February 20th, 2020

Daily Market Commentary

Canadian Headlines

• After posting the weakest annual profit growth since 2016, Canada’s banks now must prove to investors that it’s still worth buying their shares. Half of the country’s Big Six banks — Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce — missed expectations for the fiscal fourth quarter, prompting analysts to temper their 2020 forecasts. Concerns about weak economic growth, slower domestic lending, higher loan losses and eroding net interest margins have weighed on banks’ earnings and investors’ minds. The S&P/TSX Commercial Banks Index has lagged a broader Canadian market measure since last year, with shares of the nation’s eight largest lenders — which constitute about a fifth of the overall benchmark — gaining a mere 13% since the end of 2018. That performance lags the S&P/TSX Composite Index’s climb of 25%.

World Headlines

• European equities retreated on missed profit expectations and as some stocks traded without the right to dividends. The Stoxx Europe 600 Index fell 0.2%, with Spain’s Telefonica SA and French insurer AXA SA among the biggest decliners after both reported profit that missed estimates. Some major European companies were trading ex-dividend, including GlaxoSmithKline Plc, Imperial Brands Plc and Unilever, adding to the decline. European equities closed at a record high on Wednesday amid investor optimism that China will step up support to counteract the negative economic impact from the coronavirus. While the number of new cases in China continues to come down, Japan reported two deaths and cases in South Korea jumped.
• U.S. equity futures edged lower and European stocks fell as investors pored over the latest reports on the spread of the coronavirus beyond China and a batch of lackluster corporate earnings. The dollar jumped. Contracts on the three major American stock gauges turned lower after Japan reported two deaths from the virus, with South Korea confirming its first fatality from the disease shortly after. Corporate earnings also underwhelmed, with ViacomCBS Inc. slipping in the premarket after its quarterly revenue missed estimates.
• In Asia, stock gains in Shanghai, Tokyo and Sydney were countered by declines in the rest of the major markets. The yen extended its slump, weakening past 112 per dollar, with market participants ascribing a host of reasons, ranging from disappointing economic news to early positioning before the fiscal year-end next month. Treasuries climbed and gold jumped to a seven-year high.
• Oil steadied in London after the longest rally in a year on signs of tighter global supply, and hopes that Chinese economic stimulus will cushion fuel demand from the impact of the coronavirus. Brent traded near $59 a barrel after gaining 11% during a seven-day advance. The U.S. projected that shale output, which has kept markets awash with oil for years, will see only limited growth next month. The halt of exports from OPEC member Libya is showing no signs of ending, and American sanctions on Rosneft PJSC’s trading unit could impede shipments from Venezuela.
• Gold reached a new seven-year high as investors seek safety assets on concerns the coronavirus outbreak will hurt global growth and amid speculation the Federal Reserve will ease monetary policy before year-end. Prices extended gains above $1,600 an ounce to the highest since March 2013. The dollar strengthened and European equities fell after a spike in confirmed infections in South Korea and additional deaths in Japan.
• Seven & i Holdings Co., the Japanese company that controls 7-Eleven, is in exclusive talks to acquire Marathon Petroleum Corp.’s Speedway gas stations for about $22 billion, according to people familiar with the matter. The 7-Eleven owner is lining up financing for the potential transaction, which could be announced as soon as next week, said the people, who asked not to be identified as the deliberations are private. No final decision has been made and discussions could fall through, they said. Seven & i is considering various possibilities including partnerships and acquisitions for its new growth strategy, the company said in a filing to the stock exchange on Thursday, adding there’s no final decision at the moment. A representative for Marathon Petroleum declined to comment.
• Michael Bloomberg is running hard on his record as a three-term New York City mayor, business owner and philanthropist to convince wary Democrats he’s the one who can beat Donald Trump. On the debate stage Wednesday night, his Democratic rivals tore into that record to make the case he isn’t fit for the task. Democrats unleashed their fiercest, most personal attacks of the campaign on the newest candidate in the race — with a series of jabs about Bloomberg’s crude statements regarding women and a stop-and-frisk policing policy that targeted minority men. They also reminded voters of Bloomberg’s past political life as a Republican to say he shouldn’t lead the party into battle against Trump.
• The yen’s biggest one-day decline in six months may just be a prelude to more losses. The intraday 1.5% drop against the dollar on Wednesday had traders and analysts pointing to a myriad of reasons, ranging from fears of a recession in Japan to improving risk-sentiment and short-covering. A flood of local cash leaving the country for better returns is seen as another key culprit. As Japan’s fiscal year ending in March draws to a close, Japanese funds have been rushing to trade their yen for dollars and euros to buy overseas securities. Data Thursday showed they bought 1.4 trillion yen ($12.6 billion) of debt last week, adding to the 1.6 trillion yen before that. That’s the largest back-to-back purchases since September 2018.
• The Hubei province at the center of the coronavirus outbreak reported a sharp drop in new cases, but another change in the way China diagnoses infections called into question the reliability of the data. South Korea reported its first fatality amid a surge of cases tied to a cluster from a religious sect, while Japan confirmed two deaths from a quarantined cruise ship. The global death toll climbed to 2,129 and confirmed cases reached 75,730.
• Morgan Stanley is buying E*Trade Financial Corp. in a $13 billion deal that will reshape the storied investment bank and firmly stake its future on managing money for regular people. The all-stock takeover, set to be announced Thursday, will combine a Wall Street firm in the late innings of a decadelong turnaround with a discount broker built on the backs of dot-com day traders. It is the biggest takeover by a giant U.S. bank since the 2008 crisis. E*Trade brings five million retail customers, their $360 billion in assets and an online bank with cheap deposits that Morgan Stanley can funnel into loans. Its CEO, Michael Pizzi, is coming along to run the e-brokerage business, which will keep its brand, its handful of retail storefronts and its buzzy and well-funded ad campaigns, Morgan Stanley Chief Executive James Gorman said.
• L Brands Inc. is close to selling a controlling stake in its Victoria’s Secret brand to private equity firm Sycamore Partners in a deal that values the lingerie brand at $1.1 billion, Wall Street Journal reported citing unidentified people familiar with the development. Sycamore Partners is expected to buy 55% in Victoria’s Secret in a transaction that with L Brands and retain 45% in a separate firm that will include the young-adult focused Pink chain, according to the newspaper. L Brands’ billionaire founder Leslie Wexner will step down as chairman and chief executive officer, WSJ said. The deal could be announced as early as Thursday.
• The new U.S. Space Force could see procurement reach $4.7 billion in fiscal 2025 as it expands steadily from the $2.4 billion requested for acquisitions in the coming year, according to projections by the White House budget office. The funding reflects the priority that President Donald Trump and Defense Secretary Mark Esper are placing on the new force, starting with a total proposed budget of $15.4 billion for fiscal 2021. The Air Force previously oversaw offensive and defensive operations in space and was the primary buyer of launch services.
• President Donald Trump said he’ll appoint Ric Grenell, the current U.S. ambassador to Germany, to be the next acting director of national intelligence. Grenell is a Trump loyalist who was nominated to be ambassador to Germany in 2017 after having served as spokesman for the U.S. Mission to the United Nations in the early 2000s. He regularly caused friction with the NATO ally by demanding German companies leave Iran and warning them against working on a Russian gas pipeline, among other moves.
• U.S. Agriculture Secretary Sonny Perdue, whose department has been criticized for suppressing research on climate change, will announce an initiative Thursday to reduce the environmental impact of American farming. Perdue will emphasize voluntary conservation incentives and efficiency improvements rather than regulation as he joins major farm groups in seeking to shape the public debate on agriculture and climate change. Twenty-one farm groups including the American Farm Bureau Federation and the National Pork Producers Council announced a coalition Wednesday on environmental sustainability.
• BP Plc and Royal Dutch Shell Plc are exploring adding more ethanol in gasoline in top corn state Iowa to take advantage of how cheap the biofuel has become. The oil majors are gauging driver interest at a small number of stations in 15% ethanol blends, up from the current state standard of 10%, after the Trump administration in May allowed an increase nationwide. Adding more ethanol to gasoline may help Midwest farmers who have been struggling to find markets for corn after biofuels demand plateaued last year. Ethanol futures slumped to the lowest in more than a decade in 2019, making it unprofitable to make the biofuel that accounts for about a third of demand for the U.S. corn crop. But cheap ethanol won’t save drivers much money: At current prices, filling up a Ford-F150 would only cost about a quarter less.
• A.P. Moller-Maersk A/S, the world’s largest container shipping company, is positioning itself for a strong rebound in two months, based on an expectation that the fallout of the coronavirus on global trade may soon peak.
• U.K. retail sales jumped the most in almost two years in January, ending the worst run for British stores on record and adding to signs of an economic rebound after the December election created a Brexit breakthrough. Sales excluding auto fuel rose 1.6% from December, the biggest increase since May 2018. Economists were expecting a rise of 0.8%. Sales including fuel rose 0.9%, the most since March.
• Indonesia’s central bank cut its benchmark interest rate after a three-month pause, and lowered the growth forecast as the spread of the coronavirus threatens the outlook for Southeast Asia’s biggest economy. Bank Indonesia lowered the seven-day reverse repurchase rate by 25 basis points to 4.75% Thursday, joining a string of other central banks around the region that have eased policy in recent weeks to counter the impact of the virus. Nineteen of the 31 economists in a Bloomberg survey predicted the central bank’s move while the rest saw no change.
• Apple Inc. is considering giving rival apps more prominence on iPhones and iPads and opening its HomePod speaker to third-party music services after criticism the company provides an unfair advantage to its in-house products. The technology giant is discussing whether to let users choose third-party web browser and mail applications as their default options on Apple’s mobile devices, replacing the company’s Safari browser and Mail app, according to people familiar with the matter. Since launching the App Store in 2008, Apple hasn’t allowed users to replace pre-installed apps such as these with third-party services. That has made it difficult for some developers to compete, and has raised concerns from lawmakers probing potential antitrust violations in the technology industry.
• Hinduja Group Ltd. is partnering with private equity firm Cerberus Capital Management LP in seeking to pick up a stake in embattled Yes Bank Ltd., according to people familiar with the matter. Representatives of Cerberus and the U.K.-based Hinduja group, run by brothers Gopichand Hinduja and Ashok Hinduja, met Reserve Bank of India officials earlier this month regarding the bid, the people said, asking not to be identified as the information is private. The beleaguered Indian lender has been struggling to raise capital for the past few months, amid concerns about the quality of its assets and its exposure to the stressed shadow banking sector. Firms including JC Flowers & Co., Tilden Park Capital Management, Oak Hill Advisors and Silver Point Capital have submitted non-binding expressions of interest, Yes Bank said in a stock exchange filing in Mumbai on Feb. 12.
• China plans to take over indebted conglomerate HNA Group Co. and sell off its airline assets, the most dramatic step to date by the state to contain the deepening economic damage from the deadly coronavirus outbreak. HNA-related shares rose. The government of Hainan, the southern island province where HNA is based, is in talks to seize control of the group after the contagion hurt its ability to meet financial obligations, according to people familiar with the plans. The once little-known airline operator shot to prominence between 2016 and 2017 after a debt-fueled acquisition spree saw it become the leading shareholder of iconic companies such as Hilton Worldwide Holdings Inc. and Deutsche Bank AG, while paying top dollar for properties from Manhattan to Hong Kong.

*All sources from Bloomberg unless otherwise specified