July 27, 2021

Daily Market Commentary

Canadian Headlines

• Canadian equities fell Monday with weakness in information-technology stocks. The S&P/TSX Composite Index fell 0.1%. Shopify Inc. dropped 3.9%, most since May 3. The Canadian tech giant is set to report second quarter earnings July 28. Meanwhile, materials and energy stocks rallied ahead of big earnings reports. The takeover battle for one of Canada’s largest energy companies moved closer to resolution after Pembina Pipeline Corp. terminated its C$8.5 billion ($6.7 billion) deal to acquire Inter Pipeline Ltd., clearing a path for Brookfield Infrastructure Partners LP, which has pursued a hostile bid. On the commodities front, nickel rose for a third straight session, approaching a seven-year high on booming demand for the metal used in stainless steel and electric-vehicle batteries. Copper advanced the most in more than two months.
• Brookfield Asset Management Inc. said it has raised $7 billion for the initial close of its new impact investment fund, pulling in money from Singapore’s sovereign wealth fund and Canadian pension managers for an investment vehicle that will help businesses cut their carbon emissions. The Toronto-based alternative asset manager said it plans to raise as much as $12.5 billion for the Brookfield Global Transition Fund, which would make it the largest of its kind to date. Ontario Teachers’ Pension Plan Board and Singapore’s $281 billion Temasek Holdings will be significant initial investors, Brookfield said in a statement. Canadian pension funds PSP Investments and Investment Management Corp. of Ontario have also made meaningful commitments to the fund, Brookfield said, without disclosing how much each is contributing.
• Lundin Mining to Sell Remaining Specialty Cobalt Business, according to a press release. Lundin Mining Corporation announced today that its 24% owned subsidiary, Koboltti Chemicals Holding Limited, has entered into an agreement to sell its specialty cobalt business based in Kokkola, Finland to Jervois Mining Limited. The transaction is subject to the completion of Jervois financing and other customary closing conditions and is expected to close in the third quarter of 2021.

World Headlines

• European equities dropped for a second day as investors digested a slew of company earnings and a widening regulatory tech crackdown in China weighed on sentiment. The Stoxx Europe 600 Index fell 0.5% at 10:50 a.m. London time, led lower by autos, retailers, and banking stocks. Reckitt Benckiser Group Plc tumbled 8.2% after earnings missed estimates. Prosus NV, which holds a stake in Chinese media giant Tencent Holdings Ltd., was another big decliner, sliding 7.5%. The slump in Reckitt Benckiser weighed on the U.K. FTSE 100 Index, which slid as much as 1.4%. The consumer-goods maker warned of lower profitability this year amid slowing disinfectant sales. Worldline SA slumped 8.6% with analysts flagging a mixed set of results, while MorphoSys AG tumbled more than 10% following an analyst downgrade from Commerzbank AG.
• Global stocks fell with U.S. futures as investors dumped Chinese shares amid a regulatory overhaul in the country. Treasuries climbed. While the losses were more muted in Europe and U.S. futures, the mood was pessimistic across markets. Tesla Inc. and General Electric Co. rose in premarket trading after their earnings beat forecasts. The rout in China is spooking investors already jittery about global growth, given the delta virus variant is on the rise and central banks are talking about tightening policy to put a lid on inflationary pressures. While traders expect more volatility from here on, near-term market catalysts come from this week’s Federal Reserve meeting and from earnings of tech giants such as Apple Inc. and Alphabet Inc.
• Asian equities dropped for a third day, as a selloff in Chinese tech shares deepened amid continued worries over Beijing’s regulatory crackdown. The MSCI Asia Pacific Index fell as much as 1.4% after sliding 1.3% on Monday. The Hang Seng Tech Index slumped as much as 9.6% to the lowest level since its inception exactly an year ago. Delivery giant Meituan plunged the most on record, while Tencent, Alibaba and JD.com also declined. Fears over the government’s intensifying crackdown has shaken sentiment toward Chinese stocks, forcing investors like Cathie Wood of Ark Investment Management to dump shares of companies like Tencent Holdings and KE Holdings.
• Oil steadied as investors assessed the outlook for global demand amid a resurgence in Covid-19 that’s leading to tighter restrictions. Futures fluctuated near $72 a barrel in New York. The rebound in key energy consumers such as the U.S. and China has helped to underpin increasing fuel consumption and drained bloated stockpiles built up during the pandemic. The fast-spreading delta variant, however, has raised some concerns about the short-term demand outlook.
• Gold held a two-day drop as investors awaited a Federal Reserve meeting at which officials are expected to discuss an eventual tapering of the stimulus used to revive the U.S. economy from the pandemic. The Fed will start paring purchases next year, with an emphasis on mortgage-backed assets, according to economists surveyed by Bloomberg, who see the bank raising rates at a quicker pace through 2024 than previously thought. Bullion is holding near $1,800 an ounce as investors stay on the sidelines before the two-day Federal Open Market Committee meeting that starts on Tuesday. Gold initially pushed higher on Monday amid ructions in stocks following a crackdown in China’s tech sector, which weighed on risk sentiment. But the precious metal gave up those gains even as the real yield on 10-year Treasuries fell to a record low on concerns over the outlook for economic growth.
• Sydney’s month-long lockdown shows no signs of being eased as daily Covid-19 cases keep climbing. However, Adelaide and Melbourne — Australia’s second-largest city — announced that they would lift their lockdowns at midnight after bringing their clusters under control. Singapore said it’s aiming to start allowing quarantine-free travel in September, even as it struggles to control an outbreak of the delta variant. The situation is much worse in the rest of Southeast Asia. Thailand has started transporting patients out of virus-wracked Bangkok, while a spike in deaths during pregnancy in Indonesia is being blamed on Covid-19. Reliance Industries Ltd. said more than 98% of its workers have had at least one vaccine shot. Helmed by billionaire Mukesh Ambani, Reliance is one of several big Indian corporations that have pulled off the feat of inoculating nearly all of their employees in a resource-crunched country that’s scrambling to boost its supply of coronavirus shots.
• Russia is leaving Europe scrambling for natural gas, opting against flowing more via Ukraine and deepening a supply crunch that’s already sent prices to a record. Gazprom PJSC decided against sending more gas via the key transit route next month, tightening its grip on the region ahead of the winter. That’s the fourth consecutive month that the Russian gas giant snubs one of two monthly auctions held by Ukraine, its former Soviet Union partner turned rival. The move comes even after Russia got the green light from the U.S. and Germany to complete its Nord Stream 2 pipeline, which will supply gas to Europe bypassing Ukraine. Traders have widely seen Russia’s move to snub Ukraine as a negotiating tactic to get its new link to Germany running as soon as possible, and high gas prices add to the pressure to get it done.
• Meituan has shed more than $60 billion of its market value over two frenetic trading sessions, after Beijing unveiled sweeping reforms against private-sector companies that darkened the outlook for the world’s No 2 economy. China’s top food delivery company slid a record 18% Tuesday in Hong Kong, on top of a 14% plummet the previous day. Spreads on Meituan’s dollar bond due 2030 rose 16 basis points to 232 basis points, set for the widest on record, Bloomberg-compiled data showed. The Tencent Holdings Ltd.-backed company, already the target of an antitrust probe with uncertain outcomes, was among the biggest losers in an accelerating selloff that convulsed internet stocks after China ordered swathes of its $100 billion private education sector to go non-profit.
• A tweak to BlackRock Inc.’s model portfolios has triggered a record inflow for the biggest exchange-traded fund protecting investors from inflation. The $30.7 billion iShares TIPS Bond ETF (ticker TIP) absorbed nearly $1.4 billion on Friday, according to data compiled by Bloomberg. The same day, $1.3 billion was pulled from the $16.3 billion iShares U.S. Treasury Bond ETF (GOVT) — also the most-ever. In an emailed statement, BlackRock confirmed it recently made some asset allocation changes to reposition its model portfolios for inflation protection and adjusting sector exposures.
• Tesla Inc. reported better-than-expected earnings as record sales of its electric vehicles fattened margins and carried the company to a first $1 billion quarter of net income in its 18-year history. Profit more than tripled to $1.45 a share on an adjusted basis, beating the 97-cent average of analysts’ estimates and marking the eighth straight quarter of profit. Tesla shares rose as much as 2.6% before the start of regular trading Tuesday. Rising sales of Model Y crossovers and Model 3 sedans delivered a fourfold increase in operating income, even as Tesla grappled with chip shortages and port congestion and slogged through a costly ramp up of new Model S and X vehicles. The company widened its margins from core auto operations to 25.8%, from 22% in the prior quarter and 18.7% a year earlier.
• Pendo, a startup that helps companies develop better software products, has raised $150 million at a $2.6 billion valuation with an initial public offering potentially on the horizon. B Capital, the venture capital firm started by billionaire Facebook Inc. co-founder Eduardo Saverin and backed by management adviser Boston Consulting Group, is leading the round, Pendo Chief Executive Officer Todd Olson said in an interview. Silver Lake Waterman, a fund that focuses on investing in pre-IPO companies according to Silver Lake’s website, is joining as a new investor in Pendo, Olson said. Existing investors including Battery Ventures, General Atlantic, Tiger Global Management and Sapphire Ventures are also participating in the round.
• APi Group Corp. is nearing an acquisition of Carrier Global Corp.’s fire-safety and security business Chubb for about $3 billion in cash, according to people familiar with the matter. A deal could be announced as soon as Tuesday, the people said, asking not to be identified discussing confidential information. Representatives for APi and Carrier couldn’t immediately be reached for comment. Chubb makes products such as burglar alarms and fire extinguishers. Carrier, which was spun off from United Technologies Corp. last year, is selling the company to focus on its core businesses of air conditioners, heating systems and refrigeration.
• United Parcel Service Inc. is bolstering profit by combining efficiency gains with a torrent of package-delivery demand fueled by soaring e-commerce. Adjusted operating profit rose to 14% of sales in the second quarter, UPS said in a statement Tuesday. Wall Street had expected 13.2%, based on the average of analyst estimates compiled by Bloomberg. Investors watch the measure as a yardstick of the company’s ability to boost its bottom line. The Atlanta-based courier and rival FedEx Corp. are racing to profit from the rise of online shopping as the coronavirus pandemic accelerates a long-term consumer shift away from stores. The challenge is that carrying packages to homes is typically less profitable than serving businesses, where drivers often handle several packages per stop in denser route networks.
• North Korea’s Kim Jong Un and South Korea’s Moon Jae-inagreed in letters to restore relations, improving the prospects for a breakthrough in an extended stalemate in nuclear talks. The two countries released what appeared to be coordinated statements Tuesday calling for reconciliation on the peninsula, with state media in Pyongyang saying they agreed “to make a big stride in recovering the mutual trust.” Both sides reopened hotlines that had been silent since a flare-up a year ago, when Kim’s regime symbolically blew up a liaison office funded by Moon’s government. The effort to thaw relations came on the 68th anniversary of the armistice that halted fighting in the 1950-53 Korean War, a conflict that has never formally ended. Last week, U.S. Deputy Secretary of State Wendy Sherman reaffirmed President Joe Biden’s openness to talks during a visit to Seoul in which she met South Korean officials, including Moon.
• Attempts to craft a bipartisan infrastructure plan hit multiple obstacles that again pushed Senate negotiators past another deadline to reach a deal. Talks continued through Monday night but a resolution remained elusive, even as the White House and some Democrats expressed confidence that an accord would eventually be struck. Negotiators ended the day Monday still attempting to bridge differences over transit funding, spending levels on water projects, whether all federally-backed projects should pay so-called prevailing wages and how much unspent Covid-19 money can be used to pay for infrastructure, among other disputed items.
• Blackstone Group Inc. is acquiring a minority stake in GTCR LLC, adding to its portfolio of secondary interests in alternative asset managers. Funds managed by Blackstone’s GP stakes business are making the purchase, the companies said in a statement Tuesday. The deal will allow Chicago-based GTCR to draw on Blackstone’s considerable resources and expertise, they said. Buyout firms including Blackstone, Dyal Capital Partners and Goldman Sachs Group Inc.’s Petershill unit have raised multibillion-dollar funds to invest in alternative asset managers. Stake sales give the smaller firms capital to seed new strategies or funds and also allow founders to take cash out of their businesses. For investors, a minority interest in a firm with multiple funds can provide a relatively predictable source of income.
• Exxon Mobil Corp.’s petrochemicals division, an often-overlooked segment of the oil major’s business, is supercharging its financial turnaround and will likely post record-high earnings this week due to surging prices for plastics. Demand for products such as packaging and materials for flooring and roofing not only held up during the pandemic, as cooped-up consumers shopped online and spent on sprucing up their homes, but increased markedly this year amid economic reopenings. Exxon’s second-quarter earnings, scheduled for Friday, are expected to show a radical financial transformation from last year, when the supermajor posted its first annual loss in decades. The chemicals boom and a strong recovery in oil prices in 2021 mean the Texas oil titan will likely have generated enough cash to comfortably pay the S&P 500’s third-largest dividend for a second straight quarter, a stark reversal from two years of borrowing to fund the payout and capital spending. In fact, the level of cash Exxon is now generating provides the best dividend coverage in a decade, according to Morgan Stanley.
• A rout in Chinese shares in the crosshairs of Beijing’s regulatory crackdown extended into the bond and currency markets Tuesday as unverified rumors swirled that U.S. funds are offloading China and Hong Kong assets. The speculation, which included talk that the U.S. may restrict investments in China and Hong Kong, circulated among traders in late afternoon in Asia, spurring a renewed bout of selling. The Hang Seng Tech Index, a gauge of many Hong Kong-listed Chinese stocks, plunged as much as 10%, while the yuan slid to its weakest since April against the dollar and even Chinese bonds were dumped. The drastic moves underscore how fragile investor confidence has become after a monthslong regulatory onslaught by Beijing that only seems to be getting worse. Traders fear the latest crackdown on the nation’s education, food delivery and property sectors could expand to other industries such as health care, as China looks to tighten its grip on Big Tech and reduce the wealth gap.
• CBRE Group Inc. has cut a deal to make one of its largest acquisitions ever, paying roughly $1.3 billion, or GBP960 million, for a 60% stake in Turner & Townsend Holdings Ltd., one of the world’s largest managers of infrastructure, natural-resources and real-estate construction projects. CBRE, the world’s largest commercial-real-estate-services firm, is buying a controlling stake in the London-based company partly in anticipation of a wave of investment in alternative energy and infrastructure in the coming years. The owners and corporate tenants of many of the buildings CBRE manages and leases have put a priority on steps to reduce their carbon footprints, according to Bob Sulentic, the firm’s chief executive.
• General Electric Co. climbed as growth in the jet-engine division prompted the company to raise its cash outlook, fueling optimism that improving air travel will give a boost to Chief Executive Officer Larry Culp’s turnaround effort. Free cash flow for industrial operations will be $3.5 billion to $5 billion this year, the company projected Tuesday. Boston-based GE previously forecast $2.5 billion to $4 billion. GE jumped 3.7% to $13.40 before the start of regular trading in New York. The stock had advanced 20% this year through Monday while the S&P 500 climbed 18%.
• Bitcoin held below $40,000 after Amazon.com Inc. pushed back against speculation it will accept the token for payments this year. The largest digital currency was little changed at $37,532 as of 11:37 a.m. in London. Rival coins including Ether retreated. The moves suggest that Bitcoin’s latest roller-coaster ride is starting to fizzle out. On Monday, prices soared on the back of a Amazon executive job postinglinked to crypto. The rally quickly ran out of steam hours later, after a company spokesperson denied the token will be accepted for payments this year. Investors rushing to cover bearish bets also helped propel Bitcoin’s earlier advance to a peak of $40,545, its highest since June 15. More than $950 million of crypto shorts were liquidated on Monday, the most since May 19, according to data from Bybt.com

“The key is not the will to win. Everybody has that. It is the will to prepare to win that is important.”– Bob Knight, USA men’s basketball coach, Olympic gold medalist

*All sources from Bloomberg unless otherwise specified