$1,229.80 per ounce.
“Gold is moving technically and is giving a very good signal after it rebounded from US$1,220 levels,” ActivTrades chief analyst Carlo Alberto De Casa said. “We are now approaching another key resistance area around US$1,230 and a break above the US$1,230-US$1,235 will confirm an appropriate inversion for gold and it would no longer be a rebound.”
Prices have eroded both the 55-day moving average around US$1,200, and a 6-month downtrend, and closed above the Aug. 28 high around US$1,214, Commerzbank analysts wrote in a note.
Currencies and bonds
The loonie was trading slightly lower Wednesday but was still above the 77-cent-US mark.
The Canadian dollar "closed below trendline support at US$1.2957 (77.17 cents US), opening the way towards support at US$1.2933 (77.32 cents US) and the 200 day moving average at US$1.2893 (77.56 cents US). Initial resistance stands at US$1.3082 (76.44 cents US), wrote RBC in a note Wednesday.
The dollar edged higher on Wednesday as a rally on Wall Street boosted risk appetite, although gains were capped before the release of Fed minutes later in the day.
Still, moves were muted in currency markets, contrary to the big gains in global stocks and drops in government bond yields in markets such as Italy.
“The dollar has been strongly correlated to risk appetite for much of this year, but in the last few days we have seen this correlation loosening a bit, suggesting markets need more strong economic data to push the dollar higher,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.
Against a basket of its rivals , the dollar rose 0.1 per cent to 95.15. It remains about 2 per cent below a 2018 peak of near 97 hit in mid-August.
The U.S. 10-year Treasury yield was at 3.163 per cent, up slightly. The Canadian 10-year bond was at 2.491 per cent, down slightly.
Stocks to watch
IBM Corp. reported a bigger-than-expected drop in revenue on Tuesday, hit by slowing software sales and wavering demand for mainframe servers, pointing to a bumpy recovery for the technology services giant that is in the midst of a turnaround. The company’s overall revenue slipped 2 per cent in the third quarter ended September, with almost all of its businesses missing Wall Street’s revenue estimates. Its shares were down 4.5 per cent in premarket trading.
CSX Corp. hauled in nearly double the profits it reported in last year’s third quarter when the railroad was struggling with service problems as it implemented its new operating model. The Jacksonville, Florida-based company said Tuesday it earned US$894-million, or US$1.05 per share, in the quarter. That’s up from US$459-million, or 51 cents US per share, last year. The Wall Street analysts surveyed by Zacks Investment Research expected earnings of 94 cents US per share. Its shares rose 0.8 per cent in premarket trading.
Electric auto brand Tesla Inc. said it signed an agreement Wednesday to secure land in Shanghai for its first factory outside the United States, pushing ahead with development despite mounting U.S.-Chinese trade tensions.
Shares of Netflix Inc. soared 11 per cent before the bell on Wednesday after the company put fears of a slowdown in growth to bed by racking up 7 million new subscribers between July and September. The video streaming pioneer shocked Wall Street last quarter by falling short of new subscriber estimates, but Tuesday’s figures put its total customer base at 137 million worldwide, 2 million more than consensus forecasts. At least eight brokerages raised price targets on the stock, with three of them, Morgan Stanley, Goldman Sachs and Raymond James, raising them just two days after trimming.
United Airlines says it is now passing the full impact of higher fuel prices to its customers, helping the nation’s third-biggest carrier boost third-quarter profit by 30 per cent. Parent company United Continental Holdings Inc. said Tuesday that it earned US$836-million, as rising revenue more than offset a 40 per cent jump in fuel spending. The company raised its forecast of full-year earnings per share. United said it earned US$3.06 per share, which included losses of seven cents per share from tropical storms that led to cancelled flights. Analysts expected US$3.09 per share, according to a survey by Zacks Investment Research. Its shares were up 5.6 per cent in premarket trading.
Organigram Holdings Inc. (OGI-X) said it has an agreement to buy alpha-cannabis Pharma GmbH for €1,625,000 (about $2.4-million Canadian).
Earnings are expected from: Abbott Laboratories; Alcoa Corp.; Altaba Inc.; A&W Revenue Royalties Income Fund; Crown Castle International Corp.; Kinder Morgan Canada Ltd.; M&T Bank Corp.; Northern Trust Corp.; U.S. Bancorp; eBay Inc.
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Economic news
(8:30 a.m. ET) Canadian manufacturing sales for August. The Street expects a decline of 0.7 per cent from July.
(8:30 a.m. ET) U.S. housing starts for September. Consensus is an annualized rate decline of 5.6 per cent.
(2 p.m. ET) U.S. Federal Open Markets Committee minutes for Sept. 25-26 meeting.
with files from Reuters