February 26th, 2018

 

Daily Market Commentary

 

Canadian Headlines

• Evidence of mortgage fraud amid surging home prices and household debt has prompted S&P Global Ratings to lower a key risk metric for Canadian banks. The credit ratings agency dropped its economic risk assessment by one notch due to evidence of residential-mortgage fraud at smaller Canadian banks, which could compound existing risks from the country’s hot housing market, according to a statement Friday. S&P lowered the Canadian banks’ economic risk level to 3 out of 10, with a higher number representing great risk, revising the trend to stable. That puts Canada in line with the U.S., but lower than the U.K. and Australia.
• British Columbia Premier John Horgan said he’s “hopeful” an agreement will be reached with Royal Dutch Shell Plc and its partners on a proposed gas export project to allow a final investment decision. Horgan says he met Korea Gas Corp., Mitsubishi Corp. and PetroChina Co.during a recent trip to Asia to stress the province’s commitment to its climate pledges.
• Manitoba Premier Brian Pallister plans to unveil personal income tax breaks in the budget next month as he tries to offset rising interest rates and utility fees that make his province one of the highest-cost regions in Canada. Manitobans are among the most heavily taxed in the nation and “there is absolutely” room in the upcoming budget to reduce that burden, Pallister said in an interview. There’s a “triple threat” of higher federal small business taxes, rising interest rates from the Bank of Canada and pending Manitoba Hydro rate hikes that are putting the squeeze on citizens. The province needs to ensure taxes are “going in the right direction,” he said.

 

 

World Headlines

• European stocks start the week with a broad advance across the board, with miners and energy shares leading gains. The Stoxx 600 rises 0.8%, up for a second day, with all industry groups in the green. Commodity stocks follow gains in oil and metal prices. The benchmark has still recovered less than half the ground lost in a selloff that began at the end of January.
• U.S. Index futures point to a stronger open, following their European and Asian counterparts higher, as benchmark Treasury yields remain below 3%. Investor focus this week will be on the speeches of new Federal Reserve Chairman Jerome Powell. Powell appears before the House Financial Services Committee on Tuesday and the Senate banking panel on March 1.
• Asian shares rose for a second day after U.S. stocks gained amid expectations the Federal Reserve will maintain a slow pace of rate hikes. The MSCI Asia Pacific Index advanced 0.8 percent to 179.57 as of 4:43 p.m. in Hong Kong, heading for a three-week high. Japan’s Topix gained 0.8 percent, with telecommunications and drugmakers providing the biggest boosts. Australia’s S&P/ASX 200 added 0.7 percent, while Hong Kong’s Hang Seng Index rose 0.7 percent.
• Oil steadied as Libya’s crude exports from a key terminal were disrupted and Saudi Arabia pledged that global producers will ease their output curbs without shocking the market. Futures in New York were little changed, after rising 3 percent the previous two sessions. Libya’s crude loadings from the Mellitah terminal will be “modified”after protests impeded output at the El-Feel field. Cuts by OPEC and its allies may be phased out in 2019 in a way that won’t disturb the market, Saudi oil minister Khalid Al-Falih said. Still, U.S. supply remains a threat, with the nation’s rig count rising for a fifth week to the highest since April 2015.
• Gold rebounds from weekly decline as U.S. monetary policy back in focus with Federal Reserve Chairman Jerome Powell scheduled to speak before House Financial Services Committee Tuesday and Senate Banking Committee two days later to give Humphrey-Hawkins testimony.
• Iron ore rallied to a 10-month high on the possibility that steel supply curbs in China could go on beyond the winter, which would buttress demand for higher-grade material and may put top-quality ore on course to hit $100 a metric ton. The spot price for benchmark 62 percent content ore advanced 1.1 percent to $79.65 a ton on Monday, the highest since April 6, according to Mysteel.com. The increase was preceded by a gain in futures, with the SGX AsiaClear contract up as much as 1.5 percent to $79.15, also an April-high.
• The clock is ticking for John Cryan to complete the next step in Deutsche Bank AG’s turnaround. The lender on Monday said it will sell shares in its DWS asset management business “in the earliest available window,” confirming a plan first outlined a year ago and kicking off what is usually a four-week run-up to the initial public offering. Deutsche Bank didn’t indicate how much it plans to raise, though people familiar with the plan previously said the lender expects to sell a 25 percent stake for about 2 billion euros ($2.5 billion).
• Federal Reserve Chairman Jerome Powell and his colleagues may be willing to accept inflation rising as high as 2.5 percent as they seek to extend the almost nine-year economic expansion. So say a number of veteran Fed watchers who argue that the central bank’s Federal Open Market Committee would tolerate a moderate rise in inflation above its 2 percent goal after years of falling below that objective. Powell delivers his first testimony to Congress as Fed chief on Feb. 27 and March 1.
• The global #MeToo movement that Harvey Weinstein unwittingly kicked off is now claiming the company he founded, the Weinstein Co. The Los Angeles-based film studio will file for bankruptcy after failing to secure funding from investors, according to a copy of a letter provided by the company on Sunday. The demise of the 13-year-old studio follows accusations by dozens of actresses of decades of sexual misconduct at the hands of Weinstein, setting off a movement that saw a string of similar revelations of bad behavior by prominent men.
• VTB Group’s new acquisitive streak was boosted by profit that beat estimates, though much of the gain at Russia’s second-biggest bank was driven by one-time benefits. Fourth-quarter net income totaled 44.8 billion rubles ($800 million). That compares with a 29.7 billion-ruble average estimate of seven analysts surveyed by Bloomberg. Full-year profit more than doubled.
• U.S. companies including FedEx Corp. and Motorola Solutions Inc. are seizing an opportunity to borrow money and top up their pensions, before a tax benefit shrinks. Tax laws passed in December and a quirk in accounting rules are giving corporations an unusual incentive to take care of the massive pension obligations that have weighed on balance sheets for at least a decade. Companies are selling bonds to fund the contributions, and injecting the money into retirement plans now can save them tens, or even hundreds, of millions of dollars on taxes.
• Qualcomm Inc. has said it will engage in negotiations with Broadcom Ltd., the clearest indication by the company that it is open to a potential takeover. Following a meeting with executives at both companies on Friday, Qualcomm Chairman Paul E. Jacobs sent a letter to his rival Hock Tan, published Monday, inviting Broadcom to enter into a nondisclosure agreement and conduct due-diligence talks in order to come to an agreement over price.
• Dramatic testimony from survivors of a deadly shooting at a Florida high school may spark the first changes in the nation’s gun laws in a decade, but Congress is unlikely to embrace sweeping new regulations on firearms. President Donald Trump and some Republican lawmakers have indicated a willingness to consider tightening the existing background check system for gun buyers, raising the age limit for buying military-style semiautomatic rifles to 21 from 18, and encouraging states to adopt “red flag” laws that would allow authorities to take weapons from individuals deemed a threat.
• Indian shares tracked gains in Asian markets, with the benchmark index trimming its biggest monthly loss in 15. The volatility gauge slid for a fourth straight day. The benchmark S&P BSE Sensex rose 0.9 percent at the close in Mumbai, led by property firms and automakers. Maruti Suzuki India Ltd. and Tata Motors Ltd.were the best performers on the gauge. Simbhaoli Sugars Ltd. sank 15 percent after the Central Bureau of Investigation registered a complaint against its chairman, managing director and other officials for allegedly causing a loss toOriental Bank of Commerce. Oriental Bank slid 10 percent.
• Europe’s booming market for collateralized loan obligations has caught the eye of U.S. funds looking to expand overseas. Credit Value Partners, a Greenwich, Connecticut-based fund managing $2.2 billion, plans to issue CLOs in Europe and has hired former KKR & Co. executiveBrian McNamara to run its business in the region, according to people familiar with the matter. New York-based credit fund Sound Point Capital Management and Angelo Gordon & Co. are also among U.S firms looking to build European CLO operations, said the people, who asked not to be identified because the information is private.
• The car industry is witnessing one of its biggest disruptions since Karl Benz assembled the first automobile more than a century ago, and Li Shufu wants to play an active part in the revolution. The founder and chairman of Zhejiang Geely Holding Group Co. has become the top shareholder in Daimler AG, the German company that traces its roots to Benz, and inherits a storied legacy with inventions such as the world’s first diesel car. The 7.3 billion-euro ($9 billion) stake, disclosed on Friday and first reported by Bloomberg, represents the biggest investment by a Chinese company in an overseas automaker — and one right in the nerve centers of the global automotive world.
• United Parcel Service Inc. is suing the European Union for 1.7 billion euros ($2.1 billion) in compensation for the damage it says it suffered when regulators wrongly vetoed its attempted takeover of parcel delivery rival TNT Express NV. UPS is asking the EU’s General Court to award it compensation plus interest and taxes it would pay on any windfall payment, according at a court filing published on Monday. The same court threw out a 2013 veto because merger watchdogs had failed to inform the Atlanta-based logistics giant when they changed an economic model used to weigh evidence.
• The European Union may consider the U.K. Labour Party’s ideaof the country remaining in a customs union after Brexit acceptable — but it would come with conditions attached. The opposition party’s plan, set out by leader Jeremy Corbyn in a speech on Monday morning, heaps pressure on Prime Minister Theresa May who has ruled out such a move and whose Brexit vision was on Friday dismissed as “pure illusion” by EU President Donald Tusk. Corbyn’s policy would give the U.K. a similar relationship to the EU as Turkey, which isn’t an EU member but has a customs union arrangement. Unlike other non-EU members Norway and Switzerland, Turkey doesn’t have access to the bloc’s single market so doesn’t have to accept free movement of people.
• Alibaba Group Holding Ltd. has agreed to buy out Baidu Inc. and other investors in Chinese startup Ele.me to shore up its delivery network, a person familiar with the matter said, placing its biggest bet yet in online food and local services. The e-commerce giant, which owned 23 percent of Ele.me as of May, plans to buy the stock from existing investors including Baidu, the person said, requesting not to be named because the matter is private. It’s unclear how much Alibaba agreed to pay, but Ele.me was said to have been valued at between $5.5 billion to $6 billion in a May fundraising last year. The startup then bought Baidu’s delivery business at a $500 million valuation in August 2017, a person familiar said at the time.
• General Electric Co. is nominating a top financial accounting leader and two former industrial bosses for its board as the manufacturer reshapes its director ranks. Leslie Seidman, the former chairman of the Financial Accounting Standards Board, would join ex-Danaher Corp. Chief Executive Officer Larry Culp and former American Airlines CEO Thomas Horton as directors, GE said Monday in a statement. The company also announced departures from the board as part of a previously announced plan to reduce the oversight council to 12 members.
• As WeWork Cos. has grown to 200 buildings across the globe, the company said its increased size is helping cut costs for everyday needs like glass, wood flooring, aluminum and light fixtures. Early signs of financial improvement are encouraging for a co-working business that critics say is overvalued and spends with abandon. Last year, the New York-based startup generated about $900 million in revenue, mostly from its main business of renting out desks and offices to small and large companies, said Artie Minson, WeWork’s president and chief financial officer. The company also reduced recurring costs on constructing and running offices, in part because it gets discounts for buying in bulk. “This is a business where scale matters,” Minson said. “We’re building global supply chain capabilities, which allows you, frankly, to build cheaper than anyone else out there—materially cheaper.”
• Australia’s largest gold producer, Newcrest Mining Ltd., will invest $250 million for a stake in Lundin Gold Inc. to boost its presence in Ecuador, which is attracting a slate of mining giants hunting for major untapped metals deposits. Newcrest will take 27.1 percent of Vancouver-based Lundin Gold, which expects to bring the Fruta del Norte gold and silver mine in southeastern Ecuador into production by the end of next year. The companies will explore eight other concessions to the north and south of the project under the deal, and Newcrest can earn up to a 50 percent interest in that joint venture by spending $20 million over five years, the Melbourne-based producer said in a statement Monday.
• Mitsubishi Corp., Japan’s biggest trading house, may boost its stake in a potential multi-billion dollar copper project in southern Peru in the global race for supplies to meet surging demand from electric vehicles. The company’s in discussions with Anglo American Plc over its stake in the Quellaveco project, and is eyeing an increase to about 30 percent from 18.1 percent, Kanji Nishiura, head of the metals and coal business, said in an interview Feb. 22. Mark Cutifani, chief executive officer of Anglo American, which owns the remainder, said the same day that there’s interest from potential partners to develop the mine, and a decision will be made this year. China-owned MMG Ltd. said in October it’s monitoring plans to add a partner.

 

*All sources from Bloomberg unless otherwise specified