March 26th, 2020

Daily Market Commentary

Canadian Headlines

  • Canada’s stock market surged for a second day, putting it on the cusp of a bull market, as investors saw hope that government spending plans will bolster a global economy hit by the coronavirus pandemic. The S&P/TSX Composite Index closed 4.5% higher, posting its first back-to-back gains since Feb. 20, the day the market peaked. The head-spinning rebound happened as Justin Trudeau’s government won support in the House of Commons for his stimulus deal and the U.S. Senate moved toward a vote on a $2 trillion package of spending and tax breaks.
  • A steady deterioration in the performance of active equity managers as markets locked up this month is spurring mutual fund clients into yet another mass exodus from their products. About $68 billion has been yanked from stock-picking funds globally in the past four weeks as passive benchmarks widened their advantage during the rout. U.S. funds led by active money managers have trailed the main indexes by 1.3 percentage points in March, according to Bernstein Research. Peers in Europe were 3.3 points behind.

World Headlines

  • European stocks fell on Thursday after posting their best two-day rally since 2008, as concerns over the coronavirus outbreak overshadowed the latest government stimulus packages. The Stoxx 600 Index was down 1.1% as of 10:53 a.m. in London, with almost all industry groups in the red, led lower by basic resources and oil and gas shares. The travel and leisure sector was the only climber. Recorded coronavirus infections and fatalities keep rising globally, with Japan among countries that have adopted a tougher approach after a spike in cases. Efforts by governments to reduce the economic fallout continue. The U.S. Senate approved a $2 trillion rescue plan to combat the pandemic that has to now been passed by the Democratic-led House.
  • U.S. equity futures declined with European stocks and most Asian shares on Thursday as investors started to look past stimulus packages to the mounting human impact of the coronavirus outbreak. Government bonds and the yen advanced. Contracts on all three main American equity benchmarks slipped as the U.S. death toll from the pandemic topped 1,000. U.S. and global stocks just posted their first back-to-back gains since before the bear market began, in part thanks to optimism over a $2 trillion rescue plan for the American economy. The Senate has passed the stimulus bill and sent it to the House, which was scheduled to vote on the legislation Friday. But President Donald Trump had urged Congress to act “without delay” and said he would sign it immediately.
  • Japanese shares closed almost 2% lower amid further efforts to contain the movement of people. Equities in Australia and India rallied, bucking the broader trend. Japan stocks dropped even as the U.S. Senate approved a historic $2 trillion stimulus package to respond to the outbreak. The massive U.S. legislation passed on a 96-0 vote after days of intense negotiations between Senate Republicans and Democrats. The House is scheduled to vote on the legislation Friday.
  • Oil’s recovery rally went into reverse as broad weakness across physical crude markets compounded mounting evidence of the demand devastation being wrought by the coronavirus. Futures in New York fell 3.2% to below $24 a barrel. Goldman Sachs Group Inc. warned that crude demand would decline by almost 19 million barrels a day next month, as American deaths from the virus topped 1,000 and India imposed the world’s biggest lockdown. Market gauges are already flagging weakness, with key swaps in the North Sea plummeting and U.S. traders concerned about storage space. Meanwhile, the price structure for both major oil benchmarks has collapsed, indicating a massive oversupply.
  • Fears over the historic squeeze in the gold market showed signs of easing after some short sellers appeared to exit and investors rolled forward contracts. The bullion market was thrown into turmoil this week as logistical disruptions caused by the coronavirus pandemic led to a divergence of prices in the U.S. and London and curbed supply. An issue was whether there would be enough gold in New York to deliver against futures contracts traded on the Comex. But open interest in the April contract dropped almost 30% on Wednesday, indicating a small amount of short-covering and as investors rolled positions forward, according to David Govett, head of precious metals trading at Marex Spectron. The decline helped narrow the gap between the volume of gold that could be due to be delivered at expiry and how much sits in Comex warehouses.
  • Iron ore has held up remarkably well amid the global market turmoil unleashed by the coronavirus pandemic, giving up far less ground than other industrial commodities. Now, that relative resilience is about be tested as warnings stack up that the steelmaking material is set to slide. Investors should brace for a drop to $70 a ton as a surplus looms next quarter, Citigroup Inc. warned this week. Wood Mackenzie Ltd. also said prices will head toward $70, but added there’s a risk of $50 should the market become acutely oversupplied. Spot benchmark prices were at $87.10 on Wednesday.
  • Spain reported a surge in cases, though fewer deaths than a day earlier. The number of infections in Europe has tripled over the past week, the World Health Organization said, adding that the continent now accounts for 7 out of 10 reported fatalities. The U.S. Senate approved a $2 trillion package and the European Central Bank will scrap limits on bond purchases, giving it almost unlimited firepower to fight the economic fallout. Singapore and India also unveiled measures, while self-employed Britons will be promised a rescue package later on Thursday. Singapore estimated that its economy contracted the most in a decade, an early sign of what’s in store for many. Japan slashed its assessment of the economy, characterizing it as “extremely depressed,” and French business confidence plunged at a record pace in March.
  • Citigroup Inc. and Truist Financial Corp. are among banks that have been selling off hundreds of millions of leveraged loans to help unwind swap trades tied to the debt, according to people familiar with the matter. The banks solicited buyers for around $1.3 billion in two separate leveraged loan auctions on Tuesday, said the people, who asked not to be named discussing private transactions. About half of the loans seeking bids ultimately traded, the people added.
  • Federal Reserve Chairman Jerome Powell said the central bank will maintain its muscular efforts to support the flow of credit in the U.S. economy as Americans hunker down from the coronavirus pandemic. “We will keep doing that aggressively and forthrightly, as we have been,” Powell said in a rare interview on NBC’s “Today” show Thursday. “When it comes to this lending we’re not going to run out of ammunition.” Over the past three weeks, the U.S. central bank has introduced an unprecedented series of measures pushing it deep into uncharted territory as it seeks to cushion the blow of the coronavirus on financial markets and the U.S. economy.
  • The U.S. Senate approved a historic $2 trillion rescue plan to respond to the economic and health crisis caused by the coronavirus pandemic, putting pressure on the Democratic-led House to pass the bill quickly and send it to President Donald Trump for his signature. The massive legislation passed on a 96-0 vote just before midnight Wednesday after days of intense negotiations between Senate Republicans and Democrats, who demanded changes to the bill introduced last week by Senate Majority Leader Mitch McConnell. The package includes an unprecedented injection of loans, tax breaks and direct payments for major corporations and individual taxpayers to help the U.S. economy get through an abrupt shutdown as people avoid social interaction and businesses close to keep from spreading the coronavirus. More than 68,000 people in the U.S. have been infected with the deadly respiratory disease, and some economists warn that unemployment could hit 30%.
  • Revenue is swelling in a key part of JPMorgan Chase & Co.’s trading division as its teams stay engaged through violent price swings that have prompted some market players to pull back. The bank’s equity derivatives traders have generated roughly $1.5 billion in revenue so far this year, according to a person with knowledge of the situation who asked not to be identified because the numbers are confidential. That’s almost what JPMorgan reported from all equity markets businesses in last year’s first quarter — and at least twice what that derivatives desk usually earns, people familiar with the bank’s performance said.
  • The European Central Bank scrapped most of the bond-buying limits in its 750 billion-euro ($819 billion) pandemic emergency program, in a landmark decision that massively boosts its firepower to fight the economic fallout from the coronavirus. Government bonds rallied across the euro area after the ECB released a legal document that said the issue limits, which constrained sovereign bond-buying to a third of each of its member state’s debt, “should not apply” to its new program. Purchases started on Thursday, and the ECB said it will “explore all options and all contingencies to support the economy to counter this extraordinary shock.”
  • Kosovo lawmakers voted to remove Prime Minister Albin Kurti, becoming the first nation in Europe to vote out a government over the way it handled the coronavirus outbreak. The government collapsed late on Wednesday, just months after it took office. The vote was called by a junior coalition partner who criticized steps taken to curb the contagion. Kurti ordered a curfew and banned public gatherings on Monday to stem the spread, defying President Hashim Thaci who wanted to declare national emergency. The two officials have been at odds all along, mainly on how Kosovo should mend ties with Serbia and which one of them should lead those talks.
  • Even if Riyadh and Moscow ended their fight for oil-market share now, everything they achieved together over three years of OPEC+ would still go up in smoke. The U.S. has used the build-up to Thursday’s emergency teleconference between leaders of Group of 20 nations to urge a rapprochement between Saudi Arabia, which is chairing the event, and Russia. Even if President Donald Trump could resolve the conflict between the two exporters — and Moscow is giving reasons to think he can’t — the kingdom has already committed to flood the market with crude next month. While a truce could help temper any further price slump, it would be too late to rescue the legacy of the partners-turned-rivals, who until this month had cooperated to keep world oil markets in equilibrium.
  • The shutting of European borders in a bid to contain the coronavirus pandemic is about to derail a 200 billion-zloty ($47 billion) industry. The Polish construction sector, which employs 400,000 people and accounts for 8% of gross domestic product, faces unprecedented trouble amid concerns over the Ukrainian workforce it depends on. The builders are gradually heading back to their homeland while would-be reinforcements can’t cross back into Poland. As Poland puts the final touches on its stimulus package to avoid recession and protect jobs, a lobby group for builders warned about the imminent risks and called for bolder steps. The wish list of the industry — one of the hardest hit by the closing of borders — includes prolonging deadlines to avoid penalties and the suspension of some taxes and fees.
  • Banks took 11.13 billion pounds ($13 billion) as the Bank of England held an emergency liquidity operation to help combat financial stress prompted by the coronavirus pandemic. The central bank activated the Contingent Term Repo Facility this week after banks’ demand for cash soared at its regular operation. The BOE said it was holding the unlimited operation, and another one on April 2, in an effort to “support financial stability by reducing the cost of disruption to critical financial services.” The launch came after banks bid for 10.66 billion pounds at a weekly operation Tuesday, and were alloted 7.2 billion pounds. Both numbers were the highest since the operations were restarted around 2016’s Brexit referendum, while demand outstripped supply for a second straight week.
  • India announced a 1.7 trillion rupee ($22.6 billion) spending plan as part of measures to ease the economic impact of coronavirus pandemic on the poor in the world’s most populated nation after China. The plan will include cash transfers as well as steps on food security, Finance Minister Nirmala Sitharaman said in New Delhi Thursday. The package will benefit migrant workers, she said. Cash support listed by the finance minister include payments to farmers under an existing income support program. Free cooking gas to the poor for three months, state-sponsored contributions to retirement funds for the same duration and insurance cover of 5 million rupees to medical workers are also part of the plan, she said.
  • India’s oil refiners are slashing crude-processing rates as a three-week lockdown to stem the spread of the coronavirus pandemic crushes energy demand in the second-most populous country. Even as refiners in Asia, Europe and the U.S. cut the amount of crude they’re processing due to the loss of demand, the market is poised to be swamped with a flood of barrels from Saudi Arabia and Russia after the acrimonious break up of the OPEC+ alliance. Goldman Sachs Group Inc. is predicting a “harsh shock” for refiners as the global glut swells in the second quarter.
  • Liquefied natural gas prices fell the most in more than two months after India’s lockdown to combat the fast-spreading coronavirus forced some buyers to delay or cancel shipments, flooding the market with distressed cargoes. Spot assessments of the Japan/Korea Marker, the global LNG benchmark price, dropped for a second day Wednesday to erase this month’s gains, according to S&P Global Platts. India’s lockdown dashed hopes the nation would help absorb cargoes in times of tepid demand, as three importers declared force majeure, a clause absolving them from meeting their contractual commitments for reasons beyond their control. Meanwhile, top exporter Qatar offered cargoes in the spot market after its term buyers delayed deliveries, a further sign that sellers are struggling to find markets as the coronavirus outbreak exacerbates a global glut. Asian prices are now again near the historic low reached in February after a milder winter, the startup of new projects and a drop in Chinese consumption.
  • Sixth Street Partners plans to activate a $3.1 billion fund raised on the contingency that it would only be tapped during an economic or market dislocation, according to people with knowledge of the matter and investor correspondence seen by Bloomberg. The firm, founded by former Goldman Sachs Group Inc. partner Alan Waxmanand nine others, advised investors that it plans to activate the vehicle raised mostly in 2018 known as the TAO Contingent Fund, on April 1. Once that occurs, Sixth Street will have more than $10 billion of dry powder to invest, said one of the people, who asked not to be identified because the matter is private.
  • Malaysia’s AirAsia Group Bhd. is weighing options for its long-haul unit AirAsia X Bhd. including introducing a financial investor to help shore up the unit’s finances, according to people familiar with the matter. The budget carrier is also studying alternatives including getting support from Khazanah Nasional Bhd., Malaysia’s sovereign wealth fund, or integrating AirAsia X into the group, the people said. Shuttering AirAsia Xcould also be one of the options, said the people, who asked not to be identified as the discussions are private. AirAsia, founded by entrepreneur Tony Fernandes, has been in talks with investment banks about strategic options for the long-haul unit, which reported a net loss of about 490 million ringgit ($113 million) in 2019, the people said. The discussions began even before the coronavirus pandemic disrupted global travel, one of the people said. Bond issuance to boost the unit’s financing has also been considered, the person said.

*All sources from Bloomberg unless otherwise specified