February 17, 2021

Daily Market Commentary

Canadian Headlines

• Canadian stocks advanced for a second day as pot stocks outperformed. The S&P/TSX Composite index rose 0.2% Tuesday, supported by health and energy shares, while the materials and consumer staples sectors led decliners. Aphria was the day’s best performing stock, driven higher after Cantor said the larger Canadian cannabis companies deserve to trade at a premium to their U.S.-focused peers. On the M&A front, Onex Corp. and Pierre Karl Peladeau are contenders to buy Transat AT, if the tour operator’s deal to be acquired by Air Canada falls apart, according to a Desjardins Securities analyst. Meanwhile, Canadian home buyers are facing the tightest market on record, with a purchasing frenzy driven by the Covid-19 pandemic showing no signs of slowing down.
• Shopify Inc. posted another blockbuster quarter, beating analyst forecasts on sales and earnings, and said it expects revenue to grow “rapidly” this year — though at a lower rate than in 2020. Gross merchandise value — the broadest measure of product sales flowing through Shopify’s platform — was $41.1 billion in the fourth quarter, up 99% from the same quarter a year earlier, helped by soaring demand for online shopping during the global pandemic. Full -year GMV was $119.6 billion. “Our outlook coming into 2021 assumes that as countries roll out vaccines in 2021 and populations are able to move about more freely, the overall economic environment will likely improve, some consumer spending will likely rotate back to offline retail and services,” the company said in the earnings statement. That means “a more normalized pace of growth,” the company said.

World Headlines

• European stocks fell after rallying earlier this week, as investors weighed underwhelming earnings reports. The Stoxx Europe 600 Index was down 0.4% at 11:54 a.m. in London. Kering dragged retail shares lower after its comparable sales missed estimates. British American Tobacco Plc slid after its full-year results. Beiersdorf AG slumped after the Nivea owner’s margin guidance disappointed analysts. Despite Wednesday’s drop, the Stoxx 600 is trading less than 4% away from a record high reached last February, before equities were gripped by a pandemic-fueled rout. While Europe has lagged behind U.S. and Asian markets in the recovery, some market players expect the region’s shares to catch up on bets that value and cyclical shares will strongly benefit from a global economic rebound.
• Treasury yields edged lower from their highest in a year on Wednesday, while European stocks dropped as investors assessed a busy day for earnings. S&P 500 futures were flat, while the yield on benchmark 10-year Treasuries dipped to around 1.29% after touching the highest since February 2020. The three-month implied volatility on 10-year swap rates jumped, signaling that U.S. Treasuries are in for more wild gyrations. The dollar strengthened. The dramatic rise in bond yields has investors wondering afresh how high they can climb before spoiling the risk rally. That adds to concerns among some analysts that speculative froth may be setting equities up for a fall. Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist, said a 10% pullback in U.S. shares is “very plausible” based on sentiment readings, valuations and earnings momentum.
• Japanese stocks fell after a rally that pushed the nation’s major stock gauges to the highest levels in 30 years and as rising yields spooked some investors. Electronics makers were the biggest drag on the Topix, which closed Tuesday at its highest level since June 1991. The Nikkei 225 pulled back after advancing beyond the key 30,000 mark to its highest since August 1990. The 14-day relative strength index on both measures continues to hover above the key 70 level, which some see as indicating the market is due for a correction.
• Oil held gains after surpassing $60 a barrel for the first time in a year as a cold snap and power crisis took out a third of U.S. crude production. Some 3.5 million barrels a day of American output has been halted, according to traders and industry executives, as a cold blast freezes well operations and cuts power across the central U.S. That’s being offset, however, by the suspension of more than 3 million barrels a day of refining capacity, according to Energy Aspects Ltd. The crisis has spurred a rush for fuels, with U.S. gasoline futures up more than 5% this week. But the loss of demand from the refineries has also pushed West Texas Intermediate futures’ prompt time-spread into a bearish contango structure for the first time in about a month.
• Gold fell to the lowest in more than two months as the metal’s allure suffered from a stronger dollar and a recent rally in Treasury yields on expectations of an economic recovery. Progress on the coronavirus vaccine front and a slowing pace of infections is driving optimism over global growth, supporting yields and weighing on demand for non-interest-bearing bullion. A bout of strength from the dollar is also hurting gold, with the metal falling for a fifth day and down about 6% so far this year. Further losses may be on the horizon after bullion’s 50-day moving average retreated below its 200-day counterpart, a so-called death cross pattern. Meanwhile, holdings in SPDR Gold Shares, the world’s largest bullion-backed exchange-traded fund, fell to the lowest since June. ETF purchases were a key driver of gold’s rally to a record in August and could further pressure prices if outflows are sustained.
• Sweden fleshed out tougher new measures to help the country cope with a potential Covid-19 resurgence in response to “a concerning” increase over the past week. The European Union finalized an agreement with Pfizer Inc. and BioNTech SE for 200 million more doses of their vaccine, locking in a second-quarter supply boost as countries struggle to speed up their immunization drives. New Zealand is ending a three-day lockdown in Auckland after authorities expressed confidence that the latest community outbreak is contained. The U.K. is preparing plans for a testing blitz to lift its lockdown, the Times reported.
• The deep freeze that has forced the shutdown of U.S. refineries, oil wells and meat plants, disrupted shipments of soybeans and corn, and is still leaving more than 3 million customers without electricity could continue to keep parts of Texas in the dark for several days. To prevent the collapse of their networks, suppliers from North Dakota to Texas implemented rolling power cuts for a second consecutive day, with outages spreading to more states including Arkansas, Louisiana and Mississippi. The operator of the Texas electric grid says it could take days for enough power plants to be up and running to restore supply. Utility CenterPoint Energy Inc. also warned residents blackouts may last for several more days. In the Permian Basin, major producer Occidental Petroleum Corp. told customers it would be forced to curtail oil deliveries, while Chevron Corp. shut in some wells in the region. Fracking in the top U.S. shale plays has gone dark. U.S. oil production has plunged by a third.
• Energy Transfer LP, the giant U.S. pipeline operator founded by billionaire Kelcy Warren, agreed to buy Enable Midstream Partners LP for $2.6 billion in an all-stock deal. The transaction is valued at about $7.2 billion including debt, the companies said Wednesday in a statement. The deal has almost no premium for Enable unitholders. CenterPoint Energy Inc. owns about 54% of the common units representing limited partner interests in Enable. The takeover will give Energy Transfer, the largest U.S. pipeline operator by revenue, natural gas gathering and processing assets in the Anadarko Basin in Oklahoma and combine Enable’s assets with Energy Transfer’s existing gas operations on the U.S. Gulf Coast.
• Ford Motor Co. will drastically overhaul its business in Europe, where it didn’t sell a single fully electric vehicle last year, vowing to go almost entirely electric by the end of the decade. One of the first steps in the transformation announced Wednesday will be to plow $1 billion into a German assembly plant that will start making an all-electric model in two years. By mid-2026, all passenger cars Ford sells will be plug-in hybrids or fully electric. By 2030, Ford’s passenger-vehicle range will be completely all-electric — one of the more demanding road maps among Europe’s major incumbent carmakers. Only its smaller but strategically important commercial-vehicle business will sell some vans and trucks that lack a plug by then.
• Prime Minister Mario Draghi urged Italians to pull together in a historic effort to rebuild their country, comparing the task ahead to the post-war reconstruction, as he set out an ambitious, firmly pro-European agenda for his new government. “Today we have the possibility or rather the responsibility to start a new reconstruction, as governments did after World War II,” the former head of the European Central Bank told Rome senators, in his first detailed presentation of his administration’s program. The newly installed premier, credited with saving the euro in 2012, centered his speech around European integration ahead of a confidence vote in the upper house on Wednesday evening he’s set to win thanks to a big majority. Senators are due to vote at about 10 p.m., while lower house lawmakers will vote Thursday evening.
• The U.K. is holding back its plan for evaluating the economic impact of new trade deals, which was prepared before Prime Minister Boris Johnson signed the post-Brexit agreement with the European Union. According to an internal email seen by Bloomberg, the Department for International Trade was ready in mid-December to release a 20-page document — also seen by Bloomberg — committing the government to regular monitoring and evaluation reports of free-trade agreements signed by the U.K. A person familiar with the matter said publication was delayed because ministers didn’t want that level of analysis applied to the EU accord. Another person said work on assessing trade deals was paused because the timing clashed with the signing of the pact with the bloc. “We do not comment on leaks,” the Department for International Trade responded in a statement, when asked by Bloomberg why publication of the document was delayed, when it will now be published and whether the framework for scrutinizing deals will apply to the U.K.-EU agreement.
• Car sales in Europe slumped to a record low for January as coronavirus lockdowns again shook the continent’s biggest markets. New-vehicle registrations plunged 26% to 842,835, the European Automobile Manufacturers’ Association said Wednesday, cutting short a reprieve of smaller declines toward the end of last year. Spain led the drops among major markets with a 52% fall, while sales in Germany fell by almost a third. Shuttered showrooms and hesitant consumers are plaguing automakers which also are fighting production outages due to a worldwide shortage of semiconductors. Many manufacturers’ earnings are being rescued by resurgentdemand from China, with Volkswagen AG and BMW AG among those posting better-than-expected preliminary earnings.
• When Jared Bernstein worked as chief economist for then-Vice President Joe Biden during the slow recovery from the financial crisis, White House discussions would often revolve around taming the fiscal deficit. It was “exactly the wrong economic issue” to be focused on, Bernstein said in January 2012, less than a year after he left President Barack Obama’s administration. The political backdrop of the time made it tough “to explain to the public we have to spend more now and spend less later,” he said in a PBS “Frontline” interview. Nine years later, Bernstein’s back in the White House, serving on now-President Biden’s Council of Economic Advisers. This time, the debate is entirely different. Bernstein’s prescription of powerful, sustained spending to lift prospects for the economy’s marginalized communities is shared across the administration.
• AEye Inc., a startup that makes lidar systems for self-driving vehicles, is going public by merging with blank-check company CF Finance Acquisition Corp. III in a deal valued at $2 billion. The merger will net $455 million in cash for AEye, which the company will use to further develop its lidar and software systems. AEye is banking on growth in systems like General Motors Co.’s Super Cruise assisted driving system and, eventually, self-driving cars. Lidar is a technology using laser-based sensors that allow a car’s computer to “see” its surroundings. The deal shows that investors still have interest in companies working on self-driving technology. Capital is still flowing into autonomous technology, but has tightened up in the past year as it has become more apparent that it may take longer for cars to truly drive themselves.
• Bitcoin’s incredible rally shows little sign of abating yet after the token jumped past $51,000 for the first time. The largest cryptocurrency rose almost 6% Wednesday to about $51,431 after a fivefold surge in the past year, according to a composite of prices compiled by Bloomberg. The Bloomberg Galaxy Crypto Index reached a record. Bitcoin’s rally for some is emblematic of speculative froth in financial markets awash with stimulus. The crypto faithful counter that the digital asset is grabbing more mainstream attention, especially after Tesla Inc.’s recent $1.5 billion purchase. MicroStrategy Inc. said Tuesday it would sell $600 million of convertible bonds and use the proceeds to buy more of the tokens.
• The European Commission secured hundreds of millions of additional doses and vowed to accelerate authorization of vaccines targeting coronavirus variants as it sought to put its inoculations campaign back on track. The EU’s executive arm finalized an agreement with Pfizer Inc. and BioNTech SE for 200 million more doses of their Covid-19 vaccine, and announced a major new order with Moderna Inc for 150 million more doses, also for this year. The moves lock in a second-quarter supply boost as countries struggle to speed up their immunization drives. They come as the Commission announced policy plans to accelerate research, authorization, procurement and distribution for vaccines that fight variants of the coronavirus. “New variants of the virus are emerging in Europe and around the world” Commission President Ursula von der Leyen told reporters in Brussels. “ Up until now the vaccines that have been approved in Europe appear to be effective against these new variants but these variants are more infectious so there will be more infections and that means more variants.”
• Hilton Worldwide Holdings Inc. reported worse-than-expected results for the fourth quarter, as cost-cutting measures enacted early in the pandemic failed to offset inconsistent room demand. Hilton reported an adjusted loss per share of 10 cents, according to a statement Wednesday, missing the average analyst estimate of a profit of 3 cents a share. Worldwide revenue per available room — or revpar, a measure of room rates and occupancy — fell 59% in the fourth quarter from a year earlier. The results sent the shares sliding in early trading.
• It was hardly the role Citigroup Inc.’s bankers signed up for when they helped Ron Perelman’s Revlon Inc. borrow $1.8 billion in 2016. But, now a back-office blunder is leaving the financial behemoth faced with the prospect of becoming one of the biggest creditors to the troubled cosmetics empire. A surprise ruling by a New York judge on Tuesday blocked Citigroup’s efforts to recover $500 million it had mistakenly sent Revlon’s lenders last year as the so-called administrative agent on the company’s loan. While the bank says it will appeal the decision, a failure to overturn it will leave Citigroup holding the bag on the bulk of the $900 million remaining on the loan that Revlon hasn’t itself paid. “Revlon’s loan was never paid off. So if appeals fail, Citi will ultimately step into the shoes of the lenders and own $500 million of that nearly $900 million term loan.” said Philip Brendel, a senior distressed debt analyst at Bloomberg Intelligence.

“All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time.” – John Kenneth Galbraith

*All sources from Bloomberg unless otherwise specified