August 16, 2021
Daily Market Commentary
- Prime Minister Justin Trudeau called an election for next month, seeking to capitalize on polls showing his Liberal Party with a large enough lead to retake a majority in parliament. The prime minister met Governor General Mary Simon, the Queen’s representative in Canada, on Sunday morning to request that parliament be dissolved. The vote will be on Sept. 20. Public opinion polls show Trudeau’s Liberals, in power since 2015, hovering in the mid-30% range of support, which is near the threshold needed to regain control of the House of Commons in Canada’s fragmented political system. To reach his goal, he needs to win over voters in key suburban swing ridings around Montreal, Toronto and Vancouver.
- Canadian Solar Inc., a panel maker with most of its factories in China, confirmed U.S. customs detained some imports as the sector navigates the Biden administration’s crackdown on equipment with possible links to labor abuses in the Xinjiang region. Four sample modules being shipped from China to the company’s U.S. office were held by officials last week due to a sourcing issue, according to the Ontario-based manufacturer. While the number of the company’s modules affected was very limited, “it seems that all solar module shipments from China are detained” by U.S. Customs and Border Protection, a Canadian Solar spokesperson said Monday. The U.S. in June banned imports of equipment that may have used raw materials originally from Hoshine Silicon Industry Co., an industry leader in the solar sector supply chain, as part of efforts to confront alleged human-rights abuses involving China’s ethnic Uyghur Muslim minority in Xinjiang.
- European equities retreated on Monday, snapping the longest record-setting streak since the dotcom era, as worries over the spread of the delta variant and its impact on growth prompted investors to lock in some gains. The Stoxx 600 Index was down 0.5% by 8:10 a.m. London time, with cyclical sectors like energy, basic resources and travel stocks falling most. Stocks pulled lower following disappointing data from China, which showed that fresh virus outbreaks weighed on an economic recovery. The pullback comes after the Stoxx 600 Index clocked up its longest record-setting streak since 1999 in the previous session, fueled by a strong second-quarter earnings season and growing optimism over an economic rebound.
- U.S. stock-index futures fell and the dollar rose as weak Chinese data and the spread of the coronavirus delta variant sparked worries the global economic rebound is faltering. Contracts on the S&P 500 Index declined 0.3% after the underlying gauge notched up another record high on Friday. Commodities declined after Chinese retail sales and industrial output data showed activity slowed. Alibaba Group Holding slid in premarket trading after China’s state media criticized the online-game industry. Treasuries were higher, though they trimmed gains with the 10-year yield giving up a drop of as much as three basis points. In addition to the town hall, traders will also be watching the Federal Open Market Committee’s latest minutes this week as competing views on the persistence of inflation spurs bond-market volatility.
- Asian stocks declined on Monday, with investor sentiment dampened by concern over the coronavirus and China’s disappointing economic data. The MSCI Asia Pacific Index fell as much as 0.8%, with Japan’s benchmarks leading the drop after the country extended states of emergency across six prefectures and amid an appreciating yen. The Hang Seng Tech Index slumped as much as 3% after China’s state media called for strengthened oversight of online games. Market sentiment continues to be weighed on by fear that the delta variant coronavirus spread will delay countries’ reopening plans. Figures released Monday by China’s government showed economic activity slowed more than expected in July, with fresh virus outbreaks adding risks to a recovery already hit by floods and faltering global demand.
- Oil sank for a third consecutive day as Chinese economic data disappointed and the spread of the delta coronavirus variant hurt prospects for global demand. West Texas Intermediate slumped as much as 2.4% as fresh outbreaks in Asia have started weighing on China’s economy, with retail sales growth and industrial output slowing. cases are also at or near records in nations including Thailand, Vietnam and the Philippines. Stock markets were also weaker, adding to the pressure on oil.
- Gold slipped after finishing strongly last week, with UBS Group AG warning investors to rethink their bullion holdings as the global economy recovers and the greenback strengthens into next year. Bullion had been clawing back some ground over the past week after better-than-expected U.S. jobs data sent prices tumbling on bets the Federal Reserve may start paring back massive monetary stimulus soon. This week, investors will parse through a speech by Chair Jerome Powell, as well as minutes of the Fed’s latest meeting, for more clues about the likely timeline for tapering. Figures for U.S. retail sales are due Tuesday.
- Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week, ending four weeks of inflow that reached $2.49 billion. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $345.4 million in the week ended Aug. 13, compared with gains of $189.7 million in the previous week, according to data compiled by Bloomberg. This was the biggest weekly outflow since Sept. 25. So far this year, inflows have totalled $34.5 billion.
- Saudi Aramco is in advanced talks for an all-stock deal to acquire a stake in Reliance Industries Ltd.’s oil refining and chemicals business, people with knowledge of the matter said. The Saudi Arabian firm is discussing the purchase of a roughly 20% stake in the Reliance unit for about $20 billion to $25 billion-worth of Aramco shares, the people said, asking not to be identified because the information is private. Reliance, which is backed by Indian billionaire Mukesh Ambani, could reach an agreement with Aramco as soon as the coming weeks, the people said. Shares in Reliance extended gains to as much as 2.6% in Mumbai after the Bloomberg News report.
- Faurecia SE surged after the French auto supplier agreed to take over Hella GmbH, boosting its standing with German automakers and rendering the company less reliant on fading internal combustion engines. The deal reached over the weekend values Hella at 6.8 billion euros ($8 billion) and will form the world’s seventh-largest car-parts maker. The portion of Faurecia’s business linked to combustion engines will drop to less than 20% once the deal closes and fall to 10% by mid-decade. Faurecia shares climbed as much as 11% — their biggest intraday gain in nine months — to 42.55 euros. Hella dropped as much as 3.5%, paring gains since initial reports in April said the Hueck family that controls the company was mulling a sale of its 60% stake.
- The company running the Chinese business of iconic Canadian coffee shop chain Tim Hortons agreed to go public through a merger with blank-check company Silver Crest Acquisition Corp. The transaction will give Tim Hortons China a Nasdaq listing and value the business at about $1.69 billion including debt, Silver Crest said in a regulatory filing Monday, which confirmed an earlier Bloomberg News report the parties were nearing an agreement. The deal is expected to close in the fourth quarter. Tim Hortons China is a joint venture between Restaurant Brands International Inc., owner of the coffee chain brand, and private equity firm Cartesian Capital Group. Other investors include Sequoia Capital China and Chinese internet giant Tencent Holdings Ltd.
- Hong Kong tightened its travel curbs for residents returning from 16 countries — including the U.S., France and Spain — less than two months after it started easing some of the world’s strictest quarantine measures. The abrupt reversal reflects a fear of reopening as the delta variant drives resurgences across the world. Fifteen countries were moved up to the “high-risk” category, which means that vaccinated Hong Kong residents returning home must spend 21 days in hotel quarantine upon arrival, triple the previous length of stay. Tourists and unvaccinated residents are no longer allowed entry, according to a government statement Monday. The new restrictions take effect starting Aug. 20.
- The world’s largest underwriter of green bonds plans to significantly expand its offering of investment products touting environmental, social and governance metrics, as Wall Street starts attaching the label to more complex financial services. JPMorgan Chase & Co. says its decision to add the ESG tag to derivatives is part of a strategy to link sustainability to all forms of finance. The bank intends to replicate a novel cross-currency swap with Italian energy company Enel SpA, in which both parties need to meet specific ESG targets or face additional costs. Competitors are also pushing into the trendy and lucrative space, with Deutsche Bank AG and NatWest Markets seeking to attract business with ESG currency and rates hedges. The development has raised questions around how effectively such products actually help in reducing greenhouse gas emissions or promoting equality. But JPMorgan says the goal is to make ESG ubiquitous across finance.
- European natural gas prices climbed to fresh records on signs that a Russian supply crunch will linger into September. Power prices also gained. Supplies via a major Russian pipeline via Belarus and Poland fell further on Monday with little explanation from state-controlled gas exporter Gazprom PJSC. And for the first time in recent months, Gazprom didn’t book full firm capacity offered by Ukraines transit operator in September. Russian natural gas flows entering Germany at the Mallnow compressor station dropped more than 20% since Friday, according to data from grid operator Gascade. That suggests Gazprom PJSC is struggling to restore supplies via the Yamal-Europe pipeline after a fire at a plant in Siberia earlier this month.
- HSBC Holdings Plc agreed to buy AXA Singapore for $575 million in a push to build a global wealth hub in Singapore and fuel its expansion across Southeast Asia amid increasing tension in China. “This is an important acquisition that demonstrates our ambition to grow our Wealth business across Asia,” Chief Executive Officer Noel Quinn said in a statement. “Wealth is one of our highest growth and highest return opportunities, and plays to our strengths as an Asia-centred bank with global reach.” The London-based bank is in the midst of a pivot to Asia, pouring billions into the region as it exits unprofitable business elsewhere. Expanding in Singapore comes after years of tensions for the bank in Hong Kong, its biggest market, and mainland China. While there has been no major evidence of money flowing out of Hong Kong, many high-net worth individuals in the city have set up contingency plans should they need to move cash out of the city as China tightens its grip.
- Malaysian Prime Minister Muhyiddin Yassin and his cabinet resigned after more than 17 months in power, fueling a crisis of leadership in a country beset by a weakened economy and a surge in coronavirus cases. Muhyiddin, 74, will stay on as a caretaker prime minister until a successor is named, the palace said in a statement on Monday after he met with the country’s king earlier in the day. The king had accepted his resignation and said a fresh election is not the best option during a pandemic. Confirmation of the resignations first surfaced on an Instagram story posted by Science, Technology and Innovation Minister Khairy Jamaluddin. The palace made the official announcement before Muhyiddin addressed the country, signaling how strained ties had become and marking an end to an administration that has been beset by repeated demands from opposition lawmakers and coalition allies to step down.
- Desperate scenes played out at Kabul’s international airport on Monday as thousands rushed to exit Afghanistan after Taliban fighters took control of the capital, with Reuters reporting at least five people were killed as they tried to force their way onto planes. With land borders now under the control of the militant group, the airport is the last remaining exit point and there are fears that option may close soon. Videos circulating on social media showed hundreds of people swarming the tarmac. Afghanistan’s aviation authority asked people not to rush to the airport. That’s even as countries including the U.S. seek to evacuate their diplomats and other nationals. The panic in Afghanistan’s largest city reflects the Taliban’s rapid territorial advance, returning the fundamentalist group to power two decades after the U.S. military invaded and kicked it out. Criticism is mounting of President Joe Biden, who is following through on his predecessor Donald Trump’s plan to withdraw the remaining U.S. troops stationed there.
- As Covid-19 surged last year, governments worldwide touted the hope of “herd immunity,” a promised land where the virus stopped spreading exponentially because enough people were protected against it. That’s now looking like a fantasy. The thinking was that the pandemic would ebb and then mostly fade once a chunk of the population, possibly 60% to 70%, was vaccinated or had resistance through a previous infection. But new variants like delta, which are more transmissible and been shown to evade these protections in some cases, are moving the bar for herd immunity near impossibly high levels. Delta is spurring widening outbreaks in countries like the U.S. and U.K. that have already been walloped by the virus, and presumably have some measure of natural immunity in addition to vaccination rates of more than 50%. It’s also hitting nations that have until now managed to keep the virus out almost entirely, like Australia and China.
- China’s economy slowed more than expected in July, adding to signs that the global recovery is coming under pressure as the delta virus variant snarls supply chains and undermines consumer confidence. Retail sales were hit by tough new virus restrictions introduced toward the end of the month to contain fresh outbreaks. Flooding in central China and weak auto sales due to a chip shortage hurt manufacturing, while a slowing property market and environmental policies reduced output of steel and cement, hitting commodity demand. Alongside a slump in U.S. consumer confidence to an almost decade low and increasing supply chain pressures in southeast Asia, China’s data underlined the potential havoc the more contagious delta virus variant could have on the global recovery. A key container port in China was partially shut last week after a worker was infected there, disrupting trade at a time when businesses are ramping up for the Christmas holiday shopping season.
- Japan skirted a recession last quarter as a rebound in consumer spending defied virus restrictions, with the increased activity also fueling the spread of Covid-19. Renewed investment by businesses and increased government spending also helped gross domestic product expand an annualized 1.3% from the prior quarter in the three months through June. Private consumption rose 0.8% from the prior quarter on a non-annualized basis, compared with economists expectations it would be flat. While the resumption of growth offers support for Prime Minister Yoshihide Suga’s approach of limiting the economic damage of the pandemic through light restrictions on activity, voters aren’t crediting the premier. With his poll ratings at record lows and virus cases surging, analysts see Suga unveiling yet another stimulus package ahead of elections due in the next few months.
- The Biden administration plans to announce the biggest long-term increase in food stamp benefits in the program’s history, giving Americans more money to buy groceries and adding billions of dollars in costs to the government. Average benefits in October will go up by more than 25% from pre-pandemic levels for the 42 million people in the program, a U.S. official said, speaking on condition of anonymity before an announcement planned for Monday. The increase means that average monthly benefits will rise $36 per person from $121, according to the official. The New York Times reported the planned change earlier.
- Last week was notable for the tsunami of agency mortgage bonds offered to the Federal Reserve during its routine purchase operations on Friday. The central bank’s quantitative easing schedule called for it to buy $2.9 billion of 30-year uniform mortgage bonds Friday, and that was nothing outside of its usual pattern. However, mortgage investors flooded the Fed with $15.06 billion of bonds for sale, the largest daily amount offered during a single operation since April 1, 2020. In terms of how that compares to the total amount purchased, investors offered 5.2 times as much as were eventually taken down by the central bank. That is well above the 2.3 times average for 30-year uniform mortgage bond operations seen during all of this round of quantitative easing, and the second-highest overall. The highest submission ratio was the 5.5 times seen on July 16, 2020
“Don’t look for the needle in the haystack. Just buy the haystack!”— John Bogle
*All sources from Bloomberg unless otherwise specified