March 22, 2021

Daily Market Commentary

Canadian Headlines

• Canadian Pacific Railways Ltd.’s Keith Creel for years followed in the footsteps of his mentor, Hunter Harrison, an industry legend whose revolutionary efficiency strategy became the standard at all the major North American railroads. Now, the protege has a good shot at achieving a major merger — something that Harrison, who died in late 2017 at age 73 during a turnaround effort at CSX Corp., couldn’t after several failed tries. Canadian Pacific on Sunday agreed to buy Kansas City Southern for $25 billion, creating the first railroad to traverse Canada, the U.S. and Mexico. If Creel, the Canadian railroad’s 52-year-old chief executive officer, can complete the deal next year as he envisions, it may very well be the last chapter in a rail merger saga that was kicked off by deregulation in 1980s and was credited with saving a dying industry.
• More than 20 Western diplomats staged a public show of unity outside a Canadian’s high-profile spying trial, highlighting their shared concern about the risk of arbitrary detention in the country. Representatives from the U.S., the U.K., the European Union and numerous European countries were turned away en masse while attempting to attend the trial of Michael Kovrig. The International Crisis Group analyst and a former Canadian diplomat was accused of spying on state secrets. “Michael Kovrig has been arbitrarily detained for more than two years now, precisely 833 days,” Jim Nickel, the charge d’affaires at the Canadian Embassy, told reporters outside the court. “This is completely unacceptable, as is the lack of transparency in these court proceedings.”

World Headlines

• European equities fell on Monday as cyclical sectors retreated and concerns over vaccine supplies and extended lockdowns weighed on travel stocks. The Stoxx 600 Index was down 0.2% by 8:17 a.m. London time, retreating further from its highest level in over a year. Sentiment was soured as Chancellor Angela Merkel proposed extending Germany’s lockdown for another four weeks amid a surge in coronavirus cases, while the European Union warned it was ready to withhold vaccine shipments to the U.K. Among individual stocks, shares in AstraZeneca Plc rose 0.8% after a U.S. clinical trial showed that the company’s Covid-19 vaccine was 79% effective in preventing the disease. Airline operators including Wizz Air Holdings Plc, Ryanair Holdings Plc and TUI AG all slumped after the BBC reported that a U.K. government adviser said foreign holidays are “unlikely” this summer.
• U.S. equity futures edged higher with European shares on Monday as a drop in Treasury yields provided a tailwind for stocks. Turkey’s lira tumbled after the country’s central bank governor was ousted. Contracts on the S&P 500 Index rose modestly and those on the Nasdaq 100 jumped after the 10-year U.S. Treasury yield fell back to 1.67% from the highest levels in about 14 months. The Treasury market remains in sharp focus this week amid a slate of auctions and moves by the Fed to let a key bank capital exemption lapse.
• Japanese stocks fell, with the Topix halting a nine-day winning streak, as rising U.S. Treasury yields and concerns over chip supply kept investors in Tokyo on edge. A majority of the Topix’s 33 industry groups fell, with electronics companies and automakers the heaviest drags. Toyota Motor, Honda Motor and Denso weighed on the auto subgauge the most after the chief executive officer of Renesas Electronics said a fire at one of its semiconductor facilities may have a big impact on the supply of chips for the automobile industry. Japanese banks dropped after the U.S. Federal Reserve said an exemption that allowed lenders to load up on Treasuries and deposits without setting aside extra capital to cushion losses will lapse March 31. The regulator also said it plans further changes to this supplementary leverage ratio, or SLR.
• Oil was steady as investors assessed the near-term demand outlook after prices fell the most since October last week. Brent futures rose 0.2% on Monday after falling 6.8% last week. Demand is showing some signs of weakness with the number of unsold April-loading oil cargoes from West Africa piling up. In Europe, new virus restrictions are expanding in France and Italy, while Germany is proposing an extension to lockdown measures. However, there’s continued optimism over consumption in the U.S. as the Biden administration unleashes a wave of stimulus. The number of passengers checking through airport security in the country has been above 1 million people every day since March 10. That could provide support for jet fuel, the worst-hit oil product during the coronavirus crisis.
• Gold declined as the dollar remained resilient and 10-year Treasury yields held near the highest level in more than a year, while investors looked to key U.S. bond auctions to gauge demand for havens amid the economic recovery. The metal fell after two weeks of gains which saw it stage a partial recovery from its dismal performance at the start of the month. It remains down nearly 9% this year amid pressure from higher Treasury yields, which make non-interest bullion seem less attractive. Gold is facing “some resistance from the top of the recent downtrend so I’d say it’s consolidating,” said StoneX analyst Rhona O’Connell. Still, she sees it edging higher on “improving physical demand and masses of liquidity looking for a home.”
• AstraZeneca Plc’s vaccine was 79% effective in preventing Covid-19 in a U.S. trial, likely bolstering global confidence in the shot after earlier confusion over its efficacy. The European Union is ready to start withholding shots from the U.K., risking a sharp deterioration in relations with London. The weekly tally of global Covid-19 deaths rose for the first time since January, while coronavirus infections climbed for a fourth straight week. Fatalities in the U.S., however, were the lowest since November. Chancellor Angela Merkel proposed keeping German lockdown restrictions in force for another four weeks. Australia’s vaccine rollout is being hampered by torrential rain and flooding. Miami Beach extended to April 12 a curfew aimed at controlling large spring-break crowds.
• President Joe Biden’s economic team at the White House is determined to make good on his campaign pledge to raise taxes on the rich, emboldened by mounting data showing how well America’s wealthy did financially during the pandemic. With Republican and business-lobby opposition to the administration’s tax plans stiffening, Democrats need to decide how ambitious to be in trying to revamp the tax code in what’s almost-certain to be a go-it-alone bill. Interviews with senior officials show there’s rising confidence at the White House that evidence of widening inequality will translate into broad popular support for a tax-the-wealthy strategy.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the 20th straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $2.07 billion in the week ended March 19, compared with gains of $2.11 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $17.5 billion.
• Food-delivery startup Deliveroo Holdings Plc started taking investor orders in a share sale of as much as 1.77 billion pounds ($2.45 billion), marking the largest initial public offering in the U.K. since September. Deliveroo is selling shares at 3.90 pounds to 4.60 pounds apiece, according to a statement Monday, valuing the company at 7.6 billion pounds to 8.8 billion pounds. The offering is the biggest float on the London Stock Exchange since THG Plc’s 1.88 billion-pound offering in September, according to data compiled by Bloomberg. The company will take investor orders through March 30, with the stock set to start trading a day after, according to terms seen by Bloomberg News.
• Blackstone Group Inc. offered to buy Crown Resorts Ltd. in an A$8.02 billion ($6.2 billion) deal, pouncing on the troubled Australian casino operator while it’s under assault from domestic regulators. The New York-based private equity firm, which already owns 10% of Crown, bid A$11.85 a share in cash for the rest of the company, Crown said Monday. Crown is assessing the proposal and its stock soared 21% to A$11.97 at the close of trade in Sydney, indicating investors expect a higher bid or a rival suitor. Crown was last month found unfit to run its new Sydney casino after years of money laundering at other properties, and faces inquiries into its suitability to own casinos in Melbourne and Perth. But if Crown’s planned corporate makeover can appease regulators, the prize for Blackstone is clear: casino monopolies in two Australian cities and a gleaming A$2.2 billion resort on Sydney’s waterfront.
• Leon Black stepped down as chief executive officer of Apollo Global Management Inc. months earlier than planned, citing health issues and “other interests.” Co-founder Marc Rowan took over as CEO and Jay Clayton was named non-executive chairman of the board, Apollo said Monday in a statement. In January, Apollo said Black would retire as CEO on or before July 31. Apollo expects to report earnings that exceed analysts’ estimates and first-quarter fundraising that’s at the high end of the firm’s annual range, Black said in the statement.
• U.S. companies including hotel chain Hilton Worldwide Holdings Inc. are so anxious to lock in low borrowing costs now, before inflation fears push yields even higher or close the market altogether, that they’re paying millions of dollars in penalties to refinance debt early. The corporations, which also include car renter Avis Budget Group Inc. and financial index company MSCI Inc., are selling new bonds and using the money they raise to buy back existing notes. But those repurchases come at a cost: high fees they have to pony up to buy back securities early. Usually those fees, known as call premiums, would be lower or even zero if the company waited anywhere from a few months to a year. More of these deals may be coming. There’s at least another $70 billion of outstanding bonds that would make sense to refinance now instead of waiting for the next date at which buybacks become cheaper, according to a Bloomberg Intelligence analysis. Many companies are betting they’ll come out ahead if they just pay the fees now, because if they wait too long, they’ll end up having to pay much higher interest costs, or may find they can’t even sell notes.
• Credit Suisse Group AG CEO Thomas Gottstein signaled he’d consider further separating the asset-management unit from the rest of the bank after the Greensill Capital collapse, as he steps up efforts to limit the reputational damage from the supply-chain finance scandal. Making asset management an independent entity is “potentially part of the plan,” Gottstein said in a Bloomberg Television interview, days after the bank replaced the head of the business and removed it from direct oversight of the wealth management unit. “Having a holding company around that could be something we are pursuing,” he said, adding that the Greensill affair for Credit Suisse is primarily an asset-management problem.
• The European Union is ready to start withholding Covid-19 shots from the U.K., risking a sharp deterioration in relations with London in a bid to turn around its lackluster vaccination campaign. The EU will likely reject authorizations to export AstraZeneca Plc’s coronavirus vaccines and their ingredients to the U.K. until the drugmaker fulfills its delivery obligations to the 27-nation bloc, according to a senior EU official. The conflict between the EU and the U.K. has been growing since Astra informed Brussels it wouldn’t deliver the number of shots it had promised for the first quarter. Both sides have blamed each other for export curbs and nationalism, posing a risk to the fragile post-Brexit trade relationship agreed on in December.
• Aramco’s payments to the Saudi Arabian government fell by 30% last year, even as the company maintained its $75 billion dividend, with the coronavirus pandemic sending crude prices tumbling. The world’s biggest oil producer transferred 413 billion riyals ($110 billion) to the state in 2020 in the form of dividends, royalties and incomes taxes, Aramco said in a financial statement on Monday. The money is a crucial source of revenue for the government, whose budget deficit widened last year as the economy went into recession. Aramco, 98% state-owned, kept its pledge to pay the $75 billion dividend, the largest of any listed company. But royalties and taxes more than halved to around $41 billion.
• The financial services industry, braced for what could be its biggest disruption in decades, is about to get an early glimpse at the Federal Reserve’s work on a new digital currency. Banks, credit card companies and digital payments processors are nervously watching the push to create an electronic alternative to the paper bills Americans carry in their wallets, or what some call a digital dollar and others call a Fedcoin. As soon as July, officials at the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology, which have been developing prototypes for a digital dollar platform, plan to unveil their research, said James Cunha, who leads the project for the Boston Fed.
• A new tool developed by Microsoft Corp. to contain damage from a massive hack of its email server software has helped to reduce the number of vulnerable entities in the last week, according to a National Security Council spokesperson. The tool was created by the technology giant after recent discussions with the White House. Anne Neuberger, the deputy national security adviser for cyber and emerging technology, worked with Microsoft to find a simple solution for smaller businesses facing time consuming and difficult cleanup of the hack, the spokesperson said. The company released the “Exchange On-Premises Mitigation Tool” last weekand it’s been downloaded 25,000 times, the official said. The tool protects against future attacks, and scans the system for known compromises then attempts to remediate them. The company has said its software should still be updated to the latest version after running the tool.
• The Biden administration is considering ways to push the global finance industry into consistently accounting for carbon-dioxide emissions and green investments. The Treasury Department and U.S. regulators are in the early stages of working on measures to improve companies’ environmental impact disclosure, according to people familar with the matter. The moves seek to address carbon leakage — where producers move to regions with less restrictive pollution rules — and climate-related metrics for ESG investing, the people said
• While equities across major markets are hovering around record highs, Goldman Sachs Group Inc. strategists say many of the characteristics of a dangerous bubble are absent from global stocks. Typical signs of systemic risk, such as increased leverage in the private sector and a collapse in savings, aren’t present, the strategists led by Peter Oppenheimer wrote in a report to clients on Monday. Moreover, the rally is unfolding against the backdrop of market concentration in companies that are fast-growing, generate cash and transform their industry, such as major technology businesses, they added. “There are signs of complacency and heightened optimism in the market,” the Goldman strategists wrote in the 46-page report titled “Bubble Puzzle.” “Nevertheless, the fundamental factors that drive the market and the early stage of the economic cycle would suggest that we are far away from a bubble or bear market.”
• Former President Donald Trump is planning to back Representative Jody Hice in his bid to unseat Georgia Secretary of State Brad Raffensperger in next year’s Republican primary, Politico reported, citing three people familiar with Trump’s decision. Trump repeatedly slammed Raffensperger after the November election, when the secretary of state refused to support the then-president’s claims that he had actually won in Georgia. The former president has vowed to support challengers to any lawmakers or official who did not back his false claims that he only lost the presidency through widespread fraud and abuse. After the 2020 election Trump pressured Raffensperger to refuse to certify Biden’s win in the state. In a January phone call that is now being investigated by prosecutors, Trump suggested the state official find enough votes to ensure he won.

“After the printing press, the guillotine” – French Revolution Anecdote

*All sources from Bloomberg unless otherwise specified