By MacNicol & Associates In Morning Notes
May 9th, 2018
Daily Market Commentary
- Mexico is opening the door to compromise on the key Nafta issue of auto manufacturing, though it’s unclear if the flexibility is enough to reach a deal with the U.S. and Canada, according to four people familiar with the talks. In talks in Washington on Monday and Tuesday, Mexico for the first time indicated a specific level to which it’s willing to raise North American automotive content — 70 percent, according to the people, who asked not to be identified discussing private negotiations.
- Kinder Morgan Inc.’s proposed expansion of an oil pipeline to Canada’s Pacific Coast will never happen because local opposition to the project that’s dividing the nation is only going to intensify, according to the mayor of Vancouver. “I don’t think this project will go — I really don’t — based on the resistance on the ground,” Gregor Robertson said in an interview Tuesday at Bloomberg’s headquarters in New York. Kinder Morgan has threatened to walk away from the C$7.4 billion ($5.7 billion) project, setting a May 31 deadline for the federal government to neutralize opposition from a British Columbia government that’s vowed to use “every tool” to block it. Prime Minister Justin Trudeau, who’s staked his economic and environmental agendas on the pipeline, has pledged to get it completed to ensure landlocked Canadian crude flows to Asian markets.
- For many Canadians, higher interest rates are reason to grumble. But for the country’s 3.4 million subprime borrowers, they could spell disaster. Borrowers with impaired credit histories may have limited access to emergency funds compared with their prime counterparts, giving them less wiggle room when debt servicing costs rise. That puts them on the frontline of the Bank of Canada’s recent interest rate increases.
- European stocks inch higher as traders assess the implications of the U.S. withdrawal from a historic accord to curb Iran’s nuclear program on a busy day for profit updates. The Stoxx 600 climbs 0.2%. The energy sector index surges 1.4%, rallying along with oil prices as investors weigh the impact of the Iran developments on energy supplies. AB InBev advances after 1Q earnings growth surpassed analyst estimates, while Siemens gains after raising its outlook for full-year profit. Vodafone climbs after agreeing to buy German and Eastern European units from Liberty Global.
- U.S. inflation markets have shown a muted reaction after President Donald Trump’s decision to withdraw from the Iran nuclear deal boosted crude oil prices to the highest level in 3 1/2 years. Traders’ reluctance to push up break-even rates — a market-derived measure of inflation expectations — was due in part to the recent strength of the dollar, according to John Davies, a U.S. interest-rate strategist at Standard Chartered Plc. While the cost of a barrel of West Texas Intermediate crude jumped, the 10-year break-even rate barely budged.
- Equities fell in Japan, while Hong Kong shares rose. Australian stocks ended firmer after that country’s government announced tax cuts. U.S. futures were little changed and FTSE 100 Index contracts ticked higher.
- Crude rallied as traders digested President Donald Trump’s decision to walk away from a nuclear deal with Iran. Energy producers shored up European stocks, while U.S. futures also rose and the dollar erased a gain even as 10-yield Treasury yields topped 3 percent ahead of a bond auction. West Texas oil reversed Tuesday’s slump to briefly surpass $71 per barrel, while Brent nudged $77 as the market came to terms with a U.S. message that buyers of Iranian crude have six months to curb their purchases. The Stoxx Europe 600 Index advanced a fourth day as energy companies surged, and contracts for the S&P 500, Dow Jones and Nasdaq followed suit. The MSCI Asia Pacific Index fell. Having erased its 2018 losses earlier this week, the greenback gave up an earlier advance. Most metals fell.
- Gold drops on stronger dollar as investors weigh President Donald Trump’s move to exit deal to curb Iran’s nuclear program. An aggressive response from Islamic Republic could push up prices.
- U.S. Secretary of State Mike Pompeo met with officials in North Korea on Wednesday to prepare for President Donald Trump’s summit with leader Kim Jong Un and seek the release of three American detainees. Trump disclosed the trip Tuesday while announcing the U.S. would pull out of the multinational accord intended to curb Iran’s nuclear program. The visit is Pompeo’s second trip to North Korea in recent weeks, and comes shortly after Kim arrived back in Pyongyang after his second meeting in as many months with Chinese President Xi Jinping.
- President Donald Trump said the U.S. will withdraw from the landmark 2015 accord to curb Iran’s nuclear program and reinstate financial sanctions on the Islamic Republic, opening an uncertain new chapter for the Middle East. His decision, widely anticipated by allies and analysts, was intended to force Iran to renegotiate an agreement the country’s leaders have said they will not revisit. Trump’s political opponents warned he could lead the U.S. into another Mideast war.
- Walmart Inc. will acquire control of India’s largest online retailer Flipkart Ltd. in an $16 billion deal, taking on Amazon.com Inc in one of the fastest growing e-commerce markets. The world’s largest retailer through its investment arm will acquire 77 percent stake in Flipkart’s Singapore-based holding company India’s leading homegrown e-commerce firm, according to officials close to the deal. The deal, which comes after months of negotiations, values Flipkart at around $20.8 billion, the officials said. SoftBank’s 20 percent stake in India’s largest e-retailer is worth about $4 billion in the deal, Chief Executive Officer Masayoshi Son said in an earnings webcast earlier in the day. The Japanese company had earlier bought this stake, through its Vision Fund, for $2.5 billion, he said.
- Tencent Music Entertainment Group, controlled by China’s biggest social network operator, has picked banks to advise on a planned initial public offering in the U.S. that could raise at least $1 billion, people with knowledge of the matter said. Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley were selected to work on the proposed deal, said the people, who asked not to be identified because the details are private. The company also chose Deutsche Bank AG and JPMorgan Chase & Co., the people said.
- Bharti Airtel Ltd. is looking to pare $4.6 billion from its net borrowings over the next three years by listing its African unit and potentially selling some stake in its tower business, according to a person with knowledge of the matter, in a bid to safeguard its investment grade ratings. India’s top wireless operator plans to raise as much as $1.5 billion by listing a quarter of equity in its Africa unit by early 2019 in either London or South Africa, the person said, asking not to be identified as the information isn’t public. The parent will also look to sell part of its stake in the $14.6 billion tower giant after Bharti Infratel Ltd. merges with Indus Towers Ltd.
- Vodafone Group Plc agreed to buy German and Eastern European units from Liberty Global Plc in a 19 billion-euro ($23 billion) deal that shakes up the region’s TV and broadband market and signals a retreat by U.S. billionaire John Malone. Vodafone will buy Liberty Global’s Unitymedia, the second-largest cable network in Germany, as well as the Czech Republic, Hungary and Romania divisions of the central and eastern European brand UPC, Malone’s cable carrier said in a statement Wednesday.
- Toyota Motor Corp. shares jumped the most in more than seven months after the automaker announced a stock buyback and gave a profit guidance that assuaged concerns about a slowing U.S. market and stronger yen weighing on earnings. The world’s most valuable carmaker plans to buy back as much as 300 billion yen ($2.7 billion) of shares. The company’s 2.3-trillion-yen operating profit forecast also exceeded average analyst estimate.
- It’s not what the Bank of England does on Thursday, but what it says that may hog the headlines — and set the pound’s fate. With money markets having already priced out an interest-rate increase, investors and traders will be parsing the language of the statement to decide whether it’s a hawkish hold or a dovish intent that will determine the possibility of a hike later in the year. The former will lead to a sterling recovery after the currency’s slump in the past month, strategists say.
- Burberry Group Plc fell the most in almost four months after billionaire Albert Frere sold his 6.6 percent stake in the trench-coat maker a little more than a year after disclosing an initial investment. Frere’s Groupe Bruxelles Lambert SA said Wednesday that it expected proceeds of about 498 million pounds ($673 million) from the sale. Burberry shares were sold at 1,805 pence a share, according to data compiled by Bloomberg, 4.2 percent below their closing price on Tuesday. The stock dropped as much as 7.8 percent in London.
- Bond traders’ obsession with the 3 percent level on 10-year Treasuries may see a new wrinkle at Wednesday’s $25 billion auction of the maturity. The benchmark Treasury yield hit that key psychological level in the cash market last month for the first time since early 2014. And while that was an achievement, it’s been almost seven years since investors were able to purchase 10-year notes with a fixed 3 percent coupon at auction.
- JPS cigarette maker Imperial Brands Plc said it plans a wave of asset sales that may raise 2 billion pounds ($2.7 billion) as it spends more money to develop smoking alternatives. Imperial already sold a portfolio of tobacco products in the U.S. and the other sales will come in the next 12 to 24 months, the Bristol, England-based company said in a statement Wednesday. The shares rose as much as 5.3 percent, the most in more than four years.
- Fast Retailing Co., owner of the Uniqlo casual-wear brand, will open its first store in India next year as Asia’s largest retailer looks to tap consumers in a country with more than 1.2 billion people. The Japanese company’s opening of a New Delhi store in the autumn of 2019 has been long in the making. Tadashi Yanai, Fast Retailing’s founder, had sought access to the Indian market as far back as 2011. The company, which will set up a wholly owned subsidiary in India, will initially focus on expanding its presence in the capital region, it said in a statement Wednesday.
- An activist firm representing Tesla Inc. shareholders has excoriated the electric-car maker, claiming that it’s veered off the path to profit and urging a major overhaul of the Elon Musk-led board. CtW Investment Group, working with union pension funds that are Tesla investors managing more than $250 billion, opposes the re-election of three board members who are up for votes during Tesla’s June 5 annual meeting. The firm calls for shareholders to cast ballots against Antonio Gracias, a private-equity investor and Tesla’s lead independent director;Kimbal Musk, Elon’s brother; and James Murdoch, CEO of Twenty-First Century Fox Inc.
- In boardrooms and corner offices across Europe, executives are assessing the fallout of U.S. President Donald Trump’s decision to scrap the Iran nuclear deal, which threatens to choke off an investment boom that started after the country returned to the international fold two years ago. Since debilitating sanctions were eased in 2016, trade with Europe has tripled as Iran has won a reputation as a plum opportunity for growth, according to Natixis. Renault SA initiated a joint venture to build 100,000 cars a year in the Islamic Republic. Airbus Group SE won a $19 billion order for 100 planes. German engineering giant Siemens AG agreed to supply turbines to the country. Those deals are now up in the air.
- Tyson Foods Inc., Cargill Inc. and Fosun International Ltd. have expressed interest in the potential acquisition of Keystone Foods LLC, the U.S. supplier of chicken nuggets to McDonald’s Corp., according to people with direct knowledge of the matter. Marfrig Global Foods SA, Brazil’s second-largest beef producer, plans to sell Keystone and raise more than $3 billion, said the people, who asked not to be named because the discussions are private. An agreement on the transaction may be reached in the next few weeks, one of the people said.
- Malaysians cast their vote on Wednesday to determine whether Prime Minister Najib Razak’s ruling alliance can extend its 61-year run in power despite rising living costs and lingering corruption allegations. Voting closed at 5 p.m. in Kuala Lumpur, with results expected to trickle in from 7 p.m. onward. A winner may not be known until late in the evening. Turnout reached 69 percent as of 3 p.m. local time, according to the Election Commission website.
- Turkish President Recep Tayyip Erdogan was said to summon economic decision makers to his palace to discuss the lira, driving a rebound in the currency from a record low. The meeting on Wednesday will include the central bank’s Governor Murat Cetinkaya, according to two officials with knowledge of the matter, fueling speculation that authorities may take measures to stem a market rout. The currency jumped as much as 1.4 percent to end its longest losing streak in seven months.
*All sources from Bloomberg unless otherwise specified