By MacNicol & Associates In Morning Notes
May 3rd, 2018
Daily Market Commentary
- Bombardier Inc.’s effort to bolster its cash reserves is getting a lift from the booming real-estate market in Canada’s biggest city. The maker of planes and trains agreed to sell its Downsview factory in Toronto to Canada’s Public Sector Pension Investment Board for about $635 million. The transaction is expected to close in the second quarter, increasing cash by more than $550 million after costs, Bombardier said in a statement Thursday as it reported earnings.
- Spring has finally sprung but Toronto’s home sales remain gloomy as tougher mortgage qualifications and rising interest rates continue to push buyers out of the market. Realtors in Canada’s biggest city had one of their worst months in the past 15 years in April, with sales down by almost one-third from a year earlier to 7,792 units, according to data released Thursday by the Toronto Real Estate Board. That’s the fewest number of sales for April since 2003. On a seasonally-adjusted basis, sales have fallen for four straight months, with the fewest transactions to start a year since the 2009 recession.
- Bond traders are growing increasingly skeptical that the Bank of Canada’s policy tightening cycle will ultimately keep pace with the Federal Reserve’s. The BOC forecasts its neutral rate — the level at which monetary policy is neither restrictive nor stimulative for the economy — at 3 percent, above the Fed’s long-term projection of 2.875 percent. But market participants aren’t buying it anymore, pushing terminal rate expectations for Canada well below those of the U.S., to the widest gap in 10 months.
- Salesforce.com Inc., the largest maker of online customer-management software, is investing $100 million in Canadian technology through a venture fund to support tech start-ups. The Salesforce Ventures unit set up the Canada Trailblazer Fund to help cloud-computing startups in the country, the San Francisco-based company said Thursday in a statement. First-round funding recipients include Tier1CRM, Traction Guest, Tulip and OSF Commerce, which all have products that integrate with Salesforce’s platform.
- Prime Minister Justin Trudeau is pressing ahead with a goal of legalizing recreational marijuana in Canada within months, as senators push for changes and a delay of as much as a year. The government’s pot law is working its way through the Senate, where a trio of lawmaker reports has this week called for changes or a delay. While the government didn’t welcome or rule out an extension, there’s little sign it will pump the brakes. Trudeau says the push will continue, and a spokesman said the health minister looks forward to a final Senate vote June 7.
- European stocks opened lower after the Federal Reserve signaled it’s in no hurry to hike rates even as inflation rises to its target and as investors awaited the start of trade talks between the U.S. and China. The Stoxx 600 fell 0.2%, taking a breather following recent sharp gains. As trade negotiations begin today, Beijing said it won’t agree to preconditions that include abandoning its advanced manufacturing program and agreeing to cut the trade gap by a fixed amount.
- U.S. equity futures advanced while stocks in Europe followed Asian peers lower as investors began to switch their attention away from the Federal Reserve and back to earnings and the outlook for global trade. The dollar gave back some of its recent gains.
- In Asia, Hong Kong stocks underperformed just as Chinese smartphone maker Xiaomi Corp. Thursday sees the start of trade talks between the U.S. and China, with both sides dialing back expectations. Beijing won’t agree to preconditions that include abandoning its advanced manufacturing program and agreeing to cut the trade gap by a fixed amount, a Chinese official said. American delegates said earlier that a breakthrough is unlikely, and they might leave early if unsatisfied.
- Oil’s recovery, buoyed by potential supply risks, was capped by rising U.S. inventories while President Donald Trump neared a decision on whether to reimpose sanctions on Iran. Futures in New York held steady after rising 1 percent Wednesday, the biggest gain in two weeks. U.S. data showed that stockpiles last week climbed the most since January, beating estimates. Meanwhile, Trump has set a May 12 deadline to decide whether to pull out of a deal between Iran and world powers that eased restrictions on the OPEC producer’s crude exports in exchange for curbs on its nuclear program.
- Gold advances after the Fed signaled it’s sticking with path of gradually tightening policy even as inflation moves close to central bank target.
- Euro-area inflation unexpectedly weakened in April, a setback for European Central Bank policy makers that might yet prove to be a temporary blip in the data. Consumer-price growth slowed to 1.2 percent and the core rate, which excludes highly volatile items like food, was the weakest in more than a year at just 0.7 percent. Both readings were lower than economists estimated.
- The U.K.’s dominant service sector grew at a slower-than-expected pace in April, raising further questions about the underlying strength of the British economy. IHS Markit said its Purchasing Managers Index for the industry saw only a modest rebound from the 20-month low posted in March, with the reading of 52.8 the second weakest since September 2016. In a separate report on Thursday, the European Commission predicted that the U.K. will continue to lag growth in the euro area and the U.S. for the next two years.
- Chinese finance officials had high expectations entering the first major meeting with new American counterparts last summer. PresidentDonald Trump had feted Chinese President Xi Jinping at his Mar-a-Lago resort a few months earlier, suggesting the two nations would enjoy warmer ties than his campaign-trail attacks had implied. Mnuchin told his visitors that he wouldn’t sign a traditional joint statement to end the meeting. Nor would there be a joint news conference, a ritual moment relished by the Chinese. Ross, a longstanding China hawk, proceeded to lecture the foreign delegation. The meeting ended in confusion, accelerating a downward spiral in economic ties with China.
- KKR & Co. will convert to a corporation from a partnership, seeking to capitalize on tax reforms enacted by the Trump administration and win more mutual fund and ETF investors. The new structure will take effect July 1, New York-based KKR said in a statement announcing first-quarter earnings Thursday. The firm expects to pay a dividend of 50 cents per common share in the third quarter and immediately increased its share buyback program to $500 million.
- The European Central Bank is unlikely to pay much attention to the inflation report for April because all the readings were distorted by the timing of Easter. Instead, the Governing Council is likely to focus on nascent signs of increased wage growth for a signal on underlying price pressures.
- Donald Trump signaled a more aggressive posture toward Special Counsel Robert Mueller’s investigation as the president rid his legal team of its most determined advocate of cooperation with the Russia probe. White House lawyer Ty Cobb, who will leave at the end of the month, was one of the few at Trump’s side urging the president to refrain from personally attacking Mueller and to comply with the prosecutor’s requests. His replacement, Emmet Flood, who assisted in President Bill Clinton’s impeachment defense and President George W. Bush’s response to politically charged congressional inquiries, brings experience asserting constitutional prerogatives to fend off investigative demands.
- Vonovia SE offered to buy Swedish real estate company Victoria Park AB for about 9.56 billion kronor ($1.1 billion), topping a bid by Starwood Capital Group. The German landlord is pushing to expand further outside its home market after completing its biggest cross-border deal in March. Victoria Park recommended accepting the Vonovia bid, which is 800 million kronor higher than Starwood’s.
- DowDuPont Inc. is getting a lift from rising oil prices that boosted profit at the chemical giant’s Dow plastics unit, scheduled to be spun off in a separate company next year. Increased production and higher resin prices helped boost first-quarter earnings at the Dow plastics unit by 17 percent, the company said in a statement Thursday. A recovery in the crude market is driving up global plastic prices as producers who use oil-based raw materials try to recoup escalating costs.
- Starwood Capital Group LLC agreed to sell 14 hotels around Britain to Fonciere des Regions for 830 million pounds ($1.1 billion) as the weak pound draws tourists. The private equity firm, led by billionaire Barry Sternlicht, had bought the properties through various portfolios from 2013 through 2015 as the U.K. hotel industry suffered from excess debt following the financial crisis. It has since modernized the lodgings.
- Xiaomi Corp., going for wow-factor ahead of what could be the largest initial public offering since 2014, has revealed a blistering pace of growth that’ll help it take on Apple and Samsung in global smartphones. The Chinese smartphone maker filed for an IPO in Hong Kong Thursday, kicking off a process that’s expected to raise at least $10 billion and confer a value of $100 billion on the eight-year-old company. That offered investors a glimpse into the inner workings of the company controlled by billionaire Lei Jun, and its ups-and-downs since almost dropping off the radar in 2016.
- The earnings report started optimistically enough, with Elon Musk forecasting an end to Tesla Inc.’s cash-burning days after blazing through another $1 billion last quarter. But by the end of Tesla’s first-quarter conference call, Musk was berating analysts for asking “boring” questions, the shares had plunged and any shred of predictability was out the window.
- International oil majors stayed away from India’s first round of auctions for big oil and gas blocks in eight years, even after the country eased pricing policies, offered simpler permits and went on roadshows to woo foreign investment. Bids in the first round of the nation’s the so-called Open Acreage Licensing Policy announced Tuesday were dominated by state-owned Oil & Natural Gas Corp. and Vedanta Ltd.’s Cairn division. It’s the first auction in almost two decades that drew no bids from foreign explorers, records going back to 1999show.
- Societe Generale SA is nearing an agreement to pay as much as $1 billion to resolve two U.S. probes — into the rigging of benchmark interest rates and allegations of bribery in Libya — according to people familiar with the matter. The settlement deals with the U.S. Justice Department, which the people said could be announced as soon as this week, would end years of scrutiny that led to rate-rigging charges against Societe Generale bankers and the departure of deputy CEO Didier Valet in March.
- BP Plc is weighing an acquisition of some of BHP Billiton Ltd.’s energy assets as the British oil major seeks more U.S. shale, according to people familiar with the matter. The London-based company is working with Morgan Stanley to advise on the plans, said the people, asking not to be identified as the matter is private. BP is weighing teaming up with other suitors or swapping conventional assets — where oil and gas typically flow more easily to the surface than shale — with BHP, they said.
- Elon Musk started Tesla Inc. with a goal of accelerating the switch to electric cars by about a decade. That wish is now catching up with him. Starting with Jaguar’s I-Pace crossover and later this year Audi’s e-tron, virtually every major carmaker is rolling out stylish, sporty electric vehicles in the mold of his Models S, X and 3. Unlike Tesla, they have roughly a century of experience launching models every few months and can spread development costs across a broad portfolio.
- The European Union cautioned that an increase in global trade conflicts could threaten the broadest economic expansion the world has seen in years, echoing recent warnings from the International Monetary Fund. “Additional protectionist measures such as tariffs and retaliatory measures could harm global trade and impact negatively on economic activity and welfare,” the European Commission said in its economic forecast released in Brussels on Thursday. “Trade tensions present an unambiguously negative risk to the global economy.” The commission, the EU’s executive arm that’s also in charge of trade policy for the 28-nation bloc, kept its 2018 growth forecast for the euro area unchanged at 2.3 percent, even as growth slowed in the first quarter to itsweakest expansion in six quarters. The EU is in an escalating trade conflict with the U.S., which is threatening tariffs on the bloc’s metals exports on national security grounds.
- Money managers who have gorged on corporate debt this decade are increasingly worried about how they’ll shed their holdings when the credit cycle turns, and some are now opting to instead buy the most actively traded mortgage bonds. The demand for government mortgage bonds from investors like BlackRock Inc. and BNP Paribas SA’s asset management unit has been enough to make the securities one of the better performing debt sectors this year in the U.S.. That’s a surprising turn given the headwinds for the more than $8 trillionmarket, including the Federal Reserve’s plans to continue hiking rates, which it reiterated on Wednesday, and the central bank’s shrinking holdings of the debt.
- Linde AG Chief Executive Officer Aldo Belloni said the German industrial gas supplier is making progress on assets sales aimed at getting antitrust approval for its $43 billion merger with Praxair Inc. “There is considerable interest in the parts of our companies we will need to relinquish,” he told shareholders at the company’s annual general meeting in Munich on Thursday, adding that the deal is still progressing as planned.
*All sources from Bloomberg unless otherwise specified