April 25th, 2020

Daily Market Commentary

Canadian Headlines

  • Prime Minister Justin Trudeau’s search for a successor to Bank of Canada Governor Stephen Poloz is entering its final days with the government having already reduced the shortlist of candidates to two, according to people familiar with the matter. As Poloz prepares to step down on June 2, the pressure is on Trudeau’s finance minister, Bill Morneau, to name a replacement to allow for a transitional period at a time when the central bank is on the frontlines of fighting the economic fallout of the coronavirus.
  • Canada’s malls are facing a wave of skipped rents and could see vacancy rates triple by year-end, with the coronavirus poised to leave its scars on a fragile retail sector long after the pandemic ends. In the country’s enclosed regional malls — a category that includes Toronto’s Eaton Centre and Pacific Centre in Vancouver — only 20% to 25% of tenants paid rent in April, according to brokerage firm JLL Canada. Big box shopping centers and community strip malls took in only a little over half their expected rent.
  • The coronavirus crisis is giving Quebec’s nationalist government an excuse to attempt what may be impossible. The Canadian province is embarking on an uphill battle to chip away at Amazon.com Inc.’s position. Reckoning that weeks of confinement will permanently accelerate the growth of online shopping, Premier Francois Legault wants to boost Quebec retailers’ digital sales, and is urging the population of 8.5 million to buy from local firms. His government took a first step by building an online directory of retailers called Le Panier Bleu — or Blue Basket, a reference to the color of the French-speaking province’s flag. To run it, the government recruited a board including the former president of Lowe’s Cos. Inc. in Canada and Alexandre Taillefer, a private equity partner who years ago floated the idea of a Quebec response to Amazon’s dominance.

World Headlines

  • The Stoxx Europe 600 Index also rose after missing out on a late Wall Street rally on Friday. Data over the weekend showed coronavirus deaths slowed the most in more than a month in Spain, Italy and France, and all three countries have signaled tentative moves to reopen their economies. Italian stocks were among the biggest winners and its bonds outperformed after the nation dodged a credit rating downgrade.
  • U.S. equity futures climbed alongside stocks in Europe and Asia on Monday as major economies edged toward reopening, the Bank of Japan boosted stimulus measures and corporate results rolled in. The dollar weakened and oil slumped. Contracts for the three main American benchmarks all pointed to a second day of gains amid continued talk of easing the lockdowns that have been used to help contain the coronavirus.
  • Japanese stocks rose on Monday, extending gains in the afternoon session after the Bank of Japan stepped up stimulus measures with a pledge for unlimited bond buying. All but one industry group in the Topix index rose, with electronics and chemicals makers the biggest boosts. The benchmark closed above its 50-day moving average for the first time since Feb. 13. The BOJ said it will remove limits on its purchases of government bonds, while also increasing its scope for buying corporate debt, as part of its efforts to combat the economic impact of the coronavirus.
  • Oil dropped back below $15 a barrel as swelling global crude stockpiles made it more difficult for leading producers to balance the market by curbing output. Futures in New York slid 16%, snapping a four-day gain. While U.S. drilling is sliding and Saudi Arabia has started reducing output ahead of the start date for OPEC+ supply cuts, an immense glut of oil means storage tanks are close to capacity around the world. South Korea became the fourth Asian nation to run out of commercial storage space on Monday.
  • Gold retreated in London as investors looked to signs that major economies are moving toward reopening, while also weighing fresh stimulus measures. Equities climbed on Monday, curbing demand for havens, after data showed coronavirus deaths slowed the most in more than a month in Spain, Italy and France, and the countries signaling tentative moves to open up their economies. New York’s virus deaths also dropped, with Governor Andrew Cuomo sketching out a phased-in restart. Still, the metal may find some support from more monetary easing. The Bank of Japan boosted stimulus measures, while the Federal Reserve and the European Central Bank will announce policy decisions later this week. Spreads between prices in key gold hubs also remain elevated.
  • Italy will start easing restrictions next week and Germany reopened some schools on Monday, while British Prime Minister Boris Johnson returned to work but warned that lifting the lockdown now would risk a “second spike.” U.S. President Donald Trump called Health and Human Services Secretary Alex Azar to say his job is safe amid reports he may be ousted. Presumptive Democratic nominee Joe Biden laid out his vision for reopening the economy, calling for more increase testing and criticizing Trump’s inaction.
  • Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week. This was the 10th 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 $1.69 billion in the week ended April 24, compared with losses of $1.76 billion in the previous week, according to data compiled by Bloomberg. So far this year, outflows have totalled $12 billion.
  • CNX Resources Corp. plans to shut some Appalachian natural gas production to weather the “severe pain” of the coronavirus pandemic, according to its top executive, the first step of the shale producer’s seven-year plan to boost free cash flow. The driller is deferring new production and closing some existing wells in the Marcellus and Utica shale plays, with the target of boosting production again next winter, according to Chief Executive Officer Nicholas Deiuliis. The seven-year plan released Monday also includes a shift to “production maintenance” mode by 2022, which will see it drill 25 wells annually, he said.
  • Government bailouts for the European airline industry are taking shape after France and the Netherlands pledged as much as 11 billion euros ($11.9 billion) to save Air France-KLM, and German rival Deutsche Lufthansa AG heads into a crucial week to work out a similar-sized rescue. The lifelines to the region’s two biggest carriers by passenger traffic would come after each warned of impending cash crunches and their inability to survive the effects of the coronavirus pandemic without state help. They join a global chorus of distressed airlines that have grounded fleets, furloughed staff and decried the biggest crisis ever to confront the sector.
  • Oil-rich Gulf nations may turn to asset sales to complement an almost $50 billion debt spree to support economies rocked by the coronavirus pandemic and the collapse in crude prices, according to Citigroup Inc. Countries including Saudi Arabia and the United Arab Emirates have “really attractive” government-owned assets, which could be sold to the public or partnered with other investors, Atiq Rehman, head of Citigroup Inc.’s emerging-market cluster for Europe, the Middle East and Africa, said in an interview. Gulf governments are looking at ways to shore up their economies as the coronavirus pandemic and a historic crash in oil prices add to pressure on already strained finances. Unlike in Europe, most major entities in the region are still state owned. Saudi Arabia last year raised $29.4 billion by selling less than a 2% stake in the world’s biggest oil producer, Saudi Aramco.
  • It’s a busy week, with the Federal Reserve, BOJ and European Central Bank all due to announce policy decisions as the battle against the pandemic continues. Several major economies will release GDP numbers, while corporate earnings will keep flooding in, including from Amazon.com Inc., Barclays Plc and Samsung Electronics Co.
  • Soured investments, a forecast record loss and a rating cut are not turning SoftBank Group Corp. analysts and investors into bears on the stock. That’s because they believe a massive $23 billion share buyback plan will buoy SoftBank’s shares for months to come, more than offsetting the hit from the Vision Fund’s write-downs. Masayoshi Son’s tech giant last month boosted the size of planned share repurchases to 2.5 trillion yen, to be funded with proceeds from asset sales. The stock is up more than 40% since then, continuing to rise even after it said earlier this month that it will post an operating loss of 1.35 trillion yen for the fiscal year ended in March on hits from the Vision Fund’s soured wagers on startups such as WeWork and OneWeb. The shares rose 4.5% Monday.
  • Mongolia has shelved near-term initial public offering plans for state-owned coal miner Erdenes Tavan Tolgoi JSC as the Covid-19 pandemic roils financial markets. The country’s cabinet partially repealed a resolution that called for immediate action for ETT’s overseas offering, while an international share sale plan remains the goal for the long term, according to a statement posted on the government’s website on Monday. The authority urged ETT to turn its focus to a long-delayed railway project to link its Tavan Tolgoi coal mine with China.
  • BP Plc confirmed its commitment to completing the sale of its Alaska business to Hilcorp Energy Co., but said financial terms had been adjusted to reflect market conditions. The renegotiation of the deal will come as a relief to the London-based oil major, which is leaning on asset sales to rein in its debt and sustain its dividend amid a historic oil crash that has battered company valuations globally. Under the revised agreement, the total consideration for the sale remains unchanged at $5.6 billion, but the structure and phasing of payments has been modified, BP said Monday.
  • Prime Minister Boris Johnson returned to work and moved to stamp his authority on a government under pressure over its handling of the U.K. coronavirus outbreak, warning that to lift a nationwide lockdown now would risk both a health crisis and an “economic disaster.” Speaking exactly one month after he went into isolation with a case of Covid-19 that would go on to put him into intensive care, Johnson said the U.K. is close to having the outbreak under control, and urged people not to relax the social-distancing efforts that had achieved this. He compared the virus to a mugger, and said the nation had “begun together to wrestle it to the floor.”
  • Electricity use in the European Union rose for the first time in eight weeks, indicating economic activity may be starting to increase as coronavirus infections and deaths decline. Factory doors are reopening after nations from Denmark to Germany began easing restrictions on public life. Volkswagen AG has begun rebooting plants, while Airbus SE is up and running as Europe starts returning to work after shutdowns plunged the region into its worst economic slump in living memory. The restart is crucial to pull the region’s economy out of a tailspin that’s forced governments to pledge hundreds of billions of euros to keep companies afloat in the global health crisis. The Federal Reserve, the Bank of Japan and European Central Bank all announce policy decisions this week in the battle against the pandemic as some countries proceed with steps to relax lockdown measures.
  • Russia’s plan to almost double local bond issuance to as much as $27 billion got a boost after borrowing costs plunged to near a record low. Government bonds, also known as OFZs, rallied on Friday as the central bank cut interest rates and said another 100 basis points of easing is possible. Russia needs to boost borrowing this year by 1.5 trillion rubles to 2 trillion rubles ($20.2 billion to $26.9 billion) to cover a budget shortfall from the collapse in global oil prices, First Deputy Prime Minister Andrey Belousov said last week.
  • India is considering a proposal to guarantee as much as 3 trillion rupees ($39 billion) of loans to small businesses as part of a plan to restart Asia’s third-largest economy, which is reeling under the impact of a 40-day lockdown, people with knowledge of the matter said. Under the proposal, small firms will be eligible to borrow an additional 20% of their credit limit, the people said, asking not to be identified as the discussions are private. The extra debt will be fully backed by Prime Minister Narendra Modi’s administration, the people said. The government will set up a special fund to pay for any defaults, they said.
  • The Bank of Japan paved the way for itself to buy more shorter-end debt in May, seeking to mitigate the impact of increased government borrowing on markets. The central bank widened the indicative buying range for debt maturing in 1-to-10 years, while reducing by one the number of days it will buy 3-to-5 bonds in May, according to its statement on Monday. The overall amount to be spent on purchases of debt due in up to a decade may increase by about 375 billion yen ($3.5 billion) next month. The move comes after the BOJ earlier on Monday said it’ll buy as many bonds as it needs, ditching its guideline to increase holdings of government debt by around 80 trillion yen per year. The change sees Japan’s central bank joining global counterparts in their unprecedented expansion of monetary stimulus as the coronavirus hammers the nation’s economy.
  • Argentina and the province of Buenos Aires will start setting up virtual meetings this week with institutional investors as they continue the process of restructuring more than $76 billion in debt, according to people familiar with the plan. The national government will call on about 20 institutions and funds — including BlackRock, Ashmore and Fintech’s David Martinez — to present its offer to restructure $69 billion in debt, the people said asking not to be named because the the plan isn’t public yet.
  • Joe Biden called on the Trump Administration to vastly expand the country’s testing capabilities for the coronavirus, including launching a new public health jobs corps of 100,000 people to assist with the testing and contact tracing, as he laid out his vision for safely reopening the economy in a new memo on Monday. In a lengthy plan written by Biden and his public health committee, the presumptive Democratic nominee criticized the president’s inaction on testing and detailed how the country should expand its capabilities in order to catch a spike in infections before it spreads. “We are still seeing a massive shortfall and extensive disparities between states in testing — that’s unacceptable,” Biden and his committee wrote in the memo. “And those failures are in no small part due to the federal government mishandling and delaying the pandemic response. We are now several months into this crisis, and this administration refuses to own up to the original sin of its failed response –- the failure to test.”
  • Deutsche Bank AG became the latest European lender to gird for mounting losses from the coronavirus pandemic, setting aside about 500 million euros ($542 million) to cover bad loans after a better-than-expected first quarter performance. Revenue and net income at Germany’s largest lender beat analyst estimates during the first three months of the year, for the most part unaffected by the outbreak, the company said late Sunday. But its provisions for soured credit were probably the highest in six years and the bank scrapped its minimum target for capital buffers as fallout from the virus spreads.

*All sources from Bloomberg unless otherwise specified