June 4th, 2020

Daily Market Commentary

Canadian Headlines

  • Canadian shares continued their march upward as investors turned to buying riskier assets amid optimism for a quick economic recovery from Covid-19. The S&P/TSX Composite index rose 1.2% in Toronto. The real estate, financials and industrials sectors outperformed, while materials and tech stocks fell. Gold miners took a hit as gold futures fell. Investors turned away from havens after data on U.S. private payrolls showed fewer job losses than forecast. The Bank of Canada also said that the country’s economy appears to have avoided the worst-case scenario, prompting policy makers to wind down some market operations and pare back estimates of the downturn. Meanwhile, Canada Goose Holdings Inc. was the best- performing stock on Wednesday, after reporting a smaller-than-expected revenue decline last quarter. Even so, the luxury parka maker sees “negligible” sales this quarter as consumers prioritize staples and food over discretionary merchandise.
  • Canadian banks’ exposure to oil-and-gas loans has surged to a record as energy firms tapped credit lines to combat plunging oil prices. Energy loans at the country’s six largest lenders jumped 23% to C$71.6 billion ($52.9 billion) in their fiscal second quarter from the prior period, disclosures show. Toronto-Dominion Bank had the largest increase at 29%, while Bank of Nova Scotia remained the biggest lender with C$21.6 billion in loans. The banks’ rising exposure comes amid an eleven-fold increase in impaired energy loans, topping C$2 billion. Energy firms have been hard hit this year as global oil prices plummeted, with some grades even briefly turning negative in April as measures to combat the spread of the coronavirus hammered worldwide demand.
  • Canada’s labor market is starting to recover as lockdowns begin to lift in an economy awash in money from government support programs. A Bloomberg News poll taken at the end of May found that 30% of respondents who had lost their job or seen hours decline because of the coronavirus pandemic said they were re-employed or working more. The survey, conducted by Nanos Research, is consistent with other high-frequency data from Indeed Canada and Google that suggest a stabilization in labor conditions and economic activity over the past few weeks. Any recovery would be a reassuring development for a country that’s experienced a historic employment crash, with more than one quarter of workers either losing their jobs or recording a substantial reduction in hours worked. Still, given the massive drop in employment, some type of rebound was inevitable and it remains too early to declare a substantial comeback.

World Headlines

  • European stocks eased ahead of a meeting of the region’s central bank, as investors assessed gains that had pushed shares to a three-month high. The Stoxx 600 Index fell 0.5% as of 9:55 a.m. London time, snapping its biggest three-day gain in a month. Autos, banks and insurers posted the steepest declines. The mood soured after the U.S. planned a suspension of passenger flights to the country by Chinese airlines in a retaliatory move against Beijing. A recovery in European stocks has been gathering pace in June, with the Stoxx 600 up around 30% from a March low as markets cheered the easing of lockdown measures and planned economic stimulus measures. Chancellor Angela Merkel has secured a $145 billion package to get Germany out of crisis, while investors are widely anticipating further measures from the European Central Bank later today.
  • The stock rally that’s been fed by bets on a speedy economic recovery from the pandemic paused for breath on Thursday as U.S. futures struggled alongside equities in Europe and Asia. The dollar snapped a five-day losing streak. Contracts on the S&P 500 and Nasdaq 100 gauges edged lower, a day after the tech-heavy index traded briefly above its record-high close.
  • Japanese stock valuations have trailed U.S. levels for a long time, but the recent rebound from the coronavirus selloff has driven the gap into new territory. The Topix index’s climb into bull-market zone has left it trading at around 16 times earnings estimated for the next year, near the highest level since 2013. Yet the multiple on the S&P 500 Index has surged even faster to around 22 times. While Japanese stocks have been at a discount consistently since 2013, the gap now is the largest in data compiled by Bloomberg going back to 2005.
  • Oil retreated from a three-month high as OPEC+ unity was threatened by a long-running feud over complying with production cutbacks, while U.S. data cast doubt on the strength of the demand recovery. Futures in New York fell 1.9% to below $37 a barrel after closing at the highest since March 6. Saudi Arabia and Russia have reached a preliminary deal to extend output curbs for an extra month, but it’s conditional on other members making deeper cuts in the months ahead to make up for past non-compliance, people familiar with the matter said. The two leading producers have lost patience with the errant behavior of the next-biggest member, Iraq.
  • Gold climbed back above $1,700 an ounce, as investors took stock after Wednesday’s price plunge and the recent rally in global equities paused. Riskier assets gained on Wednesday after U.S. private payrolls showed fewer-than-expected job losses, adding to optimism over reopening economies. Traders are gauging hopes for a quick economic recovery against continuing risks to growth, including an escalation of U.S-China trade tensions. Attention is also turning to the European Central Bank, which is expected to boost its rescue program Thursday. The U.S. labor market report is due Friday.
  • China will ease its ban on foreign airlines from June 8 and lessen quarantine requirements for official and business travelers, while Japan debated scaling back next year’s Summer Olympics. Iran reported its highest number of daily cases, with 3,574 positive tests, exceeding the previous record of March by almost 400. Roche Holding AG got emergency U.S. regulatory approval for a test that can identify patients who are at high risk of needing mechanical ventilation. Mexico and Brazil each reported a record daily increase in coronavirus deaths. New York Governor Andrew Cuomo declared victory over the pandemic, touting the lowest daily death toll and hospitalization rate since it began.
  • Donald Trump faced a direct challenge to his leadership from his current and former defense secretaries, who issued a pair of rare public dissents questioning the president’s threat to use military force against rolling, nationwide protests over police brutality. Defense Secretary Mark Esper said in a news conference on Wednesday that he did not support invoking the 1807 Insurrection Act to quell protests using the military, saying National Guard troops are sufficient. Esper said active-duty troops should be a last resort, angering White House officials and Trump for what they regarded as a matter of breaking rank. Trump confronted Esper later that day in the Oval Office during a meeting with Vice President Mike Pence, Attorney General William Barr and General Mark Milley, head of the Joint Chiefs of Staff. The president privately asked advisers whether Esper could still be effective in his position, according to two people familiar with the matter. But Trump’s pique at Esper seemed to blow over, one of the people said.
  • Amazon.com Inc. is in preliminary talks to buy a stake in No. 2 Indian carrier Bharti Airtel Ltd. for at least $2 billion, Reuters reported, joining Facebook Inc. and other U.S. giants in betting on one of the world’s fastest-growing internet arenas. The U.S. online retailer is in early-stage discussions to buy about a 5% stake in the Indian wireless operator, Reuters said, citing anonymous sources. A deal will help Amazon access Bharti’s 300 million subscribers — a user base akin to the entire U.S. population. American technology and investment giants have been buying stakes in Indian companies to build their presence in Asia’s second-most populous nation. Facebook agreed to invest about $5.7 billion into a unit of Mukesh Ambani’s Reliance Industries Ltd. in April, while Microsoft Corp. is reportedly considering a stake in the same company.
  • Nearly a decade after arriving in Europe’s exchange-traded fund market, Vanguard Group doesn’t have to look far for reminders of just how tough it can be. The U.S. investing giant’s first European ETFs turned eight last month, but the firm’s performance in the region will surely have put a damper on any celebration. Vanguard products bled more than 600 million euros ($670 million) in May, their first losing month in 10 and the worst since 2018. Compare that with the American market, where the Pennsylvania-based firm trounced all competitors, spurring talk it could even overtake BlackRock Inc. to become the largest asset manager globally.
  • Royal Caribbean Cruises Ltd. (RCL) said Thursday it is offering up to $2 billion in senor notes and convertible bonds that mature in 2023 in two separate offerings. Proceeds of the deal will be used for general corporate purposes, which may include repaying debt, the cruise operator said in a statement. Cruise companies have been hit hard by the coronavirus pandemic, which has forced them to stop voyages. Shares fell 3.4% premarket and are down 56% in the year to date, while the S&P 500 has fallen 3%.
  • In the latest lawsuit over WeWork’s scuttled IPO, investors say the company hoodwinked them by promoting a transformation of the concept of workspace in order to sell hundreds of millions of dollars worth of stock. The complaint was filed as a class action on behalf of investors who bought shares in the privately held company for 2 1/2 years before the IPO was canceled in September and the value of WeWork plummeted. They allege that WeWork executives and board members overhyped the business plan and downplayed its losses as “strategic investment spending that would lay the foundation for profitability.” “As would later be revealed, WeWork was engaged in profligate spending in a reckless bid for growth at all costs –- not in a manner designed to sustainably grow its business, but rather to induce capital raises from investors at ever higher valuations,” according to the complaint filed Wednesday in San Francisco federal court.
  • American Airlines Group Inc. will boost July flights 74% from its current schedule as U.S. consumers freed from shelter-in-place orders rush back to flying more quickly than expected. The busiest days next month will have about 4,000 flights, up from 2,300 in June, said Vasu Raja, American’s senior vice president of network strategy. The carrier plans to operate about 40% of 2019 capacity next month, according to a statement Thursday. That’s up from 30% in June. American’s expansion builds on recent indications from rivals that customers are starting to make their way back onto planes after fleeing in April because of the coronavirus pandemic. Next month, American will bring back some of the 450 jets it parked during the worst of the collapse in flying.
  • Chancellor Angela Merkel’s coalition agreed on a sweeping 130 billion-euro ($145 billion) stimulus package designed to spur short-term consumer spending and get businesses investing again. The wide-ranging plan to lift Germany out of the crisis unleashed by the coronavirus exceeded the top end of expectations by 30%. Alongside an immediate jolt from a temporary reduction in value-added tax, coalition officials allocated money to build out 5G data networks, improve railways and double incentives for electric vehicles. In one of the most contentious issues in the talks, the auto industry fell short of its goal of getting direct government support for purchases of conventional cars, as Merkel sent a signal that she intends to take a longer term view in fostering a recovery of Europe’s largest economy.
  • The U.K. is heading for a damaging showdown with China as it takes on Beijing over Hong Kong and Huawei Technologies Co. Prime Minister Boris Johnson’s government has criticized Beijing’s planned imposition of a security law on the former British territory of Hong Kong, and is taking steps to exclude Huawei from its fifth-generation mobile networks by lining up potential replacements. The upshot is that China has become an overriding foreign policy priority of the Johnson government just as it attempts to reach a deal with the European Union on future relations. It’s a challenge that risks leaving the U.K. out in front on its own, having left the shelter of the bloc of some 450 million people on Jan. 31 to pursue its Brexit ambitions.
  • Rolls-Royce Holdings Plc plans to eliminate 3,000 jobs in the U.K. this year, the first wave of cuts that could ultimately see the jet-engine maker emerge from the downturn a much smaller business. The London-based manufacturer said it expects to trim a total of 8,000 positions from the aviation division. This would make up the bulk of the 9,000 global reductions it announced in May, when it became clear how the Covid-19 crisis is undermining demand for new aircraft. Rolls-Royce is offering voluntary redundancy packages to all of its aviation workforce and part of its back-office staff, according to an email on Wednesday. The company expects 1,500 jobs to go in Derby and the East Midlands, its main manufacturing base, 200 in nearby Barnoldswick, and an additional 700 in Inchinnan, Scotland.
  • China will ease its ban on foreign airlines starting June 8, changing course a day after the Trump administration demanded the country reopen to U.S. airlines or face curbs on its own carriers flying passengers to America. Foreign airlines excluded from an earlier pact will be able to operate one commercial passenger flight to China a week, the Civil Aviation Administration of China said. It didn’t name any countries or carriers, but the move opens up a chance for U.S. airlines to return for the first time in four months. While the timing may have been coincidental, it appeared as a concession from China just as tensions between the superpowers intensify. The nations are locked in a tussle that began over trade but escalated to include Beijing’s handling of the coronavirus and its treatment of Hong Kong. The friction puts the phase one trade deal signed on Jan. 15 in jeopardy, along with billions of dollars in Boeing Co. aircraft sales.
  • Bank of Japan officials see a need to start broadening their focus to include companies’ ability to pay their debts amid the coronavirus pandemic, not just their capacity to pay day-to-day bills, according to people familiar with the matter. While the central bank stands ready to provide any further help needed to shore up corporate financing and stabilize financial markets, it must also be wary of the potential damage to banks and the financial system if a large number of companies go bankrupt, the people said. The main responsibility for ensuring corporate solvency lies with the government, according to the people. Still, if the government issued more debt to help injections of capital into companies, the BOJ could buy the debt as part of its yield-curve control framework to keep interest rates low, some of them said.
  • Bankers have a message for America’s debt-laden companies: raise money now, because things could get a lot worse. The gradual reopening of businesses after months-long shutdowns and a pick up in manufacturing activity have given investors reason for optimism in recent weeks. But underwriters who cater to heavily indebted corporations are offering their clients a bleak preview of what may lie ahead. The long list of worries includes a new wave of coronavirus contagion in the fall, an extended period of double-digit unemployment, a spike in defaults and a slower-than-expected economic recovery as businesses around the globe adapt to the realities of prolonged social distancing.
  • LVMH’s board has discussed its planned $16 billion purchase of Tiffany & Co. amid reports that the deal might need to be reworked as the Covid-19 pandemic and protests in U.S. cities cloud the jeweler’s prospects. The Louis Vuitton owner said directors met Tuesday to examine the agreement. LVMH ruled out buying Tiffany shares on the open market even though they trade at a 15% discount to the agreed price of $135 a share. The French company said its board “focused its attention on the development of the pandemic and its potential impact on the results and perspectives of Tiffany & Co. with respect to the agreement that links the two groups.”

*All sources from Bloomberg unless otherwise specified