August 26th, 2020

Daily Market Commentary

Canadian Headlines

  1. Royal Bank of Canada’s strength in capital markets is helping it overcome earnings woes brought on by Covid-19. Royal Bank is a powerhouse among its Canadian peers in investment banking and trading, and that advantage shone through in its fiscal third quarter. Earnings at the company’s RBC Capital Markets division rose 45% to a record C$949 million ($720 million) in the period, as Canada’s largest lender by assets posted profit that beat analysts’ estimates. Royal Bank’s record C$2.83 billion in provisions in its fiscal second quarter were designed to buttress the Toronto-based lender against souring loans from Covid-19. Such set-asides may have been the peak, as provisions were C$675 million in the third quarter, about half of what analysts were expecting.
  2. Justin Trudeau’s selection of Chrystia Freeland to be Canada’s new finance minister cements her place as his most trusted lieutenant, hinting the 52-year-old former journalist isn’t done with her political rise. But its real significance is that it signals the most decisive lurch to the left in economic policy in at least four decades. Freeland has firmly established herself as Trudeau’s Ms. Fix-It during their five years in power, handling President Donald Trump on trade and the energy-rich western provinces on their grievances. She’s now being tasked with nothing less than remaking the country’s socio-economic architecture. As she put it in her inaugural news conference, Covid-19 offers “a fabulous opportunity for our country” to craft an “equitable” and “green” recovery. This echoed Trudeau’s own promise “to get through this pandemic in a way that gives everyone a real and fair chance at success, not just the wealthiest 1%.”

World Headlines

  1. European stocks opened steady on Wednesday as incremental news on jobs support and trade was counteracted by persistent concerns around the Covid-19 pandemic. The Stoxx Europe 600 Index was little changed as of 8:12 a.m. in London after Germany extended a program that’s kept millions of people from unemployment and China was reported to be set to buy a record amount of American soybeans after reaffirming its commitment to the phase-one deal with the U.S. earlier this week.
  2. U.S. index futures swung between gains and losses while shares in Europe advanced and those in Asia were mixed. Oil climbed while the dollar was little changed. S&P 500 futures fluctuated hours after the index closed at a fresh record high, to trade little changed as of 10:33 a.m. in London. As global economies reopen, investors are showing cautious optimism that fresh outbreaks of the coronavirus will be limited amid potential progress on a vaccine. Traders are also awaiting Federal Reserve Chairman Jerome Powell’s speech on Thursday about the central bank’s monetary policy framework review, which is expected to entail a new inflation strategy.
  3. Japan’s Topix index fell after climbing to an 11-week high on Tuesday, as downbeat U.S. data damped sentiment. Pharmaceutical makers weighed most on the benchmark measure, while the telecommunications group advanced. The Nikkei 225 Stock Average was little changed, closing above the 23,000 level for a second day, more than 40% above its March low. Ichikawa said Prime Minister Shinzo Abe’s planned press conference this week will be closely watched by investors for any clues about plans for the rest of his term. Abe is planning to hold a news conference Friday, where he will discuss his health, Kyodo News reported. It would be his first extended public speaking appearance since June.
  4. Oil held near a five-month high as Hurricane Laura bore down on key refining facilities on the U.S. Gulf Coast, with forecasts saying it will strengthen rapidly into a “potentially catastrophic” Category 4 storm. Futures in New York were steady after jumping 1.7% on Tuesday. The storm is expected to make landfall late Wednesday or early Thursday along the Texas-Louisiana coast, according to the National Hurricane Center. More than 84% of oil output in the Gulf of Mexico has now shut, while almost 3 million barrels a day of refining capacity has been closed. Prices also got a boost after the American Petroleum Institute reported U.S. oil inventories fell by 4.52 million barrels last week and gasoline stockpiles shrunk by 6.39 million barrels, according to people familiar with the data. That would be the fifth straight weekly decline in crude supplies if the industry estimates are confirmed by official data due Wednesday.
  5. Gold and silver struggled to pare losses after three days of declines as investors weighed signs of easing U.S.-China tensions and optimism about a coronavirus vaccine against expectations for loose monetary policy. China is set to buy a record amount of American soybeans this year, people familiar with the matter said, following news earlier this week that the two countries reaffirmed their commitment to the phase-one trade deal. Gold-backed exchange-traded funds saw their first net outflow since Aug. 14 on Tuesday, according to preliminary data compiled by Bloomberg. That added pressure on bullion prices, already hurt by optimism over vaccine progress and the recent rally in global equities.
  6. The Federal Reserve looks likely to keep short-term interest rates near zero for five years or possibly more after it adopts a new strategy for carrying out monetary policy. The new approach, which could be unveiled as soon as next month, is likely to result in policy makers taking a more relaxed view toward inflation, even to the point of welcoming a modest, temporary rise above their 2% target to make up for past shortfalls. Fed Chairman Jerome Powell is slated to provide an update on the Fed’s 1-1/2-year-old framework review of its policies and practices when he speaks on Thursday to the central bank’s Jackson Hole conference, being held virtually this year because of the coronavirus pandemic.
  7. Germany will extend a program designed to stop millions of workers losing their jobs, joining several other European nations in renewing its job-support package. Meanwhile, France is preparing to announce a 100 billion-euro ($118 billion) stimulus plan next week. Japan’s virus czar said the country faces a second wave of Covid-19 cases that is larger than the first. South Korea ordered striking doctors back to work as several Asian countries tightened restrictions on travellers from the nation.
  8. Inc. shares jumped in premarket trading on Wednesday, after the company reported second-quarter results that were much stronger than expected. Adjusted earnings were more than double what had been anticipated, while the 5.1% upside surprise for revenue was the biggest in at least a decade, according to data compiled by Bloomberg. The software company also reported improvement in operating margins and lifted its full-year sales outlook, in what Jefferies described as a “monster beat and raise” quarter. Analysts raved about the report, with Citi calling it “one of the strongest quarters we’ve seen recently from Salesforce,” adding that the forecast “removes much of [the firm’s] prior caution.” Firms roundly lifted their price targets, with the average jumping to $250, up from $207 over the weekend.
  9. Finland’s $53 billion pension fund Varma is adding to its pile of U.S. equities and divesting from Europe, citing a technology gap it says exists between the two stock markets. Varma cut its allocation to European listed stocks outside Finland to just 5% at the end of the second quarter from 10% in March and 16% in December. More than a third of the listed equities it now owns are in U.S. companies. Chief Investment Officer Reima Rytsola says U.S. tech firms “have been able to show incredible growth rates with increasing profitability; that’s of course a heavenly combination from an investors’ point of view.”
  10. A federal program meant to help small businesses hurt by the coronavirus pandemic may have sent more than $1 billion to places it shouldn’t have gone, according to a Bloomberg Businessweek analysis of Small Business Administration data. In some parts of the country the SBA approved far more $10,000 Economic Injury Disaster Loan (EIDL) grants than the number of eligible businesses, the analysis found. The epicenter was six adjacent congressional districts in the Chicago area, where 81,000 grants were approved even though there are only 19,000 eligible recipients. That’s more than $600 million going to phantom entrepreneurs.
  11. Hurricane Laura is poised to become a life-threatening Category 4 storm before coming ashore along the Texas-Louisiana coast this week, potentially inflicting as much as $18 billion in damage on the region and keeping some of America’s largest oil refineries shut for months. Laura’s winds were forecast to peak at 130 miles (209 kilometers) per hour over the Gulf of Mexico, but may weaken slightly before hitting the coast on Thursday, according to the National Hurricane Center. The storm has already disrupted offshore oil and natural gas production, shut a third of the Gulf Coast’s refining capacity, halted exports and prompted mandatory evacuations. It’s set to be the first major system to hit the Gulf Coast since Michael in 2018.
  12. First lady Melania Trump capped the second night of the Republican convention by attempting to soften the image of her highly divisive husband, forgoing attacks on Democrat Joe Biden to focus on the ravaging toll of coronavirus and the nation’s tortured racial history in a way Donald Trump usually avoids. She acknowledged the deaths of more than 178,000 Americans and called for national unity in response — a departure from the president’s customary handling of a virus he first downplayed and now seeks to put behind him. In between, Melania Trump called on the nation to see the president as she does, as a leader devoted to the safety of the country and deserving of a second term.
  13. Ireland’s government undercut efforts by Phil Hogan, the European Union’s trade chief, to minimize the fallout from his visit last week to a golf dinner in his native country that violated coronavirus regulations. Ireland’s Prime Minister Micheal Martin, Leo Varadkar, the deputy prime minister, and Green coalition partner Eamon Ryan late Tuesday said his “delayed and hesitant” response undermined public confidence. Ryan added later that Hogan’s public comments could also impair health regulations. It’s now up to Ursula von der Leyen, the European Commission President and Hogan’s boss, whether the powerful trade chief should step aside. The commission has stood by Hogan until now, even after requesting that he submit two reports and further clarifications amid the shifting details and circumstances of his story.
  14. U.K. judges can set global royalty rates for the use of telecommunications technology, Britain’s highest court said in a pair of cases over how much Huawei Technologies Co. owes a U.S. patent owner. The U.K. Supreme Court on Wednesday affirmed a decision that Huawei would either have to pay Unwired Planet International Ltd. a global rate set by judges or face an order limiting its British sales. In a related decision involving another patent owner, the court rejected Huawei and ZTE Corp.’s argument that, if any court were to establish a global rate, it should be in China, where manufacturing and the bulk of sales are located. Unwired Planet and Conversant Wireless Licensing Sarl each have patents related to the 2G, 3G, and 4G telecommunications standards. Unwired Planet is seeking royalties on Huawei’s phones and infrastructure, while Conversant contends it’s entitled to royalties from both Huawei and ZTE.
  15. China says it has made concessions in proposing to let U.S. regulators to audit some of its most sensitive companies and is calling for direct talks to solve a years-long dispute that threatens global markets. In an interview in Beijing on Wednesday, Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said China is “sincere” in wanting to solve the standoff over the accounting issues. U.S. officials have recently stepped up a push to gain access to audit working papers for Chinese companies that trade in the U.S., threatening rules that would trigger delisting shares such as those of Alibaba Group Holding Ltd. and Baidu Inc. if the request isn’t met. The standoff has dogged relations for years and deteriorated since 2017, after a trial inspections done jointly by Chinese and American regulators failed to yield an agreement.
  16. Xiaomi Corp. reported better-than-expected profit after cracking the Chinese market for high-end smartphones and growing its share of overseas markets like Europe and India. The Chinese smartphone maker more than doubled net income to 4.49 billion yuan ($716 million) in the June quarter, beating the highest analyst estimate. Sales increased 3.1% to 53.5 billion yuan. Xiaomi’s overseas business has recovered to pre-Covid-19 levels, acting Chief Financial Officer Wang Xiang said Wednesday. Smartphone shipments in European countries like France and Spain grew by 64.9% in the quarter, propelling Xiaomi into the No. 3 spot in the region for the first time, the company said, citing consultancy Canalys. The phonemaker also kept its top position in India in the quarter even though the country’s smartphone shipments halved during lockdown measures. That drove a 12% fall in the company’s device shipments globally, according to IDC, just when tensions between Delhi and Beijing threatened to further depress sales in its biggest foreign market.
  17. Dick’s Sporting Goods Inc. posted its highest-ever second-quarter sales as shoppers stocked up on sneakers and athletic apparel during the pandemic. The key retail metric of same-store sales surged 21% — more than double the estimate of analysts compiled by Consensus Metrix. Sales and profit also beat analyst’s estimates and were the highest ever for a second quarter.
  18. Mexico remains on track for its worst recession in nearly a century after the coronavirus pandemic led to the biggest quarterly contraction in data going back to 1993. Gross domestic product fell 17.1% in the second quarter compared to the three previous months, the national statistics institute reported on its website Wednesday. The contraction was slightly less than the median estimate for a 17.2% drop from economists surveyed by Bloomberg and the 17.3% fall estimated in preliminary data last month.
  19. Big Ten football fans face months of empty Saturdays this fall. But for at least one conference member, the lost revenue means the permanent elimination of four other sports that rely on football for survival. The University of Iowa said last week it will discontinue men’s gymnastics, men’s and women’s swimming and diving, and men’s tennis after the 2020-2021 season. The school said the cuts will help make up for $100 million in football losses and an overall deficit of as much as $75 million this fiscal year. The Big Ten announced Aug. 11 it was cancelling all fall sports, including football, a major revenue source for the 14 conference members. The Hawkeyes are the only school so far that’s wiped out other intercollegiate sports teams to make up for the lost income, but many of the universities say losses could be near $100 million, with a combination of job and pay cuts, furloughs and delayed spending being deployed to fill the shortfalls.
  20. It’s been a big couple days for tech companies gearing up to go public. On Tuesday, Palantir Technologies Inc. filed for a direct listing, joining a fall rush to the markets that will include data platform Snowflake Inc., software company Asana Inc. and delivery behemoth DoorDash Inc. But perhaps the most closely watched listing of them all will be Airbnb Inc. Just a few months ago, the company’s bookings had fallen by 90% and it looked to be on the verge of getting wiped out by Covid-19. Now, it’s filed for what’s likely to be one of the biggest market debuts of the year.  It’s worth taking a look at how we got here. Before the pandemic, Airbnb was at its peak with billions in cash on hand and plans to go public via a non-traditional direct listing because it didn’t need to raise any new money, it just wanted to let employees and investors cash out. When I asked to profile Chief Executive Officer Brian Chesky for a magazine feature in February, I was told to expect a long wait because he was such a hot commodity.

*All sources from Bloomberg unless otherwise specified