August 5th, 2020

Daily Market Commentary

Canadian Headlines

  1. Brookfield Asset Management Inc. and the Canada Pension Plan Investment Board are mulling a bid for the fiber unit of Brazilian telecom firm Oi SA, according to two people familiar with the matter. The unit, called InfraCo, has also attracted interest from Highline do Brasil II Infraestrutura de Telecomunicacoes, Digital Colony’s local unit, the people said, asking not to be identified because the discussions aren’t public. Oi is planning to sell as much as 51% of the subsidiary’s shares and has scheduled an auction in the first half of next year, according to a company presentation. A private equity fund managed by a unit of Banco BTG Pactual SA has presented a non-binding bid for the asset as well, according to a July 28 regulatory filing.

World Headlines

  1. European stocks rose on Wednesday, boosted by oil stocks, while investors also focused on reports of a plan to review the U.S. and China’s phase one trade deal. The Stoxx Europe 600 Index was up 0.7% by 08.06 a.m. London time. Energy shares gained after the oil futures rose following an explosion at Lebanon’s main port. Retail stocks also outperformed, led higher by a 5% jump in Royal Ahold Delhaize NV shares after the supermarket operator raised its 2020 earnings forecast thanks to a boom in e-commerce. Investors also assessed Europe’s autos sector following results from BMW AG, which dropped 4% after reporting its first quarterly loss since 2009. Elsewhere Commerzbank AG cut its outlook, hit by a rise in bad loan provisions.
  2. U.S. futures rose and European stocks climbed to a one-week high as investors focused on U.S.-China trade discussions and American lawmakers making progress on an economic aid package. Square Inc., which runs an peer-to-peer payment app, rallied in the pre-market trading as revenue surged. Walt Disney Co. climbed after posting a surprise profit. Pressure is growing on Republicans and Democrats to resolve differences over a new U.S. virus relief package. Treasury Secretary Steven Mnuchin said the goal is to strike a deal on legislation by the end of the week.
  3. Japanese stocks ended slightly lower, as observers saw bargain hunters and possibly the central bank stepping in to buy into an early drop, with the market awaiting a virus-related U.S. stimulus bill. Telecommunications providers weighed the most on the Topix index, which erased a decline of as much as 1%. Automakers were the biggest boost. The morning decline may have been steep enough to prompt the Bank of Japan to buy exchange-traded funds, according Seiichi Suzuki, a market analyst at Tokai Tokyo Research Institute Co.
  4. Oil climbed to a five-month high in London, topping $45 a barrel after U.S. industry data showed a decline in the nation’s stockpiles. Brent futures gained for a fourth day, rising as much as 2.6% to the highest price since March 6. The American Petroleum Institute reported a 8.59 million-barrel drop in crude inventories last week, according to people familiar with the figures. The international benchmark moved above its low from March 6 in European trading hours, closing a so-called price gap that was formed on that day, a move that traditionally leads to additional buying. Over the same period, West Texas Intermediate rose above its 200-day moving average for the first time since January.
  5. Gold rallied into record territory above $2,000 an ounce as investors assessed increased geopolitical risks and the prospect for further stimulus to combat fallout from the pandemic. Bullion is up more than 30% this year, with its haven status enhanced by sliding U.S. real yields. Gold could extend gains as governments and central banks respond to slowing growth with vast amounts of stimulus. The metal’s appeal is strengthening as the dollar weakens and a long global recovery looms. Goldman Sachs Group Inc. forecasts a rally to $2,300.
  6. Army personnel and rescue workers sifted through mountains of rubble from a massive explosion that flattened Lebanon’s main port, looking for survivors from a blast that roared through the capital, Beirut, killing at least 100 people and wounding thousands more. Authorities appealed to other countries for emergency aid as concerns over food supply in the import-dependent nation mounted. Officials blamed highly explosive ammonium nitrate equivalent to 1,800 tons of TNT that had been stored at the port for years, without saying what triggered the blast. Among the pledges of support, France said it would send medical supplies and doctors by Thursday, while Germany offered members of its armed forces to aid search operations.
  7. Teladoc Health Inc., a U.S. supplier of virtual health care, agreed to buy Livongo Health Inc., which helps manage diabetes with connected devices, for about $18.5 billion as the coronavirus pandemic spurs demand for remote medicine. Each Livongo share will be exchanged for 0.5920 shares of Teladoc and $11.33 in cash, the companies said in a statement. At $159 per share, the price is 10% above Livongo’s close on Tuesday. Both boards backed the transaction, in which Teladoc holders will own 58% of the enlarged company. The deal gives Teladoc a way to move from preventive health care to management of chronic diseases at a time when patients and doctors look for ways to move care away from facilities that present a contamination risk. Livongo offers devices that monitor patients’ vital signs and alert doctors when they’re out of range, offering alerts as well as coaching.
  8. The head of market strategy at Bank of America Corp.’s wealth-management unit has advice for investors: get into equities before a Covid-19 vaccine is found, which should propel the market to new heights. “Every day we’re getting closer to a vaccination. We’re not there yet, it could take another couple of months, it could take another year, but we’ve never had science so focused on one problem all over the world,” said Joe Quinlan, head of chief investment office market strategy for Merrill and Bank of America Private Bank, which manages $2.9 trillion in client assets. “And when that day comes, and if you’re not in equities, you left a lot of money on the table.” His top tip would be to buy stocks — which in the U.S. alone have surgedalmost 50% since hitting March lows and are nearing record highs — during pullbacks, and diversify across higher-quality value companies in addition to those with strong earnings growth potential.
  9. Businesses in the euro zone saw stronger growth than initially reported in July, with output expanding for the first time since coronavirus lockdowns hit the economy in March. Services providers and manufacturers both saw activity pick up. A composite purchasing managers’ index rose to 54.9, the highest level in just over two years and above a flash estimate. Orders increased for the first time in five months.
  10. White House and Democratic negotiators driving toward a deal on a final massive virus relief package by the end of the week still must overcome a raw mix of election-year pressures, internal GOP splits and a profound lack of trust between the parties. President Donald Trump’s sinking poll ratings amid the virus’s resurgence have Democrats sensing they have leverage with 90 days to go before the November election and Republicans bickering over additional aid spending on top of the almost $3 trillion Congress previously approved. House Speaker Nancy Pelosi and top Senate Democrat Chuck Schumer have been playing hardball, dismissing out of hand smaller-scale proposals floated last week by Trump’s chief of staff, Mark Meadows, as well as a $1 trillion plan cobbled together by Senate Majority Leader Mitch McConnell.
  11. The global death toll from Covid-19 surpassed 700,000, data from Johns Hopkins University showed. The U.K. agreed to invest $18 million in a Scottish vaccine-manufacturing plant, while a panel of lawmakers criticized the government response. China will speed up approvals for rapid-turnaround coronavirus test products, while a key Japanese minister warned a major new virus wave is coming.
  12. Walt Disney Co. shares jumped in premarket trading Wednesday, after the media company reported a surprise third-quarter profit and detailed new moves that it was taking in the streaming-video space. Streaming has been a bright spot for the company, which has otherwise struggled with the impact the pandemic has had on theme parks and movie theaters. In addition to reporting strong streaming subscriber growth, the company also said the film “Mulan” would debut as a pay-per-view option on Disney+, and it announced the launch of a new Star international service. Shares rose 5.8% before the bell.The stock has lost 19% thus far this year, compared with a 2.3% gain in the S&P 500.
  13. Blackstone Group Inc. is betting on your family tree. The alternative asset manager is set to buy about 75% of Inc., the business known for family history research and DNA testing, in a deal valued at $4.7 billion including debt, according to people familiar with the transaction. Singaporean sovereign-wealth fund GIC Pte, which took a stake in 2016, will hold about 25%, said the people, who asked not to be identified because the information is private. It will be the first acquisition by Blackstone’s largest ever private equity fund.
  14. Health and Human Services Secretary Alex Azar will lead a delegation to Taiwan in the highest-level visit by a U.S. cabinet official since Washington cut ties with Taipei more than 40 years ago. Azar is scheduled to arrive in Taiwan “in the coming days” to discuss the global response to the Covid-19 pandemic, as well as supplies of medical equipment and technology, according to a statement on Wednesday from the Department of Health and Human Services. Azar said he would underscore “our shared belief that free and democratic societies are the best model for protecting and promoting health,” according to the statement.
  15. The U.S. Department of Justice is demanding Purdue Pharma LP, maker of the infamous OxyContin opioid painkiller, pay more than $11 billion in criminal and civil penalties as part of its bankruptcy reorganization plan, according to people familiar with the claims. Federal prosecutors want Purdue to pay as much as $6.2 billion on the criminal side and about $5 billion in civil compensation for tax dollars spent battling the U.S. opioid epidemic and the havoc wreaked by allegedly illegal marketing of the drug, said the people who asked not to be identified because they’re not authorized to speak publicly about the filing of the claims.
  16. The combined wealth of New York City residents shrank by an estimated $336 billion, or 13%, in the past year, exacerbated by the fallout from the coronavirus crisis in 2020. The decline — measured as of June 30 compared with the previous year — is the biggest in dollar terms among major U.S. cities during that period, according to a report released Wednesday by research firms Webster Pacific and New World Wealth. San Francisco, the nation’s second-wealthiest city, held up better, losing $105 billion, or 5% of wealth. The estimated number of billionaires there fell by two to 43 over the past year, while it dropped by five to 60 in New York.
  17. Financial repression is building in global markets, with the world’s stock of bonds paying less than 0% climbing above $16 trillion for the first time in almost a year. While still $1 trillion short of last year’s record, according to a Bloomberg Barclays index, many of the world’s largest investment-grade markets have bonds teetering on the edge of the negative-yielding abyss. U.S. two-year Treasuries, for example, are hovering near 0.1%, a rate similar to those on 10-year U.K. gilts. The trend comes as global central banks have cut interest rates and boosted asset purchases in response to the coronavirus crisis, spawning a new wave of aggressive yield hunting in markets. Investors are taking bigger risks in search of returns, buying less creditworthy debt to avoid holding negative-yielding securities that can lose money if they don’t appreciate.
  18. Rents for homes in London are set to drop to the lowest level in nearly six years, as a slow reopening of the economy weighs on demand. The capital has already seen a 3% drop in rents during the first half, and the slide could extend to 5% by the end of the year to 1,580 pounds ($2,072), the lowest level since late 2014, according to a report from property portal Zoopla Ltd. Some areas of central London are seeing even steeper declines, with landlords flooding the market with properties previously rented out to short-term visitors.
  19. Sampo Oyj agreed to buy Hastings Group Holdings PLC in a deal valuing the U.K. non-life insurer at about $2.2 billion, marking a shift in strategy for the Finnish company to expand beyond its Nordic base. The cash offer of 250 pence per Hastings share represents a premium of about 47% to the closing price on July 28, the companies said on Wednesday. Sampo will own 70% of Hastings, while South Africa’s Rand Merchant Investment Holdings Ltd. will hold the remaining 30% (it already has 29.7%). Hastings shares jumped as much as 19%, trading above the offer price at 256 pence. Sampo declined as much as 3.4% in Helsinki trading, partly weighed by earnings that missed estimates.
  20. Boris Johnson’s government made an “inexplicable” decision to lift border restrictions as coronavirus was spreading out of control in the U.K., a cross-party panel of lawmakers said in a scathing report. The House of Commons Home Affairs Committee said Wednesday that the March 13 decision to remove all restrictions on the movements of people arriving in the U.K. came as other countries were tightening border controls. As many as 10,000 cases of coronavirus may have been imported into the country around this time, the committee said. It also criticized the way ministers talked up the opportunity for people to take summer vacations abroad as they lifted travel restrictions, only to reimpose them on some countries without warning last month. The panel said the U.K.’s Joint Biosecurity Centre should publish information about the different levels of risk in each country, to help people assess the chances of getting caught out if they book holidays.
  21. Tencent Holdings Ltd. is driving discussions to merge China’s biggest game-streaming platforms Huya Inc. and DouYu International Holdings Ltd., people familiar with the matter said, in a deal that would allow it to dominate the $3.4 billion arena. The Chinese social media titan — which owns a 37% stake in Huya and 38% of DouYu — has been discussing such a merger with the duo over the past few months, although details have yet to be finalized, said the people, who asked not to be identified because discussions are private. Tencent is seeking to become the largest shareholder in the combined entity, one person said. A deal would create an online giant with more than 300 million users and a combined market value of $10 billion, cementing Tencent’s lead in Chinese games and social media. Faced with rising competition for advertisers from ByteDance Ltd. and its rapidly growing stable of apps, the WeChat operator would then run a highly profitable service akin to Inc.’s Twitch. Huya and DouYu would keep their respective platforms and branding while working more closely with Tencent’s own esports site eGame, said the people.
  22. China’s banks need about $500 billion in fresh liquidity this month to roll over existing debt and buy government bonds, complicating the People’s Bank of China’s efforts to exit crisis measures. Monetary policy makers have been signaling for weeks that abundant funding made available to tide the world’s second-largest economy through the coronavirus slump will soon be reined in, mindful of rising debt risks. At the same time, over a trillion yuan in new government stimulus bonds are expected to be offered this month, putting the onus on the PBOC to ensure the financial system has sufficient cash to absorb them.
  23. Japan’s tally of virus infections is shooting up faster than ever, and support for Prime Minister Shinzo Abe is sinking to new lows. While Japan’s total death toll remains close to the number the U.S. sees in a day, the public fears Japan may be sitting on a ticking time bomb. Abe’s approval slid to a record low of 35.4% in a poll published by JNN Monday. More than 60% of respondents said Abe should declare a second state of emergency to bring infections under control — something his ministers have rejected. Abe has come under fire for failing to hold a press briefing since June, although his main spokesman said he was in good health. After years of consolidating power, Abe may be starting to let go: Speculation over an early election has all but ended, and it looks like he’s letting potential successors vie for attention before his term as party leader ends in Sept. 2021. Asked Tuesday if he should address the media, Abe deferred to others in his cabinet.
  24. Climate-change activists are pressuring Joe Biden to distance himself from former Obama administration advisers they view as either too moderate or too cozy with the fossil fuel industry, a sign of disunity on the eve of the Democratic convention. Groups such as Data for Progress and the Revolving Door Project are building a case against some people advising the Democratic presidential nominee, such as former Energy Secretary Ernest Moniz and Obama environment aide Heather Zichal. Both have served on the boards of companies linked to fossil fuels since leaving government. The effort reflects simmering tension between the party’s moderate nominee and progressives whose votes he needs to win. Polls show a lack of enthusiasm for Biden among young voters, something that could be exacerbated by open divisions within the environmental movement. But if climate activists succeed in pulling him to the left it could cost him mainstream support.

*All sources from Bloomberg unless otherwise specified