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November 30th, 2018

Fed Comments Lift Markets

By PRATTE

Blogue 30 nov EN

Wall Street had again a week full of rebounds. Recent comments from the Fed gave strength to the US indexes on Wednesday, closing the day up. However, trade tensions continued to affect markets. General Motors announced this week a restructuring of its spending with the closure of several plants including the one in Oshawa, Canada. This announcement gave strength to GM’s stock. Here is what happened this week in the markets.

Markets Brief

The markets started the week in the green ending Monday session up, supported by a rebound from tech stocks. Apple closed with gains of 1.4%, Facebook gained 3.5% and Alphabet took 2.5%.

Tuesday was, however, more difficult. The three major US indexes opened down after the US president cast doubt on a possible agreement between his country and China. In an interview with the Wall Street Journal, Donald Trump announced that it was “highly unlikely” that he would cancel the planned $200 billion tariff increase on imports from China. This announcement has reiterated its threat to impose additional taxes on $267 billion Chinese products. Most tech stocks opened down Tuesday including Apple.

On Wednesday, US markets opened up waiting for a speech from the president of the US Federal Reserve (Fed). The latter said that the central bank wants to slowdown the pace of rising interest rates. Investors welcomed Jerome Powell’s comments and Wall Street ended sharply higher on Wednesday.

Thursday, big drop for the three major US indexes. Markets were watching closely for a possible meeting between China and the United States at the G20 summit in Argentina. Stocks ended the day lower again, marking a pause after three good sessions. Friday, Wall Street opened in scattered order as investors remained on their guard before the meeting between the US president and the Chinese president during the G20.

TSX also began the week in the green, closing on Monday up 1.92 points, supported by the information technology sector. The sector gained 2.5% thanks to Shopify and BlackBerry. On Tuesday, the Toronto Stock Exchange opened down 8.55 points. The TSX had a good day on Wednesday, starting the day up helped by strong quarterly results from Royal Bank of Canada. The Toronto index closed up 227.16 points, its largest daily increase since February 17, 2016. On Thursday, the TSX continued on its momentum, starting the day up, helped by a good performance from the energy sector. The Toronto index opened lower on Friday, pulled down by the energy sector as oil prices continued to fall.

General Motors
Nearly ten years after its rescue, the survival of General Motors was again under the radar this week. The auto producer has announced the closure of seven plants, four in the United States, one in Canada and two outside North America. The closure of its Oshawa plant in Ontario triggered the loss of more than 2,500 jobs, greatly affecting the region and the province. A difficult announcement, as in 2008, the Canadian and Ontario governments injected more than $13.7 billion to save GM Canada and Chrysler Canada from bankruptcy.
Following this news, the stock jumped 4.8% as investors were satisfied with the latest announcement. GM will reduce its number of salaried employees by 15% and its workforce by 25%, thus offering an opportunity to increase its profits over the upcoming years. The manufacturer has also announced the end of the production of several models like the Volt, the Cruze and the Impala. This decision was made in order to please American consumers who are more and more attracted to multi-segment, sport-utility vehicles and vans. On Wednesday, President Trump asked GM, through Twitter, to repay all the money they had been given during the 2008 financial crisis. As a result of these threats, the company’s stock was down 1.21%.

Fed

Wall Street welcomed with optimism the latest comments from the US Federal Reserve who is considering a pause in rising interest rates. A change of tone for the Bank that seemed to appeal to investors who feared a too rapid rise in rates would cause a slowdown in the United States. “He said the magic words, rates are just below neutral, that’s what the market wanted to hear,” said Gregori Volokhine, an analyst at Meeschaert Financial Services. Analysts still expect a rate hike at the next meeting of the Fed in December.

“Interest rates are still low considering historical standards and they remain just below (…) a level that would be neutral for the economy, that is, without stimulating or slowing growth ‘said US Central Bank President Jerome Powell, justifying further rises. The Fed has raised its rates six times since the election of Donald Trump. For its part, the president continues to criticize the latest decisions of the central bank. The Fed is trying to find a balance between its speed of execution and economic growth. Thus, they hesitate between two options: either to slow down their level of execution and risking shortening economic growth, or to speed up their level of execution and thus risk overheating the economy.

Oil
Black gold continued its decline this week. The price of a barrel of Brent lost more than 20% during November while the Texas WTI barrel fell 21% in November and 10.84% in October. In just a few weeks, crude prices went from their highest peak in four years to a full-blown bear market. Prices are under pressure from an overabundance of oil as well as a global economic slowdown that has lowered demand. Demand for black gold is down, as big players in Europe, Asia and India have recently decreased their appetite for oil. CNN’s article on the subject explains this sudden drop.

RBC

The Royal Bank of Canada posted this week better than expected quarterly results. The financial institution posted a rise of 15% of its profits and a record of 12.4 billion in gain. The rise in interest rates and the latest tax reform in the United States supported this good performance from the bank. “While rising protectionism and geopolitical risks have created uncertainty throughout the year, our results have benefited from higher rates, higher gross domestic product and (tax cuts) American, “RBC President and CEO Dave McKay said Wednesday.

In addition, the bank increased its net earnings per share to $2.20 from $1.88 in the fourth quarter last year. This strong performance from Canada’s largest bank is mainly due to improved results from their personal and commercial banking, capital markets and wealth and insurance sector.

 

 

 

Pratte Portfolio Management is registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).

This newsletter is solely the work of the author for the private information of clients. The views (including any recommendations) expressed in this newsletter are those of the author alone, and are not necessarily those of Pratte Portfolio Management.

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