Market rotation continues as traders turn defensive
This week's notable Canadian economic data:
The consumer price index (CPI) declined 0.4% in September, mostly due to cheaper airfares and lower gasoline prices. The annualized inflation rate fell from 2.8% to 2.2%.
Retail sales declined 0.1% in August, to $50.8 billion. Lower sales at gasoline stations offset gains in auto and auto parts.
After three months of increases, manufacturing sales fell 0.4% to $58.6 billion in August, mostly on lower auto sales. Capacity utilization rose from 79.5% in July to 80.2% in August.
The number of Canadians collecting Employment Insurance (EI) benefits in August declined 1.6% to 464,700. Declines were seen in most provinces, except Ontario. Year-over-year, 62,000 fewer Canadians are collecting EI.
This week's notable US economic data:
Retail sales rose 0.1% in September, mostly on higher auto and gasoline sales.
After a 0.4% increase in August, industrial output increased 0.3% in September. Manufacturing and mining both gained ground, while energy was unchanged for the month.
Existing home sales fell 3.4% in September, the sixth consecutive monthly decline, while new housing starts fell 5.3%.
Latest FOMC meetings minutes released this week confirm the trajectory towards higher interest rates in the US. In previous years, planned rate hikes by the Federal Reserve have been shelved during times of market upheaval, which is often precipitated by rising interest rates, and tends to drag on consumer confidence.
US bond yields rose across the board this week, dragging bond prices lower on both sides of the border. The US dollar rebounded 0.6%, pulling all major foreign currencies lower. The loonie also fell 0.6%, as markets await another rate hike from the Bank of Canada next week.
Gazprom says the Russia's energy ministry has effectively called an end to their pact with OPEC to restrain production. At the end of 2016, Russia agreed to reduce output by 300,000 bbl/day, as per their agreement with OPEC. Russia produced a record 11.4 bbl/day in September. President Vladimir Putin says output could potentially rise by another 300,000 bbl/day next year.
US output declined by 300,000 bbl/day last week, due to outages in the Gulf of Mexico due to Hurricane Michael.
The US put four more oil rigs into service this week, bringing the total to 873, the highest since the spring of 2015. Canada lost four oil rigs, ending Friday at 123.
Desjardins is maintaining its WTI forecast at US$68 on average for this year, rising to US$72 for 2019. The firm says risks to oil prices are "more on the upside," despite ongoing trade disputes between China and the US.
Goldman Sachs says the chances of US$100 oil anytime soon is not "very likely." The firm says although there is a chance of lower output from Iran, it looks like the US will make concessions on waivers, while other key importers may simply turn off ship transponders to avoid getting caught. Goldman also says there's roughly 1 million bbl/day of output "readily available" to come on line at a moment's notice. The investment bank sees prices hovering around US$80 a barrel, with "modest" declines in global inventories going into the fourth quarter. The rise of US supply should push prices to about US$70/bbl at the end of 2019 and potentially US$60 in the longer term.
The differential between Brent and WTI widened to just under US$11/bbl this week, the highest since last June. Edmonton Condensate (C5+) was this week's biggest loser in oil markets, tumbling 7.5% as the discount to WTI widened to over US$10/bbl. Western Canadian Select (WCS) also declined 4%, returning to the lows of Q2/2016, when WTI was trading closer to US$40 a barrel.
Volatility returned to equity markets this week due to ongoing trade disputes, weak Chinese economic data, rising interest rates, concerns over Italian debt, and lack of progress on Brexit negotiations.
US markets tried to rally this week, but ended the week roughly unchanged. Chinese markets were the worst performers this week.
Despite the threat of rising rates, markets are turning more defensive, with utilities and staples leading gains.
JP Morgan remains bearish on the oilfield services sector and equipment makers, despite higher oil prices. Echoing a similar sentiment from Jefferies, JPMorgan says it expects Q3 earnings to range from "uninspiring to outright brutal." In the uninspiring category is Schlumberger and Baker Hughes, while Canadian firms Calfrac Well Services and Trican Well Service were downgraded due to a difficult pricing environment. JPMorgan sees little relief in sight for Canadian oil and gas prices, particularly in light of lack of progress on pipeline.
|Imperial Oil||IMO||43.81||▲2.6||33.43||44.91||94||D W|
|Husky Energy||HSE||20.08||▼-0.8||15.09||22.99||75||D W|
|Pembina Pipeline||PPL||44.83||▲2.0||37.60||47.84||90||D W|
|Inter Pipeline||IPL||22.49||▲3.8||21.36||27.92||44||D W|
|Gibson Energy||GEI||22.70||▲8.5||15.68||23.04||98||D W|
|LARGE CAP E&P|
|Cdn Natural Res||CNQ||37.17||▼-1.8||36.47||49.08||11||D W|
|Cenovus Energy||CVE||11.15||▼-2.4||9.03||14.84||20||D W|
|Seven Generations||VII||14.44||▼-5.5||13.62||21.25||15||D W|
|Pason Systems||PSI||20.14||▲0.1||16.05||22.10||88||D W|
|Mullen Group||MTL||15.21||▲2.6||14.10||17.12||72||D W|
|Secure Energy||SES||7.98||▲0.6||6.98||9.82||57||D W|
|REFINING & MARKETING|
|Parkland Fuel||PKI||45.88||▼-0.2||23.41||47.45||98||D W|
|Exxon Mobil||XOM||81.97||▲0.7||72.16||89.30||65||D W|
|Kinder Morgan||KMI||17.98||▲2.7||14.69||19.83||79||D W|
|Williams Co||WMB||26.74||▲0.2||24.00||33.67||54||D W|
|LARGE CAP E&P|
|EOG Resources||EOG||117.67||▼-3.7||95.36||133.53||58↓||D W|
|Occidental Petroleum||OXY||72.18||▼-6.2||62.47||87.67||31||D W|
|Anadarko Petroleum||APC||66.00||▼-2.4||46.75||76.70||62||D W|
|Concho Resources||CXO||147.54||▼-1.9||123.63||163.11||60||D W|
|National-Oilwell Varco||NOV||40.40||▼-3.6||31.47||49.08||52↓||D W|
|Baker Hughes||BHGE||29.94||▼-2.9||25.53||37.76||22||D W|
|Phillips 66||PSX||102.77||▼-6.1||89.14||123.97||32||D W|
|Valero Energy||VLO||92.76||▼-14.3||75.84||126.98||11||D W|
|Marathon Petroleum||MPC||73.92||▼-7.7||55.87||88.45||33||D W|