July 6th, 2020

Daily Market Commentary

Canadian Headlines

  • Canada’s most vulnerable debtors are holding up admirably through the worst economic contraction since the Great Depression, thanks to massive government assistance and a steep drop in monthly spending. Non-bank lenders active in the subprime market — such as Goeasy Ltd. and Fairstone Financial Holdings Inc. — are reporting stable or falling delinquencies. National insolvency figures meanwhile are plunging. The numbers will come as a big relief to policy makers worried job losses would unleash a wave of defaults in a country carrying among the highest household debt levels in the world. If individuals with the lowest credit ratings are doing well, the rest of the system should be resilient.

World Headlines

  • European equities kicked off the week with gains on optimism that global monetary and fiscal support will continue fueling the appetite for risk assets. The Stoxx Europe 600 Index jumped 1.6% to the highest since June 10 by 9:22 a.m. in London. Cyclical and most economically sensitive sectors, such as banks, automakers and travel shares, led the gains. European stocks are extending last week’s advance on bets that stimulus measures will outweigh the risks from rising Covid-19 infections and boost the economic recovery. JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou said that extremely loose monetary policy will be required for a long time to support growing debt levels worldwide, buoying global equity and bond prices.
  • U.S. stock index futures advanced Monday as investors focused on the prospects for an expansion of economic stimulus to help counter the impact of the spreading global pandemic. September contracts on the S&P 500 rose 1.1% as of 8:11 a.m. in London. Futures on the Dow Jones Industrial Average climbed 1.3% and those on the Nasdaq 100 Index added 1.2%. U.S. financial markets were closed on Friday before Independence Day on July 4.
  • Japanese stocks rose for a third day as investors noted that coronavirus cases in the country still look low compared with the surges seen in other parts of the world. Electronics and telecommunications gave the biggest boosts to the Topix index, with all industry groups advancing as the yen weakened against the U.S. dollar. Futures on the S&P 500 Index also gained, after the underlying gauge climbed Thursday ahead of a three-day weekend. The S&P 500 has rebounded 40% from its March low compared with 28% rebound for the Topix.
  • Oil rose in London to above $43 a barrel as Saudi Arabia hiked its official selling prices, and as global equity markets climbed. Brent gained 1.3% in London to near the highest level since March. Saudi Aramco increased its crude prices to Asia as demand recovers. Libya’s oil exports are expected to fall this month as forces opposed to the government continue to block shipments. Global equity markets are near the highest in a month, giving crude another boost.
  • Spot gold edged higher as traders weighed the stock-market rally against an increase in coronavirus cases. While hopes over economic recovery have pushed the MSCI World Index to the highest level since early June, Goldman Sachs Group Inc. economists revised down their estimates for the U.S. economy this quarter. The World Health Organization reported a one-day high in global infections over the weekend, with cases climbing from India to the U.S. Investors continue to seek safety in gold, with bullion-backed exchange traded funds tracked by Bloomberg seeing 15 straight weeks of net inflows. That’s the longest run of weekly advances since 2010.
  • Coronavirus is skyrocketing in Republican-leaning Sunbelt and interior states, where shifting attitudes about the virus and President Donald Trump’s handling of it could spell more trouble for his re-election effort. New cases have exploded in particular in Arizona and Florida, battlegrounds Trump must retain to win re-election. Jacksonville, Florida, where the president relocated the Republican National Convention, had the fastest-growing rate of coronavirus of any metropolitan area in the U.S. for the week ended July 4, according to Evercore ISI. The convention site was changed after Roy Cooper, the Democratic governor of North Carolina, balked at holding a gathering in Charlotte, as planned since 2018 when it was the only city to officially submit a bid, at full capacity.
  • Jerome Powell isn’t “even thinking about thinking about” raising interest rates, but investors still wonder what it would take for the Federal Reserve chair to start taking his foot off the gas. U.S. central bankers dropped some strong hints on the answer to that question this past week. The minutes of the Federal Open Market Committee’s June 9-10 meeting, released July 1, showed “a number” of policy makers favor tying future moves for interest rates and asset purchases to inflation. They even suggested they’ll wait until inflation overshoots the Fed’s 2% target before making substantial changes.
  • Uber Technologies Inc. has agreed to acquire Postmates Inc. in a $2.65 billion all-stock takeover expected to be announced as soon as Monday morning in the U.S., according to people familiar with the matter. Uber Eats head Pierre-Dimitri Gore-Coty is expected to continue to run Uber’s combined delivery business, according to a person who asked not to be identified discussing a private deal. Under their agreement, Postmates Chief Executive Officer Bastian Lehmann and his team will stay on to manage Postmates as a separate service, another person said. The takeover would help Uber gain ground against privately-held DoorDash Inc., the current market leader in U.S. food delivery. While Postmates hasn’t kept pace with DoorDash, it maintains a strong position in Los Angeles and the American Southwest, both of which could be valuable to Uber Eats.
  • Warren Buffett is betting the future’s bright for U.S. liquefied natural gas. Berkshire Hathaway Inc. agreed to purchase a 25% stake in Dominion Energy Inc.’s Cove Point LNG export facility as part of a broader $4 billion deal for the utility’s natural gas pipeline and storage assets. Berkshire’s energy-focused unit will also take over operations of the plant in Maryland, while Dominion will retain a passive 50% stake. Cove Point epitomizes how the shale boom transformed the U.S. into one of the world’s biggest suppliers of LNG, on course to rival Qatar and Australia as the dominant producer. Originally built in the 1970s to import supplies from Algeria, Dominion shepherded the conversion of the site and started exports two years ago, seeking to benefit from natural gas’s role as the fastest-growing fossil fuel.
  • Hong Kong stocks joined the rest of the world in bull market territory Monday, after a more than $1.1 trillion rebound. The Hang Seng Index jumped 3.8%, extending its rally from March’s low to 21%. Tencent Holdings Ltd. and Hong Kong Exchanges & Clearing Ltd. have contributed 42% of the benchmark’s gains during the period, according to data compiled by Bloomberg. Sino Biopharmaceutical Ltd., the gauge’s biggest gainer of 2020 as of June 30, and Tencent were the only two Hang Seng members to fall Monday while underperforming sectors in Hong Kong — including autos, commodities and financials — soared. Mainland investors have been buying record amounts of Hong Kong equities, while sentiment has been fueled by a heavy activity of initial public offerings and secondary listings of U.S.-listed Chinese companies, triggering inflows into new-economy shares and HKEX. Meanwhile, mainland stocks have surged to multiyear highs.
  • AirAsia Group Bhd. reported a record quarterly net loss in the three months through March as the coronavirus pandemic slashed travel worldwide. Asia’s biggest budget airline posted a first-quarter net loss of 803.8 million ringgit ($188 million) compared with a net profit of 96.1 million ringgit a year earlier, according to a stock exchange filing. “This is by far the toughest challenge we have faced since we began in 2001,” Chief Executive Officer Tony Fernandes said in a statement. “We are positive in the strides we have made in bringing cash expenses down by at least 50% this year, and this will make us even stronger as the leading low-cost carrier in the region.”
  • Wall Street is too negative on prospects for the markets if Democratic candidate Joe Biden wins the U.S. presidential election in November, according to JPMorgan Chase & Co. Numerous factors could make Biden more market-friendly than analysts currently predict, including a historical tendency to converge toward the political center, potential benefits from infrastructure spending, a softening of tariff rhetoric and higher wages, strategists including Dubravko Lakos-Bujasand Marko Kolanovic wrote in a note Monday. They also said the tax hit to S&P 500 earnings is likely to be lower than many are expecting, and that an increase in the federal minimum wage would probably be net positive for companies.
  • U.K. Foreign Secretary Dominic Raab will name the first foreign citizens from Russia, Saudi Arabia and North Korea to face sanctions for alleged human rights abuses, as he sets out the British version of the U.S. Magnitsky Act in Parliament on Monday. Raab’s sanctions will involve visa bans and assets freezes and are expected to target Saudi citizens suspected of involvement in the killing of the columnist Jamal Khashoggi in 2018. The Magnitsky Act is named for Sergei Magnitsky, the Russian lawyer who died in a Moscow jail in 2009 after alleging officials were involved in tax fraud.
  • The U.K. will plow 1.6 billion pounds ($2 billion) into theaters, museums and music venues in a bid to rescue the country’s arts and culture sector from the brink of collapse in the wake of the coronavirus lockdown. The money “will go to those institutions that most need it, to see them through this storm,” Culture Secretary Oliver Dowden told Sky News on Monday. “The biggest challenge we will have, and this is still some way off, is returning without social distancing.”
  • Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $804.9 million in the week ended July 2, compared with gains of $327.8 million in the previous week, according to data compiled by Bloomberg. So far this year, outflows have totalled $18.3 billion.
  • Japan’s government is urging smaller banks to make greater use of a Bank of Japan lending program by using a wider range of assets for collateral. In a letter to regional banks on July 1, the ministry of internal affairs said trillions of yen in assets eligible as collateral for BOJ lending weren’t being utilized, according to a document obtained by Bloomberg. Only about 1.3 trillion yen ($12 billion) of deeds to municipal governments had been accepted as collateral for obtaining loans from the central bank as of the end of May, even though the ministry estimated the overall size of eligible deeds at about 15-20 trillion yen, according to the document.
  • Samsung Asset Management Hong Kong Ltd. has changed the underlying benchmark for its oil ETF after it was unable to track the current index following a dramatic sell-off and subsequent rally in crude prices this year. Samsung Asset said it worked with S&P Dow Jones Indices to come up with a new index that will track multiple contract months for oil futures to mitigate the risk from holding a single-month contract, the Hong Kong-based money manager said in a statement Monday. Once the new U.S. dollar index is rolled out in August, it will eventually be weighted 55% to the one-month forward index, 30% to the two-month index and 15% to the three-month, according to the statement.
  • Beijing police arrested an outspoken critic of Chinese President Xi Jinping on Monday morning as his administration took steps to crack down on potential threats to the Communist Party stemming from the economic fallout of the pandemic. Xu Zhangrun, a law professor at Tsinghua University, was taken away by police from his house at a Beijing suburb, according to his friend, Geng Xiaonan, who said she got the information from his domestic helper, his wife and students. She said she believed Xu’s arrest was linked to a book he published in New York last month, a collection of ten political essays with scathing criticisms of Xi and the Communist Party’s rule.
  • Apollo Global Management Inc. is launching a big new credit operation as the buyout giant dives deeper into the rapidly expanding pool of direct lending. The New York firm is creating a $12 billion platform focused on providing companies with loans of around $1 billion, Apollo officials said. Abu Dhabi state fund Mubadala Investment Co. is the lead backer of the venture, whose firepower Apollo plans to augment with additional capital from other investors. In direct lending, an alternative credit provider makes a loan and keeps it on its books rather than syndicating it out to investors. Direct lending has expanded dramatically since the financial crisis as new regulations and a desire to avoid the mistakes of the past push banks to eschew riskier businesses. That has left a void for private capital to fill, creating a market Apollo and others estimate at roughly $800 billion — up from around $100 billion a decade ago.
  • The giants of Wall Street and European banking are giving up their stronghold on London. In the coming months alone, Barclays Plc may ditch its investment bank’s headquarters in the capital; Credit Suisse Group AG is offloading nine floors of office space; and Morgan Stanley is reviewing its entire London footprint. And all of those moves were planned before the coronavirus hit. Now, with thousands of job cuts likely to follow what’s forecast to be the worst recession in three centuries, the tenants of the glass and steel towers that dominate the City of London and Canary Wharf may face an even bigger retreat.

*All sources from Bloomberg unless otherwise specified