April 28th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian equities advanced Monday alongside U.S. stocks as major economies edged toward reopening and corporate earnings season continued. Crude fell after the biggest oil ETF said it would sell out of its June WTI futures position amid ballooning physical storage levels. The S&P/TSX Composite Index gained 1.5% to its highest level since March 10. Health care stocks rallied led by Canopy Growth Corp. Real estate firms and utilities also climbed. Meanwhile, it could be August before Ontario’s economy is fully back in business after the coronavirus pandemic eases, a time frame that depends heavily on the province seeing a continued decline in cases.

World Headlines

• European stocks climbed to a seven-week high, boosted by earnings from heavyweights such as ABB Ltd. and UBS Group AG, and optimism over a slowing rate of coronavirus cases. The Stoxx Europe 600 Index added 1.1% as of 10:23 a.m. in London, extending a monthly gain as all sectors rose. ABB climbed 4.7% after posting better-than-expected results and saying it doesn’t expect a loss in the second quarter. UBS led lenders higher after expressing confidence it can withstand a surge in bad loans. But BP Plc fell 1.6% after its profit plunged. European shares are rising for a second day, following their worst week in five, on optimism about the easing of lockdown measures in major economies and corporate results. The Stoxx 600 has bounced from a mid-March low amid stimulus efforts and hopes of the outbreak slowing. Still, defensive sectors have led the rebound, signaling investor sentiment remains fragile.
• U.S. equity futures advanced alongside European and Asian stocks on Tuesday as governments contemplated reopening their economies and the earnings season gathered pace. Crude oil extended its plunge, and the dollar weakened. S&P 500 contracts pointed to a firm start on Wall Street after the underlying index closed at its highest since March 10 a day earlier.
• The Topix index erased a morning loss and closed higher as investors speculated about possible purchases of exchange-traded funds by the Bank of Japan. Electronics makers were the biggest boost to the benchmark gauge, with major name Keyence Corp. set to announce results after the close and Nidec Corp. later this week. Chemicals makers were the biggest drags as Kao Corp. declined after reporting weak cosmetics sales as the coronavirus hit tourism. The Nikkei 225 Stock Average dipped but ended above 19,700. The market will be closed Wednesday and May 4 to 6 for holidays.
• Crude whipsawed near $11 a barrel after a major index tracked by billions of dollars in funds bailed out of near-term contracts for fear prices may turn negative again. June futures fell as much as 21% in New York before paring some of the decline to trade 8.8% lower. S&P Dow Jones said it will roll all of its West Texas Intermediate contracts for June into July on Tuesday, due to the risk that the nearer contract will go negative. Crude for July rose as much as 9% to $19.66.
• Gold remained under pressure near $1,700 an ounce as a drumbeat of moves toward reopening economies eroded appetite for havens and investors counted down to policy announcements from key central banks. Prices slipped for a third day as governments take steps toward easing lockdown restrictions. Italy, one of the countries hit hardest, is preparing to begin reopening, with similar plans being discussed in Spain and France, although the World Health Organization warned the coronavirus pandemic is far from over. Gold is still near its highest in more than seven years amid the health crisis. Investors are also tracking the stimulus by governments and central banks to aid growth, with the Federal Reserve and the European Central Bank to make policy announcements on Wednesday and Thursday.
• The White House issued a strategy to expand U.S. testing for the coronavirus on Monday, accelerating President Donald Trump’s push to reopen the economy even as the nation’s outbreak approaches 1 million infections. The new guidance to states to help them build testing capacity, developed with the Centers for Disease Control and Prevention and the Food and Drug Administration, was coupled with announcements by retailers including Walmart Inc. and CVS Health Corp. that they would open hundreds of new sites to provide tests. Trump has endured criticism that the U.S. outbreak has become the largest in the world in part because the government was slow to develop widespread testing to track and contain the disease. The U.S. didn’t exceed 100,000 Americans tested for the virus until March 19, according to the Covid Tracking Project, which compiles state data — more than eight weeks after the first case was reported in the country.
• Federal Reserve Chair Jerome Powell has already cut interest rates to nearly zero, but he still has to decide if more should be said about how long they will stay there. U.S. central bankers have been busy rolling out emergency lending facilities to provide liquidity to an economy largely shut down by the coronavirus pandemic. It’s taken them away from the primary object of their attention in more normal times: deliberating over where to set borrowing costs. Powell and his colleagues on the Federal Open Market Committee still have an important decision to make on that front. A big lesson from the last time rates were this low is that it’s just as pressing to be clear with the public about how long they plan to stay there if they want, to get the maximum boost for the economy.
• The world’s biggest maker of mining and construction equipment is predicting that the pain from the coronavirus crisis is far from over. Caterpillar Inc. said the current quarter will be “more significantly impacted” by the virus after profits for the first three months of the year trailed analysts estimates. The Deerfield, Illinois-based company also shelved its traditional earnings forecast for 2020 as the fallout from the pandemic jolts customers in mining, construction and energy. Caterpillar is taking steps to slash costs and pare production in the face of deteriorating commodity markets that stand to crush demand for the company’s signature yellow machines. BofA Securities Inc. analyst Ross Gilardi downgraded its stock this month, and said that weakness in the company’s energy business was “a problem that is not going away.”
• Harley-Davidson Inc. is in talks with major U.S. banks to secure $1.3 billion in funding and expects to tap capital markets for more after sales of its motorcycles declined in every market worldwide, including a 13th consecutive quarterly drop in the U.S. The American manufacturer ended the first quarter with $1.47 billion in cash and marketable securities, almost double its balance a year ago, after amending and extending credit and loan facilities. But Harley apparently isn’t counting on that amount of liquidity lasting for long after posting an 18% plunge in worldwide retail sales
• European banks are getting a big break on leverage limits as the region’s policy makers look to keep credit flowing to the economy during the coronavirus pandemic. A key rule on banks’ indebtedness — the so-called leverage ratio — will be relaxed under a European Union proposal announced Tuesday, enabling banks to hold less capital for funds they keep at central banks. Deutsche Bank AG, which had 134 billion euros in cash primarily at central banks at the end of 2019, stands to be a major beneficiary. The softening of the rule is part of the latest plan unveiled by the European Commission, the EU’s executive arm, that also would allow banks to save on capital when they invest in software and when they fund infrastructure and small- and medium-sized businesses. The commission also highlighted flexibility that banks can use with expected loan losses, saying they should consider the longer-term risks to a loan and not just the sudden shock of the pandemic.
• Spain and France will give details on plans to ease lockdowns as Europe moves to loosen restrictions. The White House issued a strategy to expand U.S. testing, including partnering with retail chains, accelerating President Donald Trump’s push to reopen the economy. The number of new infections in Germany fell below 1,000 for the first time in more than five weeks, while Spain recorded a drop in new infections and fatalities. China’s top scientists said the virus will not be eradicated, joining a growing consensus that the pathogen will likely return in waves. PepsiCo, 3M and Xerox became the latest companies to withdraw forecasts and Caterpillar said it would cut costs. WH Group, the world’s biggest pork producer and owner of Smithfield Foods, said it faces unprecedented challenges as the virus forces it to shutter plants, leaving Americans close to seeing meat shortages at stores.
• Southwest Airlines Co. is selling shares and $1 billion in convertible bonds in a push to add liquidity as the coronavirus pandemic all but erases demand for flights. The carrier will offer 55 million shares plus an option for the underwriters to buy another 8.25 million to cover over-allotments, according to a company statement Tuesday. The combined total represents about 12% of Southwest’s current outstanding shares. The underwriters can also buy an extra $150 million in the bonds, which are due 2025. Southwest is following United Airlines Holdings Inc. in offering shares amid the biggest crisis in the history of the industry, as carriers rush to shore up liquidity even after receiving billions of dollars in government aid. Southwest is also cutting the number of Boeing Co. 737 Max jets it will take through December 2021 by more than half and said the travel outlook demand remains bleak.
• S&P Global Inc., the company behind the most popular commodity index, told clients to roll all their exposure out of the West Texas Intermediate crude oil futures for June into July with immediate effect, triggering a big drop in oil prices. “This unscheduled roll is being implemented based on the potential for the June 2020 WTI Crude Oil contract to price at or below zero as well as the steady decline in open interest for the June 2020 contract,” the company said in a notice seen by Bloomberg News. A spokesperson confirmed the notice. The changes affect dozens of investment products that track the S&P GSCI, the most popular commodity index that’s tracked by billions of dollars in passive, long-only funds such as pension funds.
• The Pentagon’s inspector general is evaluating whether the Defense Department and military services have adequate ground testing, evaluation facilities and specialized chambers to support the U.S.’s spending surge on hypersonic weapons that fly faster than five times the speed of sound. The review, begun this month, is focused on the existing infrastructure for ground testing of the new weapons, not on their capabilities or on eventual flight tests on outdoor ranges. Hypersonics were elevated to the Pentagon’s top research and development program in 2017 as China and Russia move ahead with the agile new weapons, but until now the U.S. effort has been limited to two early flight demonstrations. The Pentagon’s fiscal 2021 budget proposes spending $3.2 billion, up $400 million from what Congress approved for this year. It’s part of $12.6 billion in planned hypersonics spending through 2025, Lieutenant Colonel Robert Carver, a Pentagon spokesman, said in an email.
• Russia, one of the world’s top wheat shippers, was among the first nations that moved to guard domestic food supplies amid the coronavirus pandemic. The window closed swiftly on the sales abroad that it did allow. A 7 million-ton quota the nation allotted for grain exports through June was filled over the weekend —  well before the quarter’s end. Traders rushed to get orders on the books for future shipments and some key importers have moved to bolster reserves. According to a Kommersant report on Tuesday, the Russian Bakers Union sent a letter to Minister of Agriculture Dmitry Patrushev asking for subsidies and tighter quotas on wheat exports.
• Deutsche Lufthansa AG, locked in tense negotiations over terms of a multibillion-euro state bailout, is considering court protection as a last resort should the sides fail to reach an agreement, according to people familiar with the matter.  The so-called Schutzschirm protection would shield Europe’s biggest airline from creditors for three months while it works out a management-led restructuring plan. The specter of a court-supervised proceeding comes as talks with Germany intensify over terms of a rescue that could exceed 8 billion euros ($8.7 billion), the people said.
• Britons are being urged to stick with the lockdown that has helped slow deaths from coronavirus as the government plans safe ways to reboot the battered U.K. economy and gradually ease restrictions. Scientists are drawing up options for lifting limits on movement, with some details of the plan expected to be set out later this week, while Chancellor of the Exchequer Rishi Sunak is mulling how to gradually unwind support for businesses. The focus on an exit strategy comes as the U.K. moves through the peak of the outbreak, with doctors reporting 360 hospital deaths from the disease on Monday, the lowest daily number for a month.
• While some countries begin to relax lockdown measures, Japan is about to enter its Golden Week holidays with citizens being asked to hunker down in their homes during what is typically the busiest traveling season of the year. Carriers have cut flights, local governments are asking tourists to stay away and families have canceled travel plans. Average spending during the extended break will be about 23,000 yen ($216), less than half the spending during last year’s 10-day holiday, according to a survey published Monday by Meiji Yasuda Life Insurance Co. About 66% of some 1,620 people surveyed plan to stay at home, according to the report.
• Reliance Industries Ltd., India’s largest company by market value, plans to sell shares to existing investors for the first time in about 30 years as the energy-to-technology conglomerate steps up efforts to pare debt. The board of the Mumbai-based company will consider a proposal for the rights issue on April 30, when it announces its earnings for the quarter ended March 31, it said in a statement late Monday. The shares fell 1.8% as of 11:49 a.m. in Mumbai trading. The proposal would be the third fund-raising announced by Reliance Industries in recent weeks, underscoring Chairman Mukesh Ambani’s confidence despite a pandemic that’s slammed the oil industry. Reliance unveiled a $5.7 billion investment by Facebook Inc. in its digital platform last week and in early April said it would raise as much as 250 billion rupees ($3.3 billion) through non-convertible debentures.
• China Merchants Group Ltd. is exploring taking China Merchants Port Holdings Co. private after shares of the state-owned conglomerate’s unit slid in Hong Kong this year, according to people with knowledge of the matter. China Merchants Group has held initial discussions with advisers to study the feasibility of buying all of the China Merchants Port shares that it doesn’t already own, said the people, who asked not to be identified as the information is confidential. China Merchants Group owns about 63% of the port unit, data compiled by Bloomberg shows. Shares of China Merchants Port jumped as much as 29.5% in Hong Kong on Tuesday after the Bloomberg News report. The stock closed down about 31% for the year on Monday, underperforming the benchmark Hang Seng Index.
• Blackstone Group Inc. said the Covid-19 pandemic is bringing uncertainty to its offer for Dutch lender NIBC Holding NV, putting one of Europe’s biggest banking deals this year at risk. “In light of the emerging widespread impact of Covid-19 and macro-economic developments, the offeror believes there is substantial uncertainty concerning the transaction-related business plan,” the private equity firm said in a statement on Tuesday. Shares of NIBC plunged as much as 28% in early trading in Amsterdam. The statement comes more than two months after Blackstone offered to buyNIBC for 9.85 euros ($10.67) a share, valuing the transaction at about 1.45 billion euros. It was a rare move by a financial sponsor to buy a bank. In mid-march, NIBC said that nothing has changed with respect to the takeover so far.
• Less than a year ago, the U.S. economic expansion was celebrated as the longest on record. This week its end will become all but official. Commerce Department figures due Wednesday are projected to show gross domestic product shrank at a 3.8% annualized rate from January through March amid the Covid-19 pandemic and government-mandated lockdowns aimed at preventing its spread. Such a decline would be the steepest since just before the last recession ended in 2009. And it pales against expectations for the second quarter, with the worst estimate for a previously unimaginable 65% pace of contraction, by far a record in data back to the 1940s. The main economic questions now revolve around the duration of the slowdown and the shape of the recovery as governments gradually lift restrictions on businesses and schools.

*All sources from Bloomberg unless otherwise specified