May 11th, 2020

Daily Market Commentary

Canadian Headlines

• After weeks of wondering how corporate Canada fared in the early days of the Covid-19 pandemic, investors finally got a proper look under the hood. Senior executives spoke about the impact. Some described the future as too hard to predict. Others tried to identify parallels and differences with the financial crisis. By withdrawing their 2020 forecasts, many Canadian companies have expressed their lack of confidence about when the economy will reopen and how consumers will behave when it does. Profit expectations have slumped to levels unseen in four years, according to data compiled by Bloomberg. Even so, stocks continued to rally. The S&P/TSX Composite Index rose every day last week and has gone up seven weeks in a row, its longest winning streak in 14 months.
• SSR Mining Inc. agreed to buy Alacer Gold Corp. for about C$2.4 billion ($1.7 billion) in shares to create a gold-mining company with operations from North America to Turkey. SSR Mining will pay 0.3246 shares for every Alacer share, valuing Alacer’s stock at C$8.19 apiece, the closing price of the shares on Friday. The two miners expect the combined company will have a market value of about $4 billion, they said in a statement Monday. After the deal, SSR holders will own 57% of the enlarged company. There have been a series of gold deals in the last six months, as junior miners respond to a surge in prices and reposition themselves following large transactions completed by the two biggest producers.

World Headlines

• European equities erased their earlier advance as oil slipped, weighing on energy stocks, and as investors assessed steps to relax lockdowns across major economies. The Stoxx Europe 600 Index retreated as much as 0.3% after rising 0.7%. Travel stocks tumbled the most among industries, while oil shares were under pressure because Brent fell. The FTSE 250 Index of mid-caps gained as much as 1.3% after Prime Minister Boris Johnson announced the “first careful steps” to easing lockdown rules in a three-point plan, before trimming the advance. While the coronavirus pandemic remains a key concern, France, Italy and the U.K. all reported the fewest deaths since March and governments around the world have given more details on how their economies will gradually restart.
• U.S. stock-index futures retreated alongside European shares on Monday as investors weighed the latest moves around the globe to relax restrictions for the coronavirus. Crude oil slipped, while the dollar strengthened. Contracts on the S&P 500 Index gave up an earlier gain, with airlines including United Airlines Holdings Inc. dropping in pre-market trading after the carrier canceled a bond sale on Friday.
• After a holiday-shortened week, Japanese stocks are sitting on the cusp of a major milestone. The nation’s benchmark Topix index rallied the most in a month on Friday, and in the process moved about 2% away from recouping half of its coronavirus-fueled losses. This comes amid renewed investor risk appetite as economies around the world begin to plot their way out of lockdowns and as the U.S. and China pledged to create favorable conditions to implement the phase-one trade deal.
• Oil pared last week’s gain as fears of a potential resurgence in global coronavirus cases countered tentative signs of a demand recovery. Futures fell 2.3% in New York to trade near $24 a barrel. China put Shulan, a city near the North Korean border, in lockdown over the weekend, while in the U.S., the White House was hit with a case of the virus even as President Donald Trump encouraged Americans to return to work. In India, data showed that consumption of oil products slumped 46% in April to a 12-year low.
• Gold held just above $1,700 an ounce as investors balanced moves to reopen economies after coronavirus lockdowns against concerns over a new wave of infections and U.S.-China trade tensions. Spot prices in London were steady, while futures in New York extended Friday’s losses after money managers cut their net bullish gold bets to 11-month low. Bullion has traded in a tight range recently as governments give more details on how economies will gradually restart. U.S. President Donald Trump cast doubt on the future of his trade deal with China last week, in contrast to the more upbeat statements from his own and Chinese negotiators. South Korea reported a flare-up in virus cases tied to nightclubs in Seoul, while China put a city near the North Korea border under lockdown due to an increase in infections.
• Hg will soon stop accepting new money for three of its buyout funds after raising $11 billion for its largest ever pool of capital, according to people familiar with the matter. The U.K.-based private equity firm, which focuses on software and service businesses, will divide as much as $10 billion equally between its second large-cap fund, known as Saturn, and its ninth mid-cap fund, known as Genesis, said the people, who asked not to be identified discussing private information. An additional $1.5 billion has been raised for the firm’s third small-cap fund called Mercury, the people said. Hg’s first investment from Saturn will go to increasing its stake in Norwegian cloud software developer Visma Group, the people said. Last April, private equity firm Cinven Group sold its stake in Visma to Hg and co-investors, valuing the business at more than 6.5 billion euros ($7 billion) at the time. Hg has been invested in Visma since 2006 when it led the company’s delisting from the Oslo Stock Exchange.
• The U.S. Supreme Court is set to hear what could become the biggest cases involving Donald Trump as president, a pair of constitutional clashes that could insulate chief executives from investigations while in office and add an explosive new element to the 2020 election campaign. Trump is trying to keep House Democrats and a New York prosecutor from seeing his financial records. The high court will hear back-to-back arguments Tuesday — by phone and live-streamed because of the coronavirus outbreak — on Trump’s efforts to block his banks and accountants from complying with subpoenas they have received. The court’s rulings could determine whether the president’s tax returns become public, and whether he faces an accelerated criminal investigation in New York. It will pose one of the toughest tests yet for Chief Justice John Roberts’s court, forcing it to navigate politically polarizing and constitutionally weighty issues less than six months before the presidential election.
• President Donald Trump faces a tricky proposition this week, as he tries to convince Americans it’s safe to return to work and social life while combating a coronavirus scare moving closer than ever to his own office. Vice President Mike Pence has been self-isolating from the White House following his press secretary Katie Miller’s diagnosis of Covid-19 on Friday, said three people familiar with the situation. A spokesman said he’d be back at the White House on Monday.
• Boris Johnson will flesh out his plan for lifting the U.K. lockdown in Parliament as he seeks to get more people back to work, as opposition politicians and labor unions accused the government of causing confusion and putting the health of workers at risk. In a televised address to the nation on Sunday evening, Johnson announced the “first careful steps” to easing lockdown rules in a three-point plan, starting this week with unlimited outdoor leisure time for sports such as golf and tennis, and allowing people to drive to parks and beaches in England. He told people who cannot work at home — such as those in the manufacturing and construction sectors — to return to their occupations.
• Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week. This was the 12th straight week of outflows. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $3.94 billion in the week ended May 8, compared with losses of $518.2 million in the previous week, according to data compiled by Bloomberg. So far this year, outflows have totalled $16.4 billion.
• Macy’s Inc., one of the U.S. retailers struggling as the pandemic crimps demand, attracted Czech billionaire Daniel Kretinsky, whose investment vehicle bought a stake to “engage in constructive discussions” with management. Kretinsky’s Vesa Equity Investment amassed a 5% stake in Macy’s for strategic investment purposes, according to a securities filing. The purchase makes him one of the company’s top five shareholders, according to Bloomberg data. The move comes as Macy’s, whose shares have slumped 68% this year, seeks additional sources of financing to meet its obligations as many stores remain closed due to the pandemic.
• Tesla Inc. asserts that restarting its operations in the midst of the coronavirus pandemic doesn’t make the company an outlier, nor is it going against the grain. But its chief executive officer’s handling of the health crisis has been anything but ordinary. Tesla sued the county blocking its car plant from reopening, with Elon Musk calling the local health officer — a former infectious diseases professor with a master’s degree in public health — “unelected & ignorant.” He threatened to move Tesla’s headquarters out of California, warning that all its manufacturing may leave the state, too. The weekend flare-up was without precedent in the three months since the first confirmed Covid-19 death in the U.S. — a resident of Santa Clara County, home to Tesla’s headquarters and neighbor to its factory in Fremont, California. As the nation’s death toll approaches 80,000, Musk has emerged as arguably the loudest voice in corporate America advocating for the economy to reopen.
• In the middle of a spat between Europe’s top courts over the limits of European Central Bank monetary stimulus, President Christine Lagardeis probably preparing to do even more. A lawyer herself, Lagarde says her institution is “undeterred” by a legal tussle over its 2.7 trillion-euro ($2.9 trillion) asset-purchase program, and will do what’s needed to carry the euro zone through the coronavirus crisis.
• HSBC Holdings Plc, Goldman Sachs Group Inc. and Barclays Bank Plc allowed more employees to resume working from their offices in Hong Kong Monday as the city relaxes social-distancing curbs after largely containing coronavirus infections. HSBC said 30% of its Hong Kong staff can return, according to a memo seen by Bloomberg News and confirmed by a bank spokeswoman. Goldman Sachs has been gradually ramping up returns and now has a third of its employees, or almost 600 people, back as of today, a spokesman said. At Barclays, about 270 workers, or 60% of staff, are working from their offices, according to Anthony Davies, chief executive of the Hong Kong branch.
• When Bharat Gite reopened his aluminum parts factories in India’s western city of Pune, he spent days servicing idle machines, sanitizing his premises and putting in place social distancing norms for staff. His bigger problem now is convincing workers to return to their jobs after millions of Indians fled cities for their rural homes when Prime Minister Narendra Modi imposed a nationwide lockdown at the end of March. Gite supplies companies like General Electric Co., ABB Ltd. and Siemens AG, and he says sales orders have dried up. The two factories run by his Taural India Pvt. Ltd. are operating at just a tenth of their capacity and with 30% of labor, he says.
• Coty Inc. agreed to sell beauty and hair-care brands including Wella to KKR & Co. in a deal that will also include an investment in the cosmetics company by the buyout firm. The deal, which values the professional beauty unit at $4.3 billion including debt, also involves an initial investment in Coty of $750 million through the sale of convertible preferred shares to KKR. Coty will carve out Wella into a standalone company in which the firm will acquire a 60% stake, with Coty retaining the rest, according to a statement Monday. The deal could result in additional cash proceeds of $3 billion for Coty, helping the company reduce leverage, the statement said. The cosmetics maker is majority owned by JAB Investments.
• Saudi Aramco is in early talks about further staggering payments for a controlling stake in local petrochemical giant Saudi Basic Industries Corp. as the collapse in oil prices hammers its finances and causes the government to slash spending. State-owned Aramco is weighing pushing out payments for the 70% holding in the petrochemicals maker and reducing the size of the initial installment to the Saudi Arabian sovereign wealth fund, known as the Public Investment Fund, according to people with knowledge of the matter. Aramco is also weighing whether it’s possible to reduce the $69.1 billion price tag, one of the people said, asking not to be identified because the information is private. The talks are in early stages and it’s unclear whether an agreement will be reached, the people said.
• Germany and the European Union are escalating a legal power struggle that could undermine the euro. On Sunday, the European Commission threatened to sue the EU’s dominant economy after the German top court questioned the legality of the European Central Bank’s bond-buying program. With the 27-nation bloc ravaged by the coronavirus pandemic, the standoff has major implications for the European project itself and the monetary policy that underpins it.

*All sources from Bloomberg unless otherwise specified