Author: Consultant

Before the Bell: July 18

Equities

Wall Street futures gained early Monday on easing concerns about aggressive rate hikes from the Federal Reserve as traders weigh more earnings from U.S. banks. Key European markets were also up in morning trading. TSX futures advanced with fresh inflation figures due midweek.

In the early premarket period, futures linked to the three main U.S. indexes were all up roughly 1 per cent. The Dow, Nasdaq and S&P 500 are coming off a losing week despite a relief rally on Friday’s session. The S&P/TSX Composite Index ended Friday up 0.36 per cent.

“Investors remain focused on earnings this week, to determine which companies are in a better position to weather the difficult macroeconomic environment, and the rising interest rates,” Swissquote senior analyst Ipek Ozkardeskaya said in an early note.

“Good news is that, the week starts with improved odds of seeing a 75-basis-point hike at the next FOMC meeting, rather than a 100-basis-point hike. The probability of a 75-basis-point hike is back to 70 per cent, up from around 20 per cent following the scary inflation report that was released last week in the U.S.”

On Monday, U.S. investors got more U.S. bank earnings ahead of the start of trading.

Goldman Sachs posted profit of US$2.8-billion, or US$7.73 per share, for the quarter ended June 30 compared with US$5.3-billion, or $15.02 per share, a year earlier. However, the latest result handily topped market forecasts. Analysts had been expecting earnings per share in the most recent quarter of US$6.58, according to Refinitiv. Shares were up more than 3 per cent in premarket trading.

Bank of America reported a drop in profit, hit by weaker investment banking revenue. Profit applicable to common shareholders fell to US$5.93-billion, or 73 US cents per share, for the quarter ended June 30, from US$8.96-billion, or US$1.03 per share, a year earlier.

Later in the week, Netflix reports Tuesday, with markets closely watching how the streaming giant’s latest subscriber numbers stack up. Tesla reports on Wednesday.

In this country, Suncor Energy Inc. says it has struck a deal with activist investor Elliott Investment Management LP that will see it undertake a strategic review of its downstream retail business with the goal of “unlocking shareholder value.” The agreement will also see three new independent directors join the company’s board.

Meanwhile, Canada Mortgage and Housing Corp. said the standalone monthly seasonally adjusted annual rate of housing starts in the country was 273,841 units in June, down 3 per cent from May.

The week’s key economic release comes Wednesday when Statistics Canada delivers June inflation figures. Earlier this month, the Bank of Canada surprised by hiking interest rates by a full percentage point in an effort to curb high price pressures. The annual rate of inflation in May hit a decades high of 7.7 per cent.

“RBC Economics anticipates that the CPI inflation rate will edge up to 8.0 per cent year-over-year,” Alvin Tan, Asia FX strategist with Royal Bank, said.

“This continued acceleration was likely largely driven by higher food and energy prices. Roughly half of inflation recently has been driven by global external forces.”

Overseas, the pan-European STOXX gained 1.41 per cent. Britain’s FTSE 100 rose 1.40 per cent. Germany’s DAX and France’s CAC 40 were up 1.41 per cent and 1.29 per cent, respectively. The European Central Bank makes its next policy decision on Thursday. Markets are expecting the central bank to raise interest rates for the first time in a decade.

In Asia, Hong Kong’s Hang Seng added 2.70 per cent, helped by gains in tech stocks. Markets in Japan were closed.

TSX 60 FUTURES

1,123.40+9.20 (0.83%)

DOW FUTURES

31,502.00+255.00 (0.82%)

S&P 500 FUTURES

3,892.75+27.75 (0.72%)

PAST DAY

0.83%0.82%0.72%

CLOSE, JULY 15

7:32 A.M., JULY 18

SOURCE: BARCHART

Commodities

Crude prices gained in early going as tight supply helped offset concerns about the health of the global economy and the potential impact of COVID-19 restrictions in China.

The day range on Brent is US$99.46 to US$104.36. The range on West Texas Intermediate is US$95.85 to US$100.57. Both benchmarks saw weekly declines last week.

“Supply risks remain evident in international markets, and futures curves remain in backwardation,” OANDA senior analyst Jeffrey Halley said.

“Despite the ructions in the speculative futures markets, the real-world dynamic remains as supportive of oil prices as ever. If Russian doesn’t switch gas exports back on to Europe at the end of the week, Brent crude could once again, find itself back near US$110 a barrel.”

Russia is scheduled to finish maintenance on the Nord Stream 1 pipeline on July 21, although many fear the resumption of gas flows could be delayed as a tactic in Moscow’s attack on Ukraine.

Meanwhile, Reuters reports U.S. Treasury Secretary Janet Yellen said on Saturday she had productive meetings about a proposed price cap on Russian oil with a host of countries on the sidelines of a meeting of the finance chiefs of the Group of 20 major economies.

In China, mass COVID-19 testing in parts of the country this week is again raising concerns that lockdowns could follow, hitting demand from one of the world’s top oil consumers.

In other commodities, gold prices gained as the U.S. dollar pulled back from 20-year highs.

Spot gold rose 0.7 per cent to US$1,719.49 per ounce by early Monday morning, after falling to its lowest in nearly a year last week. U.S. gold futures gained 0.6 per cent to US$1,714.30.

“Overall, gold’s price action continues to be uninspiring with recoveries limited in scope, while the falls, when they do occur, are much larger and faster in scope,” Mr. Halley said.

“Gold’s fate this week rests on the hopes that the investor sentiment rally seen elsewhere, inspires more U.S’ dollar weakness.”

HIGH GRADE COPPER

US$3.32+0.09 (2.72%)

WTI

US$99.60+2.01 (2.06%)

SPOT GOLD

US$1,710.40+6.80 (0.40%)

PAST DAY

2.72%2.06%0.40%

CLOSE, JULY 15

7:12 A.M., JULY 18

SOURCE: BARCHART

Currencies

The Canadian dollar advanced in early morning trading, supported by positive risk sentiment, improved crude prices and a pullback in its U.S. counterpart.

The day range on the loonie is 76.71 US cents to 77.11 US cents.

“The CAD is a middling performer on the session despite stronger stocks and firmer crude oil on the session,” Shaun Osborne, chief FX strategist with Scotiabank, said.

“Even with risk appetite up, commodities firmer and the BoC having hiked 100 basis points, the CAD can’t seem to gain much traction,” he said in a note. “Domestic growth concerns likely account for some of the CAD’s lagging performance.”

The week’s key event for the loonie will be Wednesday’s inflation report. Investors will also get fresh retail sales numbers at the end of the week.

On world markets, the U.S. dollar index, which weighs the greenback against a basket of currencies, was 0.35 per cent lower at 107.48 and down 1.8 per cent from last week’s two-decade highs, according to figures from Reuters.

The euro rose 0.5 per cent at US$1.0149 after falling below parity with the U.S. dollar last week for the first time since 2002.

Other risk-sensitive currencies were also higher.

The New Zealand dollar hit a 10-day high against the greenback of US$0.62, up 0.4 per cent.

The Australian dollar also touched a one-week high, according to Reuters.

In bonds, the yield on the U.S. 10-year note was up at 2.961 per cent in the predawn period.

CANADIAN DOLLAR/U.S. DOLLAR

US$0.7700+0.0022 (0.2892%)

PAST DAY

PREV. CLOSE

0:00 A.M., JULY 18

US$0.7694

7:12 A.M., JULY 18

US$0.7700

SOURCE: BARCHART

More company news

Delta Air Lines will buy 100 Boeing MAX 10 jets worth about US$13.5-billion at list prices and has options to buy another 30, it said on Monday. Reuters reported in March that Delta was edging towards an order for 100 MAX 10 planes and reported last week that Airbus was in talks for Delta to expand an existing order of A220 planes. Delta, which made the announcement at the Farnborough air show, said it would start taking deliveries in 2025.

Economic news

(815 am ET) Canada housing starts for June.

(10 am ET) US National Association of Home Builders housing market index.

With Reuters and The Canadian Press

BMO expects big bounce-back in TSX stocks.

The S&P/TSX Composite Index is trading at recessionary valuation levels and that, combined with the extreme breadth of weakness and the dramatic underperformance of cyclical stocks, has BMO chief strategist Brian Belski expecting a strong rally in Canadian stocks.

Mr. Belski calculates that Canadian stocks are trading at an average trailing price to earnings ratio last seen during the depths of the financial crisis and during the recession of the early 1990s. He notes that the S&P/TSX Composite is hovering within 5 per cent of its pre-Covid peak, yet profits are fully 40 per cent higher.

These recessionary valuation levels assume a sharp decline in earnings ahead but Mr. Belski does not expect this to be the case. He adds that these are likely trough valuations, or extremely close to them, and that historically this indicates strong returns for the next 12 months.

Mr. Belski also emphasizes that the extreme breadth of the recent sell-off – the sheer number of companies hitting new 52-week lows – implies that a bounceback is probable.

Significantly more than half of non-resource index stocks are at 52-week lows and less than 5 per cent of non-resource stocks are making new highs. The strategist notes that both of these results are two standard deviations from their historical averages.

“This type of indiscriminate selling is another strong contrarian indicator,” writes Mr. Belski. “Our work shows the S&P/TSX price performance 12 months after the breadth of companies hitting new lows to this extreme is almost 15%.”

Economically-sensitive, cyclical market sectors have significantly underperformed defensive sectors, providing another sign the market is in oversold territory, according to BMO. Mr. Belski noted that the performance spread between cyclical sectors like consumer discretionary, industrials and technology and defensive industries like consumer staples and utilities is at extreme highs.

Mr. Belski’s analysis indicates that when cyclical underperformance reaches current stretched levels, the market as a whole tends to rebound by more than 10 per cent in the following year. In the current case, he believes investors are over-estimating the pace of the global economic slowdown.

Mr. Belski has made a plausible argument here that domestic equities are a bit of a coiled spring after a 15 per cent sell-off since the end of March. Importantly, his perspective is bullish from both a fundamental standpoint – valuations – and also the technical factor of market breadth.

Rattled by recession talk? Railway stocks can get you through the volatility

Canadian railway stocks have been cruising through this year’s market volatility, suggesting the sector is a safe bet amid a backdrop of soaring inflation and concerns about declining economic activity. Some observers expect that railway stocks will remain attractive as uncertainty lingers – not because they are cheap or out of favour (they are neither), but because they can withstand the challenges that are weighing on many other sectors right now.

Canadian home prices spiral down in June

Canada’s housing market slowed for the third straight month in June, with home prices cratering – the largest monthly decline on record – as borrowing costs soar and buyers struggle to qualify for a mortgage.

The national home price index, which adjusts for pricing volatility, dropped 1.9 per cent to $807,400 on a seasonally adjusted basis, according to the Canadian Real Estate Association (CREA). It follows the April-to-May decline of 0.8 per cent and the March-to-April drop of 0.6 per cent.

Home prices tumbled across the country, especially in the B.C. Interior and throughout Ontario, including cottage country and smaller cities, where property values had almost doubled over the first two years of the pandemic. In Ontario, the home price index for the Kawartha Lakes region fell almost 11 per cent from May to June, while Woodstock-Ingersoll, Simcoe and London each lost more than 5 per cent over the same period.

From peak prices in March, the national home price index is down 3.3 per cent. But unadjusted numbers show even greater declines. In Toronto, the country’s largest real estate market, the index fell almost 10 per cent over three months.

CREA senior economist Shaun Cathcart said he was not surprised to see property values drop by this magnitude given that they are up 50 per cent since the beginning of the pandemic. “To give back 3.3 per cent since March is still pretty small potatoes,” he said.

The number of home resales fell 5.6 per cent from May to June on a seasonally adjusted basis. Activity was down in three-quarters of the country, with the largest declines in the major urban centres of Toronto, Vancouver, Calgary, Edmonton and Ottawa. Resales also dropped significantly in Toronto suburbs such as Burlington and the nearby city of Hamilton.

The country’s housing market started slowing after the Bank of Canada embarked on mission to hike interest rates to tamp down inflation. Last month’s housing activity does not reflect the central bank’s July hike of one percentage point. The benchmark interest rate is now 2.5 per cent, up from 0.25 per cent in early March. That has increased interest payments for variable-rate mortgage holders and has made it harder for would-be buyers to qualify for a mortgage.

Under federal banking rules, borrowers must prove they can make their monthly mortgage payments at an interest rate that is at least two percentage points higher than that of their actual loan contract; for instance, with a five-year fixed rate of almost 5 per cent, a borrower would have to show they can make their payments with an interest rate of almost 7 per cent.

This has made it particularly difficult for first-time homebuyers, especially those in expensive markets such as most of Southern Ontario and B.C.

Kristina Legault, a realtor with Century 21 Creekside Realty, which serves the Chilliwack area in B.C., said some buyers simply cannot get financing now. “The interest rate really has an effect on them,” she said.

But it’s not just interest rates making housing increasingly unaffordable for Canadian residents. Ms. Legault said the higher costs of goods and services are giving homebuyers pause.

Properties are taking longer to sell, even as more people are putting their homes up for sale. The number of new listings across the country increased 4.1 per cent from May to June. Phil Soper, the president of Royal LePage, said he will be watching the pace of new listings; if it spikes relative to weakening demand, it will lead to a drop in prices, he said.

Compared with June of last year, the home price index is still 15-per-cent higher. Private-sector economists predict prices will fall as much as 20 per cent from the record highs of the first quarter by early next year.

However, many economists believe the country’s robust jobs market and the steady flow of immigrants will sustain demand for housing and prevent prices from plunging. Farah Omran, an economist with Bank of Nova Scotia, said that would “set a floor” on home prices in the longer term.

Economic Calendar (July 18 – July 22)

Monday July 18

(815 am ET) Canada housing starts for June. Consensus is a fall of 4.1% to an annualized rate of 275,600.

(10 am ET) US National Association of Home Builders housing market index.

Earnings include: Bank of America; Charles Schwab; Goldman Sachs; Mueller Industries; PrairieSky Royalty

—

Tuesday July 19

Euro area consumer price index for June. UK releases employment numbers.

(830 am ET) U.S. housing starts for June. Consensus is a 2.7% rise to an annualized rate of 1.59 million.

(830 am ET) U.S. building permits for June. Consensus is they will see a 2.2% drop.

Earnings include: First Bancorp, Halliburton; Lockhead Martin; Hasbro; Netflix; Johnson & Johnson

—

Wednesday July 20

Euro area consumer confidence; Germany producer price index; UK consumer prices and produce price index.

Bank of Japan Monetary Policy Meeting and outlook (through Thursday)

(830 am ET) Canada consumer price index for June. Consensus is for a 0.9% monthly rise, which would be less than May’s 1.4%. On an annualized basis though, it’s expected to be up 8.4%, accelerating from May’s 7.7% jump. Core CPI is expected to rise 4.9% from a year earlier.

(830 am ET) Canada industrial product price index for June and raw materials price index. BMO expects monthly declines of 0.5% and 0.2%, respectively.

(830 am ET) Canada household and mortgage debt.

(10 am ET) U.S. existing home sales for June. Consensus is for a 0.2% decline to an annualized rate of 5.4 million.

Earnings include: United Airlines Holdings; Abbott Laboratories; Alcoa; Baker Hughes; Biogen; CSX; Las Vegas Sands; Steel Dynamics; Tesla, Nasdaq; Kinder Morgan; A&W Revenue Royalties Income Fund

—

Thursday July 21

Japan trade balance and machine tool orders

ECB Monetary Policy Meeting

(830 am ET) Canada new housing price index for June. It’s expected to be up 8% from a year ago, according to BMO. In May it was up 8.4%.

(830 am ET) U.S. initial jobless claims for last week.

(830 am ET) U.S. Philadelphia Fed Index.

(10 am ET) U.S. leading indicator.

Earnings include: Alaska Air Group; American Airlines Group; AT&T; Blackstone; Travelers Companies; Union Pacific; Capital One Financial; Choice Properties REIT; Nucor; Domino’s Pizza; D R Horton; Freeport-McMoRan; Mullen Group; Philip Morris International; Snap; Mattel; Mainstreet Equity

—

Friday July 22

Japan CPI and manufacturing PMI.

Euro area manufacturing, services and composite PMIs. UK releases consumer confidence, retail sales and PMIs.

(830 am ET) Canada retail sales for May. Consensus is for a 1.6% rise – higher than April’s 0.9% rise – or up 2.3% when excluding autos.

(945 am ET) U.S. S&P global PMIs for July.

Earnings include: American Express; Verizon Communications; HCA Healthcare; Twitter

Citigroup’s quarterly profit tops expectations on trading boom

Citigroup Inc C-N +10.17%increase posted a smaller-than-expected 27 per cent drop in quarterly profit on Friday as the third-largest U.S. bank’s trading desk cashed in on increased market volatility, cushioning a slump in investment banking.

Revenue at the markets business jumped by a quarter to $5.3-billion, thanks to volatility in the commodities and foreign exchange markets – a particularly strong segment for the bank.

Trading has emerged as a bright spot for Wall Street banks this quarter as clients look to rebalance their portfolios in the face of geopolitical tension, surging inflation and fears that aggressive Federal Reserve policy tightening could plunge the economy into a recession.

Citi shares rose 5 per cent shortly after the market opened.

The bank’s profit fell to $4.5-billion, or $2.19 a share, in the quarter ended June 30, from $6.2-billion, or $2.85 a share, a year earlier.

Excluding items, Citi earned $2.30 per share, according to Refinitiv calculations, beating the average analyst estimate of $1.68 per share.

The profit drop also reflected a $375-million increase in reserves for potentially sour loss loans as the economic outlook darkens. A year earlier, exceptional government stimulus and the economy’s recovery from the pandemic had allowed it to release $2.4-billion of reserves.

That pushed up credit costs to $1.3-billion, a sharp contrast to the $1.07-billion benefit a year earlier.

Citigroup will suspend share buybacks in the face of threats to the economy and the need to build up a key regulatory capital ratio, which is increasing, Chief Financial Officer Mark Mason told reporters.

The move confirmed expectations of analysts and followed a similar move by JPMorgan Chase & Co on Thursday.

Investment banking revenue fell 46 per cent to $805-million as the volatility in markets dried up underwriting and advisory fees for investment bankers who drove Wall Street’s profit during the depths of COVID-19.

The Treasury and Trade Solutions business – Citi’s crown jewel – posted a 33 per cent jump in revenue to $3-billion on the back of higher net interest income and fee growth.

The bank, which disclosed an exposure of $8.4-billion to Russia as of the second quarter, said it was mulling options to exit its consumer and commercial banking business in the country.

Major U.S. banks and securities firms are intent on exiting their Russia businesses as they work to comply with U.S. sanctions imposed after the invasion of Ukraine.

Retail sales rose more than expected in June as consumers remain resilient despite inflation

• Retail sales rose 1% in June, slightly better than the 0.9% estimate.
• The numbers are not adjusted for inflation, which rose 1.3% on a monthly basis, indicating that real sales still were slightly negative.
• Gasoline stations, online sales, and bars and restaurants were some of the biggest contributors.

https://www.cnbc.com/2022/07/15/retail-sales-june-2022-.html

Gold heads toward fifth weekly decline on dollar strength

Gold prices eased on Friday and were poised for a fifth straight weekly loss, as expectations of a sizeable rate hike by the U.S. Federal Reserve powered the dollar and eroded bullion’s appeal.

Spot gold firmed to $1,708.24 per ounce by 9:23 a.m. ET, but has lost about 2% so far this week. U.S. gold futures also eased 0.01% to $1,705.7.

The dollar held at a two-decade high, making bullion more expensive for overseas investors. Gold looks to be in a free fall, and typically buyers will restrain themselves until the price finds some decent support, said independent analyst Ross Norman.

With the U.S. dollar undergoing an epic rally, it’s apparent that investors see it as the ‘go-to’ safe-haven asset, Norman said, adding, there’s “some significant redemptions in the gold ETF on a daily basis as stale institutional longs liquidate.”

Two of the Fed’s most hawkish policymakers said on Thursday they favoured another 75-basis-point interest rate increase this month.

Meanwhile, U.S. retail sales increased more than expected June.

There are chances of a slight bounce back in prices as long as the stiff support of $1,670 holds the downside, said Hareesh V, head of commodity research at Geojit Financial Services, adding that the critical event, however, would be the next FOMC meeting.

Higher interest rates raise the opportunity cost of holding non-yielding bullion. The market also took stock of the EU’s plans to adopt its seventh package of sanctions against Russia, which will add a ban on imports of Russian gold.

“The EU sanctions against Russian gold will have rather limited impact. I think this move is more of a gesture. Likely the Russians will be able to find buyers outside the EU quite satisfactorily,” Norman said.

In the physical gold market, buyers in some Asian hubs were drawn to a dip in prices.

Spot silver rose 1.1% to $18.61 per ounce, but was headed for a weekly decline. Platinum climbed 0.7% to $849.1852, while palladium fell 2.5% to $1,846.01.

Oil rises on prospects of less aggressive U.S. rate hike

Oil prices rose on Friday amid prospects of a less aggressive U.S. rate hike, although worries about a recovery in demand capped gains.

Brent crude futures for September delivery added 2.3% to trade at $101.37 per barrel, while WTI crude rose 1.9% to $97.61.

“Oil is trading very much to the beat of Federal Reserve policy and the implications it could have on both demand destruction and the U.S. dollar,” said Stephen Innes, managing partner at SPI Asset Management.

“With the market falling back to base-case 75 [basis point] hike next week versus 100 [basis point] yesterday, oil prices and the broader market have a little more breathing room today,” Innes said.

The Fed’s most hawkish policymakers on Thursday said they favored another 75-basis-point interest rate increase at the U.S. central bank’s policy meeting this month, not the bigger rate raise that traders had raced to price in after a report Wednesday showed inflation was accelerating.

The rate hike uncertainty and weak economic data pushed both oil contracts to lows on Thursday which were below the close on Feb. 23, the day before Russia invaded Ukraine in what Moscow calls “a special military operation.”

Still, both Brent and WTI had clawed back nearly all losses by the end of the trading session.

However, concerns about the outlook for demand continued to keep a lid on oil prices.

’“Sentiment hasn’t been helped by renewed Covid-19 outbreaks in China, which threaten to halt the recovery in demand. High prices also appear to have blunted demand for gasoline in the U.S.,” ANZ Research analysts said.

China’s refinery throughput in June shrank nearly 10% from a year earlier, with output for the first half of the year down 6% in the first annual decline for the period since at least 2011, data showed on Friday.

Meanwhile, U.S. President Joe Biden will on Friday fly to Saudi Arabia, where he will attend a summit of Gulf allies and call for them to pump more oil.

However, spare capacity at members of the Organization of the Petroleum Exporting Countries is running low, with most producers pumping at maximum capacity, and it is unclear how much extra Saudi Arabia can bring into the market quickly.

Dow pops 400 points as Wall Street applauds latest bank earnings, strong June retail sales

Stocks jumped on Friday as traders digested a fresh batch of bank earnings and retail sales for June that came in ahead of expectations.

The Dow Jones Industrial Average popped 449 points, or 1.46%. The S&P 500 jumped 1.21% and Nasdaq Composite added 1%, but stocks remained on track for weekly losses.

A new round of bank results from Wells Fargo and Citigroup offered further insight into the state of the economy. Wells Fargo rose 2.8% even as quarterly profits declined 48% and the bank set aside funds for bad loans. Citigroup jumped 5.2% as it beat estimates and benefited from a rising rate environment.

A day earlier, investors combed through troubling reports from JPMorgan Chase and Morgan Stanley, which kicked off major bank earnings, and also weighed the likelihood of larger interest rate hikes from the Federal Reserve and looming recession concerns.

“I don’t have a lot of bullishness on our ability to grow earnings in this environment,” G Squared Private Wealth CIO Victoria Greene said Thursday on CNBC’s “Closing Bell: Overtime.” “I don’t think it was bad or tragic, you know, but I think unfortunately, this earnings season, any miss on earnings or margins is going to be punished and any actual beats may actually be picked apart.”

Shares of UnitedHealth, American Express and Salesforce led the Dow’s recovery, rising more than 2% each. All major sectors in the S&P 500 moved higher on the day with the exception of utilities, which slipped 1%.

Financials jumped more than 1%, boosted by bank shares. Marathon Petroleum and Valero Energy jumped 2% each as oil prices rose. Shares of Tesla, Nvidia, Amazon Alphabet and Meta Platforms gained more than 1%.

For the week, the Dow is down 1%, while the S&P and Nasdaq have slipped 1.55% and 2.3%, respectively.

June retail sales came in ahead of expectations on Friday, rising 1% on a monthly basis and ahead of Dow Jones’ estimate of 0.9% and indicating that consumers are bolstering retail spending even as inflation hits record highs. Preliminary consumer sentiment data also came in ahead of expectations.

In corporate news, Pinterest shares surged 14.7% following a Wall Street Journal report that said activist investor Elliott Management took a stake of more than 9% in the social media company.