April 29th, 2020
Daily Market Commentary
- Canadian equities rose for a third session Tuesday while U.S. stocks edged lower. The S&P/TSX Composite Index advanced 1.1%, with eight of eleven sectors higher. Energy stocks led the way, with stocks including Vermilion Energy Inc. and Whitecap Resources Inc. both gaining over 5%. Consumer discretionary stocks were also strong. Canada underestimated its Covid-19 fatalities amid virulent outbreaks at long-term care facilities, public health officials said. The country now expects a total of 3,277 to 3,883 deaths by May 5, according to an updated model unveiled by Chief Public Health Officer Theresa Tam on Tuesday. Meanwhile, business leaders say they want more detail on Ontario’s strategy for restarting the economy after Premier Doug Ford outlined a plan without a timeframe.
- The threat of meat shortages from the coronavirus pandemic is hitting the golden arches. McDonald’s Corp.’s Canadian unit will start importing beef to supplement its needs because of limitations in supplies from the country’s plants, including Cargill’s High River facility, the company said Tuesday in an emailed statement. An outbreak of coronavirus among workers prompted a shutdown in High River, which accounts for about 40% of the Canada’s beef processing capacity. McDonald’s is temporarily removing the Angus burger from its Canadian menus, effective immediately.
- European stocks on Wednesday were poised for their biggest monthly gain since 2015 amid earnings and ahead of key policy decisions, while U.K. equities rose toward a bull market. The Stoxx Europe 600 Index was up about 0.1% as of 10:10 a.m. in London, with gains in energy shares offsetting a slide in health-care stocks. Carmakers outperformed after earnings updates from Daimler AG and Volkswagen AG. Barclays Plc climbed 6.4% after its trading revenue beat peers, while Next Plc slipped after suspending its dividend and reporting a 41% drop in full-price sales. The U.K.’s FTSE 100 Index gained as much as 1.1%, taking its gains from a March low to more than 20%. The gauge is poised to enter a bull market later than the broader benchmarks for Europe and the U.S.
- U.S. equity-index futures advanced, helped by a late rally in Alphabet Inc. and Asian stocks heading for bull-market territory, ahead of a Federal Reserve policy decision. Contracts on the S&P 500 Index climbed as much as 1.3% before trading 0.7% higher as of 9:21a.m. in London, while futures advanced 1% on the Nasdaq 100 Index and 0.6% on the Dow Jones Industrial Average. Alphabet shares surged in after-hours trading after the company reported first-quarter revenue that beat analyst expectations. Investors also were cheered by a rebound in oil. Volatility retreated to an eight-week low on a closing basis.
- The MSCI Asia Pacific Index rose 0.8%, pushing its rebound from a March 23 low to more than 20%. The Asian benchmark was set to join peers in the U.S., Europe, Southeast Asia and Latin America in entering a technical bull market, even as global equities continue to dig their way out from last month’s coronavirus-led sell-off.
- Oil clawed back its recent heavy losses as output cuts from major producers seek to stymie an unprecedented global glut. Futures rose by almost $2 in New York to around $14 a barrel. Russian oil companies will cut output by about 19% from February levels, the nation’s Energy Minister, Alexander Novak told the Interfax news agency. Even at $10 a barrel, some countries are having difficulty selling their oil, highlighting the collapse in demand globally. There have been tentative signs of a recovery in European physical oil markets. Key pricing contracts in the North Sea and Russia have rallied in recent days, though there are still concerns that the world is on the brink of filling its storage capacity. Major producers were due to start output cuts on May 1, but some, including Saudi Arabia, are now curbing output early.
- Gold swung between small gains and losses as investors counted down the final hours before the Federal Reserve’s policy meeting. Traders are waiting for more clarity on the Fed’s array of moves to counter the damage from the coronavirus pandemic, with the European Central Bank also set to issue a policy decision on Thursday. Markets are also weighing plans in some countries to reopen businesses.
- Deutsche Bank AG relied on a trading boost and relief from regulators to soften the blow from the coronavirus pandemic, taking a smaller hit from the virus than most of its competitors. But as the trading rally fades and the crisis worsens, some analysts are starting to wonder whether it isn’t too optimistic. Germany’s largest lender set aside just 506 million euros ($550 million) in the first quarter to prepare for an expected increase in bad loans, roughly in line with the amount at rival Credit Suisse Group AG. At Barclays Plc, that number stood at $2.6 billion while HSBC Holdings Plc earmarked $3 billion. U.S. peers set aside even more.
- PepsiCo Inc. and Heineken NV joined a lengthening list of European companies bolstering defenses against the coronavirus’s onslaught by raising money from bond sales. Both are seeking at least 1 billion euros ($1.1 billion) apiece from debt offerings on Wednesday after warning the pandemic will continue to impact their business for some time yet. With massive central bank stimulus helping push the premium on euro-denominated high-grade company bonds over low-risk government debt to the lowest since March 13, many companies are seeking to lock in low-costfunding. But evidence is mounting that the economic impact of prolonged national lockdowns will be severe and investors were caught off guard by Fitch Ratings cutting Italy’s credit score to just one step above junk on Tuesday.
- U.S President Donald Trump ordered meat-processing plants to stay open to stave off shortages and said confirmed cases had topped one million in the country because of better testing. Elon Musk hit out against the lockdowns that have kept businesses closed for more than a month. France and Spain took cautious steps toward reopening, while new cases rose for the first time in three days in Germany as the government weighs removing more curbs on public life. Beijing will lower its municipal emergency response as it prepares to host the nation’s highest-profile political meeting. GE said that the pandemic ‘materially challenged’ results, Airbus burnt through nearly $9 billion in the first quarter and IAG plans to slash as many as 12,000 jobs at British Airways.
- Joe Biden is trying to win over progressives by courting the movement’s leaders and backing their calls for significant increases in pandemic relief, yet faces an uphill fight to convince skeptics on the left he won’t abandon working people in favor of Wall Street. Since the economic crisis began with the coronavirus pandemic, he has shifted some of his stances leftward, calling for trillions of dollars more in stimulus spending and complaining about big banks getting a federal bailout while some small businesses were unable to secure life-saving loans. He’s agreed to create several policy task forces that join his staff with Bernie Sanders’s, and has adopted small pieces of Elizabeth Warren’s agenda, and says he’s willing to hear more.
- With interest rates near zero, Federal Reserve policy makers are likely to turn attention to other steps they could take to ensure a strong economic rebound once the coronavirus lock-down ends. The Federal Open Market Committee is all but certain to keep its benchmark overnight rate in a target range of 0-.25%, where it was lowered at an unscheduled FOMC on March 15 to help soften the pandemic’s blow. The committee will release a statement at 2 p.m. with Chairman Jerome Powellholding a press conference 30 minutes later. Forecasts are not scheduled to be released at this meeting.
- A blockbuster quarter for Barclays Plc’s traders was overshadowed by a 2.1 billion pound ($2.6 billion) bad-loan charge stemming from the coronavirus pandemic. The securities division reported a 77% jump in first-quarter trading revenue on Wednesday as the virus whipsawed markets, beating the average 30% gain at U.S. peers. However, the lender set aside its biggest quarterly provision in a decade to cover defaults across the economy, and joined peers in warning of tough times ahead. The shares rose nearly 7% in London, leading gains among European bank stocks, as the strong trading performance helped Barclays preserve its capital levels.
- Airbus SE spent a record 8 billion euros ($8.7 billion) of cash in the first quarter as Chief Executive Officer Guillaume Faury warned of the “gravest crisis the aerospace industry has ever known.” While almost half of the cash hit came from a bribery settlement, the abrupt drop in deliveries seen in March will worsen this quarter, eating further into reserves. By June, Airbus will have a better view of how far it needs to scale back to get through the coronavirus pandemic, Faury said Wednesday on a conference call. Airbus is battling to adapt to collapsing demand as the pandemic wipes out new aircraft sales and threatens existing orders as airlines run short of money. Faury said the company is aiming to survive without state support but that its customers and supplier base need as much help as they can get.
- Europe took another step toward life after lockdown as France, Spain and Greece unveiled details of how they plan to emerge from the coronavirus and cautiously restart economies crippled by the pandemic. In Paris, Prime Minister Edouard Philippe announced plans to reopen stores starting on May 11. Spanish counterpart Pedro Sanchez said he aims to remove most restrictions on daily life and return to a “new normality” over the next eight weeks. Schools in Spain, though, will remain closed until September. A clearer picture is now emerging of how Europe aims to ease its way back toward some semblance of normality, though governments have stressed that there’s still a long way to go before coronavirus is beaten. With the absence of a vaccine, all countries are trying to strike a delicate balance between reviving businesses and household finances while averting a potentially devastating second wave of infections.
- Volkswagen AG joined other automakers around the globe in warning of the unprecedented fallout from the coronavirus pandemic. Supply and demand disruptions from government measures to slow the spread of the disease will cause operating profit to drop “severely” this year, the world’s largest automaker said on Wednesday. Efforts to rein in spending will allow the German company to remain profitable for the full year, despite an anticipated second-quarter loss. Volkswagen’s warning pales in comparison to the announcement from Ford Motor Co. last night. The U.S. carmaker forecast a second-quarter operating loss of more than $5 billion, devastating its efforts to recover from three consecutive annual earnings declines.
- IAG SA’s plan to slash as many as 12,000 jobs at British Airways, a scale of cuts unseen since the coronavirus struck, is meeting opposition from unions and putting Prime Minister Boris Johnson in a tight spot. The staff reductions, amounting to almost 30% of the workforce at Britain’s former state-owned airline, are part of a restructuring aimed at shrinking the group for a downturn that it reckons could last for years. The U.K. has ruled out a broad bailout of the aviation industry, asking firms to first tap all commercial avenues to raise funds to protect taxpayer interests, with the government assisting only as a last resort. Nor has IAG sought the state-backed loans on offer to a wide range of businesses. That’s left Johnson vulnerable as the airline slashes staffing, worsening the already bleak economic outlook.
- China’s plan to resume annual parliamentary sessions delayed by the coronavirus outbreak next month could be seen as a statement of the country’s commitment to get back to normal. The actual gathering may end up showing how much has changed. The National People’s Congress will start its annual session May 22, the official Xinhua News Agency said Wednesday, citing a decision by the body’s Standing Committee. The initial state media reports, which also said the advisory Chinese People’s Political Consultative Conference planned to meet May 21, made no mention of the length or format of the sessions. The pandemic has upended the usual pageantry of the NPC, in which 3,000 deputies — and thousands more officials, political advisers and journalists — crowd into Beijing meeting halls for two weeks. The virus has turned the platform for projecting power into a dangerous infection risk for Chinese President Xi Jinping and other top Communist Party leaders.
- GlaxoSmithKline Plc is preparing to start a sale of its $3.7 billion stake in Unilever’s listed India unit, according to people familiar with the matter. Glaxo plans to offload part or all of its 5.7% holding in Hindustan Unilever Ltd. through a series of block trades, which could start as soon as the next few days, according to the people. The company is in discussions with advisers on when to launch the transactions, the people said, asking not to be identified because the information is private. The drugmaker received the stake, valued at $3.7 billion as of Wednesday, as part of the payment for the sale of a portfolio of assets that was completed this month. In December 2018, Unilever said it would acquire the health food drinks brands of Glaxo in India and Bangladesh and other markets for 3.3 billion euros ($3.6 billion) in cash and shares in Hindustan Unilever. As part of the transaction, Glaxo received a 5.7% stake in the Indian unit.
- India’s top court dismissed an appeal by Vodafone Group Plc’s Indian unit, seeking a tax refund of 47.6 billion rupees ($629 million) from the federal government. A two-member panel headed by Justice U.U. Lalit allowed the return of only 7.3 billion rupees and dismissed the matter, according to a copy of the judgment on the Supreme Court’s website on Wednesday. The company had moved the court saying the income tax department deliberately withheld the dues since 2018. The ruling is another setback for the British telecom giant’s Indian arm, after mobile operators in the country lost a case and were asked to pay $19 billion in total government demands. Vodafone Idea Ltd. is struggling to pay $7.2 billion in back fees to India’s government.
- Governors of Japan’s 47 prefectures including Tokyo are set to ask the national government to extend a state of emergency as coronavirus cases continue to increase, local media reported. The governors held a video conference Wednesday and are likely to request that the emergency state be prolonged beyond May 6, when it’s poised to end, Kyodo News and other media reported. Tokyo governor Yuriko Koike told reporters that the extension was needed considering that the situation remains severe in the nation’s capital. Japan is asking its citizens to stay at home during the Golden Week holidays, typically one of the busiest traveling seasons of the year, even as some countries begin to relax lockdown measures. While the number of confirmed infections in Japan is lower than other major economies, it’s still in an upward trajectory, with about 13,500 cases so far.
- The good news for the Federal Reserve and the European Central Bank is that funding pressures continue to ease ahead of their policy decisions. Markets are priced for them to improve even more. As money continues to flow into prime funds, U.S. commercial paper rates — short-term company IOUs — have been falling. Dollar Libor is following suit with the three-month fixing slipping seven basis points on Wednesday, a ninth consecutive day of decline. The spread above overnight index swaps — a measure of funding stress — tightened to the narrowest since March 13. A look at the shape of the FRA/OIScurve, known as the term structure, shows that markets are priced for continued normalization. June contracts expect around 35 basis points of decline to come, with an additional two basis points seen for September.
- A deal is a deal, except for a growing number of companies that agreed to buy assets before the Covid-19 pandemic sent markets plunging. Panicked executives already have launched a handful of legal battles that could blow up billions of dollars’ worth merger and acquisition agreements. And litigators predict at least a dozen more limping deals will crash land in courts over the next few months. Among the high-profile transactions that have become feuds are Mirae Asset Global Investments Co.’s $5.8 billion purchase of a U.S. luxury hotel portfoliofrom Anbang Insurance Group Co., SoftBank Group Corp.’s $3 billion acquisition of We Cos. stock, and Sycamore Partners’s $1.1 billion deal for a controlling stake in L Brands Inc., owner of the Victoria’s Secret lingerie chain.
- Tesla Inc. is considering cutting prices of some of its cars in China for a second time this year so they will continue to qualify for government rebates on electric vehicles that are being tightened, according to people familiar with the matter. The Model 3 made at China’s Shanghai factory starts at 323,800 yuan ($45,700) before tax breaks or rebates. The cut would bring prices of the standard version of the sedan below the 300,000 yuan maximum threshold for electric cars in China to qualify for subsidies, the people said, asking not to be named as the move hasn’t been publicly announced. That would mean a reduction of more than 7.3%. The plan has been submitted to the Chinese government as carmakers typically provide advance notice on such matters to authorities, though it’s up to Tesla whether it will go ahead with it, one of the people said.
- Investments in U.S.-listed fixed income exchange traded funds declined 14% last week for the fifth straight week of inflows. Government bond ETFs led the inflows. Corporate bond ETFs had the biggest change from the previous week. Net inflows to ETFs totaled $4.23b in the week ended April 28, including the effect of leveraged funds, compared with $4.93b the prior week
- Boeing is due to deliver earnings this morning, and is reportedly working with banks to tap the bond market. Ford expects anothermulti-billion dollar loss this quarter, which could further pressure ratings, according to Bloomberg Intelligence. In other earnings, GE’s aviation unit appears to be weighing on the company’s cash flows, with the industrial business burning through $2.2 billion in the first quarter.
*All sources from Bloomberg unless otherwise specified