April 13th, 2020

Daily Market Commentary

Canadian Headlines

  • The stock market is heading into an unprecedented earnings season. With little clue as to how and when the global economy will sputter back to life after its historic thrashing from the coronavirus, companies have pulled profit forecasts and investors are flying blind. Even rare companies that have enjoyed a boost to sales because of the virus, such as Loblaw Cos., say the situation is too uncertain to give an earnings outlook. One thing is clear though: Dividend cuts and suspensions are likely to keep on coming. Companies in Canada’s S&P/TSX Composite Index are poised to see a dividend decline of 1% for the second quarter compared to a year ago, according to data compiled by Bloomberg, while the S&P 500 is expected to post 5% dividend growth.
  • Alberta’s government hasn’t asked to impose mandatory production cuts on the Canadian province’s oil companies as part of the global oil cuts pact agreed to on Sunday, the province’s energy minister said. “There’s been no talk about the numbers or volumes,” Energy Minister Sonya Savage said Sunday. Alberta has full jurisdiction of the oil under its territory, and plans to let “market forces” lead to production cuts, she said. The agreement by the OPEC members to cut 9.7 million barrels a day, with a cut of another 3.7 million barrels to come from the U.S., Canada and Brazil won’t be sufficient to offset the decline in demand caused by the Covid-19 pandemic, but will allow more time for global storage capacity to be filled, she said.

World Headlines

  • Markets across Europe were closed for the Easter holiday. Treasury 10-year futures were steady after after OPEC+ agreed to cut 9.7 million barrels a day from global crude output — just below the initial plan of 10 million. The dollar trimmed earlier declines against other major currencies, leaving the pound as the top gainer versus the greenback. Seventy coronavirus vaccines are in development globally, with three already being tested in human trials, the World Health Organization said.
  • U.S. stock index futures fell as oil declined following an initial jump on a historic deal among the world’s top producers to cut global output by nearly a 10th. Contracts on the S&P 500 slid 1.6% as of 7:21 a.m. in Tokyo, while futures dropped 1.3% on the Nasdaq 100 Index and lost 1.5% on the Dow Jones Industrial Average. Oil futures rose as much as 9% but quickly reversed those gains as markets opened following a three-day break.
  • Japanese stocks fell in thin trading, with several markets on holiday, as the yen gained and observers saw low expectations for the Bank of Japan to step in to boost the market. All but two industry groups in the benchmark Topix index fell, with electronics and auto makers the biggest drags. The Nikkei fell more than 2% in afternoon trading, but remained above the 19,000 level. Trading value on the first section of the Tokyo Stock Exchange slumped to 1.6 trillion yen ($15.3 billion), the lowest since Jan. 20, with Easter Monday being observed in places including Hong Kong and the U.K. The yen strengthened against the dollar as investors worried about the impact of the coronavirus on the global economy and corporate earnings.
  • Oil surrendered gains after rising in early trading as investors weighed whether an unprecedented deal by the world’s biggest producers to cut output would be enough to steady a market pummeled by the coronavirus. Futures in London were up 0.5% after the OPEC+ alliance agreed to a plan to slash production by 9.7 million barrels a day starting in May. The group reached a deal following days of intense negotiations after Mexico declined to endorse the original agreement reached Thursday.
  • Gold fell from the highest close in seven years as investors weighed the outlook for the global economy and appetite for risk amid a slowdown in new coronavirus cases. Some of the hardest hit countries such as Spain, Italy and France reported fewer new cases, allowing governments in Europe to look for ways to safely ease lockdowns. Last week, the Fed announced as much as $2.3 trillion in additional aid, including a pledge to provide support for risky corners of markets. Still, Fed Bank of Minneapolis President Neel Kashkari said without an effective vaccine, the U.S. could face rolling shutdowns as the outbreak flares up again.
  • Blackstone Group Inc. is investing $2 billion in Alnylam Pharmaceuticals Inc. through a combination of equity and debt, giving the biotech company the cash it needs to bring more of its products to market. The biggest piece of the deal, which the companies expect to announce later Monday, consists of a $1 billion investment led by Blackstone Life Sciences to purchase up to 10% of the future total royalties of inclisiran, a drug to treat high cholesterol. The life-sciences unit will also invest up to $150 million in the development of two other Alnylam drugs. On top of that, Blackstone credit arm GSO Capital Partners is providing Alnylam with a term loan of up to $750 million, and Blackstone is buying $100 million of the company’s newly issued stock. The deal gives Alnylam, a publicly traded company with a market capitalization of around $13 billion, the firepower to move through the costly phase of bringing late-stage drugs to market. With Blackstone receiving a relatively small amount of stock, Alnylam avoids significantly diluting its existing shareholders.
  • SoftBank Group Corp. forecast a 1.35 trillion yen ($12.5 billion) operating loss for the fiscal year ended in March, a sign of the extensive damage the coronavirus is inflicting on Masayoshi Son’s empire. The Japanese company said its Vision Fund is expected to record a 1.8 trillion yen loss in the period with another 800 billion yen in losses coming from SoftBank’s own investments. It has written down the value of investments in startups, including office-sharing startup WeWork and satellite operator OneWeb, which filed for bankruptcy last month. Son’s conglomerate has taken one blow after another, starting with the implosion of WeWork’s initial public offering and SoftBank’s subsequent rescue last year. He also bet heavily on sharing-economy startups, which allow people to split the use of offices or cars, but those investments have been particularly hard hit as the pandemic curtails unnecessary human interaction.
  • The main lenders to embattled NMC Health Plc are setting up a coordinating committee, taking a major step toward restructuring the hospital operator’s $6.6 billion debt, according to people with knowledge of the matter. HSBC Holdings Plc, Barclays Plc and Standard Chartered Plc will join Abu Dhabi Commercial Bank PJSC, Dubai Islamic Bank PJSC and Abu Dhabi Islamic Bank PJSC to lead the debt talks with representatives for NMC, the people said, asking not to be named because the discussions are private. The company was placed in administration last week.
  • Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week. This was the eighth 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 $132 million in the week ended April 9, compared with losses of $477.2 million in the previous week, according to data compiled by Bloomberg. So far this year, outflows have totalled $8.52 billion.
  • The world’s top oil producers pulled off a historic deal to cut global petroleum output by nearly a 10th, putting an end to a devastating price war but not going far enough offset the impact of the coronavirus pandemic. A week-long marathon of bilateral calls and ministerial video conferences brought the OPEC+ alliance and the Group of 20 nations together for an unprecedented agreement. But after swinging wildly in the first few minutes of trading, crude was down about 2% in London. The focus of the market now shifts to whether the cut will be enough to dent the massive supply glut, which keeps growing as the virus shuts down the global economy. The deal may turn out to be “just a plaster on an open wound,” consultant JBC Energy GmbH said in a note on Monday.
  • Italy’s government will ask parliament to allow a significant deficit deviation given the health crisis, Deputy Finance Minister Antonio Misiani said according to an Ansa report. Italy will finance part of its next economic relief package, expected to be approved by the end of April, with European Union funds worth about 10 billion euros ($11 billion), Ansa reported based on Misiani’s comments to a television station on Monday. Ravaged by the coronavirus outbreak, Italy approved an initial 25-billion-euro stimulus package last month and it is working on new measures worth at least the same amount.
  • China’s northernmost province is stepping up border controls to stave off infections from neighboring Russia, as a growing number of Chinese returning from there with the novel coronavirus threaten to trigger a new hotspot at home. Heilongjiang province said it has begun around-the-clock patrols of its border with Russia, Chinese state broadcaster CCTV reported on Sunday. China and Russia already agreed last week to close the Suifen River port on the border, the main checkpoint for land transit.
  • Exxon Mobil Corp is postponing its exploratory drilling program in offshore Block 10 of Cyprus’s exclusive economic zone given the coronavirus and the level of international oil prices, Cyprus Energy Minister Georgios Lakkotrypis said. Exxon isn’t canceling drilling but will move back its program to 2021, Lakkotrypis told Bloomberg News. Exxon had planned to start hydrocarbon exploration in Block 10 in the second half of 2020. A venture of Eni SpA and Total SA is expected to postpone its drilling program in Block 6 also because of the coronavirus, Cyprus state-broadcaster RIK reported Monday.
  • Apple Inc. is preparing a redesign of its top-tier iPhones, borrowing cues from the latest iPads, as part of a major fall refresh that will see 5G added to as many as four new handset models and the release of two key new accessories, according to people familiar with the plans. This year’s successors to the iPhone 11 Pro and iPhone 11 Pro Max will be joined by two lower-end models to replace the iPhone 11. At least the two high-end devices will have flat stainless steel edges instead of the current curved design as well as more sharply rounded corners like the iPad Pro introduced in 2018. Reminiscent of the iPhone 5 design, the new handsets will have flat screens rather than the sloping edges on current models, said the people asking not to be identified because the plans aren’t public.
  • Bankers are ramping up new debt sales for speculative-grade borrowers after the Fed pledged Thursday to start buying some of the securities. Energy bonds may get a boost following the historic OPEC+ deal to cut production, but crude prices haven’t risen materially yet as markets still assess the pandemic’s impact to demand. Junk issuers should be even more active in the primary market now with the Fed as a backstop, said Richard Zogheb, global head of debt capital markets at Citigroup
  • The auto industry — already fretting lengthy factory shutdowns and depressed new-vehicle demand — is starting to sound the alarm about a potential used-car price collapse that could have far-reaching consequences for manufacturers, lenders and rental companies. Used-vehicle auctions are for now virtually paralyzed, much like the rest of the economy. The grave concern market watchers have is that vehicles already are starting to pile up at places where buyers and sellers make and take bids on cars and trucks — and that this imbalance will last for months.
  • Saudi Arabia cut most of its crude pricing as the coronavirus hammers oil demand — a clear sign that the kingdom seeks to keep its barrels competitive after producers agreed to coordinate global cuts in output. State-run Saudi Aramco reduced official selling prices for May exports to Asia and the Mediterranean region, according to a price list seen by Bloomberg. The world’s biggest exporter raised pricing to the U.S. and trimmed discounts for some barrels to northwest Europe. Lockdowns and stay-at-home orders are choking demand for fuel amid efforts to stop the pandemic. Led by Saudi Arabia, OPEC+ producers agreed Sunday night to slash oil output by nearly a 10th to help remove excess supply. Yet, even this historic global intervention will only partly offset the estimated loss in crude demand.
  • Americans will start to receive stimulus payments this week, a centerpiece of the $2.2 trillion rescue package meant to provide a buffer against the coronavirus pandemic that’s shuttered much of the U.S. economy. The Internal Revenue Service has begun sending $1,200 payments to middle and lower income adults, plus $500 for their minor children, though it could take until September for every eligible person to get the money. The first payments “should be deposited directly into individual’s bank accounts; the precise date you will see payments in your account depends on how long individual banks typically take to process direct deposits,” according to a press release from the House Ways and Means Committee Republicans.
  • When it comes to predicting or limiting the near-term wreckage that COVID-19 will visit upon the U.S., economists and policy makers can do little to help. What happens after the virus passes is a different story. The strength or weakness of the country’s rebound, whenever that comes, will be heavily influenced by actions taken today and over the coming months. Economists pointed to three crucial areas they say will matter most. For one, the speed with which small and mid-sized business aid finds its mark. A second, the level of support for states and cities later this year. And third, something — anything — to restore public confidence in getting back to life, and business, as usual.

*All sources from Bloomberg unless otherwise specified