April 27, 2021

Daily Market Commentary

Canadian Headlines

• Canadian stocks advanced on Monday as tech and health care companies outperformed other sectors. The S&P/TSX Composite index rose 0.4% in Toronto. Tech stocks were led by Shopify, as the e-commerce giant’s shares rose 5%, heading into this week’s earnings. On the M&A front, Fortuna Silver Mines Inc. agreed to buy Roxgold Inc. in a C$1.1 billion ($884 million) cash-and-stock deal to gain gold assets in West Africa.
• Canadian e-commerce firm Shopify Inc. may show a quarter-on-quarter drop in gross payments when it reports earnings on April 28, the first decline since the pandemic, according to consensus estimates compiled by Bloomberg. Consumers’ accelerated adoption of online shopping helped boost Shopify’s revenues nearly three-fold in 2020. The resurgence of Covid cases in early 2021 may not have been enough to boost sales beyond its record fourth quarter, North America’s first lock-down holiday shopping season.
• Rogers Communications Inc. won a bidding war for Shaw Communications Inc. by giving the Shaw family two things it needed most: a high price and deal certainty. Now the question is what antitrust watchdogs will want from Rogers. Securities documents filed by Shaw on Friday revealed that two companies vied for the Calgary, Alberta-based wireless and cable firm in an auction that lasted for weeks. BCE Inc., Canada’s largest telecommunications provider, matched Rogers’ $16 billion offer — but wouldn’t agree to deal language that would have forced it to follow through with the purchase even if regulators attached major conditions. Rogers did. The filings shed more light into how much regulatory risk Rogers is exposed to in its high-stakes wager to scale up ahead of a massive investment in fifth-generation networks. The Toronto-based company — which is in the wireless, internet, broadcasting and sports businesses — is opening itself to scrutiny from regulators across much of its wide-ranging operations.

World Headlines

• European stocks were little changed on one of the busiest days of the earnings season, with UBS Group AG helping offset outperforming travel and leisure stocks after disclosing a hit from the Archegos implosion. The Stoxx Europe 600 Index was down less than 0.1% by 9:57 a.m. in London. Shares in the travel and leisure sector surged as Evolution Gaming Group AB topped both revenue and margin estimates. UBS was the biggest drag on the benchmark, falling as much as 4% after it reported a $774 million impact from the Archegos meltdown. In contrast, HSBC Holdings Plc advanced after posting its best quarter since the pandemic began. The region’s equities have only recovered gradually since retreating from an all-time high earlier this month, despite a generally strong start to the earnings season. With some of the earnings optimism already priced in, stronger profit surprises may be needed to drive gains further.
• Treasury yields rose and U.S. stock-index futures posted modest gains as investors weighed earnings reports amid optimism the developed world is on a firm path toward economic recovery. Commodities surged to the highest levels in almost three years. Russell 2000 contracts led advances in the derivative market. Yields rose across the curve, while staying below recent peaks. The dollar increased for the first time in three days. Gamestop Inc. soared 8% in early New York trading after completing an “at-the-market” equity offering. Amazon Inc., which will release its profit report this week, also climbed. Four out of five S&P 500 Index companies that have reported results so far have either met or beaten expectations. That, along with a rapid rollout of Covid-19 vaccination across rich nations, vindicate confidence about a recovery. While equity investors offered a sluggish response to the earnings reports, it only served to highlight traders’ lofty expectations than doubt over the outlook.
• Asia stocks headed toward their first decline in four trading sessions with investor sentiment weighed down by the resurgence of Covid-19 cases and China’s widening internet crackdown. Japan was among the worst performers, sending the Topix Index down by 0.8%. An analyst at SMBC Nikko Securities is wary about the country’s domestic demand as it repeatedly entered into states of emergency to control the pandemic. Political uncertainty also put investors on edge given that Prime Minister Yoshihide Suga faces weakening support. Also dragging down Asia’s benchmark was Chinese tech heavyweight Tencent, after the country’s antimonopoly probe into Meituan cast a shadow on other internet bellwethers. That said, Meituan erased an earlier decline of as much as 2.8%, rebounding to close up 2.6%.
• Oil climbed amid signs for demand is improving, even as Covid-19 flare-ups in India and other nations dragged on the near-term outlook. Futures in New York rose above $62 a barrel after slipping 0.4% on Monday. An OPEC+ technical committee raised its forecast for demand growth in 2021, but cautioned that a resurgent virus in India, Japan and Brazil could derail the oil demand recovery. India’s second wave has been particularly deadly as it overwhelms the health-care system and cripples fuel consumption. Still, the outlook beyond those countries remains robust. Shipping giant A.P. Moller-Maersk A/S raised its earnings guidance citing surging demand for its services, underscoring a boom in global trade. All the while road use continues to recover in the U.S. and U.K.
• HSBC Holdings Plc expects to cut its office footprint by 20% this year and is budgeting for half its previous business travel costs as the adoption of flexible working spurs changes to longstanding practices. The bank, which has already committed to a 40% reduction in office space in the long term, expects to get halfway to its goal over the course of this year, Chief Financial Officer Ewen Stevenson said in an interview with Bloomberg Television Tuesday.
• Countries from the U.S. to Australia pledged help for India, with many also restricting travel from the South Asian nation as it combats the world’s largest surge in Covid-19 cases. The U.S. said it will export 60 million doses of AstraZeneca Plc’s vaccine, and President Joe Biden promised his full support to Indian Prime Minister Narendra Modi. India’s new infections topped 300,000 for a sixth day, while Thailand reported its highest single-day increase in Covid fatalities. Hong Kong will allow bars and nightclubs to reopen for vaccinated people, part of efforts to encourage more shots. Companies including Novartis AG and UBS Group AG are rethinking how they will use office space post-pandemic.
• President Joe Biden will require federal contractors to pay workers at least $15 an hour in an executive order designed to leverage government purchasing power to boost working conditions for lower-earners employed via taxpayer funds. Updating an Obama-era measure, Biden’s order mandates that all federal agencies incorporate what amounts to a $4.05 minimum wage hike into new contract solicitations by January 2022 and into new contracts by March 2022, the White House announced Tuesday. The minimum hourly rate will then rise annually to keep up with inflation. The order will likely face opposition in the business community, which has argued that forcing companies to pay at least $15 will stifle job growth in an economy still recovering from the pandemic. Large corporations that do business with the government also have resisted procurement executive orders with labor mandates in the past by taking the administration to court.
• U.S. private equity firm Platinum Equity is in exclusive talks to buy Urbaser SA in a deal that could value the Spanish waste management company at about 3.5 billion euros ($4.2 billion) including debt, according to people familiar with the matter. China Tianying Inc., Urbaser’s owner, has agreed to negotiate with the buyout firm led by billionaire Tom Gores to finalize the details of a transaction, the people said, asking not to be identified because the matter is private. Platinum has emerged as the preferred buyer for the asset after beating out other investment funds including Stonepeak Infrastructure Partners, the people said. An agreement could still be a few weeks away, giving Platinum time to finish due diligence and financing arrangements, they said.
• Microsoft Corp.’s third-quarter report after the close Tuesday could be the catalyst that drives the software company to a historic $2 trillion valuation, as Wall Street anticipates robust growth, especially in its cloud-computing business. Shares have risen nearly 18% in 2021, exceeding the 10% gain of the S&P 500 information technology index. That rally, fueled by broad optimism over Microsoft’s long-term growth prospects, has resulted in a market capitalization of $1.97 trillion through the close on Monday. The stock rose 0.2% on Monday, and should it gain another 1.4%, Microsoft would join Apple Inc. as the only two U.S. stocks to reach such a milestone.
• Tesla Inc. earned record profit in the first quarter, sidestepped an industry chip shortage, improved its manufacturing and even made money off Bitcoin. And yet shares of the EV maker fell as much as 3.3% before the start of regular trading Tuesday, a sign of the lofty expectations Tesla now contends with after an eightfold gain in the stock last year. Among the quibbles from analysts: Tesla didn’t offer a specific estimate for vehicle deliveries in 2021. Chief Executive Officer Elon Musk is pushing to ramp up production and maintain Tesla’s dominance in the electric vehicle market, but competitors are moving in aggressively. Musk said Monday demand is higher than it’s ever been, but without more numbers to go on, investors shrugged.
• Aramco is considering the sale of a stake in its vast natural gas pipeline network to help free up cash and draw more international investors to Saudi Arabia, people familiar with the matter said. The state-owned energy producer is holding preliminary discussions on the potential move, the people said, asking not to be identified because the information is private. Any deal could raise billions of dollars for Dhahran-based Aramco depending how a transaction is structured, they said. The discussions are happening barely two weeks after the company announced that a consortium led by Washington-based EIG Global Energy Partners LLC would invest $12.4 billion in its oil pipelines.
• Joe Biden’s massive infrastructure and family-support plans are a direct appeal to the discontented White voters who put Donald Trump in office and to independent suburban women, his advisers say, with the president staking a claim on economic issues ahead of the 2022 midterm elections. The so-called American Jobs Plan Biden released last month features spending on traditional infrastructure like highways and airports to better compete with China, a pitch his advisers think will resonate with Republican men and blue-collar workers. And the “American Families Plan” he’ll outline this week seeks to broadly increase the availability of child care and improve working conditions for people caring for children and seniors — a top priority for suburban women, pollsters say.
• Ford plans to produce a new light commercial vehicle at its Craiova plant in southern Romania from 2023, with the full-electric version becoming available one year later, according to an emailed statement. The investment to adapt the Romanian plant is part of the company’s longer-term plan to switch its car production toward zero-polluting models by 2030.
• France and Germany support the U.S. proposal of a 21% minimum tax on multinational companies, French Finance Minister Bruno Le Maire and his German counterpart Olaf Scholz told Le Figaro and Die Zeit in a joint interview released on Tuesday. “If the Biden administration proposes a 21% rate and there is consensus, it would be acceptable for us,” Le Maire is quoted as saying. U.S. President Joe Biden’s administration has proposed combating corporate tax-reduction strategies with a global minimum rate of 21%, and a system for ensuring that the world’s 100 or so biggest companies pay more in places they actually do business.
• Hedge Fund trader Sanjay Shah won a U.K. court ruling throwing out a 1.5 billion-pound ($2 billion) lawsuit filed by Danish tax officials over Cum-Ex trades. Judge Andrew Baker said in a ruling Tuesday that the U.K. wasn’t the proper place to bring a foreign tax claim. The agency said it would appeal. The U.K. civil case is just one avenue that Denmark is pursuing in a bid to claw back massive tax rebates it says it unwittingly handed to Shah and others. The nation has also charged Shah, who lives in Dubai. The ruling is a setback for Denmark and its tax agency, which said it was “very surprised by the verdict and fundamentally disagrees” with it. In a statement published after the ruling, it said it wasn’t a tax claim, but rather a civil claim where it seeks to have the amount returned.
• BP Plc set out to win back shareholders after a difficult year, saying it will begin share buybacks after “exceptional” natural gas trading buoyed earnings. The gesture, which was flagged earlier this month, is aimed at investors who have shown little love for the company since it cut its dividend by half last year. After lagging its European peers for much of 2020, BP re-jigged its priorities to put boosting shareholder returns ahead of other goals. “It’s a story of delivering on our promise of competitive cash returns for our shareholders, while at the same time transitioning the company for the future,” Chief Executive Officer Bernard Looney said in a Bloomberg television interview on Tuesday. “It’s been a strong quarter for the company financially.”
• London’s Heathrow airport will be allowed to increase airline fees on a limited basis to help it ride out the coronavirus crisis, the U.K.’s aviation regulator said. Heathrow can claw back 300 million pounds ($416 million) after submitting an application to recover 2.6 billion pounds, the Civil Aviation Authority said Tuesday. While its full request will be considered in a wider review, the airport said the decision risks damaging its ability to attract funding. Passenger numbers at what’s normally Europe’s busiest airport collapsed after curbs aimed at stemming the spread of Covid-19 effectively wiped out demand on long-haul routes. In February, the company said it lostmore than 2 billion pounds last year, though it maintains enough liquidity to see it through to 2023.
• HSBC Holdings Plc may increase the size of its bonus pool as the bank attempts to build out its wealth business in Asia while a surge in trading causes some rivals to push investment banker pay higher. “We may need to top up our current pool assumptions as the year progresses,” Chief Financial Officer Ewen Stevenson said in a call with analysts Tuesday. “If we are seeing competitive pressure in areas like Asian wealth and investment banking more broadly, we have to be in a position to respond.” The lender, which cut variable pay about 20% last year, is trying to keep a lid on costs as part of its response to the pandemic, with plans to cut its workforce by about 35,000. Even so, operating expenses rose by $200 million in the first quarter compared to the same period last year, partly because the bank built up its accruals for performance-related pay.
• A Liberia-flagged tanker has spilled oil into the Yellow Sea, causing potential environmental damage and disruption off China’s largest crude-receiving terminal. The A Symphony, a Suezmax tanker that’s capable of carrying about 1 million barrels of crude, was struck by a bulk carrier just off Qingdao port, causing it to spill oil in the sea, according to Goodwood Ship Management, the technical manager of the vessel. Nearby vessels are being instructed to stay at least 10 nautical miles (18.5 kilometers) away from the area, the Chinese maritime safety agency said in an alert on Tuesday. All of the tanker’s crew have been accounted for and no injuries have been reported, the ship manager said in a statement. While local response experts have been deployed to contain the oil spill and begin clean up operations, the efforts are being hampered as the port is closed due to poor visibility, it said.
• Oaktree Capital is exploring the sale of Ports America in a transaction that could value the largest U.S. terminal operator and stevedore at as much as $6 billion, according to people with knowledge of the matter. The alternative-investment firm is working with advisers and is poised to begin soliciting interest from potential suitors in coming weeks, said the people, who requested anonymity because the talks are private. The ports business is likely to be valued at $5 billion to $6 billion, the people said. An Oaktree spokeswoman declined to comment and a Ports America representative didn’t immediately respond to a request for comment. Jersey City, New Jersey-based Ports America, led by Chief Executive Officer Mark Montgomery and President Peter Levesque, operates more than 30 U.S. ports in cities including Los Angeles, Miami and Freeport, Texas. In 2019, Ports America said it handled more than 2.2 million vehicles, 5 million container lifts, 3.6 million tons of general cargo and over 2 million cruise passengers. Ports America posted $1.3 billion of consolidated revenue in 2019, according to an October 2020 Moody’s Investors Service report.
• General Electric Co. burned more cash than analysts expected in the first quarter, crimping Chief Executive Officer Larry Culp’s turnaround push after recent signs of financial improvement. Cash use by the industrial divisions totaled $845 million in the first quarter, GE said in a statement Tuesday as it reported financial results. That was worse than the burn of $663.9 million predicted by Wall Street. Adjusted earnings of 3 cents a share topped the 1.4-cent average of analyst estimates compiled by Bloomberg. The results signal a sluggish start for GE’s promised financial gains in 2021 after the coronavirus pandemic last year upended Culp’s drive to nurse the humbled giant back from an epic corporate collapse. GE, which surprised Wall Street with strong cash flow in the second half of 2020 and a robust outlook for further gains this year, is banking on Covid-19 vaccinations to spur air travel and rekindle demand for its jet engines and related services business.
• U.S. companies face soaring bills for all kinds of materials that they need to do business — and surging demand is helping them pass on those higher costs to their customers. In early-season earnings calls, executives from burrito chain Chipotle Mexican Grill Inc. to appliance giant Whirlpool Corp. and diaper maker Procter & Gamble Co. have outlined price hikes, largely in response to rising materials costs. Their comments back up the data that show inflationary pressures building in the economy as the pandemic recovery gains speed. A sustained rise in prices is poised to test the Federal Reserve’s expectation that any post-Covid spike will be limited and temporary.
• Soybeans and wheat hit fresh eight-year highs, while corn surged by the exchange limit, as bullish momentum accelerated on global weather woes that could further tighten supply. Dryness gripping Brazil’s corn belt has heightened concerns about a shrinking harvest in a major exporter at a time when world stockpiles are already stretched. Arid weather is also hampering North American wheat areas, while heavy rain in Argentina has disrupted the soybean harvest. A Bloomberg gauge of spot grains prices has surged 14% in April, heading for the best month since 2015, as shortages in any one crop could boost demand for alternatives. Skyrocketing prices for products that play an essential role in many diets around the world have also stoked fears over food inflation. Egypt, the top wheat buyer, holds a tender on Tuesday that may give insight into importers’ appetite for grains as costs surge.
• United Parcel Service Inc. shares soared as first-quarter profit rose more than analysts expected, buoyed by strong sales gains as the rollout of Covid-19 vaccines helped stimulate the economy. Adjusted earnings reached $2.77 a share, UPS said in a statement Tuesday, rising from a year earlier when the coronavirus pandemic’s first wave began shutting down businesses. Analysts had predicted a profit of $1.73 a share for the latest quarter, according to the average of estimates compiled by Bloomberg. Sales climbed 27% to $22.9 billion, while analysts anticipated $20.6 billion. “We continued to execute our strategy under the better not bigger framework, which enabled us to win the best opportunities in the market and drove record financial results,” Chief Executive Officer Carol Tomesaid in the statement.
• Sandal maker Birkenstock has included a rare term in its debt documents to protect itself from hedge funds who might be tempted to take it down to collect compensation. The provision makes it harder for investors holding net short positions with credit default swaps contracts to trigger a default or accelerate one. It’s only the second instance of a company including such a term in Europe, following theme-park operator Merlin Entertainments’ debt deal more than a year ago. Investors have been lining up this year for juicier returns in a low rates environment, allowing companies that have performed well, such as Birkenstock, to get very favorable conditions when issuing debt.
• Hasbro Inc. topped Wall Street’s profit estimates for the first quarter, benefiting from the same surge in toy sales that lifted rival Mattel Inc., even as weakness in entertainment held revenue to a modest gain. The company on Tuesday reported a profit of $1 a share, excluding some items, better than the 65-cent profit analysts had predicted. Revenue rose 0.8% to $1.11 billion, missing analysts’ predictions of $1.8 billion.

“Know what you own, and know why you own it.”― Peter Lynch

*All sources from Bloomberg unless otherwise specified