March 27th, 2020

Daily Market Commentary

Canadian Headlines

  • Canadian equities rose for a third session but fell just short of a bull market as an early rally cooled off. The S&P/TSX Composite Index gained 1.8% to 13,371.17 in Toronto, with materials the only sector to close in the red. Marijuana stocks were among standouts as several jurisdictions allowed dispensaries to remain open during stay-at-home orders. Elsewhere among equity gainers, Winnipeg-based bus maker NFI Group Inc.surged 33%, the most on record. The company temporarily cut its dividend earlier this week while laying off staff.
  • Canadian engineering giant SNC-Lavalin withdraws 2020 outlook and freezes capex spending. Remedial actions taken include reduced hours and employee furloughs. Most SNCL Engineering Services personnel have been able to continue servicing clients from non-office-based locations
  • Canadian heavy crude has become so cheap that the cost of shipping it to refineries exceeds the value of the oil itself, a situation that may result in even more oil-sands producers shutting operations. Western Canadian Select crude in Alberta dropped $2.84 to a record low of $6.45 a barrel on Thursday, according to Bloomberg data going back to 2008, almost as cheap as a Starbucks venti-sized pumpkin spice latte. Synthetic crude, produced from oil-sands bitumen that’s been run through an upgrader, is in even worse shape: the price tumbled $9.94 to $10.85 a barrel, also a record-low. Canadian heavy crude now costs less than the price paid by a company with long-term contracts to ship it down Enbridge Inc.’s Mainline and Flanagan South systems to Texas. That’s a problem for oil-sands producers like Cenovus Energy Inc., which has commitments to ship 75,000 barrels a day down the system. MEG Energy Corp., another heavy oil producer, has contracts to ship 50,000 barrels a day and has plans to expand to 100,000 barrels a day in the second half of 2020.

World Headlines

  • European stocks declined on Friday, ending their best ever three-day winning streak, with investors mulling measures by policymakers to prop up the economy as the coronavirus keeps countries on lockdown. The Stoxx 600 Index was down 2.2% by 8:18 a.m. London time as basic resources stocks and banks retreated. Adding to the muted mood, the number of companies scrapping their outlooks due to the uncertainty caused by the coronavirus grew to include French advertising firm Publicis Groupe SA, whose shares fell 0.1%, and eyewear-maker EssilorLuxottica SA, which dropped 3.6%. The Stoxx 600 Index is poised to end the week with a 7.6% gain as some of the harder-hit sectors, such as travel stocks, made a comeback. However, the the most important question is how long it will take to get the virus under control, Esty Dwek, head of global market strategy at Natixis Investment Managers, said.
  • U.S. equity futures and European stocks slipped on Friday as investors caught their breath following the first three-day rally in global shares since mid-February. Treasuries climbed and the dollar swung between gains and losses. Contracts on all three main American indexes retreated in the wake of news that the U.S. has overtaken China for the most corononavirus cases worldwide. The underlying gauges had surged a day earlier.
  • Asian equities mostly rose, though shares in Australia slumped. WTI crude oil looked set to snap a four-week slide. The pound edged higher as it headed for its best week since 2009. The recent revival of risk appetite looks sure to be tested by the continuing spread of the coronavirus and the crippling effect of business closures. Tokyo is now seeing a surge in cases, while global deaths from the pandemic surpassed 24,000. The Reserve Bank of India on Friday became the latest central bank to step up emergency action to cushion the economic impact.
  • Oil traded near $23 as traders weighed the collapse in global consumption as a result of the coronavirus outbreak, which continues to roil markets, against a broader fiscal response. Futures in New York pared earlier gains but are set to eke out a small weekly increase. While global stocks staged a partial recovery this week as policy makers sought to cushion the blow from the virus, there have been more signs of a demand collapse. Refineries from India to South Korea are slashing their consumption, while the International Energy Agency warned that demand is in freefall. Lower prices are already taking their toll, with producers facing forced production cuts for the first time in 35 years. Suppliers from Brazil to Canada are already acting, while Nigeria said it will pump as much as it can at low prices, but may have to shut in production. Algeria has asked for an emergency OPEC board meeting to discuss the cuts. It comes as industry consultant IHS Markit said the world will run out of places to store oil in as little as three months.
  • Gold headed for the biggest weekly advance since 2008, rallying along with risk assets including equities, as investors weighed up the impact of massive monetary and fiscal stimulus for virus-hit economies and disruptions in the physical bullion market that have roiled trading. The store of wealth is in demand as the outbreak spreads and investors seek havens from the damage, which has led to the flood of support from central banks and governments. The rush for bullion has come when supply channels are being strangled, with some refineries shutting down and flights halted. That’s limiting sellers’ capacity to meet commitments to deliver the metal.
  • Major U.S. banks are leading the charge in the primary bond market, bolstering coffers that are already believed to be sufficient to withstand record corporate drawdowns on lending facilities. In the past two weeks, financial institutions led by Wells Fargo & Co. and Goldman Sachs Group Inc., along with Bank of America Corp., Citigroup Inc. , JPMorgan Chase & Co. and Morgan Stanley have borrowed a combined $48.4 billion, almost a third of the period’s total issuance. It comes at a time when companies have been tapping their credit lines more than ever, pressuring banks to keep money flowing and struggling companies afloat.
  • Spain reported its deadliest day since the outbreak of the coronavirus, with 769 deaths in the past 24 hours. The total number of fatalities rose to 4,858, from 4,089, and the number of confirmed cases climbed to 64,059, from 56,188 a day earlier, the Health Ministry said. The grim data comes with Spain near the end of a second week of a state of emergency set to last until April 11. With the nation on almost complete lockdown, the government is counting on limited social interactions helping contain the spread of the virus, which has already killed more people in Spain than in China where the pandemic originated.
  • The success of a massive stimulus package set for House passage on Friday will depend on how quickly the aid can get to beleaguered consumers and businesses — a huge challenge for federal and state agencies that aren’t built to move quickly. Congress has moved at a remarkable pace for such an enormous piece of legislation. The Senate unanimously approved the $2 trillion package of loans, aid and payments Wednesday night, and the House is expected to quickly pass the bill Friday.
  • Singapore Airlines Ltd. shares fell after the carrier unveiled a plan to raise about S$8.8 billion ($6.2 billion) to contend with the devastating impact of the coronavirus pandemic. The company will issue S$5.3 billion in new stock at S$3 apiece, 54% lower than the last closing price on Wednesday, as well as convertible bonds, according to a statement Friday. State investor Temasek Holdings Pte., the carrier’s biggest shareholder, said it would back the resolutions. “The board is confident that this package of new funding will ensure that SIA is equipped with the resources to overcome the current challenges,” Chairman Peter Seah said in a statement. “We are especially grateful for Temasek’s strong vote of confidence.”
  • Investments in U.S.-listed commodity exchange traded funds more than tripled last week for the 14th straight week of inflows. Precious metals ETFs led the inflows. Energy ETFs had the second biggest change from the previous week. Net inflows to ETFs that focus on commodities totaled $2.96b in the week ended March 26, including the effect of leveraged funds, compared with $906.5m the prior week
  • British Prime Minister Boris Johnson tested positive for the coronavirus, Spain had its deadliest day of the outbreak so far and European leaders struggled to agree on a strategy. U.S. President Donald Trump and China’s Xi Jinping pledged to cooperate in the fight against the pandemic after weeks of rising tensions. The World Health Organization appealed for a stronger attack against the coronavirus after Trump offered a plan to restore normal business by ranking counties by their virus risk. Earlier, the U.S. overtook China for the most cases worldwide, fueled by a large jump in infections in New York.
  • The head of the World Health Organization appealed for a stronger attack against the coronavirus on a webcast with world leaders, trying to rally support while U.S. President Donald Trump and others question the need for the extreme steps the agency has championed. Shutdowns will slow the pandemic, but they won’t extinguish it, so countries also need to adopt even more aggressive measures to eradicate the virus, WHO Director-General Tedros Adhanom Ghebreyesus said on a private video-conference Thursday. He urged nations to remove export bans on medical equipment and ensure fair distribution, as well as to test every suspected case, isolate those infected and trace all of their contacts. Tedros told the leaders on the call, including Trump and U.K. Prime Minister Boris Johnson, to “fight like hell” and said the new coronavirus could “tear us apart if we let it.” He said millions of people could die without stronger action, and that the leaders’ own lives depended on it.
  • American Airlines Group Inc. said it’s in line to receive $12 billion in a pending U.S. rescue program for an industry battered by the coronavirus pandemic. With demand for air travel having tumbled “precipitously,” American will slash its flight schedule 60% in April and 80% in May, Chief Executive Officer Doug Parker said Thursday. To make up for lost sales, the company will have to rely on government assistance that’s still subject to a Friday vote in the House of Representatives.
  • Volkswagen AG’s unprecedented move to halt output on both sides of the Atlantic costs the world’s largest automaker 2 billion euros ($2.2 billion) per week, and Chief Executive Officer Herbert Diess said decisive action is critical to overcome the coronavirus pandemic. Sales outside China have effectively come to a standstill, while demand in the country, VW’s largest single market, has clawed back to about 50% of pre-crisis levels, Diess told German broadcaster ZDF during a panel discussion late Thursday. VW can endure the factory shutdowns in Europe and the Americas “for several weeks, maybe months, but not indefinitely,” Diess said. The company is in a strong financial position, but he didn’t rule out “structural measures” if the crisis drags on for many months or even years in a worst-case scenario.
  • U.K. banks are coming under fire for terms they’re demanding on loans the government put in place to keep small businesses afloat during the coronavirus pandemic. Barclays Plc offered an interest rate of as much as 12%, according to Patrick Macnamara, a former City trader turned entrepreneur in London. The bank then lowered it to between 2% and 5%, he said. Other lenders have also said their interest rates will depend on the circumstances of the borrower. On top of the prohibitive rates, Lloyds Banking Group Plc and Banco Santander SA’s U.K. unit might ask for personal guarantees on loans exceeding 250,000 pounds ($305,000), people familiar with the matter said.
  • The Reserve Bank of India cut interest rates and announced steps to boost liquidity in a stimulus worth 3.2% of gross domestic product to counter the economic impact of the coronavirus outbreak. The benchmark repurchase rate was slashed by 75 basis points to 4.40%, Governor Shaktikanta Das said Friday after an emergency meeting of the rate-setting panel. The RBI also cut the Cash Reserve Ratio, the amount of deposits lenders must set aside as reserves, by 100 basis points to 3% to boost liquidity.
  • Malaysia announced billions of dollars in fresh support for an economy punished by the coronavirus pandemic. Prime Minister Muhyiddin Yassin said Friday the government was unveiling 250 billion ringgit ($58 billion) in support for the economy. That figure includes a 20-billion ringgit package announced last month by the previous government, as well as other measures presented since then, Muhyiddin said. Malaysia joins governments around the world who have pledged trillions of dollars to support their economies as activity grinds to a halt to stop the pathogen. Its new measures come after Singapore announced $33 billion in stimulus on Thursday and India announced a $23 billion spending plan to counter the virus blow the same day.
  • Tata Motors Ltd., the Indian owner of Jaguar Land Rover, plans to separate its cars business from trucks and buses, as the company seeks partners for a unit slammed by the coronavirus outbreak and a global shift to electric vehicles. Car sales in India fell for a 16th consecutive month in February, and that’s set to continue as the virus outbreak limits travel nationwide, and financing new vehicles becomes difficult. Automakers are cutting investment and production, and job losses in the sector, which employs more than 32 million people directly and indirectly, climbed to half a million even before the pandemic.
  • Wistron Corp., one of Apple’s manufacturing partners, said this week half its capacity could reside outside China within a year. The declaration underscored how the Asian assemblers that keep the world supplied with iPhones and other gadgets are shifting to a higher gear after the coronavirus showed the folly of staking everything on one country. The move in production out of China has been underway since the trade war between Washington and Beijing reached its zenith last year. Now, Covid-19 is expediting that. Decisions by companies like Wistron and other Apple including Hon Hai Precision Industry Co., Inventec Corp. and Pegatron Corp., could re-shape tech supply chains.
  • Only the old hands at the Coffeyville oil refinery could remember anything like the prices posted this month. The small Kansas plant in the heart of rural America was offering just $1.75 a barrel for Wyoming sweet crude. With more than two billion people on virus lockdown from India to California, energy demand has plunged. In corners of the U.S., Canada, Russia and China, oil prices at the well-head are collapsing under the weight of an unprecedented glut. And with it, the industry is bracing for something that last happened on this scale 35 years ago: producers shutting down their wells as pumping crude makes no economic sense.
  • China’s top leaders pledged to raise the fiscal deficit and sell special sovereign bonds to counter the economic fallout from the coronavirus, ramping up stimulus measures to mitigate the impact of the outbreak. China will “appropriately” raise its fiscal deficit as a share of gross domestic product, issue special sovereign debt and allow local governments to sell more infrastructure bonds as part of a stimulus package to stabilize the economy, according to a politburo meeting on Wednesday, central China television reported late Friday.
  • The coronavirus pandemic has put on indefinite hold a major portion of the U.S. Supreme Court’s docket, including a multibillion-dollar clash between software giants Google and Oracle Corp. and cases that could affect President Donald Trump’s re-election chances. What was supposed to have been a drama-filled spring at the high court has instead become a season of waiting, especially for the lawyers and litigants in 20 arguments that had been scheduled for March and April. The court has postponed 11 of those cases and could do the same soon for the remaining nine. The cases include fights over congressional and grand jury subpoenas for Trump’s financial records — clashes that need to be resolved in the court’s current term to give the president’s critics any chance of seeing the documents before the November election. Also on hold is a clash over the Electoral College for presidential elections and an $8 billion copyright dispute between Alphabet Inc.’s Google and Oracle.

*All sources from Bloomberg unless otherwise specified