July 24th, 2019

Daily Market Commentary

• Canadian Headlines
  • Three years after Vancouver became the first North American municipality to levy a tax on empty homes, several cities in the U.S. are looking to follow the Canadian trailblazer. City representatives in Honolulu, and San Diego, Los Angeles, and San Francisco all want to emulate Vancouver’s 1% tax on vacant homes, which funnels revenue into “affordable housing initiatives.” The furthest along is San Diego, where officials are planning to conduct a study on the vacancy issue. Scott Marshall, vice president of communications at the San Diego Housing Commission, said the agency will seek to hire a consultant “to conduct the study to identify the number of housing units in the city of San Diego that are vacant for six months or longer.”
  • CannTrust chairman and CEO were informed of unlicensed cannabis growing about seven months before a Canadian government regulator flagged the operation, the Globe and Mail reports, citing internal emails. CannTrust U.S. shares are down about 4.2% in pre-market trading.

   

• World Headlines
  • European stocks paused a rally after their biggest one-day gain in more than a month, as a slew of earnings drove corporate share moves. The Stoxx Europe 600 Index added less than 0.1% as of 8:10 a.m. in London, with some 30 members reporting results. Deutsche Bank AG dropped 3% after warning that lower rates will increase pressure on revenue, while ITV Plc climbed 5.9% as advertising sales got a boost from strong viewing of its “Love Island” show. Rio Tinto Plc, Anglo American Plc and BHP Group each fell more than 1.4% after they were downgraded at Liberum on warning signs for iron ore prices.
  • U.S. equity-index futures fell and European stocks edged lower as weak economic data and a raft of bad news on the corporate front offset prospects of monetary easing and the resumption of trade talks. Treasuries advanced along with bonds in Europe. Nasdaq futures declined and contracts on the S&P 500 and Dow Jones indexes edged down after the U.S. opened an antitrust probe into big technology companies and AT&T fell in pre-market trading after posting its first quarterly profit decline in four years.
  • Chinese stocks outperformed in Asia as news that U.S. trade representatives will visit China for face-to-face negotiations boosted sentiment. All major stock indexes on the mainland jumped on Wednesday, with the Shanghai Composite gaining 0.8% at the close. Hong Kong-listed Chinese firms also advanced. The Hang Seng China Enterprises Index closed up 0.5%, with automobile maker Dongfeng Motor Group Co. and developer China Resources Land Ltd. leading gains. All stocks on the Star market rose as well, led by a 49% rally in Fujian Forecam Optics Co. The 25 stocks gained an average 6.4%, according to a market-value weighted index compiled by Bloomberg.
  • Oil rose for a fourth day after a report showed a hefty drop in U.S. crude inventories and as the resumption of face-to-face trade discussions between Washington and Beijing provided a glimmer of hope for demand. Futures in New York gained as much as 0.9% after rallying 2.7% over the previous three days. The American Petroleum Institute reported a 10.96 million barrel decline in stockpiles last week, according to people familiar with the data. That’s more than twice the drop forecast in a Bloomberg survey before official figures due Wednesday. U.S. Trade Representative Robert Lighthizer will travel to China Monday for the first high-level, face-to-face talks since May.
  • Gold dropped after U.S. lawmakers agreed on a debt-limit deal, boosting investors’ appetite for riskier assets as the dollar ticked higher. Silver reversed earlier losses to trade near the highest level since June 2018. Holdings of exchange-traded funds backed by both precious metals continue to rise, with assets in silver ETFs reaching a fresh record Monday and gold funds at the highest since 2013.
  • Iron ore’s sell-off picked up pace on a salvo of bearish blows, with Brazil’s Vale SA given the green light to restart some operations, downgrades to share targets at top producers including Rio Tinto Group, and a forecast from UBS Group AG that prices will sink below $100 a ton. Futures in Singapore and China both sank more than 4%, extending retreats from the highest in more than five years. Vale said it’s got approval for partial resumption of dry-processing operations at the Vargem Grande complex, allowing the return of 5 million tons that’ll help alleviate a shortage.
  • Boeing reported a $3.4 billion quarterly loss on Wednesday as costs related to its grounded 737 Max continued to rise. The company said it recorded $15.8 billion in sales in the quarter, down 35 percent from the same time a year earlier, in large part because it has stopped delivering the Max. Boeing also said it had taken orders for $474 billion worth of goods and services, including more than 5,500 commercial airplanes. The figures reflected Boeing’s surprise announcement last week that it was taking a $5.6 billion charge related to the cost of compensating airlines that fly the Max, and that it was anticipating a further $1.7 billion in costs related to production slowdowns.
  • Caterpillar Inc. shares fell after the company projected 2019 earnings at the low end of its earlier forecast, citing higher costs and declining sales in Asia. “The increase in manufacturing costs was primarily due to higher material costs, including tariffs, variable labor and burden and warranty expense,” the company said in a statement Wednesday.
  • AT&T Inc. posted its first quarterly profit decline in four years and suffered another record plunge in pay-TV subscribers, a situation that looks to worsen after the company lost access to CBS Corp. programming in a contract dispute. With a net loss of 778,000 TV subscribers in the second quarter, AT&T has now shed about 2.3 million video customers in the past year. Adjusted earnings were 89 cents a share, matching analysts’ consensus estimate but down from the year-earlier 91 cents.
  • The Chinese government has given the go-ahead for five companies to buy up to 3 million tons of U.S. soybeans free of retaliatory import tariffs as trade negotiations between the two nations continue, according to people familiar with the situation. The retaliatory tariff-free quota for 2 million to 3 million tons will be part of a goodwill gesture toward the U.S., and there could be a second round of exemptions depending on how the trade talks progress, two of the people said, declining to be identified as the information is private.
  • U.S. Trade Representative Robert Lighthizer and senior U.S. officials are set to travel to China next Monday for the first high-level, face-to-face trade negotiations between the world’s two biggest economies since talks broke down in May. Lighthizer and a small team will be in Shanghai through Wednesday, according to people familiar with the plans who asked not to be identified. The meeting will involve a broad discussion of the issues outstanding and isn’t expected to yield major breakthroughs, a senior administration official said.
  • Satellite-TV provider Dish Network Corp. has agreed to pay $5 billion for wireless assets in a deal with T-Mobile US Inc. and Sprint Corp., setting the stage for the Justice Department to approve the $26.5 billion merger of the mobile-phone carriers, according to people familiar with the matter. After weeks of negotiations, the parties have hammered out an agreement under which Dish will pay about $1.5 billion for prepaid mobile businesses and roughly $3.5 billion for spectrum, said the people, who asked not to be identified because the details are still private. Under the terms of the deal, Dish can’t sell the assets or hand over control of the agreement to a third party for three years, the people said.
  • WeWork Cos. is looking to go public in September, people familiar with the company’s plans said, in what’s expected to be the second-biggest initial public offering of the year. The company is targeting a share sale of about $3.5 billion, though that amount may change, said one of the people, who asked not to be identified because the plans were private. The New York-based company, which rents office space to workers, has said it submitted its paperwork confidentially to U.S. regulators in December. WeWork plans to to discuss its business with analysts on July 31, the person said.
  • Brazil’s oil giant Petroleo Brasileiro SA sold a majority stake in its fuel distribution unit effectively ending government control over the biggest player in the industry as part of a drive to privatize state-run assets and stoke competition. The Rio de Janeiro-based energy producer raised 8.6 billion reais ($2.27 billion) by selling shares in its Petrobras Distribuidora SA unit, taking its position from 71% to 41%, according to a regulatory filing. Petrobras sold the shares of BR Distribuidora, as the gas station chain is known, for 24.50 reais apiece, the same reference price used in the offering prospectus.
  • TechnipFMC Plc rose the most in three months in Paris trading after winning a $7.6 billion contract to build gas plants in West Siberia. Technip jumped as much as 4.1% on Wednesday, the most since April 23. The order from Novatek PJSC will be a relief for the company as it seeks to replenish its engineering backlog and build on the successful delivery of the nearby Yamal gas project ahead of schedule.
  • Governor Ricardo Rossello’s looming resignation leaves Puerto Rico’s government in shambles and may strengthen the hand of federal overseers tasked with imposing austerity on the bankrupt island to pull it from a years-long financial crisis. Since the disclosure almost two weeks ago of scandalous text messages among Rossello’s inner circle, the administration had already lost its investment officer, press secretary and two fiscal agency heads — one of whom lasted just five days. The governor’s chief of staff quit Tuesday night. The treasurer left last month amid a federal corruption investigation. And it looks increasingly likely that the mass exodus would be capped Wednesday, with local newspapers reporting that Rossello was planning to resign within hours.
  • President Donald Trump criticized Democrats and former Special Counsel Robert Mueller on Wednesday, slamming the former FBI director being allowed to appear with an aide when he testifies before Congress on Russian meddling in the 2016 election. “It was NEVER agreed that Robert Mueller could use one of his many Democrat Never Trumper lawyers to sit next to him and help him with his answers,” Trump tweeted Wednesday. “This was specifically NOT agreed to, and I would NEVER have agreed to it.” Mueller is set to testify Wednesday for five hours before the House Judiciary and Intelligence panels. His former chief of staff when he was FBI director, Aaron Zebley, will sit next to him and act as his counsel during the hearings.
  • Texas Instruments Inc. gave stronger-than-predicted sales and profit forecasts for the current quarter, indicating demand for chips may be starting to improve. Third-quarter earnings will be $1.31 a share to $1.53 a share on revenue of $3.65 billion to $3.95 billion, the Dallas-based company said Tuesday in a statement. On average, analysts predicted profit of $1.37 a share and sales of $3.84 billion, according to data compiled by Bloomberg. At the high end, that represents a revenue decline of 7.3% from a year earlier.
  • Boris Johnson becomes prime minister Wednesday afternoon, and is preparing to announce his top ministerial team to deliver the U.K.’s exit from the European Union. Brexiteer Priti Patel is expected to be included. Three members of the current Cabinet, including Chancellor of the Exchequer Philip Hammond, have said they will resign before Johnson takes office.
  • Metro AG held out against a 5.8 billion-euro ($6.5 billion) takeover bid by Czech billionaire Daniel Kretinsky, arguing it undervalues the German wholesaler and could lead to a debt-rating downgrade. The offer of 16 euros an ordinary share is highly leveraged and the resulting increase in borrowings could limit Metro’s strategic leeway, the company said Wednesday, recommending investors reject the bid. The stock fell as much as 1% to the lowest since Kretinsky made the offer.
  • India is considering an option to raise $10 billion in one go from its first overseas bond sale as early as October, according to people with knowledge of the matter. The government would prefer to sell yen or euro-denominated debt so as to offer lower yields, the people said, asking not to be identified as the plan is still under discussion. A dollar bond isn’t ruled out given there would be more liquidity, while it could also decide to sell the debt in multiple sales over a longer period, they said. India is banking on the novelty of a debut offering at a time when investors are desperate for returns as the world’s pile of negative-yielding debt grows to a record $13.4 trillion. While Saudi Arabia and Argentina have raised more money in recent years from international bond sales as emerging markets return in popularity, Prime Minister Narendra Modi’s government will be working to a tight timeline.
  • German auto parts maker Weber Automotive GmbH has been put up for sale as part of insolvency proceedings that started this month, according to a company spokesman. Weber filed for insolvency amid deteriorating earnings and a row between its founding family and majority shareholder Ardian SAS over the “form and scope” of a financial restructuring. Failure to rescue the ailing company leaves its creditors on the hook for what remains outstanding from a 130 million euro ($145 million) loan dating from 2016. NIBC Bank NV, IKB Deutsche Industriebank AG, HSBC Holdings Plc, ING Groep NV, Sudwestbank and Helaba were in the bank consortium that provided the original facility, according to people familiar with the matter who asked not to be named discussing private information.
  • Vodafone Group Plc and Telefonica SA’s U.K. carrier O2 have agreed on how to roll out the next-generation 5G wireless technology via their shared British mast company, moving a step closer to a potential sale of the venture. The two carriers will share next-generation wireless technology like antennas but divide autonomous control over about a quarter of the masts, so each company can differentiate services. That will speed up the roll-out of 5G across the 50-50 joint venture, called Cornerstone, which owns about 16,500 masts across the U.K., they said Wednesday.
  • United Parcel Service Inc.’s three-year, $20 billion expansion plan is already beginning to pay off as the courier exceeded the profit guidance it laid out in April. Adjusted earnings were $1.96 a share in the second quarter, the company said in a statement Wednesday. That beat the $1.93 average of analyst estimates compiled by Bloomberg.
  • Tesla Inc. sold a record number of cars during the second quarter. But did the company make enough money while doing so? That is what investors and analysts will be most focused on when the electric vehicle maker reports results after the market close on Wednesday. Tesla delivered 95,200 cars to customers during the second quarter, beating most estimates, but analysts worried that the rapidly growing share of the lower-margin Model 3 sedan, along with heavy discounts, might weigh on profits.

*All sources from Bloomberg unless otherwise specified