July 8th, 2020

Daily Market Commentary

Canadian Headlines

  • Canadian equities fell Tuesday alongside global stock markets amid jitters about the pace of economic recovery from the pandemic. The S&P/TSX Composite Index fell 0.5%, with nine of eleven sectors lower. Materials and information technology gained. Spot gold advanced to a more than eight-year high, recovering from earlier losses as the dollar pared gains and simmering economic concerns boosted demand for the metal as a haven. Meanwhile, this week’s escalation of American pipeline setbacks is heightening concerns among Canadian oil producers, which export almost all of their crude to the U.S.
  • Prime Minister Justin Trudeau is set release his first estimate of the full cost of the multiphase effort to buffer Canada from its deepest recession since the 1930s. Trudeau’s finance minister, Bill Morneau, will provide a fiscal update Wednesday that’s expected to show a current-year deficit of at least C$250 billion ($163 billion), or 12% of economic output. The gap last year was about 1% of gross domestic product. The Globe and Mail newspaper reported late Tuesday the figure will exceed C$300 billion. No other major advanced economy tracked by the International Monetary Fund is expected to record a larger one-year fiscal swing in 2020.
  • At least 20% of shut-in Canadian production is being restored, just months after the price crash forced producers in Alberta’s oil sands to slash up to 1 million barrels a day of output. Cenovus Energy Inc., Husky Energy Inc. and Baytex Energy Corp. are among companies that have resumed shut-in production as prices rise above $40 a barrel. Imperial Oil Ltd., operator of the Kearl oil sands mine and Cold Lake wells, also expects to return to full upstream production after most maintenance is wrapped up in the second quarter, Chief Executive Officer Brad Corson said. ARC Resources Ltd. on Tuesday said it had restored output.
  • As the EPA crafts a rule that would trim the agency’s oversight of methane gas, a Democratic-leaning group is demanding a recusal from the division head overseeing the process, accusing her of financial ties to natural gas distribution giant Enbridge Inc. Anne Idsal runs the EPA’s Office of Air and Radiation. Valley Crossing Pipeline LLC, a wholly owned subsidiary of Enbridge, operates a 168-mile natural gas line that crosses over 16,100 feet of Idsal’s family land in the southern tip of Texas. Idsal, who started at the EPA in late 2017, was compensated by the pipeline company for use of the land, according to an EPA spokeswoman. Idsal has recused herself from any issues that concern Valley Crossing, but not Enbridge.

World Headlines

  • European shares gave up gains early in the trading session after Hungarian Prime Minister Viktor Orban said regional leaders will probably fail to agree on a massive spending plan aimed at reviving their economies. Negotiations at a summit next week will be “very tough” and will likely need to continue throughout the summer, he said.
  • U.S. stocks declined Tuesday, ending a five-day rally, the longest since December. Federal Reserve Bank of Atlanta President Raphael Bostic said that the resurgence of the virus may be threatening the pace of U.S. recovery, adding that he was worried about employment losses becoming permanent. States across the U.S. recorded new highs in Covid-19 cases and deaths, with total infections in the country approaching 3 million. Rising case counts have prompted some states to pause reopening efforts while others have restricted travel from hot spots. Brazilian President Jair Bolsonaro tested positive as the crisis in Latin America’s largest economy escalates.
  • Japanese stocks fell amid the latest signs of concern that global economic recovery may be impeded by a second wave of coronavirus outbreaks. All industry groups in the Topix index fell, with electronics and chemicals the biggest drags. The benchmark gauge has slipped 4.5% in the pas month after rebounding nearly 32% from its March low to a high in early June.
  • Oil was anchored below $41 a barrel with an industry report signaling a surprise gain in U.S. crude stockpiles, while concerns linger about the threat to demand from rising coronavirus infections. The American Petroleum Institute reported inventories rose by 2.05 million barrels last week, before government data Wednesday. The virus is setting records across the U.S., with Texas’s daily cases, Arizona’s deaths and hospitalizations in California hitting new highs.
  • Gold’s allure is only getting stronger as 2020 unfolds. Spot prices reached $1,800 an ounce and year-to-date inflows into bullion-backed exchange-traded funds have topped the record full-year total set in 2009. Investors have favored havens this year as the coronavirus pandemic rips through economies, spurring sustained inflows into gold-backed ETFs as central banks and governments unleash vast stimulus programs. States across the U.S. recorded new highs in cases and deaths on Tuesday, and Federal Reserve Bank of Atlanta President Raphael Bostic said the resurgence of the virus may be threatening the pace of America’s recovery.
  • Major companies including Coca-Cola Co., Delta Air Lines Inc. and Hyatt Hotels Corp. are backing a bipartisan congressional proposal for a $120 billion grant program to help independent restaurants survive Covid-19. “This important legislation will immediately infuse desperately needed capital into local economies and will help small independent restaurants and the broader restaurant community rebuild after months of closure and what will be months of reduced revenue as a result of social distancing,” said seven companies, which also included American Express Co., in a letter Wednesday to the two senators who introduced the proposal. The bill, sponsored by Roger Wicker, a Mississippi Republican, and Kyrsten Sinema, a Democrat from Arizona, would create a $120 billion “Restaurant Revitalization Fund” overseen by the Treasury Department to provide grants to independent food service or drinking establishments through Dec. 31.
  • Warren Buffett gave Berkshire Hathaway Inc. shares valued at about $2.9 billion to charities including the Bill & Melinda Gates Foundation as part of his annual plan started more than a decade ago. The nearly 16 million Berkshire Class B shares were donated to a total of five philanthropies, including ones run by his children, according to a statement Wednesday. Buffett has given more than $37 billion with the routine gifts and a few other philanthropic donations since 2006. Buffett, 89, has become the world’s sixth-richest man as he built out his Omaha, Nebraska-based conglomerate. He’s pledged to donate all of the Berkshire shares he owns to various philanthropies after his death, and outlined that plan in February in his annual letter to shareholders.
  • Movie theaters have already faced plenty of challenges in attempting to reopen from their pandemic shutdown: mask requirements, state guidelines that change by the day and a dearth of new movies. But one of their biggest hurdles may be luring back older filmgoers. Just 9% of baby boomers — people born 1946 to 1964 — are enthusiastic about returning to theaters, according to a Morning Consult and Bloomberg News survey of 2,200 U.S. adults. An additional 21% are somewhat interested, but the majority aren’t looking forward to sitting in a darkened theater with strangers again. The overall picture isn’t much better. Only about a third of all adults are at least somewhat interested in returning to theaters. But the chains will have an easier time enticing the young, who the Centers for Disease Control and Prevention has found are less at risk of serious illness from Covid-19.
  • The federal government is ramping up coronavirus testing in Louisiana, Texas and Florida, three states seeing a surge in Covid-19 infections, as health officials attempt to get a firm grasp on how the fast-moving pandemic is evolving. Eight temporary testing sites will each perform as many as 5,000 free tests a day, the U.S. Department of Health and Human Services said. Four sites opened Tuesday in Baton Rouge, Louisiana, while one in Edinburg, Texas, and three in Jacksonville, Florida, will open Wednesday. The sites will remain open for up to12 days. Increased testing could help health experts get a clearer picture of how the coronavirus is moving through the population, as officials weigh how far to go in reopening the economy — or in rolling back steps already taken to revive business.
  • France’s new prime minister said he would back targeted restrictions to preserve the economy if the country has a second wave of infections. Violence flared in Serbia, with Belgrade facing lockdown at the weekend to confront an “alarming” spike in cases. The U.S. gave the United Nations a one-year notice that it plans to exit the World Health Organization. President Donald Trump threatened to ban TikTok in retaliation for China’s handling of the coronavirus. States across the U.S. recorded new highs in cases and deaths Tuesday, with total infections in the country approaching 3 million.
  • The U.S. has imposed travel restrictions on Chinese officials determined to be “substantially involved” in restricting access to Tibet, Secretary of State Michael Pompeo said. “Beijing has continued systematically to obstruct travel to the Tibetan Autonomous Region and other Tibetan areas by U.S. diplomats and other officials, journalists, and tourists, while PRC officials and other citizens enjoy far greater access to the United States,” Pompeo said in a statement Tuesday, referring to the People’s Republic of China, the country’s official name. “I am announcing visa restrictions on PRC government and Chinese Communist Party officials determined to be substantially involved in the formulation or execution of policies related to access for foreigners to Tibetan areas,” Pompeo added.
  • Europe is pinning its green hopes on hydrogen in a plan that sees hundreds of billions euros in investment flowing into the clean technology and fueling a climate-friendly economic recovery. The goal is to increase sixfold the capacity to produce renewable hydrogen by 2024, driving down the costs of the fuel. The market for hydrogen has the potential to create thousands of jobs and could all but eliminate emissions from industry and transport, according to a roadmap adopted by the European Commission on Wednesday. The Commission’s president, Ursula Von Der Leyen, wants the EU to build its economic rescue plan around the Green Deal strategy that aims for a stricter 2030 emission-reduction target and eliminating net greenhouse gas discharges by 2050. European heads of government are due to hold a second round of talks on a jointly-financed recovery package on July 17-18 in Brussels.
  • In March, investors that usually buy riskier assets ended up snatching up U.S. blue-chip company debt, taking advantage of bargain-basement prices. Now that the easy money has been made, they’re likely looking to sell. The investors, informally known as tourists, may end up unloading as much as $200 billion of high-grade securities over the rest of this year, according to a Bank of America Corp. estimate. The selling pressure could be one of the few headwinds the debt faces in the coming months, said Hans Mikkelsen, the bank’s head of U.S. investment-grade corporate bond strategy.
  • KKR & Co. agreed to buy Global Atlantic Financial Group in a deal that gives it a major presence in the insurance industry and adds long-term capital. The alternative-investment manager will acquire Global Atlantic’s outstanding shares, according to a statement released Wednesday, in a transaction that could be valued at more than $4 billion. Global Atlantic, which was founded within Goldman Sachs Group Inc. in 2004 and became independent in 2013, had more than 2 million policyholders through its retirement and life insurance products and almost $90 billion in assets as of March 31. KKR’s rivals have been building out their own insurance arms in recent years and have brought on executives who can help them attract more business. Insurers are facing historically low yields in fixed-income markets. Apollo Global Management Inc. helped turn annuity seller Athene Holding Ltd. into a business with a market value of $5.8 billion, and funds affiliated with Blackstone Group Inc. teamed up with other investors in 2017 to buy Fidelity & Guaranty Life.
  • A six-week lockdown across metropolitan Melbourne is likely to affect sales and profits for some of Australia’s biggest firms as the nation battles a growing coronavirus outbreak in Victoria state, according to analysts. Victoria’s government said from midnight Wednesday people in the nation’s second-most populous city must stay home except for work, essential services, medical treatment or school — returning to curbs that were lifted weeks ago across the country. The re-imposed shutdown could cost the economy A$1 billion ($695 million) a week, Australian Treasurer Josh Frydenberg wrote in an op-ed published Wednesday.
  • Itochu Corp. is seeking to take full control of convenience-store chain FamilyMart Co. through a tender offer valued at as much as 580.9 billion yen ($5.4 billion). The Japanese trading company, which already owns 50.1% of FamilyMart, is offering 2,300 yen apiece for the shares it doesn’t already own, it said in a statement Wednesday. The offer represents a premium of 31% over Wednesday’s closing price of 1,754 yen a share. FamilyMart’s stock is down about a third this year. FamilyMart directors said they support the tender offer, and that shareholders should make their own decision. FamilyMart executives said in a conference call that Itochu approached them in February. They had originally intended to discuss the matter with Itochu after the coronavirus pandemic died down as they initially expected the impact to be short.
  • A bond market once thought to be key to the futures of Fannie Mae and Freddie Mac — and the roughly $5 trillion of home loans they backstop — could instead find itself on the scrapheap due to their own regulator. In the past several years, so-called credit-risk-transfer securities have been a primary way for government-controlled Fannie and Freddie to offload the risk of borrowers defaulting on their mortgages to private investors. The market value of such assets, known as CRT, has grown to about $50 billion, with mutual funds, hedge funds and real-estate investment trusts among investors snatching up the bonds. Some former government officials and housing-finance executives have even loftier ambitions and believe the swelling CRT market can largely eliminate the likelihood that U.S. taxpayers would ever again bail out Fannie and Freddie, as they did during the 2008 crisis.
  • Barclays Plc has reached out to potential candidates in recent months to gauge their interest in the bank’s top job, part of a long-term succession plan to replace Chief Executive Officer Jes Staley. While there is no formal search currently under way, Barclays’s board has asked search firm Spencer Stuart to work on what is known as market mapping, which can be a prelude to kicking off a process, people familiar with the matter said, asking not to be identified because the deliberations aren’t public. A select group of global banking executives has been contacted to determine their preliminary interest in the role, the people said.
  • Romania may return to foreign debt markets in 2020, even after raising a record $10 billion through international bond sales this year to fund a ballooning budget deficit. The country most affected by Covid-19 in the European Union’s east sold $3.3 billion of dollar-denominated debt this week following a 3.3 billion-euro ($3.7 billion) issuance in May. The government is accelerating investments and boosting social spending to cushion the economic slump caused by the pandemic.
  • Huawei Technologies Co. has gone from a crucial component of U.K. and French mobile networks to potential outcast, after resistance and compromises began to give way to a relentless White House campaign. Both countries indicated this week that they’re taking steps to reduce their reliance on the Chinese company — with the U.K. considering a phase out of Huawei’s role set to begin as soon as this year and French cybersecurity agency Anssi imposing a waiver system that’s likely to severely limit its use. A year ago, things were looking far more optimistic for the Chinese company. Britain’s intelligence and security committee said last July that barring Huawei would make networks less resilient to malicious attacks. The committee’s reasoning was that it would reduce competition and leave the U.K. dependent on just two suppliers — Nokia Oyj and Ericsson AB.
  • HSBC Holdings Plc, which draws more than two-thirds of its pretax income from Hong Kong, slumped as advisers to U.S. President Donald Trump discussed a potential move to punish banks in the city and destabilize the currency peg to the dollar. Europe’s largest financial institution was named as a potential target, Bloomberg News reported, citing people familiar with the matter. U.S. Secretary of State Michael Pompeo last month singled out Peter Wong, the bank’s Asia-Pacific chief executive officer, for signing a petition supporting “Beijing’s disastrous decision to destroy Hong Kong’s autonomy.”
  • Nissan Motor Co. is planning to return to the debt market after scrapping a plan to sell yen bonds just last month. The Japanese automaker hired banks for a multi-tranche yen note deal that may price in the middle of July, according to a statement from Mitsubishi UFJ Morgan Stanley Securities Co. Nissan is preparing to sell debt including 1.5-year, three-year and five-year securities, according to the statement. A bond sale would come amid concern about Nissan’s business outlook. The carmaker reported in May its first loss in a decade as the virus outbreak caused global auto demand to collapse. The company, which has been in turmoil since the November 2018 arrest of former Chairman Carlos Ghosn, also unveiled in May a plan to cut fixed costs, capacity and the number of vehicle models.

*All sources from Bloomberg unless otherwise specified