August 27, 2021

Daily Market Commentary

Canadian Headlines

  • The S&P/TSX Composite fell 0.4% at 20,504.15 in Toronto, ending a 4-day rally. The loss follows the previous session’s increase of 0.2%. Investors will be listening for any details at tomorrow’s Jackson Hole symposium for when and how the U.S. central bank will start to ease back its massive bond buying program. Toronto-Dominion Bank contributed the most to the index decline, decreasing 2.4%. Lithium Americas Corp. had the largest drop, falling 5.3%. Today, 118 of 229 shares fell, while 108 rose; 6 of 11 sectors were lower, led by financials stocks.
  • Vaccine mandates may prove costly for Canada’s biggest banks if they face reluctant ranks. The country’s largest lenders released stricter return-to-office policies last week that left some key questions around Covid-19 vaccinations unanswered — notably, the consequences for employees who refuse to comply. “The general law is that you’re allowed to bring in a vaccine mandate, subject to exceptions for religious or health concerns,” said Andrew Monkhouse, an employment lawyer with Toronto’s Monkhouse Law. A company could fire an employee who refuses to get a shot and doesn’t have a valid exemption, he said, “but they need to pay them severance, which could be quite expensive.”

World Headlines

  • European stocks were little changed as investors waited for clues on the timing and scale of a possible rollback of stimulus measures at the Federal Reserve’s Jackson Hole meeting. The Stoxx Europe 600 Index was up less than 0.1% as of 9:53 a.m. in London. Travel and leisure shares led the declines as airlines dropped following the U.K.’s latest update on travel rules and concerns over the European Union’s possible reimposition of curbs on visitors from the U.S. Banking stocks retreated, while miners outperformed. While Europe’s benchmark is on track for its longest monthly winning streak since 2013, it has lost some momentum since notching records in mid-August, as investors fret about stimulus curbs, the spread of Covid-19 variants and a Chinese regulatory crackdown. After hawkish comments from non-voting members of the Federal Open Market Committee this week, Chair Jerome Powell’s speech later today will be closely watched.
  • The S&P 500 closed in the red after after the two explosions outside Kabul’s international airport resulted in several casualties and Fed officials urged policy makers to slow asset purchases. The benchmark gauge closed down 0.6% amid thinner than usual trading volumes and as investors also awaited a speech by Federal Reserve Chair Jerome Powell at Jackson Hole on Friday. Trading for the index was 21% below the 100-day average, according to Boomberg data. Hawkish commentary from St. Louis Fed President Jim Bullard, an alternate voting member of the Federal Open Market Committee, swung stock futures into the red earlier in the day after he stated that the Fed should “get going” on tapering and finish in the first quarter of 2022. He was joined by Kansas City’s Esther George and Dallas’s Robert Kaplan in urging policy makers to move quickly on tapering.
  • Asian equities fluctuated in a narrow range, still headed for their biggest weekly gain since early February amid a rebound in Chinese technology stocks. The MSCI Asia Pacific Index was little changed on Friday as the broader market awaited clues on Federal Reserve policy from the Jackson Hole symposium. The regional gauge has rallied more than 3% this week. The Hang Seng Tech Index was set for its first weekly gain in six, surging about 7%, led by gains in internet giants including, Meituan and Baidu. Investors have sought bargains in Chinese tech stocks after Beijing’s crackdown drove them to levels that some see as attractively cheap. Others are hopeful of continued central bank liquidity boosts and gradual clarity on the Chinese government’s moves.
  • Oil headed for the biggest weekly gain in 11 months as market focus shifted to the outlook for U.S. economic stimulus and a storm that is menacing the Gulf of Mexico. Futures in New York rose above $68 a barrel and are up almost 10% for the week. Oil producers in the U.S. Gulf of Mexico have begun shutting production ahead of Tropical Storm Ida, which will be at least a Category 2 hurricane by the time it makes landfall near New Orleans in the next few days.  The market’s focus is also turning to a speech from Federal Reserve Chair Jerome Powell later on Friday for insights into how bond purchases may be eased. Strength in the dollar has weighed on crude in recent weeks, with commodities priced in the currency getting more expensive.
  • Gold edged higher with investors counting down the hours to a key Federal Reserve gathering that’s expected to shed light on tapering plans. Bullion climbed to head for a weekly advance ahead of Chair Jerome Powell’s keynote speech at the Jackson Hole symposium at 10 a.m. Washington time Friday. He’s expected to reinforce the message that it will probably be appropriate to begin scaling back the Fed’s $120 billion-a-month bond-buying program by the end of the year, though the threat of the coronavirus delta variant could limit what he can say about the outlook for U.S. monetary policy. Gold has wavered this year on changing expectations around the longevity of the massive monetary and fiscal stimulus that were the key drivers of its surge to a record last year. While Fed officials have laid the groundwork for tapering to start soon, prices are higher this week amid speculation it could be delayed by rising virus cases that may weigh on the economy.
  • European Union nations will be able to count on sufficient dosage quantities if and when they choose to give their citizens additional vaccine shots, Thierry Breton, the EU’s internal market commissioner, said. Meanwhile, China greenlighted booster doses for people deemed to be high-risk. New Zealand extended a national lockdown for a further four days as a coronavirus outbreak continues to grow, but said some restrictions outside the largest city Auckland will be eased next week. Denmark will phase out the last of its pandemic restrictions next month with the government no longer categorizing Covid-19 as a critical disease for the country. People who recovered from a bout of the illness during one of the earlier waves of the pandemic appear to have a lower risk of contracting the delta variant than those who got two doses of the Pfizer vaccine, according to a paper from researchers in Israel.
  • Joe Biden’s bid to complete an already messy U.S. withdrawal from Afghanistan was rocked after a pair of bombings in Kabul killed dozens of people and marked the most trying day yet of his presidency. The sheer scale of the tragedy — which saw at least 13 U.S. service members and at least 60 Afghans killed — renewed criticism from lawmakers and allies over the precipitous American withdrawal and the failure to forecast the Afghan government’s rapid fall at the hands of the Taliban. The attacks also undercut the president’s repeated arguments since taking office that he would offer a steady hand on foreign policy. And the scenes of chaos unleashed by a pair of suicide bombers drowned out efforts to cast the evacuation of more than 100,000 people from Afghanistan as a humanitarian success story.
  • Peloton Interactive Inc., whose bikes have become a symbol of affluence, is cutting prices in an effort to go downmarket and accelerate a push into middle-class households. The company slashed the price of its most popular bike on Thursday by $400 to $1,495, or $39 per month with a 39-month financing plan. That level should make the product more appealing to younger and lower-income consumers who want to get fit, President William Lynch said in an interview. Already, the company’s fastest-growing customer segment is people under the age of 35 who make less than $50,000 a year, he said. But Peloton’s move downscale is bringing some pain. The price cut will contribute to losses this year, the company warned on Thursday, with profits returning in fiscal 2023. Increased marketing spending — to help spread the word about Peloton’s everyman appeal — is buoying expenses as well.
  • Chinese regulators are seeking to implement far-reaching rulesabout the algorithms technology companies use to recommend videos and other content, claiming authority over internet services that governments like the U.S. have struggled to regulate. The Cyberspace Administration of China unveiled a 30-point draft proposal for “algorithm recommendation management regulations” that would directly affect companies including ByteDance Ltd., Tencent Holdings Ltd. and Kuaishou Technology. The rules would forbid practices that “encourage addiction or high consumption” as well as any activities that endanger national security or disrupt social and economic order. Tech industry algorithms have been at the heart of political controversies around the world. Facebook Inc. and Google have been accused of serving up news stories and videos that have exacerbated political polarization and fueled violence. In U.S. Congressional hearings in March, the companies were accused of using their platforms to hook kids on services like YouTube and Instagram.
  • American depositary receipts of Chinese companies were mixed in premarket trading after a report that China plans to ban companies with large amounts of sensitive consumer data from going public in the U.S. Technology giants Alibaba Group Holding Ltd. and Pinduoduo Inc. fell 2.8% and 0.9% respectively, while Inc. gained 1.1% and Didi Global Inc. rose 1.2%. Meanwhile, Chinese education stocks, which have been among the worst hitduring this year’s crackdown, were mostly higher in premarket, with New Oriental Education & Technology Group and TAL Education Group both gaining more than 2%.
  • Barclays Plc acquired a $3.8 billion portfolio of credit cards from retailer Gap Inc., giving it a new route to American consumers.  The British bank will issue co-branded and private label credit cards in the U.S. to Gap customers from the second quarter next year, Barclays said in a statement on Friday.  While Chief Executive Officer Jes Staley has made the investment bank his focus for growth, he has also spoken of expanding more into American credit cards. Barclays has previously struck deals with brands such as Uber Technologies Inc. and American Airlines Group Inc.
  • Nissan Motor Co.’s financial arm sold its first bond since 2018, after the automaker forecast a return to an annual profit for the first time in three years. Nissan Financial Services Co. priced a total of 60 billion yen ($545 million) across two tenors of 30 billion yen each on Friday, according to underwriter Mizuho Securities Co. Orders for the three-year bonds outstripped the issuance size by about 9.3 times, while the five-year notes attracted about 10.9 times more, according to underwriters. Nissan Financial had sold yen notes every year from 2016 through 2018, after which the broader group became mired in turmoil following the arrest that year of former Chairman Carlos Ghosn. Nissan Motor posted its biggest loss in two decades a little over a year ago. Its ratings suffered, with S&P Global Ratings keeping it at just one level above junk since July 2020.
  • China’s regulatory onslaught shows no signs of slowing as President Xi Jinping tries to remake the world’s second-largest economy. Xi’s “common prosperity” campaign kicked into overdrive this week, following an Aug. 17 meeting of top economic policy makers that outlined new strategies to tackle China’s yawning wealth gap. The flurry of activity included a regulatory vow to step up tax enforcement, a top court ruling against labor abuses in the private sector and a government denouncement of excesses in “fan culture.” The Communist Party has signaled it will rely on a mix of policy, market forces and private philanthropy to create a more olive-shaped income distribution, fat in the middle and tapered on the ends. Policy makers are also asserting greater control over data-rich tech companies and pushing the nation’s youthto fall in line with party priorities.
  • BlackRock Inc. is gearing up for the first test of Chinese investor appetite for its own mutual fund products, more than 15 years after entering the world’s most promising wealth market. The company’s new China unit is launching its debut product on Aug. 30, just two months after winning regulatory approval to become the nation’s first wholly foreign-owned mutual fund firm. In addition, its wealth management joint venture with China Construction Bank Corp. and Singapore’s Temasek said Friday it’s offering a maiden quant product Sept. 1. The world’s largest money manager is leading a global foray into China’s 100 trillion yuan ($15.4 trillion) asset management industry after regulators eased curbs on foreign control last year. It faces a challenge appealing to yield-hungry Chinese retail investors in a crowded market that’s dominated by local firms, even as surging demand provides a promising entry point.
  • China plans to propose new rules that would ban companies with large amounts of sensitive consumer data from going public in the U.S., people familiar with the matter said, a move that is likely to thwart the ambitions of the country’s tech firms to list abroad. In recent weeks, officials from China’s stock regulator have told some companies and international investors that the new rules would prohibit internet firms holding a swath of user-related data from listing abroad, the people said. The regulators said that the rules target companies seeking foreign listing via units incorporated outside the country, according to the people. China Securities Regulatory Commission officials said that companies with less sensitive data, such as those in the pharmaceutical industry, are still likely to receive Chinese regulatory approval for foreign listings, according to the people.
  • In his first three years atop the Federal Reserve, Chair Jerome Powell has followed in the path of his predecessors and used the central bank’s annual Jackson Hole symposium to make major pronouncements on monetary policy and the economy. In 2018, he questioned the usefulness of such economic concepts as the natural rate of unemployment. In 2019, he foreshadowed a cut in interest rates. And in 2020, he rolled out a radical re-jigging of the Fed’s monetary policy framework, at a conference held virtually because of Covid-19. So it’s no wonder that global investors are once again obsessing over what Powell will say when he speaks to the Federal Reserve Bank of Kansas City’s symposium Friday at 10 a.m. New York time.
  • A divided U.S. Supreme Court lifted the Biden administration’s moratorium on evictions, ending protections for millions of people who have fallen behind on their rent during the Covid-19 pandemic. Saying landlords were suffering “irreparable harm,” the conservative-controlled court ruled late Thursday that the U.S. Centers for Disease Control and Prevention lacked authority to impose the moratorium under the decades-old federal law the agency was invoking. The decision comes amid a spike of Covid cases around the country. “It would be one thing if Congress had specifically authorized the action that the CDC has taken. But that has not happened,” the court said in an unsigned opinion. “It strains credulity to believe that this statute grants the CDC the sweeping authority that it asserts.”
  • Tropical Storm Ida, forecast to grow into a powerful hurricane in the coming days, is hitting oil and gas production in the Gulf of Mexico as it veers toward the U.S coast. The ninth storm of the 2021 Atlantic hurricane season, Ida is passing through the Cayman Islands, with top winds of 45 miles (75 kilometers) per hour. It’s forecast to strike Cuba on Friday, reach hurricane strength over the gulf Saturday, and make landfall in Louisiana or Mississippi late Sunday or Monday. Oil and gas prices gained after energy majors shut down assets and evacuated workers. It’s almost 16 years to the day since Katrina wreaked havoc in the gulf and devastated New Orleans as a major hurricane.
  • After fighting each other for 20 years, the U.S. and Taliban are suddenly finding their interests aligned against a common enemy — but their own bloody history stands in the way of eliminating the threat. The blast at Kabul airport late Thursday, which killed 13 U.S. service members and at least 60 Afghans, showed the world the terrorism risks emanating from Afghanistan as American troops prepare to leave next week. After the attack, President Joe Biden vowed to strike against the extremist group ISIS-K while explaining why the U.S. is cooperating with the Taliban on the evacuation. It’s “in the interest of the Taliban that in fact ISIS-K does not metastasize beyond what it is,” Biden said when asked why the U.S. depended on its longtime adversary to secure the perimeter of the airport. He added: “It’s not a matter of trust — it’s a matter of mutual self interest.”
  • HP Inc. and Dell Technologies Inc., two of the biggest personal-computer makers, posted earnings reports that raised an alarm about the impact of a persistent component shortage, even as demand for their products remains strong. HP executives said they couldn’t meet all the PC orders they received in the July quarter, and expect production to be hurt by a dearth of some types of chips, shipping disruptions and the shutdown of some factories in Asia. Dell reported strong sales and profit that topped estimates in the period, and gave a bullish forecast — but its upbeat report was overshadowed by concerns raised by rival HP.
  • China Huarong Asset Management Co. is set to reveal the full extent of its financial health after flagging record losses last year and clinching a government-orchestrated bailout to keep it from the precipice. The bad-debt manager, which had strayed far beyond its original mandate into a myriad of risky ventures, will on Sunday release its long-overdue 2020 results as well as its earnings for the first half of 2021. As it outlined the framework of its rescue on Aug. 18, the Beijing-based firm said it suffered a preliminary loss of 102.9 billion yuan ($15.9 billion) last year. Trouble emerged in late March when Huarong, controlled by the Ministry of Finance, delayed its annual report, roiling markets across Asia amid concern over whether it can cover its $242 billion in liabilities — including about $21 billion of offshore bonds. The firm said last week that state-owned investors led by Citic Group would step in to restore its capital, ending months of speculation over whether Beijing would deem the troubled financial giant too big to fail.
  • With just three trading sessions to go, August is setting up to be a stand-out month for mortgage bonds. The Bloomberg U.S. MBS index has collected -0.03% in excess return for the month as of Thursday’s close. Should this level hold, it would be the best performing month since April’s +0.11% and above the -0.13% average seen during the month of August since 2010. Among the sub-components of the index, it’s the short-duration Fannie Mae 15-year seeing the best excess return in August so far at -0.22%, followed by the 30-year Ginnie Mae and 30-year Fannie Mae indexes at -0.24% and -0.32%, respectively. With a steeper Treasury yield curve, rising inflation and a looming Federal Reserve taper, adding defensive mortgages such as 15-year has been in vogue.

“Don’t worry what others are doing. Do you!”– Russell Simmons

*All sources from Bloomberg unless otherwise specified