August 27th, 2020

Daily Market Commentary

Canadian Headlines

  1. Canadian equity markets gained with tech stocks leading the advance, mainly driven by Shopify Inc.’s rally. The S&P/TSX Composite Index rose 1% in Toronto. The benchmark’s tech index rose 4.2%, the most since July 29. Shopify gained after Jamie Murray of Murray Wealth Group wrote that its shares will return 7% per annum over the next eight years assuming it’s valued at a similar multiple to Inc. Royal Bank of Canada, after posting record profit in capital markets in the fiscal third quarter, will probably see more gains from advising on mergers and acquisitions, initial public offerings and leveraged financing, Chief Financial Officer Rod Bolger said. Shares rose 1.5%
  2. Toronto-Dominion Bank is bracing for a bigger Covid-19 impact on consumer loans in Canada than in the U.S. The Canadian lender, which has a U.S. bank-branch network that stretches from Maine to Florida, set aside C$951 million ($723 million) for souring loans in its domestic retail division, compared with C$897 for its U.S. operation. Higher provisions eroded profit in the fiscal third quarter, with results beating analysts’ estimates. Toronto-Dominion had a record contribution from its investment in the U.S. online brokerage TD Ameritrade, thanks to a retail trading boom during the pandemic. That showed up in the lender’s U.S. retail business, which nevertheless saw a 48% earnings decline to C$673 million as loan-loss provisions surged from a year earlier.
  3. Canadian Imperial Bank of Commerce got a boost from its capital-markets operations, helping the nation’s fifth-biggest bank counter earnings erosion brought on by the coronavirus pandemic. Trading has been a bright spot for Canadian firms during he quarter as the crisis boosted market volatility and activity, and CIBC has benefited as well. Earnings at the bank’s CIBC Capital Markets division climbed 67% to C$392 million ($298 million), fueled by higher trading and investment-banking fees, as fiscal third-quarter earnings beat analysts’ estimates.
  4. Canada’s economy suffered its worst contraction on record in the second quarter, official data is set to show on Friday, but the country appears to have rebounded strongly since the height of the pandemic. Economists anticipate gross domestic product shrank by nearly 40% on an annualized basis as businesses and companies cut spending sharply amid virus-related shutdowns. That’s on top of the 8.2% contraction in the first quarter. It adds up to a bigger first-half hit than in the U.S., though Canada is expected to see a stronger recovery, having avoided a new wave of cases similar to the one that continues to hamper the expansion south of the border. Monthly data, also to be released on Friday, will probably show Canada has already recouped more of its lost output than the U.S. has.

World Headlines

  1. European stocks eased on Thursday as investors awaited comments from central bankers at the annual Jackson Hole symposium. The Stoxx Europe 600 Index fell 0.5% as of 10:22 a.m. in London, with declines in banks tempering gains in autos and travel shares. Insurers also underperformed as Hurricane Laura made landfall in Louisiana, threatening the region with devastation that could inflict more than $15 billion in insured losses. With the Stoxx 600 struggling since July to overcome its 200-day moving average, investors are seeking fresh catalysts. From the first virtual Jackson Hole symposium kicking off today, they are looking for any take from central bankers on the global economy and hints on potential new inflation targets. Federal Reserve Chair Jerome Powell is expected to reinforce the case of aiming for inflation that hits the 2% target on average, which could mean interest rates pinned at zero for longer.
  2. A global rally that drove equity gauges to records stalled on Thursday while bonds climbed before a highly anticipated speech from Federal Reserve Chair Jerome Powell. Futures on the S&P 500 Index and the Nasdaq 100 retreated after a surge in software and media shares on Wednesday pushed both indexes to another record close. Abbott Laboratories jumped in the premarket after winning clearance for a 15-minute Covid test. Benchmark 10-year Treasury yields edged lower in a move eclipsed by European peers. The dollar turned higher versus a basket of its biggest counterparts from a level near its two-year low.
  3. Japanese shares slipped ahead of the closely watched Jackson Hole meeting where Federal Reserve Chair Jerome Powell is scheduled to speak. Banks and automakers weighed most heavily on the benchmark Topix index, while gains in service-sector companies provided support after Recruit Holdings Co. beat earnings expectations. The yen was little changed around 106 per dollar. Powell’s speech, at 9:10 a.m. Washington time Thursday, is on the Fed’s long-awaited monetary policy framework review. He’s expected to reinforce the case for aiming for inflation that hits a 2% target on average.
  4. Oil held near a five-month high as Hurricane Laura disrupts production and refining in the U.S. Gulf. Futures in New York were steady near $43 a barrel. Laura made landfall early Thursday at Cameron, Louisiana, near the border with Texas, as a Category 4 storm. While the hurricane’s path shifted away from refineries and ports in the Houston area, traders are waiting to assess the full extent of the damage and its potential impact on fuel consumption. More than 80% of oil output in the Gulf of Mexico and almost 3 million barrels of a day of refining capacity has been shut ahead of Laura’s landfall, causing a spike in U.S. gasoline prices earlier this week. It’s also disrupting energy flows, with trans-Atlantic shipping rates rising and more than 60 oil and refined product tankers in the western U.S. Gulf waiting for the storm to pass, according to ship-tracking data compiled by Bloomberg.
  5. Gold slipped after swinging on Wednesday as investors await a highly anticipated speech from Federal Reserve Chair Jerome Powell. Powell is slated to provide an update on the central bank’s monetary policy framework review, as well as comments on the recovery from the pandemic. At present, the central bank is widely expected to keep short-term interest rates near zero for five years or possibly more, a boon for non-interest-bearing gold. The dollar entered a holding pattern, while benchmark 10-year Treasury yields slipped after rising each day this week before the Jackson Hole gathering where the Fed Chair is set to speak.
  6. Covid-19 cases surpassed 24 million worldwide with India seeing a record spike and South Korea, Italy and France reporting the most new daily infections in months. Leaders of Europe’s major economies are mostly ruling out new broad movement restrictions as they try to support economic recoveries. Rolls-Royce Holdings Plc underscored the pandemic’s painful impact on the airline industry, suffering a record half-year loss of 5.4 billion pounds ($7 billion). U.K. passenger arrivals showed a decrease of 97% for April to June compared with the same period in 2019. Japan’s most recent and largest wave of infections is showing signs of subsiding, despite a lack of heavy intervention from the government. A shift in guidelines on U.S. testing drew criticism from state leaders and public-health experts, while a top Trump administration official defended the move.
  7. Hurricane Laura raked across Louisiana early on Thursday, becoming one of the most powerful storms ever to hit the state with a “catastrophic storm surge,” flash floods and devastating winds that could inflict more than $15 billion in insured losses. The storm came ashore at 1 a.m. local time near Cameron, Louisiana, with maximum winds of 150 miles (241 kilometers) per hour, matching a record set in 1856. The hurricane was weakening as it moved north across the state, with top winds dipping to 110 miles per hour as it pushed inland across southwestern Louisiana, according to a statement from the National Hurricane Center.
  8. British e-commerce company The Hut Group Ltd. plans to sell 920 million pounds ($1.2 billion) of new shares in an initial public offering, breathing life into an IPO market that has seen little activity this year. Holders of existing shares also will reduce their stakes, the company said in a statement Thursday, without detailing the size of this portion of the offering. If the IPO proceeds, there will be a free float of at least 20% and an equity value of 4.5 billion pounds before any new capital is raised. At 920 million pounds, the listing would be the largest by a British company in London since online rail-ticketing company Trainline Plc debuted in June 2019. The offering includes a feature that’s unusual in the U.K.: The company is awarding its co-founder, Chief Executive Matthew Moulding, a so-called golden or founder share that will give him power to veto any hostile takeover attempt for three years. That wrinkle means The Hut Group doesn’t meet the corporate governance standards for a premium listing on the London Stock Exchange, and thus is ineligible for inclusion in benchmark indexes such as the FTSE 100, according to the LSE.
  9. Kioxia Holdings Corp., the memory chipmaker spun out of Toshiba Corp. in 2018, and its shareholders are seeking to raise 347 billion yen ($3.3 billion) in Japan’s biggest initial public offering of 2020. The company said it’s filed for an initial public offering in Japan of 87.63 million new and existing shares, accelerating fundraising plans amid surging stock markets. It plans to sell them at an indicative price of 3,960 yen apiece at a valuation of about 2.1 trillion yen, according to Bloomberg calculations. Kioxia plans to finalize pricing in September before an Oct. 6 listing, and shareholders including Toshiba and major backer Bain Capital will be offering shares as part of the IPO. Toshiba, a Japanese conglomerate founded in the 1800s, invented flash memory three decades ago, but suffered a series of missteps in recent years. The Japanese company had to sell the business to a group of investors led by Bain two years ago to pay for losses at its bankrupt nuclear power unit, although Toshiba retained a 40% stake. The deal announced Thursday comes with an over-allotment option of an additional 7.9 million shares, according to the filing.
  10. Xpeng Inc., one of Tesla Inc.’s Chinese rivals, will raise $1.5 billion through an initial public offering in the U.S., more than initially planned, because of high investor demand. Xpeng will sell 99.73 million American depositary shares at an offer price of $15, the company said Thursday. That is more than the 85 million shares that were previously planned, and the offer price is higher than the initial guidance of $11SHY-$13. The electric car maker joins the more than 20 Chinese technology companies to tap the U.S. market this year by listing on the Nasdaq Stock Market or the New York Stock Exchange and raising a total of over $6 billion, according to Dealogic data.
  11. Tiffany & Co. returned to profitability in the summer quarter, giving investors hope that its proposed sale to LVMH for $16 billion might still have legs. The jeweler, which saw sales pick up each month between May and July, reported global net sales down 29% in the quarter ended July 31, a marked improvement from the 45% drop reported the previous period. Adjusted earnings per share for the second quarter beat the average analyst estimate. While Tiffany’s double-digit sales drop shows much of the economic pain from the pandemic lingers, the dark days might be behind the retailer. Tiffany’s jewelry business tanked in the early stages of the lockdowns, raising concerns that proposed buyer LVMH Moet Hennessy Louis Vuitton SE might no longer want a foothold into the U.S. market. Those fears were fueled earlier this week when LVMH said it reserved the right to challenge a later deal deadline — a sign some saw as the French conglomerate keeping its options open.
  12. Volkswagen AG’s chief executive officer encouraged Bill Gates to advise governments on how to lower carbon emissions from transportation and renewed his criticism of Germany’s slow abandonment of coal power. Volkswagen AG’s chief executive officer encouraged Bill Gates to advise governments on how to lower carbon emissions from transportation and renewed his criticism of Germany’s slow abandonment of coal power. “As you say, it’s not too complicated — electric vehicles wherever possible,” Diess wrote in response to a post Gates published Monday, which posited that climate change could be more devastating to the world than the Covid-19 pandemic. The VW CEO endorsed all passenger cars and most delivery vans going electric and for long-haul trucks to run on biofuels.
  13. European Commission President Ursula von der Leyen headed off a brewing political storm by accepting her top trade official’s resignation, and in the process she may have set a dangerous precedent by letting national political concerns affect the institution. European Union Trade Commissioner Phil Hogan had sought backing from his boss to weather the growing criticism in his native Ireland over his attendance at a golf event that breached pandemic guidelines, but von der Leyen saw that as politically untenable, according to an official with knowledge of the matter. Irish government officials, including Prime Minister Micheal Martin and his deputy Leo Varadkar, had reprimanded Hogan over and asked him to “consider his position.” The public censure tested the tightly held premise in Brussels that the commission is above political controversies in any individual member country.
  14. Turkey said it was open to bilateral talks with Greece over territorial disputes in the Mediterranean and Aegean seas, rejecting a role for European Union powers that have backed Greek positions. Defense Minister Hulusi Akar called on Thursday for dialogue with Athens without the involvement of third parties. In a televised interview with state-run Anadolu Agency, he accused France of violating international agreements by deploying warplanes in Cyprus in support of the Greek-Cypriot administration.
  15. Singapore tightened regulations around employment visas for foreign workers by raising the minimum salaries for two categories of passes. Employment pass holders — in executive, managerial or specialized roles — must earn a minimum monthly salary of S$4,500 ($3,295), versus a previous threshold of S$3,900, according to a Ministry of Manpower release. Those with an “S pass,” or mid-level technical staff, must earn at least S$2,500 per month — up from S$2,400. In the financial services industry, the minimum qualifying salary for an employment pass will be increased to S$5,000, given higher pay in the sector. It’s the first time salary requirements have been set higher for a particular industry, the ministry said.
  16. China’s latest volley of missile launches into the world’s most hotly contested body of water served as a warning to two key U.S. targets: aircraft carriers and regional bases. The missiles launched into the South China Sea on Wednesday included the DF-21D and DF-26B, the South China Morning Post reported, citing a person close to the People’s Liberation Army. Those weapons are central to China’s strategy of deterring any military action off its eastern coast by threatening to destroy the major sources of U.S. power projection in the region. “China is signaling to the U.S., its allies and partners that China has an answer to America’s aircraft-carrier strike groups, an answer that is always available and not dependent on deployment schedules,” said Carl Schuster, an adjunct faculty member of Hawaii Pacific University’s diplomacy and military science program and a former operations director at U.S. Pacific Command’s Joint Intelligence Center. “In effect, China is saying, ‘If the U.S. puts two carriers in the South China Sea, we send aircraft carrier-killer missiles there.’”
  17. TikTok Chief Executive Officer Kevin Mayer has resigned just months after taking the helm of the viral short video app, stepping out of the crossfire as the Trump administration targets the business owned by China’s ByteDance Ltd. Mayer told employees of his decision in an internal memo and a company spokeswoman confirmed his resignation. Vanessa Pappas, currently general manager of ByteDance’s prized international service, will take his place. Mayer’s departure adds to the turmoil engulfing the world’s largest startup, which is grappling with the forced sale of operations in the U.S., possible restrictions in the U.K. and an outright ban in India, TikTok’s largest market. ByteDance appointed Mayer in May to try and smooth relations with Washington, attempting to make the case that TikTok operates as a separate entity from its Beijing-based parent to assuage concerns about national security.
  18. Vice President Mike Pence went to the birthplace of the “Star-Spangled Banner” Wednesday to plant a flag in America’s culture wars, offering an unequivocal defense of police and his administration’s handling of racial unrest even as turmoil again gripped the nation. Depicting President Donald Trump as a bulwark against those threatening “law and order on the streets of this country,” Pence praised Trump’s handling of the coronavirus, national security and the economy. He accused Democratic nominee Joe Biden of being weak and wrong throughout his political career, so much so that his election would pose an existential threat to America itself. The speech was an unapologetic outreach to the president’s base from one of his possible GOP successors in 2024, fanning notions of outrage and grievance that have been the trademark of Trump’s short but successful political career. It capped the third day of a Republican National Convention that started off with a markedly different tone, highlighting widely diverse voters who are largely outside the president’s usual group of supporters.
  19. Thousands of bankers, brokers and wealth managers have spent the past few months turning kitchen tables into corner offices, selecting the best backdrops for video conferences and constructing their own trading rigs. Goldman Sachs Group Inc.: The investment bank has sent invitations to hundreds of senior staff to return to its London offices in recent weeks. The firm is offering staff incentives such as free food, protective gear and access to on-site nursery, although the return to the office is voluntary, Financial News reported Aug. 27. “We continue to take a people first approach and stay consistent with U.K. government guidelines,” a spokesman said in a statement.
  20. Not even the greatest surge in joblessness in 80 years is easing the fast-food industry’s years-old labor shortage. That’s because the Covid-19 pandemic is making this year’s economic crisis very different than past downturns, when restaurants offered an important lifeline for the newly unemployed. Since service-sector jobs now mean a higher chance of infection, even higher pay isn’t coaxing workers into the kitchen. Key demographics — like teenagers, at the urging of their parents, and the elderly — are staying away for health and safety reasons, and emergency-enhanced unemployment checks have kept others on the sidelines. Restaurant chains are reporting they’re paying more, but that doesn’t mean they’re filling their staff openings.
  21. Russian President Vladimir Putin said the Kremlin has prepared a cadre of police officers to assist Belarus if necessary, doubling down on support for his embattled ally Alexander Lukashenko. So far there hasn’t been the need for a Russian intervention, Putin said in an interview with the state-run Rossiya 24 channel to be broadcast Thursday. Lukashenko “asked me to form a certain reserve of law enforcement officers, and I did,” Putin said in the interview, according to the Tass news service. “But we also agreed that it will not be used unless the situation gets out of control.”
  22. Mark Carney, the former Bank of England governor, was hired by Brookfield Asset Management to lead the firm’s expansion in environmental and social investing. Speculation about Carney’s next move was rampant earlier this month when Canadian Prime Minister Justin Trudeau enlisted him for advice on an economic plan to pull the country out of recession. That led to talk that he might become finance minister, but Trudeau gave that job last week to Chrystia Freeland, his deputy prime minister.

*All sources from Bloomberg unless otherwise specified