August 20, 2021

Daily Market Commentary

Canadian Headlines

• Royal Bank of Canada said it will require employees to be fully vaccinated against Covid-19 to work in the bank’s offices, joining Morgan Stanley and other firms in restricting access to some locations as the Delta variant spreads. Toronto-based RBC said it will begin by asking Canadian and U.S. employees to confirm their vaccination status. They’ll have to be vaccinated by Oct. 31 to work on the bank’s premises, Chief Human Resources Officer Helena Gottschling said in a memo to staff. The policy will eventually apply to RBC’s offices in other countries “where permissible,” according to the memo, which was reported first by the Globe and Mail newspaper. The highly-transmissible Delta variant is upending plans on Wall Street and other financial centers to bring back more employees back in September. Firms including Citigroup Inc., Capital One Financial Corp. and Wells Fargo & Co. are restricting the office access of unvaccinated employees, pushing back plans to reopen or imposing new requirements for masks or vaccine-status disclosure.

World Headlines

• European equities resumed their downward trajectory, extending the previous session’s selloff as worries over stalling growth and the spread of the delta variant lingered. The Stoxx 600 Index fell 0.4% at 8:51 a.m. London time as automakers, travel & leisure stocks and the tech sector declined.  The benchmark has come under pressure since recently hitting a series of all-time highs. It slid 1.5% on Thursday amid worries that stimulus in the U.S. could begin to be withdrawn this year, as well as concerns over a regulatory crackdown in China and the impact of Covid-19 variants.
• U.S. stock-index futures fell and the dollar extended a rally as faltering growth and China’s regulatory curbs compounded risks before the Federal Reserve’s Jackson Hole symposium next week. Equity markets around the world were broadly in the red for another day. Hong Kong’s benchmark stock index entered a bear market and Europe’s Stoxx 600 Index was on track for the biggest weekly loss since February. S&P 500 futures lost 0.5%. Investors sought the safety of haven assets, with the dollar rising for a fifth day, its longest winning streak in two months. Treasury yields fell and gold climbed.
• Asian stocks declined, heading for their worst week since February, as ongoing concerns over the delta virus and China’s regulatory clampdown hurt sentiment. The MSCI Asia Pacific Index fell as much as 1.3%, with Alibaba and Toyota leading a selloff in consumer shares. The Hang Seng Index was poised to enter a bear market after dropping about 20% from a February peak. Asia’s stock benchmark is down more than 4% this week as investors face a range of issues including the impact of the pandemic’s resurgence on growth, the outlook for tapering at the Federal Reserve and Beijing’s continued crackdown on private industry. The S&P 500 Index and Stoxx 600 Europe Index have both fallen less than 2.5%.
• Oil headed for its longest stretch of daily declines since 2019 as the U.S. Federal Reserve’s signal it will start tapering stimulus promoted a rally in the dollar, and concerns continue to mount about global energy demand. West Texas Intermediate futures fell for a seventh day, taking the week’s drop to 7.3%. Other raw materials including copper and iron-ore dropped on Thursday following the Fed’s signal. The Bloomberg Dollar Index has risen every day this week, making commodities priced in the currency less appealing. Oil has been hit this month by the prospect of the Fed cutting back on its asset purchases despite the spread of the delta coronavirus variant risking an economic revival. The pandemic remains a threat to energy demand, especially across Asia, with key importer China restricting mobility to combat an outbreak.
• Copper edged higher, though still headed for its worst week in two months after metals markets slumped on mounting worries that demand may slow. Commodities from copper to iron ore to oil have been pressured by concerns that the Federal Reserve may soon start curbing massive stimulus that underpinned price rallies in the past year. The fast-spreading coronavirus delta variant has also hurt sentiment, with recent weaker-than-expected data in the U.S. and China suggesting the global economic recovery is stalling.
• U.K. retail sales fell unexpectedly at the sharpest pace since the economy was in lockdown in January, signal that a sharp recovery may be loosing momentum. The volume of goods sold in shops and online dropped 2.5% last month after a 0.2% gain in June, which was revised down from a previous estimate, the Office for National Statistics said Friday. Economists had expected a slight slowdown to 0.2%. The figures along with a weaker inflation reading earlier this week ease pressure on the Bank of England to pare back its stimulus program. The central bank has warned that consumer price increases may surge to double its 2% target by the end of this year, but a slower pace of spending reduces that risk.
• AstraZeneca Plc’s antibody cocktail was found to be 77% effective in preventing symptomatic illness in high-risk people, in a key trial that could expand the range of drugs available to vulnerable groups. President Joe Biden defended his push for booster shots, amid criticism that the move is unfair to other nations still struggling to procure first doses. Apple Inc. became the latest U.S. company to delay plans for office openings, underscoring the challenges businesses still face in returning to normal. Australia extended a two-month lockdown in Sydney, while New Zealand stretched its lockdown for another four days. Japan is facing its biggest challenge yet as cases spiral out of control and strain the limits of its health-care system.
• China Evergrande Group pledged to fix its debt problems following a rare public rebuke from regulators as the developer struggles to stave off a liquidity crisis. Evergrande said it will do its best to maintain stable operations, resolve debt risks, and keep stability in housing and financial markets. The People’s Bank of China and the China Banking and Insurance Regulatory Commission earlier told the group to address its debt woes and refrain from spreading “untrue” information.  The regulators issued the joint statement late Thursday after meeting with the developer’s executives. Evergrande will disclose material events in accordance with laws and regulations and clarify untrue information in a timely way, the company said in a statement.
• SalMar ASA, one of the largest producers of farmed salmon, offered to buy Norway Royal Salmon ASA in a deal valuing the company at about 11.8 billion kroner ($1.3 billion), weeks after an offer from NTS ASA. The cash offer of 270 kroner apiece represents an 11% premium to Thursday’s closing price and is almost 13% higher than the recent offer made by aquaculture group NTS ASA. Shares of Norway Royal Salmon jumped 14% to a record high in Olso on Friday, while SalMar rose 1.9%. Norwegian salmon and trout exports more than doubled in value since 2012 as the red-fleshed fish gains in popularity. Conditions in the fjords are difficult to replicate outside of the region, supporting a sector that’s one of Norway’s top exports. Demand in the $400 billion fish market is so big that it’s attracting companies like Cargill Inc. and meat giant JBS SA, which this month announced a deal to buy Australian salmon producer Huon Aquaculture Group for about $314 million.
• Wealthy Americans wondering how much more taxes they’ll owe after Democrats pass their sweeping social-spending package may have to wait until deep into the fall, or later, to find out. The tax-writing panels in the House and Senate had until Sept. 15 to finish writing the details of what would amount to the biggest tax-hike package since 1993. Those details are part of a legislative push that incorporates Democrats’ plans for ramping up spending on initiatives including health, child care and clean energy. First off, lawmakers don’t yet know how big the final tab will be, a key determinant for how much money will need to be raised. The outline known as a budget resolution that passed last week called for $3.5 trillion over 10 years. But moderate Democrats Kyrsten Sinema and Joe Manchin have said they want a smaller figure in the final so-called reconciliation bill.
• U.S. President Joe Biden’s point man for North Korea was set to arrive in Seoul this weekend, days after Pyongyang threated a “security crisis” over U.S.-led military drills. Sung Kim, the U.S. special representative for North Korea, will make a four-day trip starting Saturday to discuss issues including denuclearization on the peninsula, the South Korean Foreign Ministry said in a statement. It’s his second visit since June. Sung Kim has said that the door with North Korea is open for nuclear disarmament discussions, including during his last trip. But a few hours before he was due to meet President Moon Jae-inin Seoul, Kim Jong Un’s sister saying the U.S. was “wrong” to believe that North Korea might be interested in returning to talks.
• Apple Inc. is delaying its return to corporate offices from October until January at the earliest because of surging Covid-19 cases and new variants, according to a memo sent to employees on Thursday.  The company told staff it would confirm the re-opening timeline one month before employees are required to return to the office. Apple had previously aimed to require all staff to return to corporate offices by early September before delaying that until October. When employees are required to return, they will be expected to work at the office at least three days a week — Mondays, Tuesdays and Thursdays — with remote work on Wednesday and Friday available. The memo to staff, sent by human resources and retail head Deirdre O’Brien, added that the company does not currently expect to shutter its offices or retail stores. But she strongly encouraged staff to get vaccinated. The company is yet to require vaccinations or testing, though it is upping its testing program to as many as three at-home coronavirus tests per week. An Apple spokeswoman declined to comment on the memo.
• U.S. stock funds enjoyed their largest inflows in nine weeks, according to Bank of America strategists, as strong central bank support means there’s no alternative to equities to generate returns. U.S. equity funds attracted $12.8 billion in the seven days ending Aug. 18, Bofa said in a note, citing EPFR Global data. Worldwide, investors poured $23.9 billion into equities in the period, and pulled $4.5 billion from cash funds, the first outflow in five weeks. The BofA data, which was collected before the Federal Reserve indicated it could potentially start to taper stimulus this year, indicate investors still have enough confidence in policy support to buy the dips, according to the strategists.
• The sovereign wealth fund of Norway, which manages $1.4 trillion in assets, said there are oil companies in its portfolio that “absolutely” aren’t doing enough to cut emissions, as the guidelines under which it operates are reviewed, potentially giving the investor more scope to act. Norges Bank Investment Management still holds stakes in a number of fossil-fuel giants, including Exxon Mobil Corp., Chevron Corp. and BP Plc., after failing to win political approval to dump its entire portfolio of oil stocks a few years back. The warning comes as Norway reassess the mandate it’s handed the world’s biggest wealth fund. A government-commissioned paper on Friday proposed having climate risk underpin investment decisions across the fund, amid increasingly alarming evidence that the planet is heating up much faster than previously feared, with fossil-fuel companies behind much of that development.
• Clayton Dubilier & Rice LLC raised its offer for Wm Morrison Supermarkets Plc to 7 billion pounds ($9.5 billion) in a bid to outmaneuver Fortress Group in the battle for Britain’s fourth-largest grocer. The U.S. private equity group offered to pay 285 pence a share for the Bradford, U.K.-based grocer, according to a statement Thursday, on the eve of a “put up or shut up” deadline. That’s above the 272 pence-a-share offer from the Fortress-led consortium and CD&R’s prior offer of 230 pence, which was rejected by Morrison in June. After weeks of speculation as to whether it would increase its offer, CD&R also pledged to support Morrison’s existing management, its relationships with suppliers and its terms on employee pay and pensions. The private equity firm promised not to carry out material sales and leasebacks of the grocer’s extensive real estate portfolio. This largely matches similar commitments made by the rival Fortress consortium.
• Chinese firms are lagging their regional peers in a key funding method to meet sustainability goals, even as the world’s second-biggest economy pushes to become carbon neutral by 2060. So-called sustainability-linked loans usually offer creditors extra margins if borrowers fail to meet their environmental goals, giving firms an incentive to make an extra effort. While the volume of such debt has climbed at a record pace in the rest of Asia Pacific, few deals are being done in China.  Borrowers are instead taking out more and more green loans that finance environmental projects. China is leading in other types of sustainable debt deals such as green bonds, of which it’s the biggest issuer in Asia and only Germany has sold more in the world so far this year.
• The slow pace of borrowing by local governments in China and curbs on the property market mean the economy will receive less of a boost this year from infrastructure investment than initially thought. Cities and provinces will sell about 1.8 trillion yuan ($277 billion) in local government special bonds by the end of August, data compiled by Bloomberg show, amounting to 48% of their quota for the year.  At the same time last year, about 75% of the quota had been sold as local authorities ramped up spending to pull the economy out of its pandemic-induced slump.
• China’s rolling regulatory crackdown on unfair markets found more targets Friday among liquor makers, cosmetics firms and online pharmacies. A slew of commentaries and reports in state media called for tougher oversight to protect consumers as President Xi Jinping’s campaign to address inequality broadens. That’s piled more misery on investors with global institutions dumping $1 billion worth of mainland shares via trading links on Friday while U.S.-traded Chinese stocks endure weeks of pain. “With regulation worries and the beginning of a downturn in economic growth, it’s extremely hard to make money right now,” said Hou Anyang, fund manager at Frontsea Asset Management in Shenzhen. “At this rate even the winning stocks in electric vehicles and chips may not stay strong much longer.”
• Deere & Co., the largest maker of agricultural machinery, raised its full-year fiscal outlook as surging crop prices boosted farmers’ demand for new equipment. Net income for the year will be between $5.7 billion to $5.9 billion, up from a prior range of $5.3 billion to $5.7 billion, Deere said Friday in a statement. The company posted net sales from equipment operations of $10.4 billion in the three months ended Aug. 1 that beat analysts’ average estimate. Deere is seeing increasing fortunes in Europe and Asia, where the company said agricultural and turf sales will be more than previously expected. The Moline, Illinois-based firm forecasts its European ag and turf business to be 10% to 15% higher, up from a prior expectation of a 10% increase, while sales of the same segment in Asia will be up “significantly” after having only expected it to be “slightly” higher.
• Volkswagen AG plants are set for a bumpy restart after the traditional summer break as the car industry remains in the grip of a chip shortage that most recently engulfed holdout Toyota Motor Corp.  VW’s Wolfsburg plant, the world’s biggest employing some 60,000 people, will restart with only one shift next week Monday through Friday, Europe’s biggest automaker said. Audi, the group’s biggest profit contributor, will extend the summer break by one week at its two factories in Germany as semiconductor supply remains “volatile and tense.” Carmakers’ recent warnings of rocky months ahead are proving prescient after Covid-19 outbreaks in Southeast Asia forced restrictions at chip-processing plants. VW last month flagged “really constrained” output during the third quarter, while BMW AG predicted ongoing uncertainty.
• Vice President Kamala Harris will look to bolster economic and military cooperation in China’s backyard as she visits Singapore and Vietnam starting this weekend in the Biden administration’s most high-profile trip yet to Asia. The White House has gone on the diplomatic offensive in Southeast Asia after years of passive U.S. engagement, recently sending top diplomats to the region along with Covid vaccines that have accounted for about a fifth of the 111.7 million doses it donated globally. In addition to securing a key military dealwith the Philippines in July, the approach signals a more assertive posture in a part of the world that has grown more economically dependent on Beijing. Southeast Asian leaders will be looking for Harris to reassure them of America’s role as a major trading partner that offers a reliable security presence against Beijing’s assertiveness in areas like the South China Sea. But they’re also wary of any comments that may force them to choose between the U.S. and China on issues from 5G networks to financial aid.
• Johnson & Johnson went to another insider to lead the health-care giant through the pandemic, naming Joaquin Duato to replace longtime veteran Alex Gorsky. Now vice chairman of the executive committee, Duato will take the reins effective Jan. 3 and take a seat on the company’s board, J&J said in a statement late Thursday. Gorsky, who’s been at the helm for nine years, will become executive chairman. Duato, 59, is a three-decade veteran of J&J, as is Gorsky. He has served in his current role since 2018, guiding the drug and consumer product divisions, and overseeing supply-chain and technology operations.
• The volume of China’s exports are expected to fall in August from the previous month due to renewed container shipping congestion, while imports likely stagnated, according to a German think tank. The Kiel Institute for the World Economy said its trade indicator for China, which measures the number of ships leaving Chinese ports, dropped 6% in August from July. The reading points to weakness in China shipments as a resurgence of the delta variant threatens to derail a recovery in global trade.  “While in recent weeks there have been gentle signs of relief, the terminal closure in Ningbo is now exacerbating the bottlenecks in container traffic again,” said Vincent Stamer, head of Kiel Trade Indicator. “If goods trade with China does not quickly find its way back to normal processes, the crisis also threatens to make itself felt in the Christmas business with missing products and higher prices.”

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*All sources from Bloomberg unless otherwise specified