June 23rd, 2020

Daily Market Commentary

Canadian Headlines

  • The shortage of pipeline space that has hamstrung Canada’s oil producers for years may finally be over — just not in the way they had hoped. The pandemic-induced oil crash prompted Canadian companies to cut about 1 million barrels of daily crude output, freeing up space on the country’s previously congested pipelines. With that production likely slow to return and as many as three new conduits slated to be built in the next three years, the industry may have years of cheap, plentiful shipping capacity ahead. That’s a significant turnabout for a country where, until Covid-19 hit, the lack of pipelines out of Western Canada was a central political and economic issue, often pitting the oil-rich province of Alberta against the government of Prime Minister Justin Trudeau.
  • The Trump administration is considering re-imposing tariffs on aluminum imports from Canada and an announcement could come by the end of the week, according to people familiar with the matter. If Canada refuses to impose export restrictions on aluminum, the U.S. will announce Friday the re-imposition of 10% tariffs on aluminum from the country and implement the tariffs by July 1, according to the people, who asked not to be identified because the information isn’t public. That would be just days before the new U.S.-Mexico-Canada trade deal enters into force on July 1. U.S. Trade Representative Robert Lighthizer has expressed concern about recent struggles by American aluminum producers, which have seen sales drop and all-in prices sink as demand evaporated amid the global pandemic.

World Headlines

  • European stocks climbed after better-than-expected economic data in the region added to investor optimism about a U.S.-China trade deal. The Stoxx Europe 600 Index rose 1.4% at 9:01 a.m. in London, extending gains after reports showed euro-area manufacturing and services data beat forecasts, while France’s output returned to expansion territory. All 19 industry groups were in the green, with autos and banking shares in the lead. European and U.S. contracts fell sharply earlier as comments by a senior U.S. adviser fueled doubts about the trade agreement with China, before recovering on President Donald Trump’s reassurance that the deal is intact.
  • U.S. equity-index futures gained along with stocks in Europe after President Donald Trump reassured investors that the trade deal with China remains in place, and economic data from the euro area pointed to further signs of an incipient recovery from the virus slump. Futures on the S&P 500 rose after fluctuating earlier in the wake of White House trade adviser Peter Navarro being quoted saying the China trade agreement was over.
  • Japanese stocks rose, recovering from a late-morning slide after a U.S. trade adviser made a comment on China that confused the market. Electronics and automakers were the biggest boosts to the Topix index. The yen weakened against the dollar after a sudden strengthening on the remarks from White House trade adviser Peter Navarro, and U.S. futures also fluctuated in Asian trading. Stocks in Tokyo had opened higher as prospects for reopening economies buoyed investor sentiment even as the number of new Covid-19 cases around the globe reached a record, fueled by a surge in Latin America as well as spikes in some U.S. states.
  • Oil resumed gains, clinging to a three-month high as signs of improving demand buoyed a market momentarily roiled by confusion over U.S.-China trade. Futures in New York rose 0.4% after President Donald Trump said the deal with Beijing was “fully intact” following remarks from a trade adviser that were interpreted as an end to the agreement. After earlier dropping 2.4%, crude is now back above $40 a barrel, bolstered in recent days by a lifting of lockdown restrictions in some U.S. states, while physical crude prices have also climbed.
  • Gold held near the highest level in more than seven years as investors weighed a resurgence in coronavirus cases against unsettling signals over a U.S.-China trade deal. Open interest in Comex gold has recovered from a one-year low as developing countries face an explosion in infections, boosting demand for havens. The number of new cases around the globe hit a record, fueled by a surge in Latin America, the World Health Organization said. Markets are also watching developments in the relationship between the U.S. and China after President Donald Trump said the trade deal between the countries is “intact.” White House adviser Peter Navarro had earlier sowed confusion with comments interpreted as a decision to end the trade agreement.
  • The pick up in euro-area economic activity after the lifting of lockdowns in June is doing little to change the picture of a long, slow recovery and rising unemployment. The latest Purchasing Managers Indexes from IHS Markit showed an economic rebound underway, with French data unexpectedly signaling expansion for the first time in four months. But new business in the region continued to fall, employment declined and companies had to cut prices to help sales.
  • Last year, before the unraveling of Wirecard AG, two heavyweight financial players set up an unusual $1 billion investment in the payments company. A structured product tied to that deal is now foundering, amplifying the damage from the fintech giant’s troubles. In April 2019, Wirecard said an affiliate of Japan’s SoftBank Group Corp., one of the world’s largest technology investors, would buy EUR900 million ($1 billion) in convertible bonds from the payments company and enter into a strategic partnership with it. Swiss bank Credit Suisse Group AG, which advised SoftBank on the deal, later packaged up those bonds and resold them to third-party investors. The deal, completed in September, buoyed Wirecard’s shaky stock price and was seen as a shot in the arm as accounting allegations dogged the company.
  • Amazon.com Inc. is investing $2 billion on “sustainable and decarbonizing technologies” in an effort to eliminate its carbon footprint. The fund, which will be run by the company’s internal sustainability team and aided by Amazon’s corporate development group, will have a mandate to back technologies being developed to reduce the greenhouse gas emissions blamed for a warming planet. The Climate Pledge Fund plans to make bets in a broad range of industries, from transportation and manufacturing to energy generation and agriculture, Amazon said in a statement Tuesday.
  • The biggest weapon in Europe’s arsenal to counter the coronavirus economic collapse has yet to find the target. Less than 15% of funds made available by governments via banks as loan guarantees for business has been used, according to figures from seven of Europe’s largest economies compiled by Bloomberg News. That means more than 2 trillion euros ($2.3 trillion) — an amount exceeding Spain’s gross domestic product — was still available to be deployed as of June 18. The programs’ teething pains risk slowing the recovery from the deepest recession in memory, especially in Italy and the U.K., as the guarantees were seen as critical to keeping small and medium-sized firms alive. Bigger companies, including Air France-KLM and Renault SA, received bespoke bailouts or were able to sell bonds.
  • Britain’s main automotive trade group called on the government to support the industry’s efforts to recover from coronavirus-related lockdowns, saying one in six jobs are at risk. Measures should include emergency funding, tax holidays and policies to boost sales, the Society of Motor Manufacturers and Traders said in a statement Tuesday. The group sees U.K. production dropping by a third to 920,000 cars and light commercial vehicles this year. The SMMT reiterated its call for Britain to negotiate a tariff-free trade deal with the European Union, saying annual output could otherwise fall to less than 850,000 autos by 2025, the lowest since 1953, leading to a 40 billion-pound ($50 billion) drop in revenues. With an agreement, it forecasts production could rise to 1.1 million next year and 1.35 million by 2025.
  • Andrew Bailey is wagering that the Bank of England can eventually achieve a stimulus withdrawal that neither his predecessors nor his counterparts ever really dreamed was possible. Only 100 days in office this week, the new governor has already set out a daunting ambition reminiscent of the bold declarations of his predecessor, Mark Carney, by suggesting the institution should ultimately prioritize shrinking its balance sheet before raising interest rates. If that policy ever materializes, it won’t be easy.
  • The World Trade Organization said its worst-case scenario for cross-border commerce this year will likely be avoided, depending on whether there’s a second wave of Covid-19 outbreaks. The euro-area economy picked up from its record slump, with private-sector activity in both France and Germany pointing to further signs of a post-lockdown turnaround. The U.K. prepared to ease more of its anti-virus restrictions as deaths continued to fall. In Asia, Singapore called for an election amid the pandemic and the Philippines saw a record number of daily infections.
  • U.S. President Donald Trump said the phase one trade deal with China was “fully intact,” after his adviser Peter Navarro sowed confusion and spurred a temporary stock slump with comments interpreted as a decision to end the agreement. “The China Trade Deal is fully intact. Hopefully they will continue to live up tothe terms of the Agreement!” Trump said in a Twitter post late Monday.
  • Allegro’s private equity owners are planning an initial public offering of the Polish online auction site, people familiar with the matter said, in what could be one of the largest European share sales this year. Cinven, Permira and Mid Europa Partners have picked Goldman Sachs Group Inc. and Morgan Stanley as global coordinators for the deal, the people said, asking not to be identified because the information is private. Lazard Ltd. is advising on preparations for the potential listing, which could value the business at about 10 billion euros ($11.2 billion), according to the people. The private equity firms are considering seeking more than 2 billion euros in the offering, which is planned for after the summer break, the people said. They are weighing Warsaw as a potential venue for the IPO, with the possibility of a second listing on another European exchange, the people said.
  • Tencent Holdings Ltd.’s shares just hit three milestones in a single day. The Chinese internet and gaming giant rose 4.9% to a record HK$497.40 in Hong Kong on Tuesday, leapfrogging Alibaba Group Holding Ltd. as Asia’s most valuable company. It’s also now doubled in value since a low in 2018, a year in which China’s restrictions on online games triggered the world’s biggest wipeout of shareholder wealth. The Shenzhen-based firm is worth $613 billion, the seventh most globally. Tencent has for years captivated investors and analysts with its massively popular online gaming business, payments system and WeChat social networking platform. After homebound players helped propel revenue during China’s Covid-19 lockdowns earlier in the year, Tencent’s integral role in the lives of hundreds of millions of Chinese is adding to optimism that it can keep up that pace of growth.
  • China’s $941 billion sovereign wealth fund shifted more than 60% of one of its largest actively managed equity portfolios to passive strategies after its long-time manager Susan Gao left, according to people familiar with the matter. China Investment Corp. has transferred most of the more than $10 billion in the Global Large Cap Value Equity Portfolio to funds tracking indexes, the people said, declining to be identified discussing internal matters. The remaining portfolio has newly promoted managers running fundamental large-cap and digital-economy stocks, they said. Gao built CIC’s proprietary equity team from scratch over the last decade, during which her funds consistently beat the benchmark MSCI ACWI Index, people familiar said earlier. She joins a slew of departures from CIC at a time when the fund is looking to invest in more resilient assets following the virus-induced volatility of the first quarter.
  • Abu Dhabi sold a $10.1 billion stake in its natural-gas pipelines to a group of six investors including Global Infrastructure Partners, Brookfield Asset Management Inc. and Singapore’s sovereign wealth fund, in the biggest infrastructure acquisition so far this year. The buyers will have a 49% holding in a new subsidiary for the pipelines set up by Abu Dhabi National Oil Co., which will retain the rest of the shares, the state-owned energy producer said in a statement Tuesday. Infrastructure has been one of the few bright spots for dealmakers since the coronavirus outbreak led to a sharp downturn in mergers and acquisitions. The volume of such deals increased in the first quarter by almost 20% year-on-year to $81 billion, according to data provider Preqin.
  • SoftBank Group Corp., under pressure to raise capital after record losses in its investment business, is unloading part of its stake in wireless carrier T-Mobile US Inc. in a $21 billion deal. The transaction, along with a plan to sell a 5% stake in its Japanese wireless subsidiary, is part of a broader $42 billion push by SoftBank to unload assets to finance stock buybacks and pay down debt. Masayoshi Son, the company’s founder, is dealing with steep losses in his Vision Fund after writing down the value of investments in the sharing economy from WeWork to Uber Technologies Inc. SoftBank’s shares gained as much as 3% in Tokyo. The Japanese investment giant will now turn its attention to other assets in its portfolio and may pursue an outright sale of part of its stake in Chinese e-commerce giant Alibaba Group Holding Ltd. Son has said $11.5 billion raised from issuing contracts to sell stock in Asia’s largest corporation was a first step toward unwinding more of its holdings.
  • Banks and their investors have for years lobbied the Federal Reserve for more transparency in the annual exam that determines how much profit they can hand out to shareholders in the form of buybacks and dividends. Amid a global pandemic, the central bank is adding a sensitivity analysis that seeks to capture how financial firms are positioned to handle the new financial pressure. That will guide policy makers in approving payouts, but won’t show up when the results of the stress tests are released on Thursday, leaving investors guessing whether each bank’s dividend is safe. While the Fed’s projections can be a mystery to banks in some years, with many firms complaining they aren’t allowed to see the central bank’s internal models, the companies usually come away from the exam with a clear thumbs up or thumbs down for their capital plans. It won’t be that simple this time around.
  • PG&E Corp. launched two public equity offerings totaling $5.23 billion as it prepares to exit the biggest utility bankruptcy in U.S. history. The company plans to raise $4 billion from a common stock offering and $1.23 billion from a separate sale of equity units, according to a statement Monday. The offerings are expected to price this week and close on or about July 1, at which point PG&E aims to exit Chapter 11. PG&E has already raised more than $13 billion in the debt markets to finance its bankruptcy, which began after its equipment sparked deadly wildfires in Northern California and saddled it with $30 billion in liabilities.
  • Wirecard AG’s former chief executive officer was detained by Munich prosecutors after 1.9 billion euros ($2.1 billion) went missing from the digital-payment company, in a scandal that has rattled Germany’s financial industry. Markus Braun, who resigned last week, turned himself in Monday evening in Munich as part of a probe into the company’s accounting practices, prosecutors said in an e-mailed statement. A judge will review whether he can be kept in custody Tuesday afternoon. The company is fighting for survival after acknowledging the missing funds probably don’t exist. The payment processor said it’s in discussions with creditors and is considering a full-scale restructuring after pulling its financial results for fiscal 2019 and the first quarter of 2020.
  • China has penalized 10 of the country’s most popular livestreaming apps, suspending some of their operations in a renewed crackdown on fast-growing services backed by Tencent Holdings Ltd. and ByteDance Ltd. Regulators singled out ByteDance’s Xigua and three apps run by Tencent-backed firms — Bilibili Inc., Huya Inc. and DouYu International Holdings Ltd. — among those subject to punishments ranging from halting new user sign-ups to suspending content updates for “main channels,” the Cyberspace Administration of China said in a notice posted Tuesday. The watchdog said those services must rectify vulgar and other problematic content and that it’s blacklisted selected live-streaming hosts, without elaborating. NetEase Inc.’s CC Live and Baidu Inc.’s Quanmin were also among those named.
  • Bayer AG rose as much as 6.8% after Handelsblatt reported that the company is close to resolving the litigation over its Roundup weedkiller. The company’s supervisory board is expected to vote on a package valued at $8 billion to $10 billion in the coming days, the German newspaper reported, citing people familiar with the negotiations and close to the company. Bayer plans to announce the deal this week, Handelsblatt said. The company declined to comment to the newspaper. Last month, Bloomberg reported that Bayer had reached verbal agreements to resolve a substantial portion of an estimated 125,000 U.S. lawsuits over the controversial weedkiller. The company still needed approval from the supervisory board and was expected to receive that and announce the settlement in June, people familiar with the matter said at the time.
  • With the nation reeling from the Covid-19 pandemic, a recession that’s thrown 20 million people out of work, and waves of protests against police violence, nearly every recent poll shows President Donald Trumpheaded to defeat in November. And Trump’s sparsely attended rally in Oklahoma last weekend did little to indicate those polls are missing a hidden groundswell of support. The RealClearPolitics average of general election polls finds Joe Biden with a commanding lead that’s grown to 9.5 points. A similar polling average from FiveThirtyEight puts Biden ahead by 9.2 points and leading Trump in every battleground state. On June 10, Gallup found that Trump’s approval rating had plummeted 10 points, to 39%.

*All sources from Bloomberg unless otherwise specified