February 19th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian shares erased earlier losses, closing Tuesday’s session slightly higher, while U.S. stocks fell on Apple Inc.’s warning that sales will miss forecasts due to the deadly coronavirus. The S&P/TSX Composite Index rose 0.06% to 17,858.34. Gold and silver miners were the best performers, as investors sought safe havens. Meanwhile, Prime Minister Justin Trudeau called for patience and dialog as indigenous-rights protests that have brought rail traffic to a halt across Canada drag on. Blockades in British Columbia, where some hereditary chiefs oppose a new natural gas pipeline by TC Energy Corp., and solidarity protests along the key Montreal-to-Toronto corridor in Ontario forced Canadian National Railway Co. to shut down a large part its network last week.
• Bombardier Inc. is making an all-in bet on the unpredictable corporate jet market, with no ace in the hole. After shedding its commercial and propeller aircraft businesses, and agreeing to sell its passenger train equipment unit to Alstom SA, the Canadian company’s only remaining product will be making and servicing corporate jets. That’s a risk none of Bombardier’s competitors has been willing to take. The producers of Gulfstream, Falcon, Cessna and Legacy brand corporate planes all have defense units or other businesses to help offset the downturns that routinely hit the market. During the last recession, private-jet deliveries plummeted to 846 in 2009 from more than 1,100 in the previous year, and then sank to a low of 614 in 2018, according to JPMorgan Chase & Co., amid trade-war concerns and sluggish commodity prices.
• EG Group, the U.K. company led by Mohsin and Zuber Issa, joined the bidding war for Caltex Australia Ltd., seeking to beat a rival offer by Canada’s Alimentation Couche-Tard Inc. The company said it would pay A$3.9 billion ($2.6 billion) in cash for Caltex’s retail outlets and is also offering shareholders a stake in a new listed entity called Ampol that will house the fuel and infrastructure business. Caltex Australia said its board was considering the proposal.

World Headlines

• The Stoxx Europe 600 Index headed toward a record close, with all 19 sectors in the green. Investors appear relatively confident in the ability of policy makers to contain fallout from the deadly coronavirus, even after Apple Inc. spooked markets earlier this week by warning of a slowdown in sales. Beijing’s planned aid would support a particularly hard-hit industry, as global carriers have stopped about 80% of their China flights. In the latest news on the virus, China’s Hubei province reported 132 new coronavirus fatalities for Feb. 18, bringing the death toll on the mainland to over 2,000.
• U.S. equity futures advanced with European stocks on Wednesday after signs emerged that China may be planning further measures to support its economy reeling from a virus-induced slowdown. The yen weakened. Contracts on the three main U.S. stock gauges pointed to a positive start on Wall Street after Bloomberg reported that China’s latest moves to aid growth include possible bail-outs for some airlines.
• Shares climbed in Tokyo, Hong Kong and Sydney, while Shanghai stocks dipped from their highest level in about four weeks. Treasuries edged higher along with European bonds.
• Oil rose to a two-week high on hopes that economic stimulus from China can revive demand battered by the coronavirus, and as a number of OPEC nations faced threats to their production. Brent futures increased for a seventh day, the longest run of gains since early 2019, even as Chinese refineries slashed processing by 25% from last year as the virus hit travel and economic activity. Crude is being supported along with equities by signs that China, the world’s biggest oil importer, is considering steps to shore up its economy, such as direct cash infusions and mergers to revive its airline industry.
• Fears that the coronavirus could be a disaster for the global economy and a drumbeat of speculation over central bank stimulus are driving another rally in precious metals. Gold surpassed $1,600 an ounce this week and is closing in on an almost seven-year high. Prices added another 0.5% on Wednesday. The most surprising metal remains palladium, which shot up 6% to $2,785 an ounce. Palladium, which traders consider a quasi-industrial and precious material, is up 14% this week as speculators bet on future supply shortages.
• Turkey issued its harshest warning yet to Russia in their standoff over Syria’s last rebel stronghold, where their battle for control threatens to destroy a fragile understanding that’s kept a refugee crisis from exploding at full force. Turkish President Recep Tayyip Erdogan said his military “has made all the preparations to implement its own operation plans” in Idlib province in northwest Syria, which is controlled by a mix of onetime al-Qaeda militants and Turkish-backed rebels. Turkey is trying to halt a Russian-backed Syrian government advance that’s threatening its efforts to establish a zone of control in Idlib. Turkey deployed thousands of troops this month to the province, where Syrian forces backed by Russian aircraft have besieged Turkish observation posts set up under accords meant to contain fighting, killing 14 Turks.
• American Century Investments is keeping its options open as it looks to make a splash in exchange-traded funds. The $180 billion asset manager is moving ahead with plans for actively-managed ETFs that disclose their holdings like mutual funds after overcoming its final regulatory hurdle last week. The funds, which could now start trading within days, will join a diverse lineup of products that already includes three distinct types of ETF. It’s an indication of just how challenging it is for newcomers to the $4.6 trillion U.S. ETF market, where more than 2,000 funds are already duking it out for assets. While indexed strategies oversee 98% of assets, more than 39% of funds started last year adopted an active approach to security selection. That’s raising the bar for stock- and bond-pickers that want to make an impact with ETFs, and need to figure out what investors want, fast.
• A money manager founded by one of China’s most famous traders closed orders for a new fund three days earlier than planned, with investors clamoring to get into the offering. Shanghai-based Foresight Fund attracted about 20 times more interest from investors for its second equity mutual fund than it’s permitted to handle, people familiar with the matter said. The firm, founded by veteran investor Chen Guangming in late 2018, received at least 120 billion yuan ($17 billion) of orders for the fund on Tuesday alone, versus a target of 6 billion yuan, the people said.
• Traders and investors are eager for more detail on the Federal Reserve’s plans to wrap up its balance sheet expansion and a related short-term lending program when minutes of the Jan. 28-29 policy meeting are released Wednesday in Washington. Beyond the balance sheet, Fed watchers have low expectations the minutes will yield a meaningful discussion about China’s coronavirus outbreak and its potential to disrupt U.S. economic growth. Concerns about such fallout have intensified since the meeting, but policy makers have continued to say monetary policy is in “a good place.”
• Northrop Grumman Corp. will receive as much as $13 billion in research spending through 2025 as the sole contractor on the Air Force’s replacement program for the aging Minuteman III intercontinental ballistic missile. The Air Force’s $1.5 billion request for the fiscal year starting Oct. 1 is up from $500 million this year, according to budget documents. The request grows to $2.5 billion in 2022 and $3 billion in 2023, staying at that level through 2025, after which $7.3 billion is estimated to be needed to complete the research phase.
• California Governor Gavin Newsom has said he wants the option to take over bankrupt PG&E Corp. if the utility gets into trouble again. Now, the state has laid out a roadmap for how that could happen. As part of proposed changes to PG&E’s reorganization plan, California Public Utilities Commission President Marybel Batjer suggested a process Monday through which the state could revoke PG&E’s operating license if the utility commits serious safety violations and doesn’t adequately address them.
• Qatar Airways lifted its stake in British Airways parent IAG SA, tightening its grip on the European carrier after expansion in the Gulf was thwarted by a Saudi-led embargo. The increase to 25.1%, from 21.4%, comes less than a month after IAG removed a cap on non-European Union investment. The move gives Qatar greater leverage as IAG Chief Executive Officer Willie Walsh prepares to exit the post next month, and BA grapples with fallout from the U.K. separating from the EU. Walsh and Qatar Airways Chief Executive Officer Akbar Al Baker have had one of the closest dynamics in the airline industry, and the increased holding will hand the Mideast carrier additional rights as that personal partnership comes to an end.
• Turkey’s central bank cut interest rates again, delivering the smallest decrease of its seven-month easing cycle but still risking a market backlash as investor tolerance of lower borrowing costs starts to wane. The Monetary Policy Committee reduced its key rate for a sixth straight time on Wednesday to 10.75% from 11.25%. While most analysts surveyed by Bloomberg predicted a cut, expectations ranged widely. The median forecast was for a reduction of half a percentage point, and a sizable minority predicted a hold.
• Russia’s exports to China dropped by almost a third in the first six weeks of the year as the spread of coronavirus sapped demand in the world’s second-biggest economy. Exports dropped 21% to 620,000 tons year-on-year in January and halved to 118,000 tons in the first 10 days of February, the Izvestia newspaper reported Wednesday, citing data from the Far East unit of the Russian Customs Service. The biggest declines were in minerals, timber and other raw materials, the data show. The report didn’t include dollar values for the trade and the agency couldn’t immediately provide figures.
• Japan’s Mitsubishi UFJ Financial Group Inc. is investing more than $700 million in Southeast Asian ride-hailing giant Grab, gaining access to millions across the region that use the mobile app to book cars and meals. The Japanese financial institution intends to market a range of financial services from insurance to loans to Grab’s users, said a person familiar with the deal who was not authorized to discuss the matter publicly. Grab, one of several ride-hailing giants backed by SoftBank Group Corp., is trying to build a regional super-app that offers a range of services including finance, payments and rides. The startup, one of Southeast Asia’s largest, doesn’t disclose its number of users — which include many for food delivery — but said its app has been downloaded onto more than 166 million mobile devices in the region. The car-hailing giant, which has taken in more than $2.6 billion from SoftBank alone, is on the hunt for more capital as it builds out and markets new services.
• The solution for Europe’s struggling banks, many of their CEOs agree, is consolidation that creates cross-continent superbanks — an American-style fix that by several measures is slipping further out of reach. Europe’s banking system is getting more fragmented, not less, 10 years after a sovereign debt crisis shook its foundations. While politicians accept some domestic mergers, they have proved resistant to the idea of larger tie-ups. The effects can be seen in cross-border lending: French, German, Dutch and U.K. banks loaned $1 trillion less in so-called periphery countries — Greece, Ireland, Portugal, Spain and Italy — than before the crisis, according to the Bank for International Settlements.
• Tesla Inc.’s potential success in energy generation and storage will be the next big thing to fuel the rally that’s already caused the stock to almost triple in the past year, analysts at Piper Sandler Cos. said as they increased their price target by more than 27%. Piper raised its target to $928 from $729, making it the most bullish estimate among those tracked by Bloomberg. The shares — which have more than doubled in the past four months — rose 8.1% in pre-market trading and are set to surpass the record high close of $887.06 reached Feb. 4.
• Japan started to let passengers leave a cruise ship placed under quarantine despite criticism it hadn’t done enough to prevent the new coronavirus spreading from the vessel that has the most infections of any place in the world outside China. On Wednesday, about 500 passengers who were cleared began stepping off the ship that has been in quarantine at the port of Yokohama. All passengers are scheduled to leave the Diamond Princess cruise by Friday, ending a weeks-long period that saw the deadly disease infect about one in seven people aboard the luxury ship.
• Investments in U.S.-listed fixed income exchange traded funds declined 44% last week for the third straight week of inflows. Broad bond-market ETFs led the inflows. Corporate bond ETFs had the biggest change from the previous week. Net inflows to ETFs totaled $4.6b in the week ended Feb. 18, including the effect of leveraged funds, compared with $8.28b the prior week
• Reliance Industries Ltd.’s talks to sell a minority stake in its oil-to-chemical division to Saudi Aramco have been gathering pace in recent weeks, according to people familiar with the matter. Aramco officials and bankers on the deal have been working at Reliance’s offices in Mumbai for due diligence this month, according to the people, who asked not to be identified as the information isn’t public. Both parties are trying to overcome differences over the deal’s structure, which had stalled the process last year, Bloomberg News previously reported.
• Attorney General William Barr has told associates he might resign in response to comments and tweets by President Donald Trump about Justice Department investigations, according to a person familiar with the matter. Barr has been discussing his frustration that Trump continues to wade into the department’s business, after issuing a rare public rebuke of Trump last week, according to the person, who asked to remain anonymous speaking about the sensitive matter. The attorney general’s private comments raise the stakes between Barr and Trump, although Justice Department spokeswoman Kerri Kupec tweeted late Tuesday that Barr has “no plans to resign.” The Washington Post reported earlier that Barr is considering quitting over Trump’s tweets.

*All sources from Bloomberg unless otherwise specified