September 24, 2021

Daily Market Commentary

Canadian Headlines

• The S&P/TSX Composite rose for the third day, climbing 0.3%, or 60.44 to 20,461.93 in Toronto. Energy stocks jumped with oil. Financials also rose, with Royal Bank of Canada contributing the most to the index gain, increasing 1.4%. BlackBerry Ltd. had the largest increase, rising 11%. Today, 107 of 235 shares rose, while 126 fell; 7 of 11 sectors were higher, led by financials stocks. Brent crude futures settled at the highest level in almost three years as supplies shrink at a time when a global energy crunch makes it increasingly likely oil will be tapped for power generation.

World Headlines

• European stocks dropped on Friday, snapping three days of gains, as market participants weighed risks to global economic recovery from China Evergrande Group’s debt crisis. The Stoxx Europe 600 Index was down 0.8% by 11:14 a.m. in London, with almost all the sectors declining. Retail, consumer products and technology shares were among the worst performers. Adidas AG and Puma SE declinedafter Nike Inc. lowered its sales outlook because of factory shutdowns. EQT AB slumped as the private equity firm is being investigated by the Swedish Financial Supervisory Authority for suspected market abuse. It’s been a turbulent week for European equities, which tumbled to a two-month low on Monday amid concerns over tapering and fallout from the Evergrande crisis. Markets recovered later in the week as traders welcomed the Federal Reserve’s decision to leave the door open to extend stimulus if the economy needs it.
• U.S. futures fell with cryptocurrencies and related stocks after the Chinese central bank said such transactions are illegal. Sovereign bond yields fluctuated after an earlier selloff fueled by the prospect of tighter monetary policy. Consumer and retail shares led declines both in U.S. pre-market trading and in Europe, with Nike Inc. down almost 5% after lowering its sales outlook amid factory closures. EQT AB, Europe’s biggest listed private equity firm, fell after Sweden’s financial watchdog opened an investigation into suspected market abuse.
• Asian stocks rose for a second day, led by rallies in Japan and Taiwan, following U.S. peers higher amid optimism over the Federal Reserve’s bullish economic outlook and fading concerns over widespread contagion from Evergrande. The MSCI Asia Pacific Index gained as much as 0.7%, with TSMC and Sony the biggest boosts. That trimmed the regional benchmark’s loss for the week to about 1%. Japan’s Nikkei 225 climbed 2.1%, reopening after a holiday, pushing its advance for September to 7.7%, the best among major global gauges. The Asian regional benchmark pared its gain as Hong Kong stocks fell sharply in late afternoon trading amid continued uncertainty, with Evergrande giving no sign of making an interest payment that was due Thursday. Among key upcoming events is the leadership election for Japan’s ruling party next week, which will likely determine the country’s next prime minister.
• Oil held gains near the highest since 2018 amid a global energy crunch that’s set to increase demand for crude, while stockpiles are falling from the U.S. to China. Futures in London traded above $77 a barrel, heading for a third straight weekly increase. Global onshore crude inventories plunged by almost 21 million barrels last week, led by China, according to data analytics firm Kayrros, while U.S. stocks are near a three-year low. The surge in natural gas prices is expected to force some consumers to switch to oil, tightening the market further ahead of the northern hemisphere winter. China on Friday sold oil to Hengli Petrochemical Co. and a unit of PetroChina Co. in the first auction of crude from its strategic reserves, said traders with knowledge of the matter. Grades sold included Oman, Upper Zakum and Forties.
• Gold recouped some losses on Friday after a 1% drop in the last session, helped by a weaker dollar and as concerns over the fate of China’s Evergrande returned to the fore, burnishing bullion’s safe-haven status. Spot gold rose 0.7% to $1,754.73 per ounce by 0924 GMT. U.S. gold futures rose 0.3 % to $1,755.10.
• The U.S. will start giving Covid-19 booster shots to millions of Americans on Friday — a watershed moment in the nation’s battle against the pandemic. The Centers for Disease Control and Prevention adopted the use of boosters for people at high risk of contracting or falling seriously ill. In Asia, South Korea reported a record number of new coronavirus cases following the Chuseok Thanksgiving holidays. Thailand is considering postponing the planned reopening of Bangkok and four provinces due to low vaccination rates. In Europe, life expectancy in Scotland has seen its largest drop on record, largely because of the pandemic, the Times reported.
• Nike Inc. lowered its sales forecast as production and shipping delays hobbled the company’s efforts to meet strong demand for shoes and athleticwear. Sales this quarter may fall as factory closures in Vietnam prevent Nike from keeping up with consumer demand, the world’s largest athleticwear company said Thursday. That means full-year growth will be in the mid-single-digits rather than a low double-digit percentage rate Nike targeted earlier. Shutdowns in Vietnam due to a Covid resurgence are hitting athleticwear makers hard as they’re unable to supply enough shoes to consumers across the world. Adidas AG sourced about a third of its production there last year. Puma SE Chief Executive Officer Bjorn Gulden said in July the company was trying to source more from China to make up for the drop in Vietnam.
• Oyo Hotels & Homes Pvt, a once high-flying Indian startup that ran into troubles during the pandemic, plans to file preliminary documents to go public as soon as next week and will seek at least $1.2 billion, according to people familiar with the matter. The initial public offering will consist mainly of primary shares, or those sold by the company, as well as a small portion of secondary stock, said the people, asking not to be identified because the details are private. Ritesh Agarwal, the 27-year-old founder and chief executive officer, doesn’t plan to sell any of his stake, one person said.
• Democratic leaders on Capitol Hill are running up against multiple critically important deadlines as they navigate a fraught political landscape where any misstep could have dire consequences for the national economy and President Joe Biden’s legacy. While some of the worst-case scenarios — a government shutdown, a federal default or the complete collapse of Biden’s economic plan — are unlikely, several obstacles stand in the way as leaders manage intertwining negotiations and competing political agendas. Democrats, who have slim majorities in both the House and Senate, are trying to balance normal legislative work — funding the federal government and managing the national debt — while simultaneously finalizing two separate bills that contain much of Biden’s economic vision.
• U.S. stocks had their worst weekly outflow in more than three years as investors turned to more defensive assets amid mounting risks from tapering and China Evergrande Group’s debt crisis. Traders pulled $28.6 billion from U.S. equity funds in the week through Sept. 22, the largest redemption since February 2018, according to a Bank of America Corp. note, which cited EPFR Global data. Instead, they piled about $40 billion into cash, $10 billion into bonds and $84 million into gold. This week sent tremors through markets, with BofA strategists led by Michael Hartnett citing concerns over the Federal Reserve’s pullback in stimulus, contagion risks from distressed developer Evergrande and pessimism over the passage of bipartisan infrastructure bill in the U.S.
• Amazon.com Inc. is developing a bevy of new devices and services as it delves into additional markets, including a larger Echo with a wall-mountable screen, a TV sound bar, more advanced car technology and wearable gear. The tech giant is working on the initiatives at its Lab126 division, which created hit products like the original Echo and the Alexa voice assistant. The Seattle-based company is holding a launch event on Sept. 28 for new devices and services, and some of these product details could be announced at that time. Other products may be launched next year or beyond — or get scrapped if they don’t show enough promise.
• Daimler AG will team up with Stellantis NV and TotalEnergies SEto boost the scale of their European battery venture to more than 7 billion euros ($8.2 billion) in a move to secure supplies for electric Mercedes-Benz cars. The world’s biggest luxury-car maker will take a 33% stake in battery manufacturer Automotive Cells Company, whose projects will be financed through equity, debt and subsidies, Daimler said Friday. ACC aims for capacity of at least 120 gigawatt hours in Europe by the end of the decade, more than double the amount laid out by the two founding partners. The venture, which has held talks with French rival Renault SA, is open to adding more partners, Stellantis said separately. Mercedes will invest roughly 500 million euros next year and expects its total spending to remain below 1 billion euros.
• The U.K. is considering fresh proposals for building a new nuclear power project at the Wylfa site in Wales a year after another plan was shelved after a lack of funding. The government has said that nuclear is vital for its plans to reach net-zero emissions by the middle of this century, but has struggled to get large scale projects built. The latest push for atomic power comes as Britain struggles with an energy crunch, with surging natural gas and electricity prices increasing the risk of blackouts this winter. Business Secretary Kwasi Kwarteng is pushing the Treasury for a new funding mechanism to attract investors to the industry amid concerns that by the early 2030s there won’t be enough nuclear capacity to generate sufficient baseload power as fossil fuel-fired stations are phased out, according to a person familiar with the matter.
• Traders are betting that in a contest to raise borrowing costs first, the Bank of England will be the runaway winner over the Federal Reserve.  Market expectations for a U.S. liftoff of 25 basis points shifted to late next year from 2023 previously, after the Fed on Wednesday confirmed consensus for the start of unwinding asset purchases this year. Yet on Thursday, the BOE opened the door to a hike as soon as November, pulling positioning on rates further and faster. Money markets now see a 15-basis-point rate increase in February, followed by an additional quarter-of-a-percentage point move in August. “Historically the Fed has the led the global policy cycle. But it’s not set in stone that they go first and then everyone else follows on,” said John Wraith, head of U.K. and European rates strategy at UBS Group AG. “It’s easily conceivable that the Monetary Policy Committee, either willingly or being forced to by market levels, raises rates first.”
• President Joe Biden will meet with the leaders of Australia, India, and Japan on Friday, as members of the “Quad” plan to unveil a series of initiatives, from semiconductors to vaccines, that they hope can counteract Chinese influence across the Pacific. Yet success will mean navigating the sort of thorny issues that have dogged the informal alliance since its creation following the 2004 tsunami in the Indian Ocean that killed a quarter million people. Now, those issues include the tumultuous U.S. withdrawal from Afghanistan, complaints about coronavirus vaccine distribution in the developing world and disputes over climate change commitments and 5G technology. Biden has placed a renewed emphasis on the group since taking office, arguing that collective action by the region’s democracies could prove more effective in countering China than the approach favored by former President Donald Trump, who traded antagonistic missives – and tariff hikes – with Beijing.
• China banned all crypto transactions and vowed to stop illegal crypto mining, delivering the toughest blow yet to the trillion-dollar industry. Crypto-related transactions will be considered illicit financial activity, including services provided by off-shore exchanges, the People’s Bank of China said on its website. It added that cryptocurrencies, including Bitcoin and Tether, are not fiat currency and cannot be circulated. It’s the harshest step yet that China’s taken against crypto and strikes at the heart of a market that’s boomed this year and attracted enthusiasts including billionaire Elon Musk. China has long expressed displeasure with crypto because of its ties to fraud and money laundering, and excessive energy usage.
• Wall Street is making sure that the world’s biggest bond market will still be able to function in the worst-case scenario of the U.S. Treasury being forced to delay payments on its securities in the coming weeks. Treasury Secretary Janet Yellen has repeatedly warned that sometime in October her department will exhaust the measures she’s used to stay under the cap on the nation’s borrowing authority, which was reinstated in August. While lawmakers have pledged that the debt limit will be raised or suspended, there’s no clear plan yet for Congress to act. The partisan battle over the debt limit has participants in the $22 trillion Treasuries market wargaming a scenario that the Treasury insists is not an option: where a failure by Congress to act in time leads the government to delay payments on some Treasuries until things are resolved.
• Singapore made work-from-home the default and tightened rules to allow a maximum of two people to meet in restaurants or other social settings, as it seeks to rein in mostly mild cases that could otherwise quadruple in two weeks and overburden hospitals. Primary school students will have to shift to learning from home, while booster shots get extended beyond seniors to a younger age group, the government said on Friday. The moves, which take effect from Sept. 27 for about a month, appear to shift away from the country’s stated transition toward living with the virus.  With health officials expecting daily cases to jump to around 6,000 from about 1,500 currently, the government wants to curb that increase and avoid a hard lockdown. This resolve may soon get severely tested even though four in five people are already vaccinated in Singapore.
• Redwood Capital Management is preparing to start a business development company as the firm seeks to expand its reach in the hot direct-lending market.  Redwood’s BDC will focus on loans to stressed and distressed middle-market companies, according to marketing materials seen by Bloomberg. The firm is raising up to $500 million for the vehicle, which will launch in early 2022 and remain private. A representative for the New York-based firm, which is known for its distressed debt investments, declined to comment.
• Bitcoin, Ether and other digital tokens tumbled as China intensified its push to rein in crypto speculation and mining. Bitcoin fell about 4% to $42,900 as of 10:39 a.m. in London. The losses were more severe in other coins, with Ether, EOS, Litecoin and Dash all falling more than 7%. Crypto-related stocks also came under pressure, with Marathon Digital Holdings Inc. tumbling 6% in U.S. pre-market trading. China’s central bank said all cryptocurrency-related transactions are illegal, according to a Q&A statement on PBOC’s website. It’s an urgent task for China to root out crypto mining and the crackdown is important to meet carbon goals, according to the guidelines on the website of the nation’s economic planning agency.
• Apple Inc. is releasing its iPhone 13 lineup on Friday, testing whether new camera technology and aggressive carrier deals will get shoppers to snap up a modest update of last year’s model. After the company began to take orders for the device on Sept. 17, the new products — the iPhone 13, 13 mini, 13 Pro and 13 Pro Max — are now reaching stores and consumers. This year’s biggest changes include a narrower notch at the top of the screen, camera features like Cinematic mode and up to a few hours of additional battery life. The product also has a somewhat faster processor. What the iPhone 13 doesn’t have is a dramatic redesign, and that may lead some consumers to put off a purchase until next year. But Apple does have some tailwinds, including a broader transition to 5G networks that may entice shoppers. U.S. carriers also are competing fiercely with discounts and promotions.
• For some of the fast-food restaurants that peddled plant-based versions of their menus to appeal to meat-conscious consumers, the novelty is already wearing off. It could spell trouble for the makers of the products, who’ve hyped the partnerships as a major step to mainstream popularity. The biggest restaurant chains are backing off—or at least slowing down—faux-meat plans after the Covid‑19 pandemic and lockdowns upended dining and eating. Instead of trying new things, Americans have been eating at home or seeking familiar, comforting foods when they do venture out. Orders of plant-based burgers and sandwiches at fast-food restaurants were unchanged for the year ended in June, while beef burger orders climbed 12% over the same period, according to market researcher NPD Group Inc. “I don’t think that plant-based meat is at the top of the list for many restaurant operators right now,” says BTIG LLC analyst Peter Saleh. “It’s more about, let’s just sell the core menu items, and let’s do it the best we can.” Inspire Brands Inc.’s Dunkin’ has taken Beyond Meat Inc.’s breakfast sausage out of thousands of locations. Yum! Brands Inc.’s KFC, which ran trials of Beyond Meat’s chicken nuggets, has yet to turn them into a regular menu item, and Burger King has notched down the marketing of its Impossible Whopper. AtLittle Caesars a trial of Impossible Foods Inc. sausage didn’t work out; it just wasn’t a popular enough topping to support an alternative. The pizza chain is giving faux pepperoni a shot, though only in large metro areas, including Miami, New York, and San Francisco.

“Action may not always bring happiness, but there is no happiness without action.” —William James

*All sources from Bloomberg unless otherwise specified