August 28th, 2019

Daily Market Commentary

Canadian Headlines

  • Canadian stocks rose for a second day as gold and silver prices soared amid trade and recession fears. Oil also jumped by more than $1 per barrel. The S&P/TSX Composite Index climbed 0.5% to 16,183.59. Materials and information technology outperformed while cannabis shares lagged. The Horizons Marijuana Life Sciences ETF (HMMJ CN) lost 4.1%, down to its lowest since November of 2017. Meanwhile, the gap between Transat’s share price and Air Canada’s takeover bid is sitting at the widest ever — indicating investors aren’t confident the deal will get done.
  • National Bank of Canada reported its third-quarter profit climbed to $608 million, helped by growth across the bank. The company says the profit amounted to $1.66 per diluted share for the quarter ended July 31. The result compared with a profit of $569 million or $1.52 per diluted share in the same quarter last year. Excluding specified items, National Bank says it earned $606 million or $1.66 per diluted share, up from $569 million or $1.52 per share a year ago.
  • Enbridge Inc.’s plan to contract space on its Mainline oil pipeline system is drawing the ire of producers who argue the new system will give too much power to Midwest refiners. ConocoPhillips and Canadian Natural Resources Ltd. are the latest companies to object to Enbridge’s proposal that would have shippers sign long-term commitments on the country’s largest crude export pipeline. The plan, which would only apply to Canadian segments of the system, would create uncertainty for oil-sands producers who use the Mainline to access other pipelines downstream, the companies said. At the same time, it could lend an advantage to some of the largest refiners in the U.S. Midwest, such as BP Plc and Exxon Mobil Corp., who source crude on the Mainline, according to Mike Walls, an analyst at Genscape Inc.

World Headlines

  • European stocks headed lower as investors awaited further developments in the ongoing trade war and turned their attention to political developments in the U.K. and Italy. The Stoxx Europe 600 Index dropped 0.5% as of 10 a.m. in London, although the U.K.’s exporter-heavy FTSE 100 Index climbed 0.3% on pound weakness after a report that the U.K. government plans to suspend Parliament until mid-October, a move that would significantly hinder lawmakers’ efforts to block a no-deal Brexit. The more domestic-focused FTSE 250 Index fell 0.5%. Elsewhere in Europe, Italy’s FTSE MIB Index fell 0.5%, with politics also in focus as the country’s head of state meets with its main political leaders in a last-ditch attempt to carve out a viable majority in parliament.
  • U.S. index futures edged higher, stocks in Europe slipped and shares in Asia were mixed Wednesday as investors awaited new developments in the increasingly unpredictable Sino-American trade war. Treasuries and the dollar were steady. Contracts on all three major U.S. stock indexes gained, while technology companies and insurers led a decline on the Stoxx Europe 600 index. President Donald Trump’s flip-flops on trade have left investors jumpy as they await his next moves and as optimism for a resolution becomes more difficult to sustain. With the latest round of tariffs from both sides due to be staggered from Sept. 1, China appears to be bracing for the worst and the U.S. leader’s credibility is becoming a key impediment to a deal. In addition, traders have to contend with Trump’s attacks on the Federal Reserve, which have clouded the outlook for monetary policy.
  • Benchmarks nudged higher in Sydney and Seoul, were little changed in Tokyo, and slipped in Shanghai and Hong Kong. The 10-year Treasury yield stayed below 1.50%, near a three-year low. The euro was flat, the pound dropped and gilts gained after U.K. Prime Minister Boris Johnson said he will ask the Queen to suspend parliament from mid-September to mid-October, increasing the risk of a no-deal Brexit.
  • Oil rose for a second day after an industry report showed a bigger-than-expected drop in American crude inventories, allaying concerns that the market is poised to tip back into oversupply. Futures in New York climbed as much as 1.6% after a 2.4% jump Tuesday. The American Petroleum Institute said stockpiles fell by 11.1 million barrels last week, according to people familiar with the data. That would be the largest decline since June if confirmed by government figures due Wednesday. The API also reported a 2.8 million barrel draw in distillates and gasoline inventories.
  • Gold ran into bumpy trading near a six-year high as uncertainty over further progress in U.S.-China trade talks kept investors in wait-and-see mode. Silver extended gains, holding above psychological level of $18 an ounce. Silver has rallied 12% in August, the biggest monthly gain since 2016, as increased demand for safe havens offset concerns over physical purchases of the metal by industrial consumers. Gold, which has gained 9% this month, tread water on Wednesday after President Donald Trump’s flip-flops on negotiations with China. Still, analysts from Citigroup Inc. to Australia & New Zealand Banking Group see more room to run.
  • China’s yuan inched lower even after the central bank set the daily fixing stronger than expected. The yuan slipped 0.03% to 7.1648 a dollar as of 5:38 p.m. in Shanghai. The currency entered the day having fallen in the previous nine sessions, the longest slump since December 2015. The People’s Bank of China earlier set its reference rate at 7.0835, compared with the 7.1126 average forecast by traders and analysts in a Bloomberg survey.
  • The pound slid as Prime Minister Boris Johnson sought to suspend the U.K.’s Parliament, raising the risk of a no-deal Brexit. Sterling was the worst performer among major currencies as Johnson confirmed an earlier BBC report, while U.K. government bonds rallied on expectations of an earlier Bank of England interest-rate cut. With the U.K. set to leave the European Union on Oct. 31, suspending Parliament would mean less time for lawmakers to attempt to block a no-deal.
  • Melco Resorts & Entertainment Ltd. is delaying its planned $1.2 billion investment in Crown Resorts Ltd. due to Australian regulatory investigations into allegations that illegal activity took place at casinos operated by Crown. The Macau-based casino operator said in a statement Wednesday that it would not stick to the timeline of its planned acquisition of 20% in Crown, and instead wait until 60 business days after the completion of the “relevant Australian regulatory processes.” The probes cover not just allegations of improper activity at Crown resorts, but also the Melco deal itself which was first announced in May.
  • Blackstone Infrastructure Partners is offering to buy out the remaining shares of Tallgrass Energy LP following a 40% slump since it took control of the pipeline operator earlier this year. Blackstone is offering $19.50 for all outstanding Class A shares and will take the company private, Tallgrass said in a press release. That’s a 35.9% premium to Tuesday’s close of $14.35 and a 12% premium to the volume-weighted average price over the past 30 days, according to Tallgrass.
  • Citigroup Inc. quietly boosted its minimum wage to $15 an hour, joining competitors in awarding raises to rank-and-file staff, after House Financial Services Committee Chair Maxine Waters prodded the firm. Unlike other major banks that announced similar moves in news releases, Citigroup disclosed its decision directly to Waters after she asked Chief Executive Officer Michael Corbat whether he would consider raising the minimum to $20. The move to $15 took effect June 1, the bank told her in a statement, according to a copy of the exchange released by the California Democrat’s office on Tuesday.
  • The Sackler family and their embattled drugmaker, Purdue Pharma LP, are backing a proposal to resolve all opioid lawsuits against themselves and the drugmaker for more than $11 billion in what would be the largest settlement to date in the sprawling litigation over the addictive painkillers, according to people familiar with the proposal. Under the proposal, Purdue will file for bankruptcy, hand itself over to a trust controlled by the states, cities and counties that have sued, and sell its overseas drugmaker Mundipharma, according to the people. In addition, the Sacklers will dig into their own pockets for at least $3 billion in cash. Funds from those sources would generate $11.5 billion to cover the fallout from the opioid epidemic, said the people, who asked not to be identified because the talks are private.
  • BP Plc agreed to sell its entire business in Alaska to closely held Hilcorp Energy Co. for $5.6 billion, ending a six-decade presence in the state as oil production there declines. The deal includes BP’s operating stake in Prudhoe Bay, the largest-producing oil field in U.S. history, as well as all its Alaskan pipelines. It makes Hilcorp, the oil company founded by Texas billionaire Jeffery Hildebrand, the second-largest producer in the state behind ConocoPhillips. It’s the latest example of a supermajor retiring from the frontier oil discoveries of the late 20th century that cushioned them from OPEC’s ascendancy and forced them to learn to drill in some of the harshest and most forbidding corners of the globe.
  • Thailand’s government is ready to take further action to support an economy growing at its slowest pace in nearly five years, and sees room for further interest-rate cuts, the finance minister said. Weeks after passing a stimulus program worth more than $10 billion, the government still has the fiscal space to do more, Finance Minister Uttama Savanayana said Wednesday in a Bloomberg Television interview in Bangkok.
  • British American Tobacco Plc and Japan Tobacco Inc. risk falling further behind in fast-growing cigarette alternatives should Philip Morris International Inc. and Altria Group Inc. complete the biggest tobacco deal ever. Analysts said BAT may be the biggest loser if New York-based Philip Morris succeeds in combining with Richmond, Virginia-based Altria. Shares of BAT fell Wednesday, extending the two-day slump to as much as 6.5%. Japan Tobacco dropped less than 1% in Tokyo. The proposed combination would reunite two companies that split more than 11 years ago and result in a behemoth that would outrank BAT as the world’s largest publicly traded cigarette maker. Plus, it would put two of the most successful smoking alternatives, Juul and IQOS, together under the same roof.
  • Unipec, the trading arm of China’s state-owned oil giant Sinopec, is trying to resell U.S. crude that won’t arrive in the Asian country before import tariffs take effect on Sept. 1. At least three buyers in Asia received offers from Unipec for crude that’s already en route to China, according to people with knowledge of the matter who asked not to be identified because the information isn’t public. Beijing announced last Friday that it would levy duties on American crude imports for the first time. The 5% tariff will make cargoes from the Permian Basin around $3 a barrel more expensive for Chinese buyers.
  • As borrowing costs plunge for the highest-quality companies, there’s a growing incentive for riskier businesses like fast-food chains to mortgage virtually all their assets. Franchised companies like burger restaurant Jack in the Box Inc. and massage provider Massage Envy are increasingly selling unusual bonds backed by most of their business. By pledging key assets like royalties, fees, and intellectual property to bondholders, companies can win investment-grade credit ratings on their debt and slash their financing costs, making their bonds higher quality even if their overall companies are still relatively risky. This year borrowers have sold more than $6.9 billion of these securities, known as whole-business securitizations, approaching the most on record, according to data compiled by Bloomberg. Fast-food restaurants used to be the main issuers of this debt, but a wider array of companies are jumping in. This year, in addition to Massage Envy, a group of preschools and a distributor of music royalties have sold the bonds.
  • Tiffany & Co. posted quarterly sales that missed projections as concerns about foreign tourists’ spending persisted. The shares rose in premarket trading in New York after earnings beat analysts’ estimates. Same-store sales, a key retail metric, fell 3% globally, excluding currency swings, Tiffany said. Analysts had estimated a 1.5% drop, according to Consensus Metrix.
  • U.S. high-grade bond sales could land between $110-125 billion next month, according to early dealer estimates. Elsewhere, Purdue Pharma may file for bankruptcy as part of a proposal to resolve all opioid lawsuits against it. Over $40 billion of September’s haul may come next week alone, and likely over three days as the week is truncated by Labor Day and August payrolls on Friday. The high-yield market is also building a potentially sizable post-Labor Day pipeline
  • Toyota Motor Corp. and Suzuki Motor Corp. are strengthening their relationship by taking stakes in one another, the latest alliance in an industry that’s facing sweeping changes in technology, consumer preferences and business models. Japan’s biggest automaker will acquire about 5% of Suzuki shares for about 96 billion yen ($907 million), while Suzuki will get a smaller holding valued at about 48 billion yen in Toyota, the automakers said in statements Wednesday. The move builds on ties established two years ago between the two carmakers and is aimed at expanding their collaboration to keep up with electric and self-driving cars, as well as growing demand for on-demand rides and new businesses that are reinventing how people get from A to B. For Toyota, the deal adds yet another automaker to the company’s expanding portfolio of partnerships, which includes Mazda Motor Corp. and Subaru Corp.

*All sources from Bloomberg unless otherwise specified