Premarket: Buoyant company earnings lift recession-focused markets

Better-than-expected earnings from a raft of U.S. and European companies helped steady global stock markets on Wednesday, cutting through gloom caused by rising interest rates and the threat of an energy crunch due to Russian gas supply cuts.

Ten-year U.S. Treasury bond yields – the reference rate for global cost of capital – held near three-month lows touched on Tuesday, while several bond market recession gauges continued to flash warnings that growth in the world’s largest economy is slowing, if not going into reverse.

Bond gains were capped, however, by the U.S. Federal Reserve meeting that is expected to deliver another big, 75 basis-point (bp) interest rate hike, and healthy second-quarter company earnings, despite cost pressures and labour shortages.

Futures for the U.S. S&P 500 and Nasdaq and rose 1% to 1.5%, while a pan-European equity index was up 0.4%.

Wall Street sentiment was lifted by 4%-5% gains on shares in Microsoft and Google parent Alphabet, which forecast strong revenue growth and posted solid search engine ad sales respectively.

In Europe, Deutsche Bank reported a forecast-beating profit rise as did Italy’s Unicredit, boosting an index of European bank shares to a one-week high.

A range of sectors reported solid earnings too, from carmaker Mercedes Benz and luxury firm LVMH to energy firm Equinor and food producer Danone.

“Some great earnings numbers, especially from Big Tech and luxury goods,” said Vincent Manuel, CIO at Indosuez Wealth Management, though he noted the divergence between buoyant earnings and softer macro sentiment.

“The question is how long we will continue to see this divergence?”

Earlier, heavyweight chipmakers helped Japan’s Nikkei close higher, but a warning from the world’s second-biggest chipmaker, SK Hynix, of slowing demand saw other Asian shares fall 0.5%.

Australian miner Rio Tinto too posted a 29% drop in first-half profits and more than halved dividends, citing weak Chinese demand, higher costs and labour shortages.

Indosuez’s Manuel noted industrials and consumer discretionary firms better reflected the pressures than tech and healthcare firms.

“I would expect earnings guidance to be more cautious from corporates,” he added.

GROWTH AND INFLATION

The growth-inflation trade-off will be on the Fed’s mind when it announces its rate decision at 1800 GMT. While a 75 bps move is priced, futures still imply a 15% chance of a 100 bps increase.

Treasury markets are already anticipating that so many sharp near-term hikes will hurt longer-run growth, with ten-year yields firmly holding around 2.8%, around 25 bps below their two-year equivalent – the so-called curve inversion that often presages recessions 1/8 US/ 3/8 .

“(Company earnings) are helping equities but bonds are pricing in more economic weakness than equity markets,” Nordea chief analyst Jan von Gerich said.

Uncertainty remains on the future Fed path, he noted, adding however that “what they are seeing on the activity side takes a bit of pressure off to do more.”

Europe’s situation is particularly fragile, with gas flows from Russia’s Nord Stream 1 pipeline expected to halve on Wednesday from already reduced levels. That’s sent energy prices zooming up, with German year-ahead prices at record highs.

The supply shortfalls and possible energy rationing were among issues highlighted by the International Monetary Fund (IMF) on Tuesday, when it cut global growth forecasts.

A complete cut-off of Russian gas to Europe by year-end and a further 30% drop in oil exports may lead to virtually zero European and U.S. growth next year, the IMF warned.

Those worries saw the euro post its biggest one-day loss in a fortnight, though it recouped 0.2% versus the U.S. dollar on Wednesday.

Another source of concern is Italy, after S&P Global cut its outlook on Italy’s credit rating, sending 10-year bond yields 10 bps higher and its risk premium versus Germany to the highest in over a month.

Reuters

CN Rail notches record second-quarter revenues amid higher fuel and freight rates

Despite recession hurdles on the horizon, Canadian National Railway Co. CNR-T +0.09%increase says the tracks are clear for a smooth year after reporting record second-quarter revenues alongside profits that surged past expectations due largely to a spike in crude oil and container sales.

Net income jumped 28 per cent or $289 million to $1.33 billion in the quarter ended June 30 versus the same period last year, the Montreal-based company said Tuesday. Revenues rose 21 per cent or $746 million to $4.34 billion last quarter compared with a year earlier.

The country’s largest rail operator said the windfall stemmed from higher fuel surcharge and freight rates as well as larger coal and U.S. grain volumes.

But the latter spike did not fully offset the 40 per cent drop in shipments of Canadian grain — usually CN’s top-selling commodity, but far outpaced last quarter by oil and chemicals — which led to a decline in grain and fertilizer carloads.

“U.S. grain and coal continues to remain strong due to the unfortunate war in Ukraine and the sanctions on Russia,” CN chief marketing officer Doug MacDonald told analysts on a conference call. The coming crop year looks “normalized,” added chief operating officer Rob Reilly.

Meanwhile, revenue from petroleum and chemicals shot up 21 per cent to $829 million year over year amid soaring oil prices, while container shipment sales leaped 28 per cent to $1.32 billion — CN’s biggest earner by far. Oil and coal were the only commodities to see volume go up, however, even as revenue rose nearly across the board.

“We’ve seen over the years a lot of growth in the western corridor,” said CEO Tracy Robinson, who took the top spot on Feb. 28.

“But we’re also going to lean in to more fully utilizing the other parts of the network, densifying the eastern region and the southern regions. This will strengthen our business, our resilience. It’s going to drive stronger returns.”

CN pointed to Halifax as a port that can “replicate the success of the Prince Rupert model.” The company’s main rival, Canadian Pacific Railway Ltd., does not serve the East Coast transport hub.

MacDonald cited “significant opportunities” to shore up business there in the coming years, noting the port operates at only half its capacity for containers. That makes it well-positioned to take in more products from Southeast Asia amid a ramp-up in manufacturing there and severe congestion at ports on the west coast of the United States, he said.

Some analysts remain skeptical about CN’s buoyant view.

“We think little or no volume growth could be here to stay for CN, as rampant inflation and rising interest rates seem likely to dampen global goods demand over the next year,” CFRA Research analyst Colin Scarola told investors in a note.

Supply chain snarls remain a thorn in CN’s side, as warehouse bottlenecks caused by a lack of storage facilities and truckers slow the flow of import containers bound for Montreal and Toronto.

“The boxes would arrive in Montreal and Toronto and no one would pick them up because there wasn’t any place to take them,” MacDonald said.

“That has been backing up the terminals, which then backs up the ports, which backs up ships at the harbour.”

However, he said traffic flow has “dramatically improved” after CN set up new storage locations in Canada’s two biggest cities and worked to speed up processing times from shipping and short-haul delivery companies.

Robinson also waved off any suggestion that the federal government’s climate plan, which aims to reduce nitrous oxide emissions from fertilizers, would hurt CN’s income.

“We’ve got some pretty strong forecasts for fertilizers and grain as we look forward. It’s one of the unique benefits of the Canadian economy,” she said.

CN affirmed its earnings forecast of between 15 per cent and 20 per cent growth in adjusted diluted earnings per share for 2022, after lowering its outlook from a target of 20 per cent three months ago.

The company continues to target an operating ratio — a measure of the railway’s efficiency that divides operating expenses by net sales — of just under 60 per cent, compared to its more ambitious January goal of 57 per cent.

“We are not modelling any major service disruptions in the second half of the year, and our outlook does not assume an economic recession,” said chief financial officer Ghislaine Houle.

“That being said, we have a strong bulk franchise including grain, potash and coal that is less impacted by economic fluctuations, and a current backlog of lumber traffic.”

On an adjusted basis, diluted earnings shot up by 30 per cent to $1.93 per share from $1.49 per share in the second quarter of 2021. The figure topped analyst expectations of $1.75 per share, according to financial data firm Refinitiv.

Joe Rogan slams TikTok: ‘It ends with China having all of your data’

Joe Rogan expressed concerns Tuesday that TikTok, one of the most used social media apps in the world, poses a unique threat to Americans’ data privacy and safety. 

TikTok is owned by Bytedance, a Chinese company. China’s Civil Military Fusion Policy and 2017 National Intelligence Law requires private businesses in China to share information and data at the request of the Chinese government.

“I read TikTok’s terms of service, I went down a TikTok rabbit hole yesterday…This is so crazy,” Rogan said on the latest episode of the Joe Rogan Experience. 

“Is it good or bad?” interjected his guest, podcaster and comedian Theo Von. 

“Bad!” Rogan responded. 

National security officials have previously raised concerns about the national security threat posed to America by TikTok. (Mateusz Slodkowski/SOPA Images/LightRocket via Getty Images)

BIDEN TO SPEAK WITH XI AMID WARNINGS THAT CHINA POSES GREATEST THREAT TO US NATIONAL SECURITY

“Listen to this, this is from TikTok’s privacy policy,” Rogan said. “It said, ‘We collect certain information about the device you use to access the platform, such as your IP address, user region.’ This is really crazy.”

“‘User agent, mobile carrier, time zone settings, identifiers for advertising purpose, model of your device, the device system, network type, device IDs, your screen resolution and operating system, app and file names and types,’” he continued. 

“So all your apps and all your file names, all the things you have filed away on your phone, they have access to that,” he said. “‘File names and types, keystroke patterns or rhythms.’” 

“So they’re monitoring your keystrokes, which means they know every f—ing thing you type,” Rogan added.  

Joe Rogan expressed concerns about TikTok’s terms of service during a clip published Tuesday.  (Photo by: Vivian Zink/Syfy/NBCU Photo Bank/NBCUniversal via Getty Images)

PENTAGON OFFICIAL SAYS ‘ONLY A MATTER OF TIME’ BEFORE CHINA CAUSES ‘MAJOR’ INCIDENT IN INDO-PACIFIC REGION

“‘Battery state, audio settings and connected audio devices, where you log in from multiple devices, we will be able to use your profile information to identify your activity across devices. We may also associate you with information collected from devices other than those you use to log into the platform’” Rogan said. 

“Meaning they can use other computers that you’re not even using to log into TikTok. They can suck the data off that. That’s what you’re agreeing to when you download and start using TikTok,” he said.

Von asked Rogan, “It’s insane… Do you think they created TikTok just on purpose to have all that?”

“100 percent,” Rogan responded.

The TikTok logo is seen on an iPhone 11 Pro max in this photo illustration in Warsaw, Poland on September 29, 2020.  (Jaap Arriens/NurPhoto via Getty Images)

“Just tell me how it ends man,” said Von. 

“It ends with China having all of your data,” Rogan said. 

Rogan also mentioned the bank runs in China and the country’s Central Bank Digital Currency.

“What’s going on in China, I don’t know if you’ve seen this, but they pulled tanks in front of banks to stop people from f—ing rioting because they just took all their money,” he said. 

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Rogan also mentioned the risks posed to freedom by China’s digital currency, which it weaponizes to control its population. “If you see what’s going on over there, with the digital currency, what they have is the ability to tell you, you can’t buy gas. Like, “Hey Theo, we don’t like the way you’re living your life, so you’re not going to be able to buy a plane ticket,’” Rogan said. 

This is a big week for earnings in both Canada and the U.S. Here’s what to watch out for

Investors are scouring second-quarter earnings reports, including a flurry landing in Canada and the U.S. this week, for signs of an economic slowdown and just how bad it could get. The impact of surging inflation and energy prices on profit margins, revenue growth and the outlook for the last half of this year will be some of the tell-tale signs.

Late Monday, Walmart Inc., the world’s largest retailer, cut its profit outlook for a second time in two months saying inflation is causing shoppers to spend more on necessities such as food and less on discretionary items like clothing and electronics. The warning has investors fearing similar moves from sectors struggling with the impact of four-decade high inflation on consumer spending.

Some investors believe consensus analyst estimates are too high across most sectors and will be looking to see how potential downward revisions could impact stock prices and broader markets. For example, analysts have been busy slashing expectations for Canadian tech giant Shopify Inc.’s second-quarter financial results amid a global rout for technology stocks. Its results are out Wednesday. Shopify also announced Tuesday that it was laying off 10 per cent of its workforce, or about 1,000 employees.

For the second quarter, total earnings for companies in the S&P 500 Index are currently estimated to rise by 6.1 per cent (or down by 3.3 per cent when excluding energy) year over year, according to Refinitiv data as of July 25. Total earnings for companies in the S&P/TSX Composite Index are currently estimated to rise by 22.2 per cent (or up 3.9 per cent excluding energy) year over year in the quarter.

Christine Poole, chief executive officer and managing director at GlobeInvest Capital Management Inc., will be following management commentary on demand trends for their companies’ products and services to gain more insight into the extent of a slowdown across various sectors.

“Many of the indicators we track to assess the health of the economy are signalling slowing growth and a rising likelihood of a downturn,” Ms. Poole says.

She’s also interested to hear more details about supply chain bottlenecks and transportation costs to gauge whether inflation pressures show any signs of easing.

“There are a lot of questions as to what companies are seeing and doing,” she says, including whether they’re pulling back on spending and hiring and if they’re able to pass rising costs on to their customers.

Ms. Poole says this earnings season will also reveal just how cautious consumers and companies are in the current economic environment.

“There are a lot of uncertainties out there and sentiment will play an important role in terms of consumer spending, as well as capital expenditures,” she says. “It’s an important quarter to see how much of that caution is being translated into retrenchment.”

Paul Harris, partner and portfolio manager at Harris Douglas Asset Management in Toronto, says analysts are “way too positive” on the economy and believes earnings estimates are “higher than they should be,” which could cause markets to fall further in the weeks ahead.

“The risk to the stock market is when analysts realize they have to bring their numbers down,” he says, something he expects to start happening soon as a huge swath of companies report earnings this week.

Some of those include big U.S. tech names such as Alphabet Inc., Apple Inc. and Microsoft Corp. as well as General Electric Co., Ford Motor Co. and Visa Inc. The second-quarter earnings season also swings into high gear in Canada this week with reports expected from several large companies such Canadian National Railway Co. and Canadian Pacific Railway Ltd., Canfor Corp., Canadian Utilities Ltd. Cenovus Energy Inc., Teck Resources Ltd. and Cameco Corp.

Mr. Harris says he’s looking for opportunities to buy good-quality stocks that drop on missed analyst expectations in the days and weeks ahead.

“I believe that we’re in a profit cycle that’s going down and that’s not represented in the earnings numbers,” he says. “I want to be a little bit ahead of that and buy some of these [overvalued] stocks that I think are great businesses at a cheaper level.”

Mike Archibald, vice-president and portfolio manager at AGF Investments, says he’ll be focused on the corporate outlooks for the second half of the year, following what he expects will be a “decent” second-quarter reporting season. He also expects analysts’ estimates to come down in the next two quarters and for 2023 as many companies lower their guidance.

One example is Canada’s Stelco Holdings Inc., which reduced its second-half earnings guidance on Monday due to falling prices of steel, a widely used commodity that’s considered a key indicator of economic growth.

The two sectors Mr. Archibald believes will provide the best clues for the economic outlook are industrials and consumer discretionary, given their direct connection to consumers.

“It will be important to pay attention to the guidance management provides … because that will give us an understanding of how resilient the consumer may be over the next six to 12 months,” he says.

Mr. Archibald expects the energy sector to continue to prop up the S&P/TSX Composite Index versus the S&P 500 as oil and gas prices remain elevated.

“We are continuing to see the same kind of playbook that we’ve seen for most of 2022, which is the bulk of the positive estimate revisions are coming from energy and to a lesser degree materials,” he says, noting that all of the other sectors in Canada have seen negative earnings revisions.

Morgan Stanley slashes oil price forecasts

Morgan Stanley oil analyst Martijn Rats has cut his oil price forecasts

“Over the last year we have argued that oil supply would be tight-enough-for-long-enough that some demand erosion needed to take place. In June, prices reached levels that achieved just that, and demand appears to be softening in response. As a result, we lower our near-term price forecasts … Prices reached levels that are hard to absorb: Add to this tightness in the refining system and this explains why diesel and gasoline prices reached ~$187 and ~$180/bbl respectively in June. In response to the commodity-induced inflation surge, central banks are now hiking rates in-sync. Of the 38 central banks globally, 29 (or 77%) have hiked rates in the last 6 months. That percentage is at a 40-year high, making this the most-synchronized cycle of rate hikes since the early 1980s … This combination of factors continues to drive rapid downgrades to GDP expectations in all main regions. Our oil demand forecasts were not stretched, but equally, they were not designed for the breadth of rate hikes and magnitude of GDP slowdown that now appears to be unfolding. With actual oil demand data also starting to come in softer than expected, we lower our 2022e growth estimate from 2.2 to 2.0 mb/d, and our 2023e estimate from 2.7 to 1.8 mb/d”

Mr. Rats has reduced his fourth quarter WTI forecast by US$20 to US$107.50 and his second quarter of 2023 estimate from US$107.50 to US$97.50.

“MS cuts oil price forecast” – (research excerpt) Twitter

Walmart Cuts Q2, FY Profit Outlook; Stock Down

Walmart Inc. (WMT) cut its profit outlook for the second-quarter and fiscal year 2023, saying that high food and fuel prices are hurting customer’s ability to spend on general merchandise categories. The company anticipates more pressure on general merchandise in the back half.

“.. Food inflation is double digits and higher than at the end of Q1. This is affecting customers’ ability to spend on general merchandise categories and requiring more markdowns to move through the inventory, particularly apparel,” the company said in a statement.

WMT closed Monday regular trading at $132.02 down $0.19 or 0.14%. In the after-hours trading, the stock further dropped $13.12 or 9.94%.

The Retail giant projects comp sales for Walmart U.S., excluding fuel, to be about 6% for the second quarter. It is higher than previously expected with a heavier mix of food and consumables, which is negatively affecting gross margin rate.

For the second quarter, the company now expects adjusted earnings per share to decline around 8% to 9%, operating income to decline 13% to 14% and consolidated net sales growth to be about 7.5%. Analysts polled by Thomson Reuters expect the company to report earnings of $1.81 per share and revenues of $148.25 billion for the second quarter. Analysts’ estimates typically exclude special items. The company said in May that it expected earnings per share to be flat to up slightly, and consolidated net sales growth of 5%.

Net sales for the second-quarter included a headwind from currency of about $1 billion in the second quarter. Based on current exchange rates, the company expects a $1.8 billion headwind in the second half of the year.

The company maintained its expectations for Walmart U.S. comp sales growth, excluding fuel, of about 3% in the back half of the year.

Looking ahead for fiscal year 2023, the company now projects adjusted earnings per share to decline around 11% to 13%, operating income to decline 11% to 13%, and consolidated net sales growth to be about 4.5%.

Excluding divestitures, the company now anticipates adjusted earnings per share for the full year to decline 10% to 12%, operating income to decline 10% to 12% and consolidated net sales growth to be about 5.5%.

The company said in May that it projected annual earnings to decline about 1% and to be flat, excluding divestitures. It also expects consolidated net sales growth of 4 percent in constant currency and about 4.5% to 5%, excluding divestitures.

Gold Slips as Investors Prepare for Fed’s Jumbo Rate Hike

Gold headed back down after posting the biggest weekly gain since May as investors weighed prospects for tighter US monetary policy and concerns over an economic slowdown.

Bullion hit the lowest level since March 2021 last week, only to rebound as Treasury yields eased following poor US economic data. After raising rates in June by the most since 1994, Federal Reserve policy makers are expected to approve another 75 basis-point hike when they meet July 26-27. Second-quarter GDP data will also indicate whether the US is in a technical recession.

Gold is heading for a fourth monthly loss as Fed tightening and a stronger dollar dim its allure as a haven, overshadowing concerns about inflation and a slowdown. Over the weekend, while former Treasury Secretary Lawrence Summers cast doubt on the likelihood of a soft landing for the US, incumbent Janet Yellen said that she doesn’t see any sign the economy is in a broad recession.

Additional downward pressure on gold has come from waning investor interest, with holdings in bullion-backed exchange-traded funds ebbing for a sixth week, according to initial data compiled by Bloomberg. Hedge funds trading the Comex flipped to being net-short on gold for the first time since 2019, according to data from the Commodity Futures Trading Commission.

“Shanghai traders are accumulating silver,” TD Securities commodity strategy head Bart Melek said in an emailed note. “In sharp contrast to gold, where outflows from most major participants have translated into a liquidity vacuum.”

Spot gold fell 0.5% to $1,719.46 an ounce at 1:52 p.m. in New York. Last week, prices sunk as low as $1,680.99 on Thursday before ending the week 1.1% higher. The Bloomberg Dollar Spot Index weakened 0.1%. All other precious metals fell except platinum. Silver went 0.8% into the red. Spot palladium lead with a 1.4% fall.

Cars, Gas power May Retail Sales

Canadian retail sales jumped 2.2% in May, beating economists’ expectations. Good news right? Well, not really. The gain was driven more by higher prices, especially for gas, than by higher volumes.

Moreover, a preliminary estimate from Statistics Canada suggests weakness to come with sales seen rising just 0.3% in June from the month before, which CIBC economist Katherine Judge says would represent a decline in volumes.

“Indeed, with consumption to shifting towards services, while inflation erodes consumer purchasing power, demand for discretionary goods will be under more pressure ahead,” she wrote.