February 24, 2021

Daily Market Commentary

Canadian Headlines

  • Royal Bank of Canada’s capital-markets operation powered earnings in the fiscal first quarter, with volatile stock markets driving record profit from the division. Earnings from the capital-markets business surged 21% to C$1.07 billion ($848 million) in the three months through January, the Toronto-based company saidTuesday. Overall profit topped analysts’ estimates. The volatility spurred by the Covid-19 pandemic has fueled a trading boom, especially in the U.S., where Royal Bank has a sizable presence. The strength continued through the end of last year, propelling higher-than-expected equities-trading revenue at the five biggest U.S. investment banks. Of Canada’s six largest lenders, Royal Bank generates the second-highest proportion of revenue from capital markets, giving it an outsize boost from the trend.
  • Joe Biden and Canadian Prime Minister Justin Trudeau said their nations would adopt a unified approach toward the pandemic, climate change and China, setting aside trade and other tensions in what the White House called the new U.S. president’s first bilateral meeting. After about a two-hour virtual meeting between the two leaders and their staffs on Tuesday, Biden said that they had agreed to cooperate to strengthen the World Health Organization and industrial supply chains, “tackle climate change” and “better compete with China.” He called for China to release two detained Canadian citizens, saying that “human beings are not bargaining chips,” and said that the U.S. and Canada would “strengthen our shared commitment to provide safe haven for refugees and asylum seekers.”
  • U.S. President Joe Biden’s decision to cancel the Keystone XL pipeline is sparking renewed interest in shipping Canadian oil-sands crude by rail, and that comes with its own environmental risks. Cenovus Energy Inc. and Imperial Oil Ltd. have increasingly turned to trains to move their crude, with oil exports by rail from Canada more than tripling since July. Now, Gibson Energy Inc. — an oil shipping company that signed a 10-year contract with ConocoPhillips to process oil-sands crude before loading it at its train terminal — expects other producers to follow suit. Without Keystone XL, which was scheduled to enter service in 2023, rail is poised to become a more important way for Canadian oil to reach U.S. Gulf Coast refineries, which need the heavy crude to replace declining supplies from Mexico and Venezuela. That means the risk of derailments may also rise.

World Headlines

  • European stocks rose with cyclicals leading on optimism that the economic recovery will gather pace as the region’s vaccination drive catches up and lockdown restrictions start to ease. The Stoxx 600 Index rose 0.4% as of 10:02 a.m. in London, with cyclical sectors including travel & leisure, chemicals and construction rising the most. Lloyds Banking Group Plc gained after Britain’s biggest mortgage lender beat estimates and reinstated dividends. Today’s advance comes as “pandemic winners” come under pressure this week as Britain charts a course out of lockdowns and European virus cases recede. Value stocks, viewed as cheap, started to outperform growth stocks with the breakthroughs in vaccines and U.S. election in November and have been accelerating their relative gains throughout February.
  • U.S. equity futures climbed and Treasuries dropped as investors took confidence from the Federal Reserve’s vow to support economic growth. The reflation trade was back in full swing, with futures on the small-cap Russell 2000 Index beating the Nasdaq 100 in early trading. Tesla Inc. added 3% after Ark Investment Management’s Cathie Wood said she bought shares during this week’s selloff. Airlines and cruise operators advanced, along with oil and copper.
  • Oil climbed again, with mixed news on global inventories offset by expectations of a prolonged market rally into the summer. Futures in New York climbed 0.5%, wiping out an earlier loss. The American Petroleum Institute reported crude inventories increased by 1.03 million barrels last week, though stockpiles at a key European storage hub are at their lowest level since September, according to Genscape. The structure of the futures curve continues to indicate tighter supply. There’s been a spate of optimism across the oil market in recent weeks, with key players talking up the prospect of higher prices later in the year. Pent up demand as the global economy recovers has even got some traders talking about the prospect of returning to $100 over the next year or two. A Saudi Aramco executive said Indian oil demand is close to pre-pandemic levels and Chinese consumption has recovered significantly.
  • Gold rose as investors weighed comments from Jerome Powell on policy and growth, with the Federal Reserve chair signaling the central bank was not close to curbing support for the pandemic-hit economy. Powell’s commitment came even as he voiced expectations for a return to more normal activity this year. He was delivering his semi-annual report to the Senate Banking Committee Tuesday and speaks to a House panel on Wednesday. Bullion is heading for a second straight month of losses amid rising Treasury yields, which are reducing the appeal of the non-interest-bearing asset. President Joe Biden’s $1.9 trillion relief plan, plus the prospect of additional stimulus later this year, is setting the stage for a shift away from historically low Treasury yields. In his remarks, Powell called the recent run-up in bond yields “a statement of confidence” in the economic outlook.
  • Ghana received the first batch of vaccines shipped through the World Health Organization-backed Covax initiative as the West African country prepares an inoculation campaign. Israel will impose a three-night curfew around the Purim holiday, and has prohibited related parties, shows and parades to prevent the mass spread of the virus. Hong Kong pledged HK$120 billion ($15.5 billion) to support its economy and will give HK$5,000 in vouchers to residents to boost consumption. Thailand, meantime, got its first vaccine doses from Sinovac Biotech Ltd., allowing it to start its immunization program within a week. It may also waive quarantine for vaccinated visitors.
  • Vodafone Egypt signed an agreement with Ebtikar for Financial Investments Co. to buy 20% stakes in e-payments firms Bee and Masary, part of the telecommunication company’s push to tap into a growing digital-payments market. Shares climbed. Vodafone would participate in capital increases in both firms, which are owned by Ebtikar, the company said in a statement, without giving details. The deal is subject to due diligence, it said. Vodafone Egypt shares rose 6.6% in Cairo on Wednesday to 150 Egyptian pounds amid thin trading volumes. Vodafone has said it wants to expand its footprint in the Egyptian market where non-banking financial services have grown rapidly, largely due to the coronavirus pandemic. In December, the company said it was working with Bank of Alexandria to introduce a pilot nano-lending service for consumers.
  • Senior executives from more than 150 companies are voicing support for President Joe Biden’s $1.9 trillion stimulus package in a letter to congressional leaders urging them to pass coronavirus relief. The letter is signed by leaders across industries, including David Solomon, chairman and chief executive officer at Goldman Sachs; Stephen Schwartzman, the chairman and CEO of Blackstone; Sundar Pichai, the CEO of Google; and John Stankey the CEO of AT&T. “We write to urge immediate and large-scale federal legislation to address the health and economic crises brought on by the COVID-19 pandemic,” the executives wrote in the letter, first reported by CNN. The letter’s signatories included several past supporters of former President Donald Trump, including Schwartzman, one of the biggest contributors to Trump’s re-election bid from the world of high finance, and New York real estate magnate Richard LeFrak.
  • Before coming under scrutiny because of a mid-air engine explosion, United Airlines Holdings Inc.’s aging fleet of Boeing Co. 777s had already garnered plenty of criticism in credit markets. The aircraft that showered debris over a Denver suburb this past weekend was among assets that investors had been reluctant to accept as collateral last year when the airline sought to borrow billions of dollars to ride out the pandemic, according to flight records and debt documents reviewed by Bloomberg. United’s first attempt to sell debt backed by some of its oldest planes — including the 26-year-old 777-200 with the engine mishap, and dozens more like it — collapsed in May after investors demanded interest as high as 11% to compensate for the risk.
  • Lowe’s Cos. Inc. reported stronger-than-expected fourth-quarter revenue, another sign that U.S. consumers are still highly motivated to upgrade their homes. Same-store sales increased 28.6% at the U.S. home-improvement business, outpacing analysts’ estimates of 23.6%, according to Consensus Metrix. The company said momentum continued in February. Lowe’s growth is coming up against some tough comparisons following the quarantine quarters when consumers invested heavily on their homes. Home Depot on Tuesday didn’t provide formal guidance, citing ongoing uncertainty.
  • Iberdrola SA unveiled plans to invest 150 billion euros ($182 billion) by 2030 as the Spanish utility seeks to cement its position as one of the world’s leaders in green energy. The company forecast higher net income for this year after posting a modest gain in 2020, even after coronavirus lockdowns hurt electricity demand and adverse currency moves dented earnings. Iberdrola’s resilience is a positive sign for the renewable power industry’s ability to grow even during difficult economic conditions.
  • The three-week selloff in global bonds looks to be attracting the attention of quant funds that follow market trends — and they have been adding fuel to fire. Funds that follow price momentum are actively building short positions in Treasuries as yields rise, according to at least one metric. The rolling 30-day correlation between the Treasury 10-year yield and Hedge Fund Research Inc.’s Macro/CTA Index reached its highest since March this week.
  • SEB AB, the Swedish bank that over a decade ago arranged the world’s first ever green bond, is now cracking down on clients in the fossil-fuel industry. The Stockholm-based bank said on Wednesday it plans to “gradually reduce its credit exposure to fossil fuels within the oil and gas sector by applying a cap to exploration, production and oilfield services activities.” The cap will be lowered annually, it said. Withholding credit from polluters has emerged as the next chapter in financial industry efforts to cut exposure to environmentally dodgy enterprises. Bank lending has so far lagged behind asset management in setting ambitious climate goals, but with companies in much of Europe tending to rely more on loans than market funding, that’s raised questions around priorities.
  • CVC Capital Partners has been exploring a bid for U.K. chemical producer Synthomer Plc, people with knowledge of the matter said. The private equity firm made an initial approach to London-listed Synthomer to gauge its interest in a deal, according to the people, who asked not to be identified because the information is private. The two parties aren’t currently holding any negotiations, one of the people said. Shares of Synthomer have risen 46% over the past 12 months, giving it a market value of about 2 billion pounds ($2.8 billion). The company is one of the world’s largest suppliers of latex for medical gloves, which have seen booming demand during the coronavirus pandemic. Synthomer also produces materials used in specialty packaging tape, artificial sports turf, bedding foam and paint.
  • Spain will approve an 11 billion-euro ($13.4 billion) package to support struggling companies and self-employed workers, Prime Minister Pedro Sanchez said. “It’s a significant amount of resources to continue supporting – during the hard weeks that we still have ahead to once and for all overcome the pandemic – sectors that were growing and that were competitive before the pandemic, but that logically now are facing a very difficult situation,” Sanchez told the Spanish parliament in Madrid on Wednesday. He said the measures would be used to “bolster the balance sheets” of the companies and allow them to make necessary investments. The funds will be approved “shortly,” Sanchez said, without providing more guidance on the time frame.
  • Facebook Inc.’s brief but tempestuous standoff with the Australian government over a world-first pay-for-news law is only the start of a string of regulatory battles that the world’s biggest social network faces in 2021. Mark Zuckerberg started the year on the offensive, blocking news across Rupert Murdoch’s home turf of Australia to fend off demands that Facebook pay media companies for content shared on its platform. On Tuesday, Zuckerberg struck a compromise after 11th-hour talks with the government on the legislation that’s also aimed at Google and is expected to pass Australia’s parliament this week. But a regulatory domino effect is already underway, with publishers pressuring the European Union to emulate Australia’s approach.
  • A rout in Malaysian glove makers is deepening, sending valuations for some companies to rock-bottom levels. Top Glove Corp., the world’s biggest, slid 7.8% in a fifth day of declines Wednesday, taking its February loss to 22%, set to be the worst for any month on record. The stock is trading at about 6 times 12-month forward earnings, from a record high of 43 times in May. Supermax Corp., which surged 784% last year, is down 26% this month and trades at 4.6 times.
  • The unprecedented $9 trillion rescue mission by central banks to haul the world economy from its coronavirus recession is being tested as rising bond yields and inflation bets threaten their ability to keep borrowing costs down. While Federal Reserve Chairman Jerome Powell this week called the recent run-up in bond yields “a statement of confidence” in the economic outlook, other counterparts are sounding less sanguine as their recoveries lag that of the U.S.. European Central Bank President Christine Lagarde said Monday that she and colleagues are “closely monitoring” government debt yields. The Bank of Korea warned it’ll intervene in the market if borrowing costs jump, Australia’s central bank has been forced to resume buying bonds to enforce its yield target and the Reserve Bank of New Zealand Wednesday promised a prolonged period of stimulus even as the economic outlook there brightens.
  • Less easy financial conditions will likely lead to lower overall returns in global markets while favoring growth stocks over value, according to UBS Group AG. Growth and earnings will become bigger drivers of returns next quarter, strategists including Bhanu Baweja wrote in a note Monday. A bottoming in real rates and credit spreads will signal the end of a liquidity “tailwind,” they said. “While these changes don’t imply a big drawdown, they do make for an important change in the nature of the rally,” the strategists wrote. “Liquidity tailwinds have been the biggest contributor to market gains.”
  • Icon Plc agreed to buy PRA Health Sciences Inc. in a $12 billion cash and stock deal that combines two research providers supporting Covid vaccine and treatment trials. Both companies help run outsourced clinical trials for drugmakers and medical device developers, a business that’s been caught up in the global rush to immunize populations against the coronavirus. Icon helped recruit 44,000 participants in clinical trials of Pfizer Inc. and BioNTech SE’s Covid vaccine, and PRA has also supported research related to the pandemic, including trials of potential treatments.
  • U.S. loan applications to purchase homes declined last week to a nine-month low, suggesting the housing market boom is starting to fizzle against a backdrop of rising mortgage rates and soaring prices. The Mortgage Bankers Association’s purchase index slumped 11.6% in the week ended Feb. 19 to 264.9, the Washington-based group said Wednesday. The contract rate on a 30-year fixed loan rose to 3.08%, the highest since mid-September, from 2.98%. While the decline also reflected adverse winter weather and extended power outages in Texas, according to the MBA, the index of purchase applications has fallen in four of the last five weeks and is down 24% from mid-January.
  • It’s not often that Hong Kong’s laissez-faire government finds itself aligned with Bernie Sanders. But the self-described democratic socialist may well applaud the Asian financial hub’s surprise decision on Wednesday to raise its tax on stock trades for the first time since 1993. The stamp-duty increase, which contributed a selloff in Hong Kong’s $7.6 trillion market and sent shares of the city’s exchange operator down the most in five years, shows that even one of the world’s most capitalist-friendly governments is under growing pressure to target financiers and wealthy investors as it tries to address worsening inequality.
  • Exelon Corp. plans to separate its power-generation unit from the U.S. company’s utilities business in an effort to streamline operations and increase shareholder value. The Chicago-based utility owner plans to structure the deal as a tax-free spinoff that will be completed in the first quarter of next year, according to a statement Wednesday. Existing Exelon shareholders will receive shares in the new entity, but the company hasn’t yet determined the distribution ratio. Exelon is the latest company to unload power-generating or pipeline assets to focus on regulated utilities that are guaranteed more predictable returns. The company owns more than 31 gigawatts of power-plant capacity. That includes the largest U.S. fleet of nuclear plants, which have come under pressure as reactors struggle to compete with natural gas, wind and solar.
  • TJX Cos., which owns the T.J. Maxx and Marshalls brands, estimates it lost about $1 billion in revenue in just the last quarter alone due to temporary Covid-19 store closures abroad. The Framingham, Massachusetts-based company said stores were closed 63% of the time in Europe and 32% of the time in Canada in the fourth quarter, which covers the crucial holiday selling season. Stores in the U.S., TJX’s biggest market, were mostly open during the fourth quarter.
  • The European Union is finally catching up in securing vaccine supplies. The challenge now is getting shots into arms. After stumbling out of the gates, the bloc shifted into higher gear in sourcing Covid-19 vaccines and is on track to immunize its population faster than anticipated thanks to new supply pacts and increased production. Following efforts to narrow the gap with the U.S. and Britain in a race to slow the coronavirus, the EU may be able to vaccinate 75% of its adult population by the end of August, about two months earlier than previously forecast, according to London-based research firm Airfinity Ltd.
  • 3D printer-maker Markforged Inc. has agreed to go public through a merger with a blank-check company started by Eventbrite Inc. co-founder Kevin Hartz. The deal with Hartz’s firm, One, values the combined equity at $2.1 billion, the companies said in a statement. “We’re focused on making manufacturing even better by capitalizing on the huge opportunity ahead, and we are making this important leap through our new long-term partnership with Kevin Hartz and the entire team at One,” Shai Terem, Markforged’s chief executive officer said.

A truly great man never puts away the simplicity of a child. – Chinese Proverb

*All sources from Bloomberg unless otherwise specified