June 6th, 2019

Daily Market Commentary

  • Canadian Headlines
    • If push comes to shove, one of the world’s largest gold miners is prepared to do an end run around the U.S. should President Donald Trump’s threatened tariffs on Mexican goods bite. Agnico Eagle Mines Ltd. currently produces about 300,000 ounces of gold in Mexico that it refines in the U.S., all of which would likely be subject to the proposed tariffs, Chief Executive Officer Sean Boyd said Wednesday. But he already knows how he’d respond to potential levies.
    • Sherritt International Corp., whose executives were once known as Fidel Castro’s favorite capitalists, is paying the price for its close ties to the struggling Caribbean nation. The Canadian miner, which gets all its revenue from assets in Cuba, is being hit on multiple fronts by Donald Trump’s isolationism, plunging nickel prices and cost overruns. With the stock at 21 cents and its bonds trading at distressed levels, investors are starting to question the company’s viability.
    • Mitsubishi Heavy Industries Ltd. fell the most in more than five months following talks with Bombardier Inc. to purchase the Canadian aircraft maker’s CRJ regional jet program, negotiations that drew analyst criticism. Concerns include Mitsubishi Heavy’s ability to manage the CRJ program, while struggling to deliver its own MRJ regional jet that has been in development for more than a decade, Jefferies analyst Sho Fukuhara said. Also in question is the synergy the 30-year-old CRJ will offer.

     

  • World Headlines
    • European equities climbed on Thursday with utilities and health-care shares supporting the advance as investors’ shift toward defensive assets amid turmoil surrounding tariff talks. The Stoxx Europe 600 Index was up 0.5%. Novartis advanced 0.9% and AstraZeneca climbed 1.2%, while Novo Nordisk was up 2%. Renault fell 7% after Fiat Chrysler abruptly withdrew its offer to merge the companies after the French carmaker’s board postponed a decision for a second time. Fiat was down 1.7%.
    • U.S. equity-index futures and European shares advanced on Thursday as the prospect of easier monetary policy continued to help fuel a rebound in stocks. The appetite for risk was measured, however, and government bonds also rose. Contracts for the three main American equity gauges pointed to gains at the New York open after the S&P 500 notched the biggest two-day rally since January.
    • Asia’s benchmark gauge slipped, with a big decline in Shanghai shares despite a cash injection into the financial system by China’s central bank. The yield on Treasury 10-year notes fell to 2.10% as the steeper yield curve showed bond traders positioning for looser monetary policy. The euro climbed against the greenback ahead of the European Central Bank’s policy announcement, with President Mario Draghi under pressure from markets to provide more stimulus.
    • Oil gained in New York and London, in a modest recovery after sinking into a bear market on Wednesday amid ballooning U.S. crude inventories and signs that demand is faltering. Futures in New York edged 1% higher after settling 3.4% lower in the previous session. U.S. total petroleum stockpiles jumped by 22 million barrels last week, the biggest increase in data going back to 1990, government figures showed Wednesday. Data from countries representing around half of global oil consumption shows year-on-year demand growth ground to a halt in March and April, Morgan Stanley said in a note in which it cut its Brent forecast for the second half of 2019.
    • Gold held near the highest in more than three months as investors weighed concerns about an expanding trade war after discussions between the U.S. and Mexico on tariffs ended Wednesday without agreement. Bullion has also been buoyed as the steepening U.S. yield curve shows bond traders have concluded that the case for Federal Reserve rate cuts is only strengthening, even as top policy makers signal they’re not yet ready to act. Lower rates generally boost the appeal of the precious metal, which doesn’t pay interest.
    • The Russell 3000 reconstitution later this month will be key for energy companies vying for investor attention, given an already low weighting in the index, according to Barclays Capital Inc. “With Energy likely to remain under 5% of the Russell 3000 and heavily weighted towards the Value indices following the Russell reconstitution this month, there is more burden on E&Ps to appeal to value investors,” analysts William Thompson and Jeanine Wai told clients in a note.
    • U.S. and Mexican negotiators are set to resume talks Thursday with time running short to avert President Donald Trump’s threat to impose tariffs next week. Trump, who’s traveling overseas, said that “not nearly enough,” progress was made during a 90-minute meeting at the White House between Mexico’s foreign minister, Marcelo Ebrard, and top American officials. The outcome raises the likelihood that the U.S. will follow through with tariffs on Monday. And it’s unclear how much progress on any deal can be made until Trump returns to Washington from a week-long trip to Europe to commemorate the 75th anniversary of D-Day.
    • Advent International has raised $17.5 billion for its largest fund yet, exceeding its target by $1.5 billion as return-hungry investors plow cash into private equity. The firm closed Advent International GPE IX LP at its hard cap — the maximum size allowed — after fundraising for six months, according to a statement Thursday. It raised $13 billion in 2016 for its predecessor fund. Advent, with headquarters in Boston and London, is the latest top-tier buyout firm to benefit from booming investor demand for alternative asset funds. Blackstone Group LP has set a hard cap of $25 billion for its latest flagship fund, people familiar with the matter said last month. That would be the industry’s largest ever if it hits that number. Other firms with multibillion-dollar funds in the market include Warburg Pincus and Brookfield Asset Management Inc.
    • Tune out the trade wars. Pay no attention to the signal of a looming recession being emitted by the bond market. It’s time for a birthday party! This month marks the 10th anniversary of the U.S. economic expansion that began in June 2009. If the streak continues into July, it will make history, surpassing the 1991-2001 growth cycle to become the longest since 1854, which is as far back as economists have attempted to date business cycles.
    • BMW AG executives are cutting the ribbon on the automaker’s first Mexican assembly plant, a week after President Donald Trump threw a wrench in their plans with a fresh tariff threat on Mexican goods. BMW spent about $1 billion on the plant, set in the vast arid plains of San Luis Potosi in north-central Mexico. It’s one of three — the other two are in Germany and China — that will produce the next-generation 3 Series sedan for sale in the U.S. and other markets.
    • The Pentagon and State Department have informally notified Congress of a potential $2 billion deal with Taiwan that includes the first-time sale of one of the U.S. Army’s top tanks, according to an official familiar with the proposal, drawing protests from China. The deal would contain the M1A2 Abrams tank, and a resupply of anti-air and anti-armor weapons, the official familiar with the matter said. The notification of the government-to-government sale doesn’t include F-16 fighters, which are still under State Department and Pentagon review, the person said.
    • The German government is probing the possibility of a tie-up between Commerzbank AG and ING Groep NV as one option to forge a European financial heavyweight, according to people familiar with the discussions. Dutch Finance Minister Wopke Hoekstra and German Deputy Finance Minister Joerg Kukies discussed the matter earlier in May in Berlin, said the people who asked not to be named because the talks were private. Among the issues discussed was Berlin’s intent that any new bank be headquartered in Germany.
    • Fiat Chrysler Automobiles NV and the French government blamed each other for the sudden collapse of talks to combine the Italian-American carmaker with Renault SA, even as both sides tried to keep the door open to an eventual deal. Fiat’s surprise withdrawal of its offer came after an hours-long Renault board meeting Wednesday night ended with no decision on the plan to create the world’s third-largest automaker. Fiat took direct aim at the French state, Renault’s biggest shareholder, for scuppering the deal with a sudden request to postpone board deliberations.
    • Rolls-Royce Holdings Plc transferred 4.6 billion pounds ($5.8 billion) of assets from its U.K. pension fund to Legal & General Group Plc, a deal the insurer called the largest of its kind in Britain. Legal & General will now be responsible for making payments to about 33,000 pensioners, the insurer said in a statement. The transferred liabilities amount to 4.1 billion pounds, according to Rolls-Royce. The insurer has now completed more than 6.2 billion pounds of so-called pension-risk transfer deals this year.
    • The U.K. Treasury supports a plan to reduce greenhouse gas emissions to zero by 2050, but wants a review before signing off on a policy it estimates will cost taxpayers 1 trillion pounds ($1.3 trillion), according to a person familiar with the matter. The Financial Times reported Thursday that Chancellor of the Exchequer Philip Hammond had written to Prime Minister Theresa May outlining the cost and pointing out it would mean less money available for schools, police, hospitals and other public spending. The person confirmed the FT report and said the calculation is based on annual estimates by the Committee on Climate Change, the U.K.’s independent adviser on the subject.
    • A year ago, in the enduring twilight of one of St. Petersburg’s famous “white nights” of summer, Saudi Arabia and Russia reached an agreement that set a new direction for the oil market. This week, when Energy Ministers Alexander Novak and Khalid Al-Falih meet again in the northerly city that’s President Vladimir Putin’s hometown, resolving differences may not be so easy for the two architects of the OPEC+ agreement. The Saudis clearly want to extend the group’s production curbs beyond their expiry at the end of this month, but Russia has been at best non-committal.
    • China’s attempts to stop the spread of African swine fever are closing the door on a black market meat trade that’s normally worth about $2 billion a year. Stricter controls at China’s borders have slashed the amount of unofficial produce being imported into the country through its immediate neighbors. That includes as much as 2,000 containers of buffalo meat that Indian herders ship to China every month via Vietnam to circumvent an 18 year ban by Beijing.
    • China’s stock exchanges have stepped up scrutiny of listed companies to address corporate governance concern, amid a push to further open up the nation’s capital markets. The Shanghai and Shenzhen stock exchanges sent out a total of at least 1,149 queries to listed companies in the first five months of this year, up 23% from the year-earlier period and 62% more than the 2017 tally, according to data compiled by Bloomberg. The questions mainly focused on irregularities in the firms’ financial results, inadequate information disclosure and relations with controlling shareholders.
    • Donald Trump has become quite comfortable deploying the U.S. economy both as lure and as threat. In London on a state visit, he tweeted that the U.K. could expect a “big Trade Deal” with the U.S. once it “gets rid of the shackles” to the European Union. In the previous week, a short one in Washington because of the Memorial Day holiday, he still found time to escalate hostilities in America’s economic war with just about everyone.
    • Hillhouse Capital is acquiring iconic Scottish whisky maker Loch Lomond Distillers Ltd. to expand its portfolio of consumer brands. The investment firm has teamed up with the distiller’s management for the acquisition, the company said in a statement on Thursday, without giving financial terms. Hillhouse plans to expand Loch Lomond in other parts of the world such as Asia, where whisky has become more popular.
    • The slump in oil has thrown OKEA ASA’s planned initial public offering off track, delaying its listing in Oslo and leading the company to possibly lower the price range and other terms. OKEA, started by industry veterans and a former Norwegian petroleum minister, was planning to raise as much as $98 million by selling new shares as it listed the company this month. But during the bookbuilding period that ended on Thursday, crude prices have descended into a bear market, resulting in insufficient interest for the shares within the asking-price range.
    • Mondelez International Inc.’s talks to acquire Campbell Soup Co.’s international brands including Arnott’s Biscuits have ended, according to CNBC. Mondelez, the maker of Oreo cookies and Cadbury chocolates, had submitted a final offer for Campbell’s international brands that was below the soup maker’s expectations of about $3 billion, CNBC said, citing people familiar with the matter. The companies reached a stalemate over valuation and talks formally ended within the past few weeks, CNBC said.
    • PG&E Corp. has spoken to lawmakers about putting together a pool of capital worth about $11 billion to settle claims related to wildfires blamed on the bankrupt California utility, according to people familiar with the matter. The utility has considered the plan in consultation with law firm Jones Day and boutique investment bank PJT Partners Inc., which are advising a group of PG&E’s equity holders that recently helped overhaul its board and appoint Bill Johnson as chief executive officer, the people said.
    • A marked slowdown in Asia’s third-largest economy pushed growth concerns to the top of the Reserve Bank of India’s agenda, suggesting more policy easing will follow its third interest-rate cut of the year. Governor Shaktikanta Das and the inflation-targeting RBI he leads is now squarely focused on boosting investment and consumption after quarterly growth cooled to a five-year low at the beginning of 2019. A benign inflation outlook and a dovish turn by the U.S. Federal Reserve strengthened the case for policy makers to switch to an “accommodative” stance on Thursday, indicating further easing ahead.
    • Koch Industries Inc. will begin importing about 3,000 barrels a day of gasoline from the U.S. to Mexico next month despite concern that Mexico will retaliate against looming U.S. tariffs. “It’s a very low probability that U.S. gasoline coming to Mexico will be affected” by U.S. President Donald Trump’s threat to impose tariffs on Mexican goods, Koch trading manager Eduardo Andrade told Bloomberg by phone from Veracruz. “The Mexican government has been very cautious, continually calling for dialogue, and that’s a good sign.”
    • The year’s best performing initial public offering will test its roughly 300% run-up on Thursday, when Beyond Meat Inc. gives its first financial report as a public company. The maker of plant-based meat alternatives included preliminary first quarter results in its IPO prospectus, but Wall Street still has plenty to watch for after the market closes. Plans to expand capacity in Europe and the possibility of the firm’s first full-year guidance will both be focal points for investors, Bernstein analyst Alexia Howard wrote in a note this week.

*All sources from Bloomberg unless otherwise specified