Canadian Market Recovers After Weak Start

After drifting lower in early trades, led by losses in mining stocks due to weak gold prices, the Canadian stock market recovered and briefly emerged into positive territory by late morning on Tuesday.

Information technology shares are the other notable losers, while energy, financial and consumer discretionary stocks are faring fairly well.

Markets in Europe and the U.S. advanced today after the U.S. Commerce Department temporarily eased trade restrictions on Chinese tech giant Huawei.

Following the reprieve announced by the U.S. government, Google reversed its earlier decision and announced it will continue to work with Huawei over the next 90 days.

The benchmark S&P/TSX Composite Index, which recovered to 16,411.65 after falling to a low of 16,354.31 earlier, is now down 14.59 points, or 0.09%, at 16,387.16.

Among the stocks in the materials space, First Quantum Minerals (FM.TO) is declining 5.2% and Kinross Gold Corporation (K.TO) is down 1.1%. Barrick Gold Corporation (ABX.TO) is down nearly 1% and IAM Gold Corporation (IMG.TO) is lower by about 0.6%.

Industrial stock Bombardier Inc. (BBD.B.TO) is rising more than 3%.

Energy stocks Encana Corporation (ECA.TO), Baytex Energy (BTE.TO), Whitecap Resources (WCP.TO) and Suncor Energy (SU.TO) are up with solid gains.

In the financial space, Royal Bank of Canada (RY.TO) and Bank of Nova Scotia (BNS.TO) are up with modest gains and Toronto-Dominion Bank (TD.TO) is up marginally, while Canadian Imperial Bank of Commerce (CM.TO) is rising 1.6%. Manulife Financial Corporation (MFC.TO) is gaining about 1.3%.

U.S. stocks are up this morning and the major averages have all posted notable gains. The temporary reprieve to Huawei triggered the upside for the market.

The Dow is gaining about 0.6% and the S&P 500 is up 0.88%, while the Nasdaq is rising 1.12%.

The U.S. Commerce Department issued a temporary license authorizing specific, limited engagement in transactions involving the export, re-export, and transfer of items to Huawei for 90 days.

Commerce Secretary Wilbur Ross said the temporary reprieve grants “operators time to make other arrangements and the Department space to determine the appropriate long term measures for Americans and foreign telecommunications providers that currently rely on Huawei equipment for critical services.”

“In short, this license will allow operations to continue for existing Huawei mobile phone users and rural broadband networks,” he added.

In commodities, crude oil futures for June pared early gains and are down $0.07, or 0.11%, at $63.03 a barrel.

Gold futures for June are down $3.50, or 0.27%, at $1,273.80 an ounce.

Silver futures for are declining $0.015, or 0.1%, at $14.430 an ounce, while Copper futures for July are down marginally at $2.7250 per pound.

Fed Chairman Jerome Powell warns business borrowing at ‘historic highs’ shouldn’t be ignored

  • There’s a “moderate” risk that “near record levels” of business debt will spill over into the broader US economy and spark another financial crisis, Federal Reserve Chairman Jerome Powell said on Monday.
  • Collaterized loan obligations (CLOs) have been a key funding source for riskier business borrowing, Powell said.
  • “Business debt has clearly reached a level that should give businesses and investors reason to pause and reflect,” Powell said. “Investors, financial institutions, and regulators need to focus on this risk today, while times are good.”

There’s only a “moderate” risk that surging volumes of business debt will spill over into the broader economy and potentially spark another financial crisis, Federal Reserve Chairman Jerome Powell said on Monday.

Business debt is “near record levels” and recent lending has been “concentrated in the riskiest segments,” Powell said at the Annual Financial Markets Conference at the Federal Reserve Bank of Atlanta in Florida. Specifically, he pointed to collaterized loan obligations (CLOs) — actively managed securitization vehicles that buy up riskier assets like leveraged loans — as a key source of funding for riskier business borrowing, given they hold 62% of outstanding leveraged loans.

“Regulators, investors, and market participants around the world would benefit greatly from more information on who is bearing the ultimate risk associated with CLOs,” Powell said. 

Business debt has “clearly reached a level that should give businesses and investors reason to pause and reflect,” Powell said. “Investors, financial institutions, and regulators need to focus on this risk today, while times are good.”

The central bank chief warned overly indebted firms could endure “severe financial strain” if the economy weakens, and a highly leveraged business sector could exacerbate an economic downturn as companies are forced to lay off workers and reduce investment.

However, the build up of business debt “does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm to households and businesses should conditions deteriorate,” Powell said.

“In public discussion of this issue, views seem to range from ‘This is a rerun of the subprime mortgage crisis’ to ‘Nothing to worry about here,'” he added. “At the moment, the truth is likely somewhere in the middle.”

Powell acknowledged similarities between the recent spike in business debt and the lending boom that preceded the global financial crisis. Debt has surged to historic highs and outpaced growth in borrowers’ incomes, lenders have loosened their underwriting standards, and much of the borrowing is financed outside the banking system.

However, Powell argued the increase in business borrowing isn’t outsized given America’s prolonged economic expansion, it isn’t being fueled by a “dramatic asset price bubble” this time around, and CLO structures are “much sounder” than the structures used during the housing bubble.

Powell also emphasized America isn’t as vulnerable to shocks anymore. “The financial system today appears strong enough to handle potential business-sector losses, which was manifestly not the case a decade ago with subprime mortgages,”  he said. The Federal Reserve is also monitoring the issue closely, holding banks to strict risk-management standards, and using stress tests to ensure their resilience to shocks, he added.

The Federal Reserve looks at four key factors in assessing financial-stability risks: borrowing by businesses and households, valuation pressures, leverage in the financial system, and funding risk.

Powell pointed out that business debt has grown slower relative to GDP than household debt grew in the lead up to the financial crisis, and household debt-to-income ratios have steadily declined since the crash. 

Although equity prices have reached new highs, bond and loan spreads have narrowed, and commercial and residential property prices have risen, Powell said borrowing isn’t fueling excessive prices or investment in a critical sector such as housing.

Banks at the core of the US financial system are also “fundamentally stronger and more resilient,” Powell said, as larger capital requirements and stress tests have resulted in them retaining more capital. The largest US banks also hold only $90 billion of the roughly $700 billion in total CLOs, he added.

Finally, the US financial system isn’t as susceptible to runs as before due to large banks having significantly amounts of highly liquid assets, Powell said. CLOs also have stable funding as investors commit funds for lengthy periods and can’t use withdrawals to force asset sales at distressed prices, he added.

OECD Downgrades 2019 Global Growth Projection

The Organization for Economic Co-operation and Development downgraded the global growth outlook for 2019 as trade disputes hurt manufacturing and investment decisions.

In its latest Economic Outlook, published Tuesday, the agency forecast 3.2 percent growth for 2019 instead of 3.3 percent estimated in March. The global outlook for 2020 was retained at 3.4 percent.

The OECD cautioned that current growth rates are insufficient to bring about major improvements in employment or living standards.

“The fragile global economy is being destabilised by trade tensions,” OECD chief economist Laurence Boone, said.

“Growth is stabilising but the economy is weak and there are very serious risks on the horizon. Governments need to work harder together to ensure a return to stronger and more sustainable growth,” Boone added.

The OECD forecast the U.S. economy to grow 2.8 percent in 2019 before slowing to 2.3 percent in 2020. Growth in euro area is seen at 1.2 percent this year and 1.4 percent next year.

China’s growth is expected to ease to 6.2 percent in 2019 and to 6 percent next year.