April 1st, 2020

Daily Market Commentary

Canadian Headlines

  • In a span of about six weeks, Canadian stocks posted their swiftest ever descent from bull to bear market, the loonie tumbled, corporate credit spreads sprang to the widest since 2009 and liquidity all but vanished at times. The head-spinning quarter has left Canadian markets lagging their U.S. neighbors as the collapse in oil prices compounds the damage from the Covid-19 pandemic. The 22% plunge in equities has laid bare the thinness of the country’s corporate base. With about a quarter of the S&P/TSX Composite Index weighted to energy and materials, and little in the way of consumer or tech stocks, the latest rout means index has returned just 112% since the lows of the financial crisis in 2009. That compares with about 307% for the S&P 500.
  • Teck Resources says that due to the “high degree of uncertainty” associated with coronavirus it is suspending its 2020 guidance, according to a statement. “Notwithstanding the challenges in the month of March related to COVID-19, all of our operations remain in production and our steelmaking coal results significantly exceeded guidance,” CEO Don Lindsay adds

World Headlines

  • Banks led the drop in the Stoxx Europe 600 Index after lenders including HSBC Holdings Plc and Standard Chartered Plc halted dividends and share buybacks. The euro extended its drop as PMI readings from the single-currency region painted a bleak picture, with Italy’s posting a record drop.
  • American equity futures fell along with stocks in Europe and Asia as investors took in worsening U.S. coronavirus figures and assessed the pandemic’s impact on corporate profits and dividends. The dollar climbed with Treasuries. Contracts on the three main U.S. indexes all slumped, and those on the S&P 500 slid as much as 3.6% after President Donald Trump warned of a “painful” two weeks ahead, with the country grappling to get the outbreak under control and New York City’s death toll topping 1,000. Stocks are beginning the new quarter with more declines, hot on the heels of the worst quarter for global shares since 2008. Investors disappointed with the loss of dividend income could spark a fresh wave of selling, knowing that analysts are dashing to update earnings forecasts to take into account the looming global recession and the slump in stock prices.
  • Stocks in Japan hit session lows in the final hour of trading, closing down almost 4%. Hong Kong shares also dropped. Chinese equities outperformed as a private reading on the country’s manufacturing sector beat expectations, rebounding in March. The coronavirus is set to throw the world into recession, and economists are becoming less convinced about the potential for a strong snapback in growth. Factories around the world suffered one of their grimmest months on record in March, as the coronavirus led to mass shutdowns and wreaked havoc on supply chains. China’s reading, however, turned back into growth territory in March, offering a ray of hope that the world’s second-biggest economy may be on its way to recovery.
  • Oil held near $20 a barrel as Saudi Aramco’s output surged above 12 million barrels a day, but Russia said it would refrain from further production hikes. Crude futures in New York were little changed Wednesday, following a record decline in the first quarter. While state-run Aramco’s oil supply has surpassed 12 million barrels a day and is ticking higher, Russia said it won’t lift output as it’s not profitable to do so, according to a government official familiar with the country’s plans. The declarations follow a flurry of U.S.-driven diplomacy with President Trump speaking with Russian and Saudi leaders in an attempt to bolster prices, though the former OPEC+ allies have no plans to talk to each other, the Kremlin said.
  • Gold rebounded from the biggest decline in more than two weeks amid signs that the coronavirus pandemic remains a serious threat to global growth even as China’s economy may be improving. Prices rose for the first time in four days and stocks dropped after President Donald Trump warned of a “painful” two weeks ahead, with officials revealing an estimate that as many as 240,000 could die. The Federal Reserve is adding measures to combat the fallout, after a move to unlimited quantitative easing last week.
  • Spain reported another increase in fatalities, while Italy and Germany moved to extend lockdown measures. U.S. President Donald Trump warned of a “painful” two weeks ahead after projections showed that as many as 240,000 Americans could die. Earlier, New York state’s infections surged past those reported in China’s Hubei province, where the virus first emerged late last year. Italian factories took a record hit from the curbs and British lenders halted payouts amid pressure from the regulator.
  • Faced with staggering projections that as many as 240,000 Americans will die from coronavirus, President Donald Trump largely abandoned his optimistic tone on Tuesday, telling the U.S. to brace for one of its toughest stretches as a nation. His critics had said for weeks that Trump had been too blithe in his approach to the outbreak, frequently telling reporters that it would simply go away. A changed president addressed the nation on Tuesday, one who appeared rattled by the scope of death and suffering the government’s scientists foresee. The president’s tone has turned markedly darker this week, after the latest projections over the weekend propelled him to abandon his ambition of re-opening parts of the country on Easter.
  • Saudi Arabia showed no sign of bowing to pressure from U.S. President Donald Trump to dial back its oil-price war with Russia. Instead, the kingdom pushed crude supply to record levels. Trump said Tuesday night that he’d spoken to both President Vladimir Putinand Crown Prince Mohammed bin Salman in an effort to broker a truce between the world’s two largest oil exporters. Saudi Arabia started the month by boosting supply to more than 12 million barrels a day, the largest on record, according to an industry official familiar with the kingdom’s operations. Aramco declined to comment. So far, Riyadh has insisted that it will only back away from a decision to flood the global market if all the world’s leading producers — including the U.S. — agree to cut output. Russia has struck a more conciliatory tone, saying it would hold back from a major production increase, but hasn’t offered any concrete proposals to end hostilities with its former OPEC+ ally.
  • For years, regulators have tried to make the financial system safer by blocking banks from taking on the extreme leverage that almost toppled the industry in 2008. Turns out, the risks just moved. In a matter of days, a slew of trades unraveled to expose various forms of soured levered bets at their heart. Citigroup Inc. was among banks that tried to sell off $1.3 billion of risky loans to unwind leveraged wagers by clients. Funds that borrow to load up on mortgage bonds fed a flood of liquidations. Large municipal-bond funds are selling billions of dollars in positions, too. In 2008, the culprits were real estate speculators, investments banks that fueled the bubble while leveraging books about 40 to 1, and investors who failed to conduct their own due diligence. A wave of defaults caused that system to come crashing down.
  • Cigarette makers may seem like an unlikely source of life-saving vaccines, yet Philip Morris International Inc. and British American Tobacco Plc are trying to devise a defense against the coronavirus from the humble tobacco leaf. BAT said Wednesday that it’s in pre-clinical testing of a plant-based vaccine via a U.S. biotech subsidiary Kentucky BioProcessing. Philip Morris has said its partially owned Canadian unit Medicago expects to start human trials for a potential vaccine this summer.
  • The U.S. Energy Department is considering renting space in the nation’s emergency oil reserve to domestic producers awash in crude, according to three people familiar with the matter who asked not to be identified before a formal announcement. The move would help drillers running out of space to stash their product amid cheap prices and low demand. With storage space and pipelines filling up with crude, domestic producers could begin to curtail drilling. Pipeline operators have begun asking producers to scale back output as tanks fill. The marketing arm of Plains All American Pipeline LP, one of the biggest shippers of crude in the U.S., sent a letter last week requesting that its suppliers “take steps to reduce oil production in response to the pandemic.” A member of Texas’s top oil regulator said Saturday that drillers were getting similar notices from other pipeline operators.
  • British mortgage providers, frustrated that sales volumes failed to match the highs before the global financial crisis, spent the last two years cutting margins and taking on riskier buyers. With the pandemic now hanging over house prices, they’re about to find out if their customers are as solid as they thought. Values soared following the 2008 crunch, helped by government programs to boost demand and low borrowing costs. Then lenders relaxed standards in ascramble for business as Brexit deterred buyers, leading Sam Woods, chief executive officer of the Prudential Regulation Authority, to warn last May that regulators should be “watching them like a hawk.”
  • Austria is planning to freeze debt repayments on about 162 billion euros ($177 billion) of consumer loans for three months to ease the economic impact of the coronavirus. The move would give borrowers a holiday from interest and capital repayments while allowing them to continue paying if they want to, according to people with knowledge of the matter, who asked not to be identified because the discussions are confidential. A decision by Chancellor Sebastian Kurz’s government may come as early as this week, they said. The government is also working on a similar plan for corporate loans but hasn’t yet reached agreement on which ones would be covered, said the people. While some support a moratorium for all companies, it’s most likely to be applied to businesses with less than 2 million euros in annual revenue and 10 or fewer employees, they said.
  • Indonesia slashed its growth forecast by more than half as the coronavirus pandemic takes a toll on Southeast Asia’s biggest economy, prompting the government to adopt a series of emergency measures. The economy is now projected to grow 2.3% this year, compared to an initial estimate of 5.3%, Finance Minister Sri Mulyani Indrawati said in Jakarta Wednesday. Under a worst-case scenario, the economy could contract 0.4%, she said. Indonesia is scrapping fiscal limits as it ramps up its response to the virus outbreak. President Joko Widodo on Tuesday took a number of emergency measures, including cutting corporate taxes, temporarily removing the budget-deficit cap and allocating 405 trillion rupiah ($24.8 billion) to fight the pandemic.
  • A global debt funding bonanza is quickening as the new quarter gets underway, with firms including Tiffany buyer LVMH and Spain’s Iberdrola SA joining the busiest day in Europe’s bond market since January. Seventeen borrowers are offering new debt in Europe on Wednesday, the most since Jan. 21 and adding to the more than $85 billion already raised globally this week. Companies around the world sold at least $752 billion of bonds last quarter, building up their defenses against collapsing earnings caused by the coronavirus pandemic.
  • Investments in U.S.-listed fixed income exchange traded funds swung to inflows last week following two weeks of outflows. Corporate bond ETFs led the inflows. Broad bond-market ETFs had the biggest change from the previous week. Net inflows to ETFs totaled $3.97b in the week ended March 31, including the effect of leveraged funds, compared with outflows of $13.2b the prior week.

*All sources from Bloomberg unless otherwise specified