Market Update US tsys weakening steadily since the start of European trading, 10Y 3.09 (+1.7bps). Equity markets rebounding, S&P futures +25 after last week’s rout (S&P -3.95%, worst week since March). News that Angela Merkel will step down as head of CDU pressuring bunds 10Y bund +4bps @0.39%. Italian BTPs rallying after S&P affirmed Italy at BBB Friday and lowered the outlook to negative from stable. Busy week for data in the US with ADP, PMI and Oct NFP Friday. Latest CFTC COT report showed specs paring back shorts from the belly out the curve, cutting short in 10s by ~70k contracts to -544k. GOCs lower in line with tsys, 10Y 2.41%. Last week’s risk off brought the GOC 10Y to the lowest levels in a month with the GOC curve continuing to flatten led by the 10Y, 2s10s barely 13bps or the narrowest since June 2007. Last week’s hawkish BOC raised the odds of a rate hike in Dec to 25% from ~14% the prior week.
News headlines
U.K.’s Hammond to Set Out a Budget That Brexit Talks Could Break (Bloomberg) It was only a few weeks ago that U.K. Prime Minister Theresa May declared an end to austerity. In doing so, she made life easier for herself but much harder for her finance minister. Chancellor of the Exchequer Philip Hammond is perceived by Brexit believers as an enemy. Terminating almost a decade’s worth of belt-tightening was always going to be tough with a sluggish economy. To attempt it in the throes of a messy divorce from the European Union is unprecedented.
China Regulator to Propose 50% Cut to Car Purchase Tax (Bloomberg) China is considering cutting a tax on most cars in half to jumpstart flagging sales in the world’s largest automotive market, triggering a surge in stocks from Volkswagen AG to Daimler AG. The country’s top economic planning body submitted a plan to key policymakers to lower the purchase tax to 5 percent for passenger vehicles with engines no bigger than 1.6 liters, according to people familiar with the matter. No decision has been made on implementation, said the people, who asked not to be identified because the information isn’t public.
Brazil Assets Jump After Bolsonaro Renews Pledge to Fix Economy (Bloomberg) Jair Bolsonaro said the words investors wanted to hear. Brazil’s next president pledged to trim the deficit, pay down debt and reduce the size of government after results showed him cruising to victory over Fernando Haddad of the left-wing Workers’ Party. An American depository receipt of Petroleo Brasileiro SA trading in pre-market hours jumped 8 percent, while the biggest overseas exchange-traded fund, the iShares MSCI Brazil ETF, added 5.6 percent. Sovereign bonds trading on European exchanges gained.
U.S. Futures Rally With Europe Stocks; Euro Swings: Markets Wrap (Bloomberg) U.S. equity futures jumped alongside European stocks as investors rediscovered some confidence at the tail end of a brutal month. The euro was whipsawed by headlines about German Chancellor Angela Merkel’s future. Contracts for the S&P 500, Dow Jones and Nasdaq indexes all rallied as the European morning wore on, with the tech gauge setting the pace amid IBM’s $33 billion purchase of Red Hat Inc. The Stoxx Europe 600 Index rose after HSBC Holdings Plc earnings beat expectations, and extended gains as automakers surged on news China’s top economic planning body is proposing to cut the tax levied on car purchases by half. Earlier in Asia the mood had been more cautious and shares were mixed, falling in Tokyo, China and South Korea and rising in Hong Kong, Australia and India.
Canada posts budget surplus in first five months of 2018-19 (Reuters) Canada recorded a budget surplus of C$2.56 billion ($1.95 billion) in the first five months of the 2018-19 fiscal year compared to a C$2.91 billion deficit in the same period a year earlier, the finance ministry said on Friday. Revenues jumped by 8.0 percent in the April-August period, reflecting a greater intake from taxes and employment insurance premiums. Program expenses increased by 2.9 percent. While the finance ministry statement did not include a line that was in the July statement, which said the results of the first four months were in line with government projections, the ministry later said the results were “broadly in line” with the fiscal forecasts.
IBM to acquire software company Red Hat for $34 billion (Reuters) IBM Corp said on Sunday it had agreed to acquire U.S. software company Red Hat Inc for $34 billion, including debt, as it seeks to diversify its technology hardware and consulting business into higher-margin products and services. The transaction is by far IBM’s biggest acquisition. It underscores IBM Chief Executive Ginni Rometty’s efforts to expand the company’s subscription-based software offerings, as it faces slowing software sales and waning demand for mainframe servers. IBM, which has a market capitalization of $114 billion, will pay $190 per share in cash for Red Hat, a 63 percent premium to Friday’s closing share price.
Trump reviewing metals tariffs on Canada (BNN) The U.S., Canada and Mexico remain at odds over metals tariffs, with Donald Trump’s envoy to Canada saying the president is reviewing them. Trump’s ambassador, Kelly Craft, argued Friday the levies on steel and aluminum imports were designed to prevent overseas metal from entering America via its neighbors. “That is not something that is against Canada,” Craft said at an event near Niagara Falls with Canada’s ambassador to the U.S., David MacNaughton. “It’s just protecting North America from other countries that will be passing raw materials through, and also to protect our steel industry at home.”
U.S. GDP grows 3.5% in third quarter on consumption, inventories (BNN) The U.S. economy expanded at a 3.5 per cent pace in the third quarter as consumers opened their wallets, businesses restocked inventories and governments boosted spending, marking the strongest back-to-back quarters of growth since 2014. The annualized rate of gains in gross domestic product compared with the 3.3 per cent median estimate in a Bloomberg survey and followed a 4.2 per cent advance in the prior three months, according to Friday’s report from the Commerce Department. Consumer spending, which accounts for about 70 per cent of the economy, unexpectedly accelerated to a 4 per cent increase — the best since 2014 — while the 0.8 per cent gain in nonresidential business investment was the weakest in almost two years. In two volatile categories, inventories provided the biggest contribution since early 2015, while the drag from trade was the largest in 33 years. Government spending rose by the most since 2016.
Overnight markets
Overview: US 10yr note futures are down -0.158% at 118-27, S&P 500 futures are up 1% at 2696.25, Crude oil futures are down -0.07% at $67.54, Gold futures are down -0.29% at $1232.2, DXY is up 0.15% at 96.504, CAD/USD is down -0.09% at 0.7639.
| Cda Benchmarks | Yield | Tsy Benchmarks | Yield |
| 2 Year | 2.275% | 2 Year | 2.822% |
| 5 Year | 2.359% | 5 Year | 2.933% |
| 10 Year | 2.411% | 10 Year | 3.094% |
| 30 Year | 2.442% | 30 Year | 3.324% |
US Economic Data
| 8:30 AM | Personal Income, Sep est 0.4% (0.3% prior) |
| Personal Spending, Sep est 0.4% (0.3% prior) | |
| Real Personal Spending, Sep est 0.3% (0.2% prior) | |
| PCE Deflator MoM, Sep est 0.1% (0.1% prior) | |
| PCE Deflator YoY, Sep est 2.0% (2.2% prior) | |
| PCE Core MoM, Sep est 0.1% (0.0% prior) | |
| PCE Core YoY, Sep est 2.0% (2.0% prior) | |
| 10:30 AM | Dallas Fed Manf. Activity, Oct est 28.1 (28.1 prior) |
Canadian Economic Data
| 10:00 AM | Bloomberg Nanos Confidence, Oct 26th (57.4 prior) |
Disclosure and Disclaimer
The following sources of information have been, or may have been, used partially or in their entirety to compile the herein provided CTI Capital Securities Inc. (“CTI Capital”) ‘Morning Comments.’ CTI Capital believes these sources to be generally reliable, however, as said sources are varied and from third parties, CTI Capital cannot guarantee the accuracy or completeness of said information: Canadian Press (CP); Bloomberg News (BN); Wall Street Journal (WSJ); Stone & McCarthy Research Associates (SMRA); New York Times (NYT); Financial Times (FT); Market News International (MNI); Globe and Mail; Associated Press (AP); CNW Group (CNW); Reuters; Business News Network (BNN); Market Watch; and others.
Ivan Greenstein, Stephan Buu, Hugues Savard
Institutional Bond and Equity Desk
CTI Capital Valeurs Mobilières Inc.
Tel : (514)-861-0240
Fax: (514)-861-3230
Institutional Bond and Equity Desk
CTI Capital Valeurs Mobilieres Inc.
Tel : (514)-861-0240
Fax: (514)-861-3230