February 27th, 2020

Daily Market Commentary

Canadian Headlines

  • Canada’s stock market rally has cracked. Volatility has spiked. And investors have been piling into government bonds, pushing yields to near-record lows. Anxiety is everywhere for investors in the nation’s markets as the coronavirus outbreak and protests that hobbled rail traffic are magnifying concerns about an economic slowdown. The S&P/TSX Composite Index lost this year’s gain in just four days of trading — it is down 0.1% in 2020. It had been up 5.2% as of last Thursday’s close.
  • Toronto-Dominion Bank’s U.S. retail banking operations are getting sideswiped by interest-rate cuts. The lender’s U.S. retail division had enjoyed better earnings growth than at its Canadian operations since the second quarter of 2018. But that streak ended in the fiscal first quarter after three U.S. Federal Reserve rate cuts since last July hurt net interest margins, pushing them down to 3.07% — the tightest in more than two years.
  • Thyssenkrupp AG plans to choose a winner Thursday in the hotly-contested bidding for its elevator unit, with Blackstone Group Inc.pitching long-term investments in an attempt to win over the German company, people with knowledge of the matter said. Blackstone, which has partnered with Carlyle Group Inc. and Canada Pension Plan Investment Board, has pledged to pour about $2 billion into the operations, according to the people. It has also vowed to keep the business in one piece and plans to keep using the Thyssenkrupp brand for now, the people said, asking not to be identified because the information is private.

World Headlines

  • A sell-off in European equities intensified as more companies warned that the coronavirus would hit profits, while cases of the epidemic outside China increased. Another day in the red sent the Stoxx Europe 600 Index closer to correction levels, with Anheuser-Busch InBev NV and Standard Chartered Plc the latest companies to sound the alarm about the outbreak’s impact on earnings. The benchmark slid 1.8% as of 10 a.m. in London, down more than 8% since last week’s record high.
  • The worldwide stock sell-off extended on Thursday, putting a global benchmark on course for the lowest close since October as investors continue to fret the spread of the coronavirus. Most government bonds added to gains, sending yields to unprecedented lows. Futures on the S&P 500 dropped as much as 1.6% but recovered to trade around 1% lower.
  • The MSCI All-Country World Index fell for a sixth straight day, with Japan’s Topix and the Stoxx Europe 600 leading declines among major indexes. Anheuser-Busch InBev NV was among the worst performers in Europe after a dismal forecast. Several large companies on the benchmark, including HSBC Holdings Plc, are today trading without the right to dividends, potentially exacerbating declines. Safer assets continued to be in demand, and the yen strengthened as yields on 10-year U.S. and Australian government bonds hit fresh record lows. Oil sank further. The pound reversed a gain after the U.K. told the European Union it could walk away from the negotiating table in June if progress isn’t being made toward a trade deal.
  • Oil extended losses after closing at a 13-month low as more new coronavirus cases were reported outside China than within, adding to fears the world is on the brink of a pandemic that will take a hefty toll on growth. Equity markets tumbled in Europe, despite President Donald Trump’s attempts to calm fears at a briefing on the outbreak, and crude tumbled below $48 a barrel in New York after the U.S. reported its first infection of unknown origin. New cases were diagnosed in countries from Pakistan to Brazil. Germany said it was likely at the start of an epidemic and Saudi Arabia halted religious visits. In addition to crude prices, diesel has also plummeted in recent days.
  • Gold held gains even as exchange-traded fund investors turned to selling, snapping the longest-ever buying spree. Palladium rallied to a fresh record as deficit warnings mount. Gold holdings in bullion-backed ETFs fell for the first time in more than a month on Wednesday. Still, demand for the metal as a haven remains strong as investors weigh signs that the coronavirus outbreak is worsening. alladium extended its record premium to platinum, trading three times higher than the sister metal. More major producers released estimates on a widening gap between palladium supplies and demand this year, pushing prices higher even as China’s car sales continue to plunge because of the virus.
  • Iron ore’s strength in weathering the virus outbreak is crumbling as supply drivers that had supported the raw material fade away and investors reassess the view that stimulus from Beijing will rescue demand. Futures in Singapore sank for a fourth day, the longest losing run in more than a month, as the contract in Dalian also fell. That’s dragging benchmark prices that had spiked above $90 a ton on Monday back toward the $70s.
  • Investors withdrew a net $890 million from State Street’s SPDR Bloomberg Barclays High Yield Bond in the latest session, the most on record for the second-largest junk-bond exchange traded fund. It reduced the ETF’s assets by 9.7% to $8.3 billion, the lowest level since Aug. 16, according to data compiled by Bloomberg. The biggest junk ETF, iShares’s iBoxx High Yield Corporate Bond fund, also had an $827 million withdrawal in its latest session, after reporting a record $1.57 billion decline on Wednesday. The outflows bring the total for the two-biggest high-yield ETFs to $5.2 billion for the past week, Bloomberg data show.
  • President Donald Trump is seeking to close ranks within his administration about the threat posed by the coronavirus and how the U.S. government plans to stop its spread, following mixed messages that rattled Wall Street and sparked an uproar in Washington. Flanked by both politically appointed and career public health officials, Trump addressed the nation Wednesday evening from the White House briefing room for only the second time in his presidency. Together, they said that while a broader outbreak in the U.S. is possible, the risk to average Americans is low.
  • Prime Minister Boris Johnson told the European Union he’ll walk away from the negotiating table in June if it’s not clear he’s going to get a Canada-style free trade agreement for the U.K. The pound fell. The U.K.’s negotiating mandate for the next stage of Brexit, published Thursday, was in many areas close to what the EU published on Tuesday. The main differences were around how closely the U.K. has to stick to EU regulations — the so-called level playing field, how the deal will be structured and governed, and fishing rights in U.K. waters.
  • Chesapeake Energy Corp.’s options for dealing with its towering debt load are shriveling as the natural gas driller seeks to auction off shale fields it needs to stay afloat. Chesapeake’s bonds and shares plunged on Wednesday after Chief Executive Officer Doug Lawler mapped out a survival strategy predicated on a sweeping divestiture program that must be consummated within months in a market already glutted with North American gas holdings. The risky plan to raise as much as $500 million, coupled with an impending reverse-stock split aimed at avoiding delisting, spooked investors. The Oklahoma shale explorer’s bonds were among the worst junk-market performers for the day amid swelling doubt among holders that recent refinancing moves will be enough to manage its leveraged balance sheet.
  • Bangkok Dusit Medical Services Pcl, Thailand’s biggest private hospital operator, offered to acquire Bumrungrad Hospital Pcl for at least 85.6 billion baht ($2.7 billion). Bumrungrad’s shares surged. The company will offer to buy the shares of its rival that it doesn’t already own for 125 baht each, according to a Thai filing Thursday. The price may be raised by as much as 20%, taking the total purchase to 102.7 billion baht.
  • U.S. health authorities said they’ve identified the first case of coronavirus that doesn’t have known ties to an existing outbreak, a worrying signal that the virus is circulating in the U.S. despite reassurances from the Trump administration that it’s contained. The hospital where the patient is being treated in California described one of the more serious cases of infection seen so far in the U.S., according a report in a local newspaper, with the patient arriving after being intubated and put on a ventilator. The U.S. Centers for Disease Control and Prevention said the patient doesn’t appear to have traveled to China or been exposed to another known case of the coronavirus. Health authorities are increasingly concerned about what’s known as community spread, where the virus begins circulating freely among people outside of quarantines or known contacts with other patients.
  • Inflation is the first place where fears about the coronavirus will show up in the hard data for the euro area — oil costs are down as China’s demand for crude has fallen away. That probably lowered euro-area inflation in February and is likely to do so again in March. Underlying price pressure remains weak and the deterioration in the economic outlook raises downside risks for inflation prospects.
  • NATO is a slightly odd collection of countries. Some of its 29 members fought wars against each other. Some are sparring even now over territory and influence. One—Turkey—is busily stirring the pot over everything from Syria to Libya to control of energy sources in the eastern Mediterranean. Even so, for 70 years the alliance has provided a security umbrella across Europe, held together in no small measure by the moral and financial imprimatur of the U.S. Differences have been papered over because states have kept their eyes on the prize of collective defense.
  • Apple Inc. has lost a pair of veteran executives who worked in the manufacturing, supply chain and operations group and were key participants in the production of many of the company’s major devices. Nick Forlenza, a vice president of manufacturing design, has retired from Apple, while Duco Pasmooij, another vice president who worked on operations, is discussing an exit in the near future, according to people familiar with the moves. Pasmooij left the operations team over a year ago, moving into a role reporting to the company’s head of augmented reality efforts, said the people, who asked not to be identified discussing personnel.
  • Best Buy Co. reported strong holiday sales, brushing off a probe of its CEO’s conduct and general sluggishness in the broader consumer-electronics sector. The shares were little changed in early U.S. trading. Comparable-store sales in the U.S. — a key gauge of performance — rose 3.2% in the fourth quarter, beating analysts’ projections for a 2.3% gain, according to Consensus Metrix.omparable-store sales in the U.S. — a key gauge of performance — rose 3.2% in the fourth quarter, beating analysts’ projections for a 2.3% gain, according to Consensus Metrix.
  • Junk bond investors are about to get their first real exposure to long-dated debt, but many are saying it’s too early to dip their toes into the water just yet. Kraft Heinz Co. is set to join the high-yield bond market in a matter of days, a move that will dump billions of dollars of long-dated debt into an index with an average duration of just 3.5 years. The packaged food maker has about $13 billion of notes that mature in 10 years or more, equivalent to around 20% of all long-dated U.S. high-yield corporate bonds outstanding. Figuring out how to handle the deluge is a fresh challenge for high-yield managers, many of whom are used to assessing companies based on credit quality, rather than their debt’s sensitivity to interest rates. Longer bonds drop faster when interest rates rise, and most junk-rated companies issue in shorter maturities because of their riskier businesses.
  • Exxon Mobil Corp. posted the second-worst reserves performance in its history as a crucial measure of future production capacity faltered. Exxon’s discoveries and acquisitions last year failed to replace 2019’s production, according to a company filing on Wednesday. In the decades since Exxon’s 1999 takeover of Mobil Corp., only 2016 was worse in terms of the so-called reserves-replacement ratio, according Bloomberg calculations. The reserves-replacement ratio is a key metric for investors because it provides a rough assessment of a company’s ability to sustain future output and cash flow that underpins dividends, drilling budgets and buybacks. In the filing, Exxon wiped more than $50 billion from its year-end 2019 estimate for discounted future net cash flows.
  • Japanese Prime Minister Shinzo Abe has called for all schools in the country to close from Monday until the end of their spring holidays, taking the unprecedented move in a bid to combat further spread of the coronavirus. The closure will apply to all elementary, junior high, senior high and special needs schools nationwide, and would keep around 13 million students across the country at home for at least a month, according to statistics from the education ministry. After being heavily criticized for a slow response to the spread of the infection in Japan, the government is moving to take more urgent steps as the number of cases in the country surge. Thursday saw 13 new infections in the northern island of Hokkaido alone, bringing Japan’s total past 200, a figure that doesn’t include the 705 infected from the Diamond Princess cruise ship.
  • A brewing fight about which country has the right to tax some of the world’s most profitable companies, including Facebook Inc. and Alphabet Inc.’s Google, could devolve into a multi-front trade war, regardless of whether President Donald Trump is still in the White House. Even if a Democrat wins the presidency in November, it could be tempting to continue the Trump administration’s policy of using trade sanctions to retaliate against new taxes on U.S. tech companies. A tit-for-tat trade war is already building with France, which passed a 3% tax on large tech companies that went into effect at the start of 2019. The U.S. responded with the threat of tariffs on $2.4 billion worth of French cheese, sparkling wine, and makeup, prompting the European Union to consider tariffs on U.S. goods.
  • Nokia Oyj is exploring strategic options as fierce competition puts pressure on the Finnish network equipment maker’s earnings, people familiar with the matter said. The company is working with advisers to consider alternatives ranging from potential asset sales to mergers, the people said, asking not to be identified because the information is private. Other options include shifting investments and making balance-sheet adjustments, one of them said. Deliberations are ongoing, and there’s no certainty they will lead to any transactions, the people said. A representative for Espoo, Finland-based Nokia declined to comment.

*All sources from Bloomberg unless otherwise specified