July 9, 2021

Daily Market Commentary

Canadian Headlines

• Canadian shares fell with the U.S. equity markets amid growing investor concern that the spread of Covid-19 variants will upend growth expectations, undoing popular reflation trades. The S&P/TSX Composite fell as much as 1.5% in Toronto, the most intraday since March 4. All of the eleven sectors were in the red, with tech and financials leading the laggards. Meanwhile, a SoftBank Group fund is leading a $215 million investment in Clear Finance Technology Corp., a Canadian growth capital startup that provides money to small online businesses.
• Thousands of rail cars loaded with grain are idled in the Vancouver corridor after Western Canadian wildfires damaged two main lines, while repairs enable a small but rising number to reach the country’s biggest port. Train movement resumed earlier this week on the Canadian Pacific Railway Ltd.line near Lytton, British Columbia, following a June 30 wildfire that burned down the village and damaged the railway’s track. Canadian National Railway Co.’s line sustained more significant damage to a bridge. The bulk of goods — from lumber to grains to crude oil — that are transported by rail for export move along these two lines.
• Telus International Cda Inc. sees most of its roughly 50,000 employees returning to “traditional work styles” in offices this year, according to its top executive. In some cases, it’s the heat that’s driving them. The digital services company, which is controlled by Canadian telecommunications firm Telus Corp., has operations in more than 25 countries. Extreme temperatures in some locations are pushing staff away from remote work “because our offices have air conditioning while their homes do not,” Chief Executive Officer Jeff Puritt said, citing Guatemala and El Salvador as examples.

World Headlines

• European stocks advanced, rebounding from their biggest drop in almost two months, as investors mulled the outlook for recovery. The Stoxx Europe 600 Index rose 1.1% as of 10:33 a.m. in London, retracing about two thirds of Thursday’s declines. Cyclicals such as travel and mining shares lead gains, while France’s CAC 40 outperformed, as it jumped 1.8%. Investors are factoring in the potential for the rapidly spreading delta virus strain to derail the economic recovery, while watching for signals from central banks on the timing of stimulus tapering. The Stoxx 600 is bouncing off the 50-day moving average it tested on Thursday, after trading in a range near a record for the past month.
• U.S. equity futures steadied on Friday and stocks in Europe rose in a broad-based rebound as China took steps to bolster its economic recovery, while Treasuries halted an eight-day rally fueled by concerns about global growth amid the spread of Covid-19 variants. Contracts on the S&P 500 edged higher, while those the Nasdaq 100 fluctuated after a report that President Joe Biden’s taking aim at big tech by encouraging regulators to reinstate net-neutrality rules. The dollar weakened against a basket of major currencies. The 10-year Treasury yield remains on course for one of its biggest weekly slides since June 2020. In U.S. hours the 30-year yield broke below 1.90% for the first time since February.
• Japan’s Nikkei 225 Stock Average pared losses that had pushed it toward a correction following the country’s decision to declare another state of emergency in Tokyo to contain the continued virus spread. The blue-chip measure fell 0.6% at the 3 p.m. close in Tokyo, after sliding as much as 2.5% and briefly extending its drop from a February peak to more than 10%. The broader Topix index was 5% below its March high. Just two weeks ahead of the spectator-free Olympic Games, prolonged virus countermeasures restricting economic activity are spurring concern over a delayed recovery for Japan, which had already disappointed many investors during the last earnings season. Globally, a stock rebound from pandemic lows driven by technology heavyweights has been tempered by higher U.S. inflation and concern over potential tapering of easy monetary policies.
• Oil prices continued to swirl as traders tried to fathom how the clash inside the OPEC+ alliance will play out in global markets. Early in the week, U.S. crude soared to a six-year high near $77 a barrel on fears that OPEC’s failure to agree a production increase would leave markets desperately tight. But the gains soon fizzled on concern that the dispute between Saudi Arabia and the United Arab Emirates could splinter the entire alliance and undo its production cuts. Futures advanced 1.3% on Friday, gaining in tandem with other commodities. Nonetheless, crude is down 1.8% for the week and the main focus for traders in coming days will be whether the the Organization of Petroleum Exporting Countries and its partners can repairs its split.
• Gold headed for a third weekly advance as fears that coronavirus variants may endanger the economic recovery saw investors opt for havens. Bullion is winning back investors after a bleak June, helped by a sharp decline in Treasury yields which burnish the appeal of the non-interest bearing metal. Renewed virus fears around the world have taken the edge off the so-called reflation trade, causing global stocks to plummet, though a partial rebound took place on Friday. The risks to the recovery were underscored this week by Federal Reserve minutes that highlighted continued uncertainties, and on Thursday by a rise in U.S. jobless claims. China’s surprise hint that it could unleash more liquidity to the economy also added to the sense that headwinds to a global recovery remain strong.
• Thailand ordered stricter measures to contain a surge in new cases including the closure of non-essential businesses and a ban on gatherings of more than five people in risk areas. South Korea is raising curbs on social distancing to the highest level in Seoul for two weeks starting Monday. France’s government backtracked on a warning about holidaying in Spain and Portugal. Pfizer Inc. plans to request U.S. emergency authorization in August for a third booster dose of its vaccine, based on early data showing it can sharply increase immune protection. Most young people face an “extremely low” risk of illness and death from Covid-19 and have no need to shield from the virus, according to researchers behind a large U.K. study.
• Philip Morris International Inc. agreed to buy Vectura Group Plc, a U.K. maker of inhaled medical therapies, for 1.05 billion pounds ($1.5 billion), the biggest move so far of a tobacco company entering the health-care industry. Philip Morris is offering 150 pence in cash for every Vectura share, the companies said in a statement Friday. That’s 11% higher than Thursday’s closing price, and beats the offer Carlyle Group Inc., which had agreed to buy Vectura for 958 million pounds in May. Philip Morris has been expanding non-tobacco offerings as an increasing number of people across the developed world quit smoking to improve their health. The company, which helped pioneer the market for cigarette alternatives with its IQOS heated-tobacco devices, aims to generate more than half of its revenue from non-combustible products by 2025, as well as at least $1 billion in sales outside nicotine.
• Online marketplace Bukalapak aims to raise as much as 21.9 trillion Indonesian rupiah ($1.5 billion) in an initial public offering, the first of Indonesia’s tech unicorns to tap the country’s stock market. Bukalapak plans to offer about 19.3 billion shares at 750 to 850 rupiah apiece, raising about $1.1 billion, according to terms of the deal obtained by Bloomberg News. The e-commerce giant would be valued at about $5.6 billion. It also set an over-allotment or greenshoe option that could take the total shares issued to a maximum 25.77 billion shares. The company aims to debut Aug. 6, the company said in an IPO prospectus, taking advantage of plans to relax requirements around listings. At the top of the range, it would rank as Indonesia’s largest-ever IPO, eclipsing PT Adaro Energy’s $1.3 billion offering in 2008, according to data compiled by Bloomberg. The company started taking investor orders for the offering Friday and plans to price the shares on July 19, according to terms of the deal.
• SoftBank Group Corp. plans to invest an additional $5 billion in Latin American companies, according to people familiar with the matter. The Japanese firm’s board is close to approving the new capital allocation, which would double its commitment to the region to $10 billion, one of the people said, asking to remain unnamed because the details are private. SoftBank will also expand the scope of its investments in the region to span from seed and Series-A startup rounds to taking stakes in public companies, according to the person. The additional infusion may be used to create a SoftBank Latin America Fund 2 or to extend the existing one, launched in 2019, according to the people. SoftBank’s Chief Operating Officer Marcelo Claure will continue to lead the effort.
• President Joe Biden will sign a sweeping executive orderdesigned to promote competition across American industries, calling on regulators to increase scrutiny of technology companies, drug prices, shipping and more. The president’s action will prompt the federal government to set new regulations on everything from airline luggage fees to non-compete clauses, according to a White House fact sheet. He will sign the order later Friday after delivering remarks on the American economy. The order will direct federal agencies to scrutinize tech companies’ use of consumer data and more closely examine industry mergers, in a nod to concerns that companies like Facebook Inc., Amazon.com Inc., Apple Inc. and Alphabet Inc.’s Google use that data to gain excessive market power.
• China’s central bank cut the amount of cash most banks must hold in reserve, a move that went further than many economists had expected and suggested growing concerns about the economy’s faltering recovery. The People’s Bank of China will reduce the reserve requirement ratio by 0.5 percentage point for most banks, according to a statement published Friday. That will unleash about 1 trillion yuan ($154 billion) of long-term liquidity into the economy and will be effective on July 15, the central bank said. The reduction was signaled earlier this week, when the State Council, China’s equivalent of a cabinet, hinted the central bank would make more liquidity available to banks so they could lend to smaller firms hurt by rising costs. The timing and magnitude of the move, coming a week before second-quarter growth data, suggests worries about the economy’s outlook and was a decisive shift away from policy tightening, economists said.
• Eric Adams won New York City’s Democratic mayoral primary but now the real politicking begins: wooing Governor Andrew Cuomo, a man he’s criticized in the past. The governor of New York wields outsize influence over operations of the nation’s largest city. The state runs and sets fares for the subways, directs the transit cops and largely determines the taxes paid by New Yorkers. During the coronavirus outbreak, Cuomo’s executive powers brought the city to a halt, exacerbating years of friction with the outgoing Mayor Bill de Blasio, who is term-limited.
• Job openings in London’s finance industry almost tripled in June from a year ago as the U.K.’s imminent exit from Covid-19 restrictions stokes optimism about the economy. There were 3,330 jobs available at the end of last month, the highest level since January 2019 and up 192% from June 2020, according to data from recruitment firm Morgan McKinley published Friday. The past three months have been the busiest for new postings since the third quarter of 2019. Despite the uptick there will still be plenty of competition for those roles. About 14,000 new job seekers entered the market in the second quarter, according to Morgan McKinley.
• The European Union concluded that the U.K. owes it 47.5 billion euros ($56.2 billion) as part of the Brexit settlement, a higher figure than the U.K. had originally estimated. The EU assessment, which was published in a budget document, is aimed at accounting for the U.K.’s ongoing commitments to EU programs it’s still benefiting from, as well as other obligations to the bloc. The bulk of funds are due to the EU in the coming years. The accounting could trigger new discussions with the U.K., which estimated in 2018 that the total bill would amount to 41.4 billion euros. But an EU spokesperson said the estimate is final and there is no indication the amount will be contested, adding that the British government has already paid the first installment of its bill for this year.
• Zeng Yuqun, the founder of the world’s biggest electric-vehicle battery maker, has overtaken Jack Ma in the wealth rankings, a symbolic moment in the rise of China’s green billionaires. Zeng’s net worth has jumped to $49.5 billion, according to the Bloomberg Billionaires Index, as shares of Contemporary Amperex Technology Co. Ltd. surged this year. That exceeds Alibaba Group Holding Ltd. co-founder Ma’s wealth of $48.1 billion and makes Zeng one of the five richest people in Asia for the first time. It’s the latest sign of how a new generation of tycoons in China is amassing vast fortunes in the clean-energy boom. Investors have pushed up stocks such as CATL, a key supplier to Tesla Inc., as the country leads the market for electric-vehicle sales and pursues an ambitious policy of reaching carbon neutrality in 2060.
• The Malaysian government, 1MDB and their units filed a lawsuit seeking more than $5.6 billion from 44 KPMG Malaysia partners for their role in auditing the state investment fund. The lawsuit filed on Tuesday alleges that KPMG committed breaches of contract and negligence in its audit and certification of 1MDB’s financial statements for the financial years 2010 to 2012. The lawsuit was first reported by the Edge newspaper. KPMG Malaysia as well as spokespeople for the Finance Ministry and the Prime Minister’s Office did not immediately respond to a request for comment.
• The Biden administration will add at least 10 Chinese entities to its economic blacklist as early as Friday over alleged human rights abuses and high-tech surveillance in Xinjiang, Reuters reported. It’s not yet known precisely how many entities are involved or their identities, the report said, citing two unidentified sources. It added that the White House and the Commerce Department declined to comment. The entity list prohibits American firms from doing business with them without first obtaining a U.S. government license. Along with sanctions on Chinese officials, the restrictions on business is another tool the U.S. has deployed against China in an effort to exert influence on the world’s second largest economy.
• After stellar inflows in June, one of the biggest real estate ETFs is coming back to earth fast. Investors pulled a net $295.7 million from the iShares U.S Real Estate exchange-traded fund (ticker IYR) in the latest session, according to data compiled by Bloomberg. That means almost $2.1 billion has now exited the ETF in six days. It’s a stunning reversal for the fund, which enjoyed big inflows throughout most of June that took assets to a record $7.6 billion. That’s now down 28% to below $5.5 billion.
• To judge by the bond market, the Federal Reserve is far too optimistic about where the economy will wind up long after the pandemic-recovery boom is over. Even before Treasury yields slid this week on speculation that the surge in inflation will be temporary, a closely watched market proxy for where rates will stand at the end of the Fed’s tightening cycle was already showing that traders were boosting bets that the economy is at little risk of overheating. By Thursday, forwards showing where one-month rates will stand in five years had tumbled to reflect expectations for a so-called terminal rate around 1.4%. That would mean the Fed will end the tightening cycle with its key benchmark well below the 2.5% it says would neither slow nor stoke the pace of economic growth. As recently as late March, the forward market was predicting the Fed would finish near that neutral rate.
• HSBC Holdings Plc’s chairman Mark Tucker has been criticized by an international group of lawmakers for refusing to discuss the bank’s actions enforcing Hong Kong’s newly-introduced National Security Law. Tucker told the Inter-Parliamentary Alliance on China, a cross-party group of legislators, that he wouldn’t discuss actions that could fall afoul of the new legislation, according to a letter sent to Tucker by IPAC and seen by Bloomberg.
• The state of Baja California is Mexico’s Covid vaccination beachhead, an island of safety better protected than California itself, just a few hundred tantalizing yards away. As President Andres Manuel Lopez Obrador rushes to revive his battered economy, Mexico is prioritizing scant vaccines for border states, trying to inoculate all adults there. In Baja California, home to Tijuana, 79% of residents 18 or over have been vaccinated with at least one shot, Mexico says. In California, that rate is only 62%, according to Bloomberg’s vaccine tracker. Efforts to vaccinate all adults along the U.S.-Mexico border would set up the countries for a “complete reopening of the border,” Lopez Obrador said at a press briefing Thursday. He said last week that the government will focus on 39 municipalities.
• Castlelake LP, a global alternative investment manager, has committed $2.1 billion in loans through its aviation lending program launched in November as demand for debt financing within the industry heats up. Among the transactions is a loan package to Turkish Airlines, secured by three new Boeing 737 MAX 8 aircraft and one new 737 MAX 9 aircraft, according to a statement viewed by Bloomberg. The deal is part of Castlelake’s newly-formed partnership with Boeing Co through which the firm is looking to provide as much as $5 billion of capital for new commercial aircraft deliveries. The Turkish Airlines loan has an appraised value of about $210 million, according to a person familiar with the matter who was not authorized to speak on the record as the details are private. Among the transactions is a $170 million loan to Falko, a commercial aircraft leasing, financing and management company, to refinance existing debt, the person said.
• China’s surprisingly generous move to ease its monetary policy on Friday will boost bonds, analysts say, though stocks are likely to take a near-term hit due to weaker sentiment. The central bank’s move to conduct a broad cut in the reserve-requirement ratio hints that China’s economic recovery could be slowing quicker than expected, thus necessitating more liquidity injections from the central bank. While the bond market reacted to the news positively Thursday when the State Council signaled action might be taken, equity traders could interpret the move news more negatively next week.

“Got to spend some money, if you want to make anything. Can’t run a ferry that won’t run.”– Cornelius Vanderbilt

*All sources from Bloomberg unless otherwise specified