A strong rally overseas in both Asia and Europe is leading Wall Street and Canadian stock futures higher Monday amid relief over Italy’s budget and promises from China that it would provide stimulus to stabilize its economy to deal with the impact of U.S. tariffs.
Investors will again be turning their attention to the latest earnings reports as U.S. corporate earnings continue to be released and Canadian corporate earnings start in earnest.
This week is the peak period of the U.S. earnings season, with Amazon, Alphabet, Microsoft and Caterpillar among the companies reporting.
Helped by a strong economy and deep corporate tax cuts, S&P 500 earnings per share are expected to grow 22 per cent in the third quarter, according to I/B/E/S data from Refinitiv.
“The season on an absolute basis will likely wind up being ’strong’ and the vast majority of companies will exceed consensus expectations,” said analysts at JPMorgan in a note.
“However, headwinds are building at the margin in the form of U.S. dollar strength, supply chain disruptions owing to all the trade uncertainty, and rising costs. Even the mere hint of a turn in profit fundamentals would have severe ramifications.”
The outlook for global growth in 2019 has dimmed for the first time, according to Reuters polls of economists, who cautioned that the U.S.-China trade war and tightening financial conditions would trigger the next downturn.
Analysts are expecting double-digit profit growth as Canadian companies prepare to report their third-quarter financial results over the next two weeks, but the big question is whether strong corporate earnings will help soothe the stock market which has been rattled by trade tariffs and rising borrowing costs.
Chinese state media sharply criticized U.S. Secretary of State Mike Pompeo on Monday after he made comments in Latin America warning about the hidden risks of seeking Chinese investment amid a growing battle for influence in the region. Pompeo was on a Latin America tour at the end of last week, meeting heads of state in Panama and Mexico. Pompeo told reporters during the trip that “when China comes calling it’s not always to the good of your citizens.”
On Friday, the Toronto Stock Exchange closed higher after tame inflation data, while U.S. stocks were weaker amid interest rate and trade concerns.
In Europe, stocks climbed after Moody’s kept Italy’s sovereign rating stable on Friday instead of cutting it to negative. The decision fueled a rally in Italian government bonds and boosted shares in the country’s banks. Britain’s FTSE was up 0.6 per cent, Germany’s DAX added 0.6 per cent and France’s CAC gained 0.3 per cent.
Promises of tax cuts and coordinated official statements of support for stock markets in the world’s second-largest economy saw Chinese shares stage their biggest one-day surge in three years. Shanghai blue chips jumped around 4 per cent, adding to Friday’s bounce on Beijing’s pledge of support for the economy and companies.
U.S.-listed shares of Chinese heavyweights Alibaba, JD.com and Baidu rose between 2.9 per cent and 4 per cent in premarket trading.
Japan’s Nikkei rose 0.4 per cent. Markets elsewhere in Asia also enjoyed healthy gains, including Hong Kong’s Hang Seng, which was up 2.3 per cent.
The Moody’s report and China’s verbal support for its economy helped markets look beyond worries over the impact on global growth from policy tightening by the Federal reserve and the U.S.-China trade war, market participants said.
“It looks like the Chinese authorities will do what they can to stem the negative effects of those factors,” said Investec economist Victoria Clarke.
Commodities
Oil edged above US$80 a barrel on Monday, lifted by nervousness over a worsening diplomatic crisis between Saudi Arabia and the West, just two weeks before U.S. sanctions potentially choke off Iranian crude supplies.
Saudi energy minister Khalid al-Falih told Russia’s TASS news agency that his country had no intention of unleashing a 1973-style oil embargo on Western consumers, but rather was focused on raising output to compensate for supply losses elsewhere, such as Iran.
Several U.S. lawmakers have suggested imposing sanctions on Saudi Arabia over the killing of Saudi journalist Jamal Khashoggi, while the kingdom, the world’s largest oil exporter, pledged to retaliate to any sanctions with “bigger measures.”
Gold prices edged higher on Monday towards a 2-1/2-month peak hit last week as the dollar eased and worries over rising political tensions and slowing global economic growth lent support to the metal.
Spot gold was up 0.1 per cent at US$1,226.43 an ounce. On Oct. 15, the bullion touched its highest since July 26 at US$1,233.26. U.S. gold futures were up 0.1 percent at US$1,229.40 an ounce.
“So far we are seeing a good recipe for gold prices to recover. One is global economic slowdown, another is geopolitical uncertainties,” said Argonaut Securities analyst Helen Lau. “If the tensions loom large we could see gold rebound through US$1,300.”
The outlook for global growth in 2019 has dimmed for the first time, according to Reuters polls of economists who said the U.S.-China trade war and tightening financial conditions would trigger the next downturn.
Geo-political concerns including tensions between Saudi Arabia and the West over the killing of journalist Jamal Khashoggi, developments related to Brexit, and Italy’s budget woes are keeping investors interested in gold, analysts said.
Currencies and bonds
The Canadian dollar was trading higher but was below the 77-cent-US mark. Traders will be looking ahead to Wednesday’s meeting by the Bank of Canada and an expected rate hike of 25 basis points.
The Canadian dollar changed hands at $1.3087 (76.41 cents US), within striking distance of a five-week low of $1.3132 (76.14 cents US) hit on Friday on the back of weaker inflation and retail sales.
“Focus is on the statement and whether the ‘gradual approach’ language that has been present since the May statement will be removed. Our Canadian economists think the BoC will be hesitant to imply acceleration in the hiking path, whether the wording stays or not. Importantly, the risk to consumption from elevated household debt levels as rates rise – becoming evident in recent retail sales softness – remains and the BoC has been (correctly) sensitive to this issue. On the growth projection side, the removal of most of the trade uncertainty impact following the USMCA deal should see them have an upward bias in 2019 and 2020. A follow up Jan hike is priced with about 86 per cent probability and another hike in April with about 58 per cent probability,” RBC wrote in a note.
The U.S. dollar index rose 0.1 per cent to 95.782.
The euro failed to hold early-session gains on Monday as investors focused on the likelihood of further political uncertainty in Europe over Italy’s spending plans, despite a large drop in Italian government borrowing costs.
Rating agency Moody’s downgraded the Italian credit rating on Friday but unexpectedly kept the outlook at stable.
That, along with more conciliatory comments from Italian officials that they were ready to sit down with European Union officials and did not intend to expand the deficit beyond 2019, boosted demand for Italian debt after a weeks-long sell-off.
But the euro, its fortunes increasingly linked this year to Italian bond prices, failed to hold on to early gains and dropped from US$1.1550 to US$1.1511, down 0.1 per cent from the open.
The U.S. 10-year Treasury yield was down slightly at 3.192 per cent. The Canadian 10-year bond yield was also down, at 2.493 per cent.
Stocks to watch
Canada’s Nutrien, whose attempt to sell its stake in Chilean lithium miner SQM to China’s Tianqi has been stalled by a row about competitive risks, vowed to “protect its interests” in an interview with a Chilean newspaper published on Sunday.
Halliburton Co.’s third-quarter profit edged past analysts’ estimates on Monday, as tight pipeline capacity in the top Permian basin led to fewer well completions. Net profit attributable to Halliburton rose to US$435-million, or 50 cents per share, in the third quarter ended Sept. 30, from US$365-million, or 42 cents per share, a year earlier. Excluding items, the company earned 50 cents per share, beating average analysts’ estimate of 49 cents per share, according to Refinitiv estimates. Halliburton shares climbed 1.9 per cent in premarket trading.
Kimberly-Clark has named its president and chief operating officer Michael Hsu as its new CEO, starting in January. The company also reported adjusted profit of US$1.71 per share, 8 cents above estimates. Its shares rose 3 per cent in premarket trading.
Intel gained 1.6 per cent after Nomura upgraded the stock to “buy.” The FAANG group of stocks – Facebook, Apple, Amazon, Netflix and Google-parent Alphabet gained between 0.5 per cent and 1.2 per cent.
Hasbro dropped 7.7 per cent in premarket trading after its quarterly revenue missed estimates, as the U.S. toymaker’s efforts to cushion sales disruption from the bankruptcy of retailer Toys ’R’ Us fell short. Rival Mattel also fell 2.6 per cent.
Recreational vehicle maker Polaris reported US$1.86 a share in adjusted earnings, beating estimates of US$1.57 per share. Its shares rose 3.5 per cent.
Jacobs Engineering Group Inc. has agreed to sell its energy, chemicals and resources business to WorleyParsons for US$3.3-billion, the Dallas-based company said in a statement on Sunday. Jacobs said it expects to receive US$2.6-billion in net proceeds from the transaction, which has been approved by both boards and is expected to close in the first half of 2019. Jacobs' shares rose 2.4 per cent in premarket trading.
Fiat Chrysler Automobiles has announced the sale of its auto components division to Japanese automotive component supplier Calsoni Kansei Corp. in a deal valued at 6.2 billion euros (US$7-billion).
American Railcar Industries Inc. is selling itself to a unit of ITE Rail Fund in a deal valued at about US$1.75-billion, including debt, the company said on Monday.
Bombardier is suing Mitsubishi Aircraft in the United States over alleged trade secret misappropriation. The Quebec aerospace company alleges some of its own former employees passed on documents containing trade secrets to Mitsubishi before going to work for the company.
Earnings include: Bausch Health Companies Inc.; Halliburton Co.; Kimberly-Clark Corp.; Newcrest Mining Ltd.; TD Ameritrade Holding Corp.; TFI International Inc.; West Fraser Timber Co. Ltd.
Read more: Monday’s small-cap stocks to watch
Economic news
Statistics Canada says wholesale sales fell 0.1 per cent in August to $63.6-billion.
Economists had expected no change to the figure for the month, according to Thomson Reuters Eikon.
Sales were down in four of seven subsectors, representing 65 per cent of total wholesale sales.
The building material and supplies subsector fell 2.3 per cent to $9.5 billion in August, while the motor vehicle and parts subsector fell 1.4 per cent to $10.8 billion.
Meanwhile, the machinery, equipment and supplies subsector increased 2.2 per cent to $13.3 billion, the highest level on record.
Wholesale sales in volume terms fell 0.1 per cent.
(8:30 a.m. ET) U.S. Chicago Fed National Activity Index for September.
with files from Reuters