By Michael McCullough on July 26, 2024 Estimated reading time: 8 minutes
Making sense of the markets this week: July 28, 2024
By Michael McCullough on July 26, 2024 Estimated reading time: 8 minutes
Biden’s step-aside reassures the bond market, Canadian rates drop again, Mag 7 stocks head in opposite directions, and Loblaw’s mea culpa costs investors.
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Harris and Biden photos courtesy of whitehouse.gov, and Trump photo by Photo by The Library of Congress on Unsplash
Michael McCullough is a contributing editor to MoneySense and a financial writer and editor in Duncan, B.C.
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Biden’s withdrawal soothes bond market, deflates “Trump trade”
Compared to the way U.S. President Joe Biden’s decision not to run for a second term shook the political world, the markets seemed nonplussed—on the surface, at least.
Biden’s U-turn took some air out of the “Trump trade” in stock, bond and cryptocurrency markets. Stock markets overall rebounded the day after the announcement, with mega-cap technology stocks leading the way. But oil and gas stocks and cryptocurrencies—foreseen to fare better under a Donald Trump administration—retrenched.
The Republican nominee is seen as a bigger deficit spender than whomever the Democrats might settle on, so a Trump/Vance administration is expected to usher in higher inflation. That recently translated into a steeper yield curve for bonds as polls showed him ahead of Biden. However, that expectation of Trump as an inevitable shoo-in has now deflated and bond yields have flattened somewhat.
However, Kristina Hooper, chief global market strategist at Invesco, warned investors to stay braced for more short-term volatility, “as the significant uncertainty about the new Democratic ticket might not be resolved until the party’s convention in August.” She also suggested that investors should pay closer attention to the U.S. Federal Reserve moves with respect to interest rates. (More on Canada’s recent rate cut below.)
Something for Canadians and investors to ponder: As a senator, Vice President and Democratic front-runner Kamala Harris voted against the U.S.-Canada-Mexico trade agreement (USMCA), the successor to NAFTA (North American Free Trade Agreement) that was concluded by the Trump administration in 2020. At the time, she cited the lack of environmental protections for her decision.
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Bank of Canada cuts rates again
Speaking of monetary policy, on Wednesday Bank of Canada (BoC) governor Tiff Macklem announced a second quarter-point cut to interest rates in as many months bringing the overnight lending rate down to 4.5%. Further, Macklem hinted there would be more cuts to come this year; provided inflation continues to subside towards the Bank’s 2% target. The country’s Consumer Price Index (CPI) increased 2.7% year-over-year in June, down from a 21st-century high of 8.1% two years earlier.
The rate cut was widely expected by markets.
“Today’s decision to cut was consistent with our call, and that of broader market consensus which had upped the odds of reduction following a cascade of recent data which showed decelerating inflation, slack in the labour market and underperforming economy.”
– Brian Yu, AVP and chief economist for Central1 Credit Union.
The BoC is forecasting 1.2% GDP growth this year, 2.1% in 2025 and 2.4% in 2026, which sounds OK until you consider population growth is currently running at 3%. Regardless, the rate cut provides some relief to mortgage holders and support for bond markets.
This year, the Magnificent 7 have looked like a classic rock band on the verge of a breakup. Some members are still out there performing with feeling, Alphabet among them. Others, notably Tesla, have looked less than magnificent. Can the electric vehicle (EV) maker return to the fold? Its Q2 earnings, released Tuesday, did not provide a clear answer. Revenue was up 2% year-over-year and higher than expected, but earnings fell well short of analyst estimates, triggering a 4% selloff in after-hours trading.
More worrying still, automotive sales—the biggest component of the company’s revenue—dropped 7% compared to the same quarter a year earlier. While still the EV sales leader in the U.S. market, Tesla has been losing market share to rivals. In an effort to stir up optimism, CEO Elon Musk announced an Oct. 10 event that promises to unveil a “robotaxi.”
Alphabet, meanwhile, just kept on keeping on, narrowly topping analysts’ estimates for earnings and revenue. The biggest upside surprise came from its Google Cloud business, while its search engine advertising revenues were in line with expectations. However, advertising sales on YouTube disappointed. The company doubled its investment in AI models across its DeepMind and Google Research divisions compared to Q2 2023, to $2.2 billion.
Tesla, Alphabet earnings highlights
Currency figures in this section are reported in USD.
Tesla (TSLA/NASDAQ): Earnings per share of $0.52 (versus $0.62 predicted). Revenue of $25.5 billion (versus $24.77 billion estimate).
Alphabet (GOOG/NASDAQ): Earnings per share of $1.89 (versus $1.85 predicted). Revenue of $84.7 billion (versus $84.3 billion estimate).
Loblaw mea culpa costs investors in the short term
Canadians, perhaps, are apt to be too trusting. We don’t expect our local grocer to rip us off any more than we expect the national women’s soccer team to use a drone to spy on its Olympic rivals. But, in conjunction with its second quarter earnings report on Thursday, Loblaw Cos. (L/TSX), along with its parent George Weston Ltd. (WN/TSX), announced a half-billion-dollar payment to settle a class-action lawsuit stemming from a conspiracy to fix bread prices dating back to 2017.
What’s good for consumers and the interests of fair play amounts to a short-term hit to investors, however. The settlement resulted in a charge of $121 million in the second quarter, bringing earnings down to $457 million or $1.48 per share on revenues of $13.9 billion. The revenue figure was up just 1.5% from a year earlier. That’s less than the rate of inflation. It reflects a decline in sales of non-food products like clothing and electronics, which the store chain decided to discontinue due to low margins.
Loblaw Cos. earnings highlights
Here is the grocer’s earnings news this week.
Loblaw Cos. (L/TSX): Earnings per share of $1.48 (versus $1.58 in Q2 2023). Revenue of $13.9 billion (versus $14.2 billion estimate).
Michael is a financial writer and editor in Duncan, B.C. He’s a former managing editor of Canadian Business and editorial director of Canada Wide Media. He also writes for The Globe and Mail and BCBusiness.
