February 26, 2021

Daily Market Commentary

Canadian Headlines

  • Ontario Teachers’ Pension Plan Board is buying a majority stake in plastic packaging company Logoplaste from private equity firm Carlyle Group. OTPP has acquired Carlyle’s majority stake in the business for an undisclosed amount, Logoplaste said in a statement Friday that confirmed an earlier Bloomberg News report. The deal gives Logoplaste an enterprise value of about 1.4 billion euros ($1.7 billion), people familiar with the matter said, asking not to be identified discussing confidential information. Logoplaste shareholders Filipe de Botton and Alexandre Relvas will retain their roughly 40% interest in the company, according to the statement.

World Headlines

  • European equities trimmed declines as the risk-off sentiment that spurred an overnight selloff in U.S. shares eased, while bond-proxy sectors advanced. The Stoxx Europe 600 Index fell 0.5% as of 9:53 a.m. in London, after earlier sliding as much as 1.7%. Utilities and health-care shares rose, tempering losses from the mining, energy and travel and leisure sectors. Tech shares also underperformed after a selloff Thursday in the Nasdaq 100 Index. European equities are giving up some of their February gains after rising to an almost one-year high last week. U.S. stocks slumped Thursday amid an investor rotation out of the more expensive pandemic winners and as Treasury yields spiked. Still, some market players view the pullback as temporary, predicting a return of the reflation trade that’s boosted shares this year.
  • The Nasdaq 100 Index is heading for the worst week since March, with futures pointing to deeper losses when U.S. markets open on Friday. Contracts on the tech-heavy index dipped 0.5% in early U.S. trading and S&P 500 futures lost 0.3%. Tesla Inc. sank 3% and Cathie Wood’s Ark Innovation ETF edged lower. GameStop Corp. jumped almost 10% as enthusiasm for the video-game retailer once again gripped traders. Stocks have slumped with week, sending the Nasdaq down almost 6%, amid a jump in Treasury yields and worries that markets are overheated. Still, there’s no shortage of investment strategists reminding clients that faster economic growth is a bullish driver for stocks while bond yields levels remain low compared with historical standards.
  • Japanese stocks slid, erasing gains made earlier this week, as an increase in government bond yields sapped demand for riskier assets. The Nikkei 225 Stock Average extended declines in the afternoon session. Having earlier on Friday given up the key 30,000 level it attained this month for the first time since 1990, the index fell through the 29,000 level at the close, finishing down 4%. That’s the most since April and left it at the lowest since Feb. 5. The broader Topix dropped 3.2%, with all industry groups falling and electronics makers and telecom shares the heaviest drags on the benchmark. Japan’s 10-year bond yield rose to the highest level since January 2016, following the trend of yields around the world.
  • Oil’s record start to 2021 was under pressure from a selloff in bond markets that spooked risky assets. While crude futures declined on Friday, global benchmark Brent has rallied to its best ever start to a year. Next week, the Organization of Petroleum Exporting Countries and its allies will meet to decide on output levels, with market gauges indicating strength. The market is also facing an escalation in Middle East tension after the U.S. carried out airstrikes in eastern Syria on sites connected to Iran-backed groups. A pocket of Chinese demand may slow, however, after its oil storage neared capacity following a buying spree of cheap crude last year.
  • Copper dropped from a nine-year high and gold traded near the lowest since June following Thursday’s surge in bond yields and worries that monetary policy could be tightened to stop the economy overheating. Copper, considered an economic bellwether, has neared a record high set a decade ago on bets that rebounding economies and central bank support will further tighten supplies. While some analysts and traders say prices could climb much higher, the sharp increases in the past week may also have left copper vulnerable to correction. Thursday’s spike in Treasury yields sent shockwaves across markets, and metals have also come under pressure from a stronger dollar as the week ends. Investors are getting worried that faster inflation could trigger a pullback in stimulus support, though Federal Reserve officials have stressed that there are no plans to tighten policy prematurely. For gold, higher yields and optimism over the recovery have dented the haven’s allure.
  • L Catterton, the private equity firm backed by luxury French fashion house LVMH, agreed to buy iconic German sandal maker Birkenstock. The investment firm and the family behind Birkenstock announced the deal on Friday without disclosing the financial terms. Bloomberg News reportedearlier this week that the purchase would value the sandal maker at about 4 billion euros ($4.9 billion). L Catterton beat out a rival offer from buyout firm CVC Capital Partners, which was close to sealing a deal earlier this year, people familiar previously said. In the end, the family owners of Birkenstock preferred L Catterton’s track record with family-backed consumer brands as well as its ability to expand in Asia.
  • Vaccinations in Ireland led to a substantial drop in infections among health workers and care-home residents, according to the country’s health authority, confirming observations made in Israel. European Union leaders inched toward establishing bloc-wide vaccine certificates to enable countries to reopen to travel as Commission President Ursula von der Leyen warned that unless they hurry Apple Inc. and Google will step into the vacuum. J&J’s vaccine will probably be approved by regulator Swissmedic next month, Swiss newspaper Tages-Anzeiger reports, citing an unidentified source. Japan is set to lift states of emergency in its western regions, underscoring progress against a coronavirus surge that has battered the economy and Prime Minister Yoshihide Suga’s approval rating.
  • The U.S. carried out air strikes in eastern Syria overnight on sites connected to Iranian-backed groups believed to be involved in recent attacks in Iraq, the first overt use of military force under President Joe Biden. The assault came after a series of rocket attacks in recent days on facilities in Iraq used by the United States, including one that killed a contractor working with the U.S.-led coalition in the country. At least 22 Iraqi militants allied with Iran were killed and three ammunition trucks were destroyed in the attack, according to the U.K.-based Syrian Observatory for Human Rights, which gathers information from a network of activists on the ground in Syria.
  • Ark Investment Management’s miserable week showed few signs of easing on Friday, as its flagship exchange-traded fund looked set for a fifth day of declines. The ARK Innovation ETF (ticker ARKK) was down more than 3% in pre-market trading as of 6:28 a.m. in New York. The fund has lost 15% this week through Thursday, amid a tech selloff triggered by rising bond yields, which is putting pressure on pricier stocks. The last time Ark founder Cathie Wood suffered a run this bad was almost a year ago, during the worst of the Covid-fueled mayhem. Her main fund is now 11 times larger than it was a year ago.
  • The House is poised to pass President Joe Biden’s $1.9 trillion Covid-19 stimulus, but a ruling by late Thursday by a Senate official dealt a major blow to prospects that the final legislation will include a hike in the U.S. minimum wage to $15 per hour. Friday’s vote in the House will bring most Americans one step closer to receiving $1,400 relief payments and move action to the Senate, where disagreements among Democrats over the minimum wage had been the biggest obstacle to turning the pandemic relief plan into law. However, Senate parliamentarian Elizabeth MacDonough found that the wage provision did not qualify for action under budget reconciliation, a fast-track procedure that would let Democrats pass the stimulus with only 50 votes in the evenly divided Senate.
  • Vistra Corp. expects to take a financial hit of between $900 million and $1.3 billion from the unprecedented cold that battered Texas this month and led to sweeping blackouts. The Irving, Texas-based power company said it couldn’t secure enough natural gas during the freeze to run some of its generating plants, forcing it to buy power on the spot market when prices were skyrocketing. The overall financial impact is still being calculated, Vistra said in a statement. Vistra, which is not reaffirming or adjusting its 2021 guidance as a result of the storm, is the latest company to report taking a hit from the cold. The historic outage caused as much as $129 billion in economic losses, and the impact to individual companies is only starting to emerge.
  • Chancellor of the Exchequer Rishi Sunak is poised to unveil a state-backed loan program to help companies in the U.K. recover from the economic devastation wrought by the coronavirus pandemic, a person familiar with the plan said. The new loans are likely to be 80% government-backed, with interest rates capped at about 15%, according to the person, who asked not to be named discussing measures set to be announced in next week’s budget. The terms are similar to those in existing state-backed lending programs. The plan will replace Coronavirus Business Interruption Loans, its counterpart for large companies, CLBILS, and the fully state-backed Bounce Back Loans, which have lent a combined 73 billion pounds ($102 billion) to struggling companies. Sunak delivers the U.K. budget on March 3.
  • British Airways parent IAG SA said there are grounds for optimism about air travel this summer, after posting its first annual loss in almost a decade. The airline group reported an operating loss of 7.43 billion euros ($9 billion) in 2020, according to a statement Friday. While Chief Executive Officer Luis Gallego expressed growing confidence that a recovery will take shape, IAG said it can’t provide an outlook for the current year as the coronavirus pandemic continues to batter air travel. Carriers specializing in long-haul routes have suffered the worst of the downturn, with the International Air Transport Association predicting some inter-continental markets could take years to revive. Airlines such as London-based IAG are counting on so-called Covid passports to help spur a quicker rebound as vaccine rollouts accelerate in countries including the U.K.
  • For the second consecutive year, Barclays Plc shareholders will vote on whether the bank should wind down its lending to the fossil-fuel sector. A group of individual investors, coordinated by Market Forces, an Australian non-governmental organization, filed a resolution calling on the British bank to bring its financing for coal, oil and gas companies in line with the goals of the Paris climate agreement. The group also demands that the bank introduce short-, medium- and long-term targets to phase out financing to the industries and report on its progress. As Europe’s biggest fossil-fuel banker, Barclays has been criticized for its role in bankrolling some of the largest emitters of greenhouse gases. Banks are major contributors to global warming via their financing and lending activities, providing the world’s leading polluters with funding for extraction and drilling.
  • Huawei Technologies Co.’s chief financial officer summoned HSBC Holdings Plc’s local unit to a Hong Kong court hearing in an effort to gain access to documents relating to transactions that violated U.S. sanctions targeting Iran. Lawyers of Meng Wanzhou, Huawei founder Ren Zhengfei’s daughter who’s fighting extradition to the U.S. from Canada, have summoned Hong Kong & Shanghai Banking Corp. to attend a closed door hearing on March 12 at Hong Kong High Court, according to a filing. U.S. authorities allege she misled banks into handling transactions that violated sanctions, while Meng has said records would show that lenders were aware of the company’s connections to Iran-linked Skycom Tech Co.
  • Central banks from Asia to Europe escalated their efforts to calm panicking markets, pledging to buy more bonds and signaling more policy accommodation, after U.S. Treasury yields surged to the highest level in a year. The Reserve Bank of Australia waded in with more than $2 billion of unscheduled purchases, while Korea announced buying plans for the next few months. European Central Bank Executive Board member Isabel Schnabel said more stimulus could be added if the surge in yields hurts growth. While the response appeared to calm bond investors, it’s unlikely to bridge a deepening divide between traders and central banks over the pace of the economic recovery. Officials fear the so-called reflation trade, already rippling through all markets, could seep into economies that have yet to rebound from the coronavirus shock.
  • Nikola Corp. shares slipped after the company cut projected output of its first commercial zero-emission vehicles and said it may seek to raise more capital to invest in facilities such as a planned hydrogen-fueling network. The startup now expects to deliver 100 battery-electric Tre semis to customers this year, down from a previous target of 600. It blamed the global pandemic and supply-chain issues for the drop in planned production volumes. The Phoenix-based company is one of a number of new and legacy automakers developing clean-energy commercial vehicles and also betting on fuel cells as a viable option for long-distance transportation. While it is also working on battery-electric big rigs, Nikola’s main focus is hydrogen-powered fuel-cell trucks, a nascent field with competition from Toyota Motor Corp., Hyundai Motor Co. and and its own supplier, General Motors Co.
  • One by one, most of the biggest U.S. banks pledged to avoid workforce reductions almost a year ago as coronavirus infections erupted in New York City. One by one, those vows have given way. The news on Thursday that Bank of America Corp. is cutting some staff in its global banking and markets division marks the end of those assurances, while the international campaign to bring the virus under control continues. Among the nation’s six banking giants, Wells Fargo & Co. was first to break with the industry as the second half of 2020 began, cutting positions amid mounting pressure to lower costs. Goldman Sachs Group Inc. and Citigroup Inc. followed. JPMorgan Chase & Co. never promised to halt cuts entirely. And Morgan Stanleyhad said it would avoid them through 2020. That firm’s takeover of Eaton Vance Corp. is set to be completed on March 1, and redundancies are typical in any merger.
  • After Federal Reserve Chair Jerome Powell spent two days telling U.S. lawmakers the economy is in no state to be thinking about monetary tightening, financial markets on Thursday suddenly started pricing in a rapid — and perhaps too-hot — recovery. The axis of tension is the new policy framework the Fed put in place last year. It dictates the central bank won’t raise interest rates early on in the recovery and will intentionally overshoot its 2% inflation target — maybe for years, while testing the limits of a hot jobs market.
  • After a banner 2020 for mortgage lenders which saw the industry employ over 100,000 people for the first time since 2007, this year is not shaping up to be as kind. Over $3.1 trillion in agency mortgage bonds were churned out last year as the 30-year lending rate plunged to a series of record lows before bottoming at 2.67% on Jan. 6. Now, amid spiking Treasury yields and that 30-year lending rate jumping back to 2.97% — the highest since August — you have to wonder how those 100,000-plus employees will keep busy amid reduced demand for mortgages. Where not too long ago almost every American homeowner had incentive to refinance into a lower rate — meaning they could cut their mortgage rate by at least 0.50% — now that tally has dipped to 60%, according to a recent report by Brean Capital.
  • Foot Locker Inc. shares fell as much as 12% in premarket trading after the athletic-goods retailer missed analysts’ expectations for same-store sales and overall revenue. Comparable-store sales declined 2.7% in the fourth quarter ended Jan. 30, Foot Locker said Friday, compared with analysts’ estimate of a 3.5% increase as compiled by Consensus Metrix. Revenue of $2.19 billion missed the expectation of $2.29 billion compiled by Bloomberg.

“The man who strikes first admits that his ideas have given out. – Chinese Proverb

*All sources from Bloomberg unless otherwise specified