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June 7th, 2019

Stocks Are Back on Track

By PRATTE

 

Blogue 21 sept EN

 

Despite a difficult start, Wall Street finally managed to accumulate gains. Investors were enthusiastic about the latest comments from the Fed chairman who announced a possible drop in interest rates this year. Here is what happened this week in the markets.

Market Brief

It was a rather difficult start for the US markets on Monday, as they got dragged down by the recent drop from FAANG’s stocks. Alphabet (Google) was down 6.1%, Facebook lost 7.5%, Amazon fell by 4.6% and Apple lost 1%. This sudden drop affected the NASDAQ, who closed the day down 1.6%. For its part, the S&P 500 fell 0.28% while the Dow, the only winner of the day, ended up slightly 0.02%. The 10-year US bond rate continued its downward plunge to 2.06%, its lowest rate level since September 2017.

Wall Street was up on Tuesday reassured “by positive news on two fronts, that of the commercial tensions and that of the rates of the Federal Reserve (Fed)”, mentioned Maris Ogg of Tower Bridge Advisors. The announcement of a settlement between China and the United States gave hope to investors. According to its latest comments, the Chinese Ministry of Commerce believes that the trade war should be resolved soon. The Dow ended the session with gains of 2.06%, the NASDAQ advanced by 2.65% and the S&P 500 gained 2.14%. Technology stocks also picked up on Tuesday; Alphabet (+ 1.5% Tuesday), Facebook (+ 2%), Amazon (+ 2.2%) and Apple (+ 3.7%) all ended the day up.

This good performance continued Wednesday after the announcement from the head of the Fed saying they might lower interest rates. This cut in rates could be necessary to support an economy greatly affected by the trade war between the United States and China. Markets closed higher on Wednesday, supported by the hope of lower rates. “The market continues to respond to comments by Jerome Powell, who said Tuesday that the Fed was ready to act to maintain the expansion, making it clear that the Fed was not going to let the economy slip into recession and that the Fed was ready to lower rates,” commented Alan Skrainka of Cornerstone Wealth Management.

Wall Street opened slightly higher on Thursday as investors remained cautious after a good session the day before.

The Canadian stock market ended Monday’s session at its worst level since February but had a good performance on Tuesday closing up 150 points. The health care sector advanced 5.4%, helped by Aurora Cannabis (+ 9.5%) and Aphria Inc. (+ 6.8%). The TSX ended Wednesday session up 46.42 points (+ 0.3%) supported by gains of 10% in Bombardier shares. The Toronto stock index opened slightly up on Thursday, after the country’s trade deficit shrunk, meaning the economy is recovering from a slowdown, as rising gold prices lifted the materials sector.

FAANG

FAANG’s stocks fell heavily on Monday following news that the US technology giants were under the scrutiny of regulators after charges of anticompetitive practices. The Judiciary Committee of the House announced a major antitrust investigation of unspecified technology companies. In a statement, they promised “a thorough review of the market power held by the giant technology platform” a first for the US Congress.

Despite heavy losses on Monday, the surprise effect dissipated on Tuesday as investors believe that the investigation will take several years and that the impacts should be limited. “Antitrust investigations take a lot of time: they are factual and require an evaluation of several aspects of the behaviour in question,” summarize analysts Bloomberg Intelligence. Many believe Monday’s reaction making FAANG’s stock plunge was excessive. Most analysts also reiterated their recommendation to “buy” shares from the group.

Air Transat

The company, which has been in negotiations with Air Canada since May 16th for its repurchase, received this week a more generous offer from the company March who raised the auction announcing an offer of $14 a share. However, this proposal is conditional to financial assistance of $120 million from the Government of Quebec. The purchase offer also includes the signing of support and share deposit agreement with the Fonds de solidarité FTQ and the Caisse de dépôt et placement du Québec. Air Canada offered $520 million, or $13 for each of the outstanding shares.

“The March Offer could be of interest to the Caisse de dépôt and the Fonds de la FTQ because it offers them the opportunity to participate in the long-term value creation potential of its hotel strategy. On the other hand, we believe that Air Canada could offer more (than $13) for Transat given the significant synergies to be generated from operations,” wrote Benoit Poirier, an analyst with Desjardins Capital Markets. Unlike Air Canada, March’s offer proposes to preserve all Transat jobs at the head office in Montreal.

China

The International Monetary Fund (IMF) trimmed its forecasts for economic growth in China, just two months after raising them. “China’s economic growth has stabilized in early 2019 and is expected to reach a moderate pace […]. The uncertainties around world trade remains high, with a risk of decline,” the IMF said in a statement.

The IMF has revealed that China’s GDP is expected to reach 6.2% for this year and 6.0% next year, it was estimated at 6.3% and 6.1% in its last forecast. The institution considers that at the moment “no further easing is necessary.” However, “if trade tensions intensify” adjustment will be inevitable. This news comes as several indicators shows that the Chinese economy is running out of steam.

 

 

 

Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
Intended to provide general information about markets and securities and not to meet your specific needs, this report is the result of the author’s only work. The opinions (including any recommendations, if any) expressed in this report are those of the author only and do not necessarily represent those of Pratte Portfolio Management and do not constitute securities investment advisory activities designed to meet your specific needs.
The information contained in this report is derived from sources believed to be reliable, but the accuracy and completeness of this information can not be guaranteed and, in providing the information, the author and Pratte Portfolio Management assume no liability whatsoever. This information was current as of the date indicated in this bulletin, and neither the author nor Pratte Portfolio Management assumes any obligation to update it or to report any new developments with respect to this information. This report is intended for distribution in jurisdictions where the author and Pratte Portfolio Management are registered for trading in securities. Any distribution or diffusion of this report in another territory is forbidden. The author, Pratte Portfolio Management, its affiliates and their respective directors, officers and employees, and the companies with which they are associated may, from time to time, hold securities referred to in this report.
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