August 11, 2021

Daily Market Commentary

Canadian Headlines

• Canadian equities rose Tuesday as investors continued to weigh strong earnings against the risks of the spreading delta virus variant. The S&P/TSX Composite Index gained 0.3%. Oil rose alongside broader equity gains with investors optimistic global economic growth will continue even amid Covid-19’s resurgence. Soaring crop prices and global demand for food encouraged farmers to pay up for inputs produced by Nutrien Ltd., the world’s largest fertilizer firm, boosting its profit. Canadian Pacific Railway Ltd. made a new, higher bid for Kansas City Southern, looking to derail the U.S. railroad’s pending merger with rival Canadian National Railway Co. ahead of an important shareholder vote less than two weeks away.
• A Chinese court jailed a Canadian tour organizer for 11 years for spying, while leaving room for his eventual deportation — a ruling that appeared timed to pressure Ottawa in extradition proceedings against a top Huawei Technologies Co. executive. Michael Spavor, who organized tours to North Korea, was sentenced after being found guilty of stealing and illegally providing state secrets to other countries, the Dandong Intermediate People’s Court said in a statement Wednesday. Spavor will also be deported, the court said, without elaborating whether that would happen before or after his full sentence was completed. Canadian Prime Minister Justin Trudeau condemned the verdict as “absolutely unacceptable and unjust” while David Meale, the top U.S. diplomat in Beijing, called the proceedings a “blatant attempt to use human beings as bargaining leverage.” Diplomats from 25 countries, including Japan, Germany and the U.K., gathered at the Canadian Embassy, in a gesture Ambassador Dominic Bartonsaid showed Beijing “that all the eyes of the world are watching.”

World Headlines

• European equities edged higher on Wednesday, on course for an eighth-straight record close amid a rebound in corporate earnings. The Stoxx Europe 600 index added 0.1% at 10:35 a.m. in London, with investors awaiting key U.S. inflation data later in the day. Insurance, media and construction gained most, while technology, consumer discretionary and bookmakers declined. European equities have rallied during the current earnings season as bullish forecasts spur optimism that companies will be able to maintain stable profit margins amid cost inflation as the economic recovery accelerates. More than half of all recommendations on Stoxx 600 firms are now “buy” or equivalent, the most since September 2011.
• U.S. equity futures fluctuated and Treasuries dropped on Wednesday ahead of a key report on American inflation that will be parsed by traders for clues on the direction of central-bank policy. Contracts on the S&P 500 Index edged lower from a record ahead of data out today showing U.S. consumer prices probably jumped again in July. Coinbase Global Inc. rose in pre-market trading after reporting second quarter results, while biotech firm Cohbar Inc. surged on results from a treatment study. The dollar strengthened. Investor focus on U.S. price data comes as Federal Reserve officialstalk up the prospects of unwinding some of the stimulus that has helped the recovery from the pandemic. Chicago Fed President Charles Evans said he expects substantial further progress later this year on the central bank’s tapering intentions.
• Asian equities were steady as cyclical shares benefited on Wednesday from an increase in bond yields, with traders turning their focus to key inflation data from the U.S. The MSCI Asia Pacific Index was little changed after tech stocks dragged the gauge back from a gain of as much as 0.4%. Energy and financial stocks were higher, and the passing of a $550 billion infrastructure plan by the U.S. Senate boosted construction-related shares.
• Oil dropped suddenly after a report that the U.S. will urge OPEC to revive production more quickly. Futures tumbled 1.2% in New York as CNBC reported that the White House intends to call on the producer group to help stabilize gasoline prices. Biden administration officials have already contacted OPEC leader Saudi Arabia, as they believe the group’s planned output increases are too slow, CNBC said.
• Gold traded just above its lowest close in four months as the dollar steadied ahead of key U.S. inflation figures that may provide more clues on future monetary policy. U.S consumer-price data due Wednesday offers the next major metric to judge the state of the economic recovery, with economists expecting gains to remain elevated. How long inflation persists has been central to discussions around the Federal Reserve’s timetable for tightening stimulus, a key driver for the gold market. Chicago Fed President Charles Evans became the latest official to discuss the prospect, saying he expects substantial further progress later this year on the central bank’s tapering intentions. Bullion has eased this year as improvements in major economies raise the prospect of central banks reining in support. But risks remain, from the spread of coronavirus variants to spotty vaccination rates in some regions.
• The U.S. employment numbers suggest that mortgage investors need not be too concerned over a near-term taper of the Federal Reserve’s support. The Fed has been purchasing a daily average of $5.6 billion mortgage bonds so far this year, and the question of when it will begin ramping down that support depends on when it believes it has made “substantial further progress” toward “maximum employment,” as its mandate from Congress dictates. The mandate includes stable prices and moderate long-term interest rates. The unemployment rate has plunged from a high of 14.8% in April 2020 to 5.4% last month. It was at 3.5% in February 2020, before the Covid pandemic and subsequent economic lockdowns hit the economy. While the drop in the unemployment rate is heartening, it can also be misleading, as the methodology doesn’t count workers who have dropped out of the labor force.
• South Korea surpassed 2,000 daily infections for the first time amid a low vaccination rate. Across Asia, the delta variant is driving new infections, triggering protests in Thailand and the lockdown of another city in Australia. Asia’s economies are showing the impact from the surging variant as consumers stay at home and travel and manufacturing take a hit. Even so, Singapore sees its economy expanding at a faster clip this year as the city-state looks to reopen more sectors in light of an inoculation rate that’s among the region’s highest. The coronavirus situation is urgent in the French overseas territories of Guadeloupe and Martinique, where vaccine take-up is “very low” and hospitals are already overwhelmed, President Emmanuel Macron said. Austria recorded the most daily infections since May, driven by a cluster in its Southern region.
• Senate Democrats took a major step toward the biggest expansion in decades of federal efforts to reduce poverty, care for the elderly and protect the environment, passing a $3.5 trillion budget framework that opens the way for President Joe Biden’s economic agenda. The party-line 50-49 vote marks an abrupt reversal from the tax-cutting philosophy of Republicans when they controlled the government. It provides a path for enactment of a long list of cherished Democratic priorities — if the party’s fractious progressives and moderates can agree among themselves in the coming months. Democrats are pitching tax cuts in the plan as the largest in history for the middle class, including an extension of the temporary pandemic child tax credit. Part of the cost would be paid by rolling back the tax cuts for corporations and wealthy households that were former President Donald Trump’s signature legislative achievement.
• China Evergrande Group’s stock and bonds jumped Wednesday after the company said it’s in talks to sell stakes in two of its units, potentially injecting fresh funds into the cash-strapped property firm. The discussions involve “several independent third-party investors,” the company said in a statement to the Hong Kong exchange late Tuesday. Talks involve Evergrande stakes in its electric vehicle start-up and property servicesunits. Evergrande closed 7.8% higher in Hong Kong, bringing its three-day gain to 21.7% on expectations the world’s most-indebted developer will ease its cash crunch with asset sales. The electric vehicle and property services stocks also rose for a third day. The firm’s 8.75% dollar bond due 2025 rose 2 cents on the dollar to 45 cents, Bloomberg-compiled prices show.
• Rivian Automotive Inc., the electric-vehicle startup backed by Amazon.com Inc., is in talks to invest at least $5 billion to build a factory near Fort Worth, Texas, according to a document obtained by Bloomberg News.  The factory — codenamed “Project Tera” according to the document — will be able to produce 200,000 vehicles a year, and will create at least 7,500 jobs by 2027. The presentation, made by the City of Fort Worth’s Economic Development Department to the City Council and dated Aug. 10, also includes a number of incentives including grants and county tax abatement of up to $440 million. The $5 billion capital investment commitment from Rivian includes a minimum $2 billion in real property improvements and $1.6 billion in hard construction costs, the document shows. The company has committed to completing its initial investments by the end of 2024.
• Boeing Co. is in advanced discussions with a newly created Indian budget carrier to sell 737 Max jets, according to people familiar with the matter, a deal that could give the U.S. planemaker a crucial breakthrough in a major market dominated by Airbus SE. The airline, Akasa, backed by billionaire investor Rakesh Jhunjhunwala, has also held discussions with Airbus for its best-selling A320neo jets, but that model isn’t available for delivery until several years down the track, tilting the equation in Boeing’s favor, the people said, asking not to be identified because the matter is confidential. The talks aren’t finalized and could still fall apart, the people said. Akasa, which is seeking initial approval from India’s aviation ministry, plans to use sale-and-leaseback deals to finance the planes, one of the people said. This would allow the new airline to receive cash from leasing firms as it takes possession of the jets.
• NortonLifeLock Inc. is set to buy Avast Plc in a deal valued at as much as $8.6 billion, giving the U.S. cybersecurity company access to one of the biggest customer bases in the industry. Avast stockholders will receive cash and shares that value the deal at $8.1 billion to $8.6 billion, the companies said Tuesday in a statement. Once the merger is completed, NortonLifeLock Chief Executive Officer Vincent Pilette will remain CEO and the company will have dual headquarters in Tempe, Arizona, and Prague. Avast CEO Ondrej Vlcek will become president and join the board, the companies said. About 1,000 jobs, or as much as 25%, at the combined firm are at risk due to overlaps in responsibility, Pilette said on a call with reporters Wednesday.
• Just nine days after the U.K. granted vaccinated Americans quarantine-free entry, JetBlue Airways Corp. is making its first foray into transatlantic service, starting flights on the world’s most lucrative air route—from New York’s John F. Kennedy International Airport to London Heathrow—on Wednesday, Aug. 11.  It’s a long-awaited move for fans of the carrier, which has made its name offering affordable, friendly service primarily in the U.S. and the Caribbean. And it’s only the first step in a plan to bring its loyal customers to Europe: The airline is also set to begin service from Boston to London within the year. In coach, it’s possible to find a one-way ticket from JFK to Heathrow for as low as $202. But the greatest asset JetBlue brings to the competitive route is its affordable business class product, Mint, with 24 enclosed suites on each A321. Those seats are selling from about $1,660 round trip—even lower than the originally advertised starting fare of $1,979. The airline’s convenient schedule, which also includes flights to London Gatwick, offers easy overnights on the outbound legs and midday departures on the returns.
• Lenovo Group Ltd.’s quarterly earnings topped analysts’ estimates after the world’s biggest personal-computer maker widened its lead over HP Inc. and Apple Inc. during a pandemic-induced boom. Net income more than doubled to $466 million in the three months ended in June, the Chinese company said in a statement on Wednesday, helped in part by $131 million of investment-related gains. Analysts predicted $347.8 million on average. Sales climbed 27% to $16.9 billion, also beating estimates. Lenovo extended its lead in the PC market in the quarter, beatinglong-time rivals HP, Dell Technologies and Apple in volumes. The company is betting on fresh models to maintain its momentum, even as component shortages and employees returning to offices threaten to weigh on demand from consumers.
• The Biden administration is asking U.S. regulators as well as OPEC countries to do more to ensure stable energy supplies, with a specific focus on retail gasoline prices that President Joe Biden pledged to keep affordable. National Economic Council Director Brian Deese asked Federal Trade Commission Chair Lina Khan to use all available tools, including monitoring prices, reviewing merger-and-acquisition activity and investigating market manipulation. National Security Advisor Jake Sullivan also called on OPEC countries to do more to ensure reliable and stable energy supplies. While the nations recently agreed to production increases, they won’t fully offset previous production cuts until well into next year, he said.
• More and more, private-equity firms looking to finance big leveraged buyouts are cutting out the Wall Street banks, and borrowing money from each other or from direct lenders. Private equity firm Thoma Bravo bypassed banks when getting $2.6 billion of debt financing for its buyout of Stamps.com in July, and for a $2.3 billion loanfor the buyout of Calypso Technology Inc. in April. In early 2019, these loans rarely exceeded $500 million. But the funds that make these loans are swelling, and the financing they offer increasingly tops $2 billion. These loans often come from the credit arms of private equity firms, or from standalone direct lending funds. The appeal of these loans for buyouts is the process is easier and sometimes lenders will offer more debt. But for banks, these transactions threaten one of the most profitable businesses on Wall Street: leveraged finance, where groups of banks arrange loans and junk bonds to fund private equity deals.
• BlackRock Inc. secondaries and liquidity solutions group is strengthening its ties with Abu Dhabi’s sovereign-wealth investor Mubadala Investment Co., leading a $1.2 billion deal that includes the purchase of secondhand assets from a fund its investment arm Mubadala Capital manages. The New York-based unit itself is committing a total of $700 million to the entire transaction, including a $400 million commitment to a new fund, according to Managing Director Veena Isaac. The BlackRock group led the purchase of assets from a $1.5 billion private-equity fund Mubadala Capital raised in 2017, the unit’s first fund to accept money from investors outside of its sovereign-wealth parent. BlackRock said it has also pledged $400 million in new money to Mubadala Capital’s third private-equity fund, MIC Capital Partners III, which closed with around $1.63 billion in July.
• Chesapeake Energy Corp., the shale gas producer that emerged from bankruptcy earlier this year, agreed to acquire Vine Energy Inc. in a cash-and-stock deal valued at about $2.2 billion to add supplies in Louisiana. The transaction values Vine at $15 per share, the companies said Wednesday in a statement. Vine closed Tuesday at $14.88 in New York trading. The deal is the first since Mike Wichterich became interim chief executive officer of the Oklahoma City-based company in April. The U.S. shale industry has been under pressure from investors to consolidate in order to achieve cost savings.
• New York Governor Andrew Cuomo’s resignation on Tuesday creates a power vacuum in the politics of a state he had dominated for a decade, adding new uncertainty for Democrats gearing up for crucial congressional and state elections next year. Cuomo’s exit follows a steady crumbling of his standing over the last week, starting with a stunning report by New York state Attorney General Letitia James that laid out evidence of sexual misconduct against 11 women, most on his staff, including a state trooper he had assigned to his personal security detail. In the report’s wake, Democrats from Albany to the White House publicly said that he needed to save the party by stepping down. But even as he gave two weeks’ notice, took responsibility for his actions and apologized to his accusers in a televised appearance, Cuomo called James’s report “false.” He said “rashness has replaced reasonableness,” an impeachment would “brutalize people” and claimed he was unaware that cultural lines had shifted in the treatment of female subordinates.
• Credit Suisse Group AG peddled a series of unusual bonds in recent years that gave the Swiss firm insurance against the equivalent of a banking earthquake. The owners of those securities are feeling some tremors. The $461 million of notes, which are rarely traded, were quoted at distressed levels last month, with a sliver of the issue selling at around 60 cents on the dollar. Traders at JPMorgan Chase & Co. recently offered to buy the junior tranche of the notes for around the same price, according to two people familiar with matter who asked not to be identified as the prices aren’t public. The bond was quoted at par as recently as March, but doubts have grown over whether the bank’s twin scandals tied to the collapses of Archegos Capital Management and Greensill Capital might trigger the insurance and wipe out the principal of the complex securities.

“Never let the fear of striking out keep you from playing the game.”– Babe Ruth

*All sources from Bloomberg unless otherwise specified