September 6th, 2019

Daily Market Commentary

Canadian Headlines

• Canadian stocks rose for a second day, rallying along with global markets after a raft of U.S. economic data bolstered confidence in the North American economy and as trade tensions eased. The S&P/TSX Composite Index rose 0.8% to 16,575. Health Care stocks led the market higher, as 8 of 11 sectors gained. Canadian National Rail contributed the most to the index advance, advancing 2.3%. Descartes Systems saw the largest gain, rising about 10%. Barrick Gold was the biggest drag on the index, declining 7.4%.
• The stalwarts of Canada’s equity market might be losing their shine and in turn, hampering what could have been an even bigger rally for the nation’s stocks this year. Financial stocks, which include banks, insurers and asset managers, make up more than 30% of the S&P/TSX Composite Index and have lagged the record-breaking surge on the benchmark in 2019 — that’s only happened for the second time in nine years, according to data compiled by Bloomberg. Canadian stocks have rallied 16% this year, joining their U.S. counterparts even as global markets have been roiled by trade tensions and geopolitical risks. Profit expectations have hit a record high on an expanding economy, stronger commodity prices and the most recent solid earnings season.
• Prime Minister Justin Trudeau is overhauling Canada’s drug-pricing regime for the first time in more than 30 years, a move that could cost drugmakers billions in sales and raise the stakes in a U.S. debate over prescription costs. Trudeau, who is trying to fend off a conservative challenger in an election in October, has pushed through new regulations to drop the U.S. from a basket of countries Canada uses to cap domestic drug prices. The move is part of a wider revamp that marks “the biggest step to lower drug prices in a generation,” said Health Minister Ginette Petitpas Taylor.
• Equitable Group, a small-cap stock which has quietly outperformed its peers in the alternative mortgage lender space, could be added to the S&P/TSX Composite as soon as next week, when a quarterly index review takes place, according to a Bloomberg News survey of index analysts. Index reshuffles are important events for fund managers as they aim to minimize the risk of their portfolio’s equity asset allocation. They typically cause short-term share price spikes and elevated trading volumes as the popularity of passive investing grows. The S&P Dow Jones Indices Canadian Index Services is expected to announced the results of its quarterly review on Sept. 13.
• Cenovus Energy Inc. is supporting Enbridge Inc.’s plan to convert its Mainline crude pipeline network to contract service, breaking with some of its peers by saying the change would provide certainty on shipment volumes. The Canadian Energy Regulator should allow producers to continue bidding for contracted space on the line — instead of halting the process as opponents of the plan have sought — in order to better inform the agency’s decision on the switch, Cenovus said in a letter to the regulator on Thursday. Changing that standard procedure would exacerbate concerns about regulatory uncertainty in the Canadian energy industry, the company said.

World Headlines

• European equities were poised for their third weekly advance on optimism over U.S.-China trade talks and as the risk of a chaotic exit of the U.K. from the European Union waned. The Stoxx Europe 600 Index was little changed, set for a gain of 1.7% in the week. Safran SA added 1.8%, extending gains from yesterday after it raised its full-year outlook for earnings and revenue. At the same time, oil and mining stocks paced the declines. Rio Tinto Plc fell 1% and BP Plc lost 0.9%. European equities have almost erased the August drop on hopes that progress will be made in trade discussions and as the risk of a hard no-deal Brexit receded this week. At the same time, economic woes are mounting in Europe as German industrial production unexpectedly declined further in July.
• U.S. equity futures climbed with stocks in Asia and Europe ahead of Friday’s American employment report and remarks by Federal Reserve Chairman Jerome Powell. Treasuries slowed declines after yesterday’s sharp sell-off. The Stoxx Europe 600 Index and S&P 500 futures extended gains after China cut the amount of cash banks must hold as reserves, injecting liquidity into an economy facing headwinds to growth. The U.S. equity benchmark on Thursday climbed to within 2% of its all-time high. The MSCI Asia Pacific Index on Friday headed for its biggest weekly advance since June.
• Australia’s S&P/ASX 200 index rose, led by gains in technology stocks. The gauge is set for its third straight weekly gain, the longest winning streak in nearly three months. The benchmark index rose 0.5% to 6,644.2 as of 12:20 p.m. in Sydney. For the week, the index has advanced 0.6%. Lynas Corp. was among the top gainers, while Pro Medicus slumped 10%, the most since Aug. 6, after company said executive director Anthony Hall sold 1 million shares. In New Zealand, the S&P/NZX 50 index rose 1% to 11,220.24.
• Gold and silver extended their biggest decline since 2016 as traders await Friday’s speech by Federal Reserve Chairman Jerome Powell and U.S. jobs figures. Better-than-expected U.S. data on Thursday, coupled with optimism about an easing in trade tensions, boosted demand for risk assets and caused a sharp sell-off among havens such as precious metals. Equity markets received additional support Friday after news on more economic stimulus in China. The moves have pushed a gauge of gold volatility to a three-year high. While gold and silver headed for weekly losses, some industry watchers noted that the pull-back is probably temporary. Given the current macro picture, the bias right now is toward precious metals and particularly gold, BlackRock Inc.’s Evy Hambro told Bloomberg TV.
• Oil fell as trade tensions between the U.S. and China worsened the outlook for global demand growth. Futures dropped 2% in New York, erasing all gains for the week. Prices had touched a one-month high on Thursday after American inventories slid by 4.77 million barrels, more than twice what analysts had expected. Yet despite the prospect of easing trade tensions as the U.S. and China plan face-to-face negotiations next month, Commerzbank AG and UBS Group AG said on Friday that their expectations for prices had weakened because of the economic gloom.
• China’s central bank said it will cut the amount of cash banks must hold as reserves to the lowest level since 2007, injecting liquidity into an economy facing both a domestic slowdown and trade-war headwinds. The required reserve ratio for all banks will be lowered by 0.5 percentage points, taking effect on Sept. 16, the People’s Bank of China said on its website Friday. The PBOC also cut the reserve ratios by one percentage point for some city commercial banks, to take effect in two steps on Oct. 15 and Nov. 15. The cuts will release 900 billion yuan ($126 billion) of liquidity, the PBOC said, helping to offset the tightening impact of upcoming tax payments. That is more than the previous cuts in January and May, which released 800 billion yuan and 280 billion yuan, respectively, the PBOC said at those times.
• Opposition parties will deny Prime Minister Boris Johnson an early general election in a Parliament vote on Monday, as they seek to ensure the U.K. can’t tumble out of the European Union without a deal on Oct. 31. That makes an election unlikely until November at the earliest. In a conference call Friday morning, the parties — including Labour, the Scottish National Party, the Liberal Democrats, Plaid Cymru and the Independent Group for Change — agreed a unified position ahead of the government’s planned vote, according to two people familiar with the decision. They also decided against calling a vote of no confidence in Johnson’s government on Monday, according to the people, who declined to be identified talking about a private call. The upshot of the call is that a general election isn’t likely until November at the earliest.
• Robert Mugabe, who ruled Zimbabwe for 37 years and plunged the southern African nation into political and economic chaos as he violently clung to power, has died. He was 95.
• President Donald Trump’s trade war with China is threatening to draw one of the global economy’s neutral referees into the fray: the International Monetary Fund. As part of his campaign to pressure Beijing into changing its trade practices, Trump last month formally declared China a currency manipulator. But in a move that risks undermining the IMF’s place as an arbiter for sound economic policy, Treasury Secretary Steven Mnuchin has also been quietly pushing the fund to endorse its view — just weeks after the IMF found China’s yuan was fairly valued and declared there was no evidence of manipulation by Beijing, according to people familiar with the matter.
• Bond bankers from London to New York and Tokyo have never had such an abrupt transition from leisurely summer lunches to scarfing down sandwiches at their desks. September typically marks a return to busier issuance, but this year has been unprecedented as borrowing costs slide. Companies including Berkshire Hathaway Inc., major Chinese conglomerate Dalian Wanda Group and Italian natural gas firm Snam SpA sold at least $150 billion-equivalent of bonds this week in dollars, euro and yen, the most ever in the first week of September. The rush is all the more striking after an especially slow August, when sales stagnated due to the U.S.-China trade war, slowing global economic outlook and turmoil in Hong Kong. Developments this week helped temper those concerns: China and the U.S. agreed to trade talks early next month, data bolstered confidence in the American economy and Hong Kong’s leader formally withdrew an extradition bill that had sparked weeks of protests.
• SoftBank Group Corp. and its affiliates own about 29% of WeWork ahead of its initial public offering, an executive for the co-working company said in a meeting with analysts this week. The sizable stake, which hasn’t been disclosed publicly, indicates that the Japanese conglomerate’s fortunes are tied up in a big way to the performance of WeWork. WeWork held a private meeting Wednesday to brief analysts on the business in New York, where the company is based. According to a person with direct knowledge of the matter, a WeWork executive also said in the meeting that Adam Neumann, the co-founder and chief executive officer, will eventually own about 29% as well. He currently has about 22%, which will rise to 29% over time after his stock vests, the WeWork executive said.
• Palantir Technologies Inc. is in talks to raise significant funding from private investors, a move that could indefinitely delay one of Silicon Valley’s most hotly anticipated initial public offerings, according to people familiar with the company. The secretive data mining company approached Singapore’s Temasek Holdings Pte, SoftBank Group Corp. and other investors outside the U.S., according to people with knowledge of the situation, all of whom asked not to be identified discussing private information. Talks are ongoing and no deal has been reached.

*All sources from Bloomberg unless otherwise specified