February 13th, 2020

Daily Market Commentary

Canadian Headlines

• Bombardier Inc., which makes everything from trains to planes, is positioning itself for a future as a much smaller company. The Canadian manufacturer completed its exit from commercial aerospace with the sale of its stake in the Airbus SE A220 program to the European planemaker. Bombardier said it is also pursuing other “strategic options to accelerate deleveraging.” The company is near a deal to sell its rail-equipment unit to Alstom SA, Bloomberg News reported. The dismembering positions Bombardier to retain only its private-jet division — and a path to taming a $10 billion debt load. The Montreal-based company sold its turboprop-plane business to Longview Aviation Capital Corp. last year, and has agreements in place to offload its regional-jet operation and a wing plant in Northern Ireland. Those deals are on track to close in the first half of 2020, the company said in a statement Thursday as it reported earnings.
• Canadians have become more confident in the prospect of wage hikes if they leave their job, another sign of health for the country’s labor market. The share of workers who say switching jobs would leave them better off financially has jumped sharply since 2018, according to a Nanos Research Group poll conducted for Bloomberg. Almost two in 10 respondents said their wages would increase if they lost their jobs or chose to find a new one. That’s an improvement from prior surveys, including one in December 2018, when as few as 12% said they would be able to find a job that pays more.
• A unit of Toronto-Dominion Bank is moving ahead with what would be the first widely marketed Canadian private-label residential mortgage-backed securities deal from one of the country’s six largest banks, according DBRS Morningstar. The transaction will be backed by a C$688.3 million ($517 million) pool of home loans that were originated by three smaller lenders, according to a DBRS Morningstar document. TD Securities plans to offer C$450 million of top-rated securities with an expected maturity around Feb. 2023, according to people familiar with the matter who asked not to be named. It will be a milestone in creating a market to help disperse housing debt risk.
• When President Donald Trump signed the U.S.-Mexico-Canada-agreement at the White House in late January, he said a variation of the word “thanks” 54 times in 37 minutes to people in attendance who helped him do the deal. But there’s one more favor he needs from someone who wasn’t in the room: Canadian Prime Minister Justin Trudeau.
• French train maker Alstom SA is in advanced talks to acquire the rail business of Bombardier Inc., according to people familiar with the matter, as the embattled Canadian firm offloads assets following a costly expansion in aerospace. Alstom and Bombardier could reach an agreement as early as this week, though talks could still be delayed or fall apart, according to the people, who asked not be named because the information isn’t public. Bombardier, which also makes planes, reports earnings Thursday and has been exploring asset sales to raise much-needed cash.

World Headlines

• European equities fell as the coronavirus returned to the spotlight after a revised methodology showed a surge in new cases, fueling concerns about the outbreak’s true scale and impact on global growth. The Stoxx Europe 600 Index retreated as much as 1.1%. Cyclical sectors, such as automakers and miners, paced the declines. The gauge of oil stocks fell as much as 2.1% following the International Energy Agency’s warning that global oil demand will drop this quarter for the first time in over a decade as the virus batters China’s economy.
• U.S. stock index futures slid after the Chinese province at the center of the coronavirus epidemic reported a jump in new cases. S&P 500 Index futures contracts expiring in March fell 0.9% as of 10:11 a.m. in London, after Hubei reported 14,840 new cases as it revised the method for counting infections. Contracts on the Dow Jones Industrial Average were 0.9% lower and those of the Nasdaq 100 dropped 1.1%. Investor sentiment had improved in recent sessions amid speculation the impact from the coronavirus outbreak on global growth would be short-lived. That assumption was thrown into doubt when Hubei, the province at the center of the epidemic, reported almost 15,000 new cases after it revised its data to include “clinically diagnosed” cases in its daily disclosure.
• Elsewhere, stock gauges in Japan, Shanghai, Hong Kong and South Korea all declined, though shares in Australia edged higher. Oil fell following Wednesday’s surge and as the International Energy Agency said the coronavirus means global demand will drop this quarter for the first time in over a decade.
• Oil slipped again after its biggest rally in five weeks as a more severe assessment of China’s coronavirus renewed fears over the threat to fuel demand. World oil consumption will fall this quarter for the first time in over a decade — wiping out the growth previously expected — as the infection and quarantines reduce economic activity and travel in China, according to the International Energy Agency. Cases of the disease jumped by almost 15,000 after Hubei province, its epicenter, changed the way it calculates infections.
• Gold advanced the most in a week and copper drifted lower as investors weighed a surge in the number of coronavirus cases in China. The Hubei province at the center of the epidemic added almost 15,000 new cases after revising its methodology, which fueled safe-haven demand and cooled risk-on sentiment.
• Sajid Javid quit as the U.K.’s Chancellor of the Exchequer as Boris Johnson’s first major Cabinet reshuffle went disastrously wrong. The finance minister resigned after a face-to-face row with Johnson inside 10 Downing Street. The prime minister demanded that Javid fire all five of his most senior aides but the chancellor refused and quit, according to three people familiar with the matter. Javid had served as Britain’s finance minister since July 2019. His departure throws Britain’s preparations for life outside the European Union into chaos, just four weeks before he was due to deliver a budget on March 11. Johnson’s office named Javid’s deputy Rishi Sunak as the new chancellor.
• President Vladimir Putin, who plays a decisive role in OPEC+ oil policy, hasn’t yet decided whether Russia will support the group’s proposal for deeper production cuts. The leader will make up his mind in a “timely” manner, his spokesman Dmitry Peskov told reporters in Moscow on Thursday, without providing a definite time frame. Russia’s position keeps the Saudi-led cartel in limbo over what action they should take to mitigate the oil-price slump caused by the coronavirus. Global oil demand will drop this quarter for the first time in over a decade as the outbreak batters China’s economy, creating a significant supply surplus, according to the International Energy Agency. Crude already sank to a one-year low below $50 a barrel last week and the impact of the epidemic will be felt throughout the year.
• European weak economic growth is set to continue this year, the bloc’s executive said, warning that a deadly viral outbreak could further damp the outlook. A month after a U.S.-China deal offered hope for global trade and industry, the coronavirus that’s killed more than 1,000 people in China and crippled parts of the country’s manufacturing capacity has pushed the world into a new crisis. The European Commission singled it out as a “key downside risk.”
• Airbus SE pledged to churn out more aircraft than ever and consolidated its ownership of the A220 jetliner, pressing home its advantage over Boeing Co. and its grounded 737 Max in the growing narrow-body market. The European planemaker said Thursday that it expects to hand over about 880 jets in 2020, building on record output last year. Deliveries of the A320-family workhorse, a direct competitor to the Max, will rise to as many as 67 a month by 2023, while the smaller A220 will also see volumes accelerate. Together, the moves are meant to draw a line under a tumultuous 2019 after production shortcomings prevented Airbus from fully exploiting the Max crisis at its U.S. rival. The Toulouse, France-based planemaker also ran into trouble with its military transport plane, the A400M, canceled the ambitious A380 super-jumbo and settled a longstanding bribery probe for 3.6 billion euros ($3.9 billion), driving annual results to a loss.
• The U.K.’s antitrust authority cleared Google’s $2.6 billion takeover of Looker Data Sciences Inc., joining U.S. regulators in declining to open an in-depth review. The purchase was not likely to weaken competition as Google would not be inclined to stymie its rivals, the Competition and Markets Authority said Thursday. Google announced in June that it planned to buy California-based Looker to boost its cloud offering, which lags behind Amazon.com Inc. and Microsoft Corp. The company, which had initially intended to complete the purchase last year, is pushing to expand its tools to better help customers manage data.
• Cisco Systems Inc. shares fell in pre-market trading on Thursday, after the company gave a revenue outlook that was seen as weak, pointing to ongoing struggles with its key networking hardware business. Analysts were unenthusiastic about the results, although many noted it had faced difficult year-over-year comparisons. “There’s nothing wrong here” from a fundamental perspective, Jefferies wrote, but Cisco “is currently getting impacted by a confluence of negative macro influences combined with tough” comps. Piper Sandler forecast “tough compares for at least the next two quarters.”
• WeWork co-founder Adam Neumann sold his stake in several properties in the heart of Silicon Valley, unwinding a real estate deal that underpinned the office-sharing company’s “future of cities” initiative, according to people familiar with the situation. Neumann’s partner on the project, Urban Community, said Wednesday that it would continue to develop the sites in downtown San Jose as part of a new arrangement with Westbank Corp., a Vancouver-based real estate firm, along with Peterson Group and OPTrust.
• PG&E Corp. told a federal judge it opposes his proposals to intervene in the company’s wildfire prevention efforts after it admitted to not fully complying with the terms of its criminal probation. The bankrupt northern California utility’s pushback is a response to U.S. District Judge William Alsup, who last month threatened to order the company to hire more tree trimmers and restrict how management doles out bonuses. The San Francisco judge is overseeing PG&E’s probation after it was convicted in 2016 of gas-pipeline safety crimes. Failure to comply with any law is a violation of probation. Alsup is testing how far he can push the utility to prevent its equipment from causing another devastating wildfire as it simultaneously navigates a complicated exit from bankruptcy.
• Barclays Plc’s Chief Executive Officer Jes Staley is being investigated over his ties to disgraced financier Jeffrey Epstein, his second run-in with British regulators since he joined the bank in 2015. The bank said regulators are probing how Staley characterized his relationship with Epstein, the convicted sex offender who died in his prison cell last year. The newest probe is another distraction for Barclays as it faces additional challenges to meet its profit goals. In 2018, Staley was fined for his attempts to uncover a whistle-blower.
• As Russia prepares to mark the 75th anniversary of the victory in World War II, President Vladimir Putin is stepping up his defense of Josef Stalin and digging in against calls to open up secret archives on the Soviet state’s killing of millions of its own citizens. At Butovo, for instance, more than 20,000 victims lie in a mass grave in a former Czarist-era estate about 20 miles (32km) outside Moscow. Some were gassed to death in the back of trucks that transported them in their underwear to the killing grounds during Stalin’s “Great Terror” of 1937-38.
• Centrica Plc became the first energy company to book a major writedown on production assets in Europe as the global natural gas glut slashed valuations on both sides of the Atlantic. The U.K.’s biggest energy supplier to homes followed oil majors from Royal Dutch Shell Plc to Chevron Corp. in feeling the pain from a worldwide slump in the heating and power-plant fuel that’s sent prices to their lowest level in a decade in Europe. Centrica booked a net exceptional charge before tax of 1.1 billion pounds ($1.4 billion) for a lower value of its exploration and production arm, as well as a stake in U.K. nuclear plants. The writedown also includes restructuring costs of 356 million pounds.
• PepsiCo Inc. forecast that this year’s earnings will fall short of analysts’ estimates as growing snack revenue fails to compensate for weakness in soft-drink demand. In the fourth quarter, Pepsi’s organic revenue growth beat analysts’ average estimate. The company sees core earnings per share, which excludes currency shifts, of $5.88 in 2020. Analysts expected $5.95.
• Alibaba Group Holding Ltd.’s revenue rose a better than expected 38% after a record Singles’ Day haul, though it now faces the uncertainty from the coronavirus epidemic that has killed more than 1,300 in China. Revenue surged 38% to 161.5 billion yuan ($23.1 billion) in the December quarter, versus projections for 159.5 billion yuan. The company reported a surprise 58% rise in net income to 52.3 billion yuan. Alibaba — the first major Chinese technology corporation to report results since the novel coronavirus emerged in January — barely mentioned the outbreak in its earnings report. Instead, it highlighted its biggest Singles’ Day ever, bagging $38 billion of business during the annual shopping bonanza.
• Kraft Heinz Co. voiced optimism that a turnaround will take hold this year, but another sales decline in the fourth quarter shows the maker of Maxwell House coffee and Grey Poupon mustard has a long road ahead. The company reported sales of $6.54 billion in the period — below the average estimate from analysts. Organic revenue, which strips out items like currency volatility, fell 2.2%, more than anticipated.
• Telecom Italia SpA is close to picking the private equity giant KKR & Co. to help it acquire wholesale fiber carrier Open Fiber SpA, according to people familiar with the matter. Telecom Italia is choosing the U.S. investment firm because it’s also open to purchasing a minority stake in a portion of the Italian company’s landline network, the socalled “secondary network” of copper and fiber lines running from street cabinets to premises, that’s valued by KKR at 7 billion euros ($7.6 billion) to 7.5 billion euros, said the people, who asked not to be named because the discussions are private.
• Deutsche Telekom AG wants to renegotiate the terms for the sale of Sprint Corp. to its U.S. wireless unit T-Mobile US Inc., according to people familiar with the matter. The German carrier, the majority owner of T-Mobile, is seeking a lower price because Sprint’s shares have been trading below their level when the deal was proposed in 2018, said the people, who asked not to be identified as the deliberations are private. Getting one of the biggest U.S. wireless mergers ever over the finish line would be a boon to both companies. For Deutsche Telekom, the deal reduces its reliance on Europe, where carriers are struggling to grow amid fierce competition. For the chairman of Sprint owner SoftBank Group Corp., Masayoshi Son, it allows him to better focus on his technology investments and the $100 billion Vision Fund.

*All sources from Bloomberg unless otherwise specified