February 21st, 2020
Daily Market Commentary
- Royal Bank of Canada’s dealmaking division is proving its worth again. A jump in investment-banking fees, higher fixed-income trading revenue and lower provisions helped the bank’s RBC Capital Markets division rebound from back-to-back quarterly profit declines last year, with earnings jumping 35% to C$882 million ($665 million) in the first fiscal quarter.
- Teck Resources Ltd. lowered its forecast for steelmaking coal sales after the Canadian producer was hit by extreme weather and rail blockades just as the coronavirus outbreak threatens demand. The Vancouver-based company will temporarily reduce production and shut down its Neptune shipping terminal, it said in its annual results report on Friday. The move will help address high levels of inventory and allow it to progress an upgrade at the Neptune facility. It’s been a tough period for Teck, as profit in 2019 was hurt by slumping coal prices and a $910 million after-tax writedown on its stake in the Fort Hills oil sands mine. Permitting delays and unrest in Chile will affect the cost of the company’s flagship copper project, QB2.
- European equities fell on Friday, pulling further away from a recent record as concerns over the coronavirus spreading outside of China weighed. The latest updates from Allianz SE and Pearson Plc were also in focus. The Stoxx Europe 600 Index was down 0.6% by 8:12 a.m. London time, with cyclical sectors such as miners, energy and banks leading the declines. Shares in Allianz fell 0.6% after the German insurer reported results, while Pearsonslid 0.5% after the education publisher confirmed a tough outlook for 2020 as pressures at its U.S. higher education courseware business continue.
- U.S. equity futures dropped on Friday with shares across most of Asia, while European stocks drifted amid renewed concern about the impact of the coronavirus after cases increased outside of China. Treasuries and gold advanced. Futures on the three main American equity gauges pointed to losses at the open while equities in Korea and Hong Kong saw declines of more than 1%.
- The declines in stocks come as manufacturing data in Australia and Japan added to worries about slower economic growth, while weak South Korean export data weighed on the won. The dollar was little changed against a basket of major peers after a four-day winning streak. The euro strengthened after data showed economic activity in the common-currency area speeded up unexpectedly. Investors were put on alert this week by a spike in infections outside China and a slew of fresh warnings by companies over the potential impact on business. Those reignited appetite for haven assets and threatened stock gains that had propelled global equities to a record high earlier this month. Two people evacuated to Australia from a cruise ship in Japan tested positive for the coronavirus and South Korea reported a surge in infections.
- Oil fell, paring this week’s gain, as renewed concern over the impact of the coronavirus overshadowed hopes that China’s stimulus efforts will cushion the blow to demand. Futures in New York fell 1.6%, yet remain about 2% higher this week after China, South Korea and Singapore started rolling out measures to protect economic growth as the virus hits businesses and travel. Commodities had rallied prematurely, focusing on the planned stimulus and ignoring the immediate disruption, according to Goldman Sachs Group Inc.
- The stars have aligned for gold, as concerns that the coronavirus outbreak may damage growth, hurt risk assets and add to pressures for easier monetary policy trigger a global hunt for havens. Bullion headed for the biggest weekly gain in more than six months as prices hit a seven-year high. With bond yields in retreat and real U.S. interest rates sinking further into negative territory, gold-backed exchange-traded funds have posted a record run of inflows.
- U.K. Prime Minister Boris Johnson sailed through his new government’s first major economic health check as he prepares to lead the nation through a potentially bumpy Brexit transition. A raft of indicators this week from inflation to retail sales confirmed signs of a “Boris Bounce” — a pickup in growth following the Conservatives’ decisive election win. Public finance figures also showed the Treasury set to undershoot borrowing forecasts, welcome news for a government prepared to unveil the biggest fiscal stimulus since the global financial crisis.
- Wells Fargo & Co. is poised to pay roughly $3 billion to settle federal investigations into a range of consumer abuses that were rampant at the bank for years, according to a person with direct knowledge of the matter. The Department of Justice and Securities and Exchange Commission may announce penalties as early as Friday, the person said, asking not to be identified because talks are confidential. The company isn’t expected to plead guilty to a crime, the person said.
- Tesla Inc. has overcome a legal roadblock standing in the way of Elon Musk’s plan to build an electric-car factory in Germany. A Berlin-Brandenburg court on Thursday ruled that Tesla can resume cutting down trees at a forest site in the small town of Gruenheide to make way for its first assembly plant in Europe. That puts the U.S. carmaker on track to start construction before the start of a crucial breeding period for local wildlife in March. The court found that local authorities didn’t violate laws when they allowed work on the factory to start, throwing out a complaint by Gruene Liga Brandenburg, an environmental group that claimed Tesla and local authorities were sidestepping regulations to rush the project.
- In the immediate run up to the U.S. presidential election and on Election Day, the homepage of YouTube is set to advertise just one candidate: Donald Trump. The president’s re-election campaign purchased the coveted advertising space atop the country’s most-visited video website for early November, said two people with knowledge of the transaction. The deal ensures Trump will be featured prominently in the key days when voters across the country prepare to head to the polls Nov. 3. While the bulk of digital ad spending typically focuses on targeting specific messages to certain audiences, the top spot on YouTube is more akin to a Super Bowl TV ad. About three-quarters of U.S. adults say they use YouTube, exceeding the reach of even Facebook, according to the Pew Research Center.
- A buyer of liquefied natural gas has canceled two cargoes from Cheniere Energy Inc., the biggest U.S. exporter, as a global glut pummels prices for the fuel and threatens to shut a key outlet for shale production. Spanish utility owner Naturgy Energy Group SA has decided not to take delivery of two shipments from Cheniere, according to people with direct knowledge of the matter. The cargoes, one of which was scheduled for April delivery, were rejected by Naturgy’s clients Repsol SA and Endesa SA, who had originally purchased the volumes from Naturgy and will now pay a fee, the people said.
- China car sales plunged 92% during the first two weeks of February as the coronavirus outbreak kept buyers away from showrooms. It was even worse in the first week, when nationwide sales tumbled 96% to a daily average of only 811 units, the China Passenger Car Association said in a report released earlier this week. Deliveries this month may slide by about 70%, resulting in a roughly 40% drop in the first two months of 2020, the association said. The figures exclude minivans.
- The coronavirus outbreak accelerated outside China, with South Korea reporting a surge in infections. China adjusted the number of cases for the third time this month, raising more questions over the reliability of the data. The epidemic in China has been tentatively contained but hasn’t reached a turning point yet, according to China Central Television, which cited a politburo meeting. Infections in China topped 75,000. South Korea reported 48 more cases, taking the total number to 204. Neighboring Japan is also seeing cases in several unconnected areas. The spread outside China continued to roil markets and stocks fell globally.
- Warren Buffett tends to rejoice when he sees a company buying back underpriced shares. At his own Berkshire Hathaway Inc., which underperformed the stock market last year by the widest margin in a decade, an increase in repurchases might not be cause for celebration. Buffett has found little success deploying Berkshire’s growing pile of cash. Its last big takeover, a $37.2 billion deal for Precision Castparts Corp., was more than three years ago. This year, the conglomerate was outbid for a tech company. Berkshire’s struggle to find well-priced takeovers led it to open another path for putting money to work: The company loosened its buyback policy almost two years ago, but has repurchased only $4.1 billion of its shares since then.
- Private equity giant KKR & Co. submitted an expression of interest for a minority stake in Telecom Italia SpA’s landline network, people familiar with the matter said, in a move that could allow the ex-phone monopoly to achieve the long-planned spinoff of part of its grid. KKR may buy as much as 49% of the landline unit, which could be valued at 7 billion to 7.5 billion euros ($8 billion), the people said.
- Machinery giant Deere & Co. delivered an unexpected increase in earnings and maintained its annual outlook as early signs of stabilization in the U.S. farm sector offset a slowdown in construction. Shares surged. “Farmer confidence, though still subdued, has improved due in part to hopes for a relaxation of trade tensions and higher agricultural exports,” Chief Executive Officer John May said in a statement accompanying its fiscal first quarter results. While the CEO didn’t mention the coronavirus in the statement, his comments may help ease concerns about how much the outbreak will delay China’s return to U.S. agricultural markets as laid out in the phase one trade deal. The tit-for-tat tariff spat with China made American farmers cautious on replacing large equipment, Deere’s top moneymaker.
- The U.S. plans to sign a peace agreement with the Taliban on February 29, after negotiators in Doha reached an understanding on a reduction in violence in what’s become America’s longest-running war. U.S. negotiators “have come to an understanding with the Taliban on a significant and nationwide reduction in violence across Afghanistan,” Secretary of State Mike Pompeo said in a statement. If successful, the deal will be signed in Qatar next week.
- Walmart Inc. is parting ways with grocery-delivery partner Skipcart, the latest defection from its network of logistics companies who often struggle to make ends meet schlepping cola and cantaloupes for the nation’s biggest food retailer. Skipcart notified Walmart on Jan. 31 that it was terminating their relationship effective April 30, according to a letter obtained by Bloomberg News. That end date has since been pushed up to March, and Walmart has already reassigned stores covered by Skipcart to other providers. Boerne, Texas-based Skipcart handles deliveries from about 126 stores in 32 states, mostly in smaller markets, and began working with Walmart in late 2018.
- Boeing Co. engineers discovered in 2017 that a software glitch had rendered a warning light on the newly introduced 737 Max inoperable on 80% of the planes. But the company chose not to fix it or to inform U.S. regulators. The next year, a Lion Air jet suffered the malfunction the alert was designed to detect and crashed in the Java Sea. The lack of an alert was cited as a factor in the crash by Indonesian investigators and Boeing’s failure to fix it drew stiff condemnation from lawmakers and families of the victims.
*All sources from Bloomberg unless otherwise specified