March 24, 2021

Daily Market Commentary

Canadian Headlines

• The Bank of Canada is signaling it will be the first Group of Seven central bank to clearly start taking its foot off the gas as the nation’s economic recovery from the Covid-19 crisis accelerates. Deputy Governor Toni Gravelle used a Tuesday speech to lay out ground rulesthe central bank will use to slow the pace of its purchases of Canadian government bonds. The quantitative easing program has been a key tool policy makers have used to keep market interest rates low since the pandemic hit a year ago. The comments suggest a greater willingness than the Federal Reserve and other major central banks to scale back support for the economy. Analysts anticipate next steps to pare bond purchases will come as early as a policy decision next month, versus expectations for a so-called taper in the U.S. next year. The Bank of Japan last week tweaked its stimulus programs, but argued it’s not hitting reverse.
• A rally that has pushed the S&P 500 Materials Index almost 25% above its pre-pandemic high has more room to run, thanks to a combination of economic forces including higher prices for raw materials. Shares in companies such as copper miner Freeport-McMoRan Inc. and lithium producer Albemarle Corp. have soared on price increases, helping to push the index nearly 100% higher since its crash a year ago. The gains have made the sector the best performing after energy on the S&P 500 in a trend analysts say could continue. “The industrial economy remains on a strong upward trajectory and stocks have further room to run,” analysts at Jefferies wrote in a note, referring to materials and industrial equities.

World Headlines

• Europe’s equities fell slightly amid lingering concerns around coronavirus infection rates and vaccine supplies. The Stoxx 600 Index was down 0.2% at 9:31 a.m. in London, with the utilities and communication sectors underperforming. Energy stocks were steady as a ship caused a blockage in the Suez canal, a key cargo route. But, technology advanced, boosted by semiconductor equipment stocks like ASML Holding N.V. after U.S. firm Intel Corp. unveiled a plan to regain its chip-manufacturing lead.
• The Nasdaq 100 Index led U.S. equity futures higher while Treasury yields were steady. Futures on the S&P 500 and Dow Jones Industrial Average also pointed to a recovery in the underlying gauges which slipped Tuesday amid a setback for reopening favorites. Shares in Intel Corp. rose in premarket trading after it unveiled a plan to make chips for other companies amid a global shortage. The stabilization in bond yields and assurances by Federal Reserve Chairman Jerome Powell on inflation risks has helped allay fears that a growth breakout will force tighter central-bank policy.
• Asian stocks were set for their fourth daily losses, the longest losing streak since January, as resurgent coronavirus-related concerns sparked broad declines. Financials were the biggest drag on the MSCI Asia Pacific Index, as Treasury yields slumped for a third day. Consumer discretionary stocks also fell as investors eyed rising infections and new lockdowns in Europe and other parts of the world. TSMC and Samsung drove losses in tech shares on Intel’s ambitious plan to create a rival foundry business. Hong Kong’s Hang Seng Index fell 2%, entering a technical correction. Japan’s Topix also shed more than 2%, although the nation’s chip-equipment sector got a boost from the Intel news.
• Oil rebounded, following a sell-off on Tuesday, as investors assessed the impact of a blockage in the Suez Canal and European manufacturing data beat expectations. Futures in New York added as much as 3.4% after a ship ran aground, giving the market a reprieve after prices sank to the lowest level since early February. Despite efforts to move the vessel, it could block the route for days, according to people familiar with the situation. Crude was also bolstered by positive economic data as Europe posted a record increase in factory output. That masked fresh concerns across the region about surging coronavirus infections.
• Gold steadied after two days of declines as traders await fresh Treasury auctions after Federal Reserve Chairman Jerome Powell played down concerns of out of control inflation. Powell said prices would rise this year as the Covid-19 crisis recedes and Americans are able to go out and spend, but that it was unlikely to spur unwanted inflation. He appeared before the House Financial Services Committee on Tuesday along with Treasury Secretary Janet Yellen as part of Congressional oversight of the government’s response to the pandemic. Both policy makers are slated to testify again on Wednesday to the Senate Banking Committee.
• Democrats will likely prove successful in raising individual income tax rates and in strengthening audits of wealthy Americans as they work on overhauling the U.S. tax code in coming months. That’s a key takeaway from a survey of 15 current and former White House and congressional aides specializing in tax policy completed by Bloomberg this month. A tax on unrealized capital gains, as envisioned by Senate Finance Committee Chair Ron Wyden, was deemed impossible to get through Congress, the survey showed. President Joe Biden is planning what would amount to the biggest set of tax increases since 1993 to help pay for infrastructure, clean- energy and social initiatives as part of his longer-term follow-up to the $1.9 trillion pandemic-relief package. With Republicans voicing opposition, Democrats must secure their moderate members’ support in the 50-50 Senate, making the tax program politically challenging to pull together.
• Italian Prime Minister Mario Draghi called on allies across Europe to guarantee “strategic autonomy” by forging a vaccine production chain across the continent. The European Union is set to unveil tougher rules on vaccine exports on Wednesday as the bloc seeks to accelerate its sluggish inoculation campaign. Poland reported record new infections, while in Germany a hospital official said the number of patients in intensive care are worrying. Hong Kong and Macau temporarily suspended vaccines manufactured by BioNTech SE because of a packaging defect, dealing a blow to the cities’ efforts to revive their economies. In Brazil, daily fatalities passed 3,000 for the first time as the virus overruns its health system.
• The U.S. has injected more than a quarter of the world’s coronavirus vaccine doses so far, thanks to two presidents who share little except a strategy to corner domestic production of shots, employing a 70-year-old law that’s so far prevented exports. From the moment the FDA authorized the first vaccines by Pfizer Inc. and Moderna Inc., the U.S. government, first under Donald Trump and then under President Joe Biden, had already arranged to buy all of the companies’ known U.S. production for months to come, assuring hundreds of millions of doses for American arms. Countries without their own capacity to manufacture vaccines have had to wait or turn to sources other than the U.S., including shots developed in Russia and China under less regulatory scrutiny.
• Deutsche Bank AG plans to rebuild its equity capital markets business in Asia, seeking to stage a comeback amid strong demand for share sales, according to people with knowledge of the matter. The Frankfurt-based lender, which shuttered the majority of its equities business in Asia Pacific in 2019, plans to hire 10 to 12 bankers, said the people. The bank is looking to hire in roles across the spectrum to support its ECM business, including in origination, distribution and research, said one of the people. Deutsche Bank is working with a recruiter and has started to reach out to prospective candidates in the region, including in Hong Kong and Southeast Asia, the people said, asking not to be named as the information is private.
• AIA Group Ltd. has agreed to pay HK$5.07 billion ($653 million) for the life insurance unit of Bank of East Asia Ltd., the Hong Kong-based lender whose shareholders include Paul Singer’s Elliott Management Corp. As part of the agreement, Bank of East Asia will distribute AIA’s life and long-term savings products exclusively to its retail banking customers in Hong Kong and mainland China for 15 years, according to an exchange filing on Wednesday. The announcement confirmed an earlier Bloomberg News report. AIA will also acquire a closed portfolio of life insurance policies underwritten by Blue Cross (Asia-Pacific) Insurance Ltd. Bank of East Asia expects to book a profit of HK$1 billion from the disposal and plans to give part of the proceeds to shareholders, the lender said in a separate filing. The parties aim to complete the deal by the end of this year.
• ACV Auctions Inc. priced its initial public offering Tuesday above its marketed range at $25 a share, according to a person familiar with the matter who asked not to be identified because the information wasn’t public yet. The Buffalo, New York-based company, which provides an online marketplace for auctioning used cars, was used by more than 16,000 dealerships and other participants last year, according to filings with the U.S. Securities and Exchange Commission. ACV had marketed 16.55 million shares in the IPO for $20 to $22 each, a range that it earlier elevated from $18 to $20. At $25 a share, the IPO would raise almost $414 million and give the company a market value of about $3.9 billion based on the shares listed in its filings.
• The oil tankers docking at the refinery in Baytown, Texas, look exactly like many others plying the waters of the Houston Ship Channel. But stashed inside their capacious holds is an unusual cargo: Russian petroleum. The sprawling complex, which belongs to Exxon Mobil Corp., isn’t the only U.S. refinery that’s been receiving shipments of Russian oil. Chevron Corp.’s plant in Mobile, Ala., and Valero Energy Corp.’s facility in St. Charles, La., are also customers. Deprived of access to Venezuelan crude by U.S. sanctions on the regime of Nicolás Maduro, and facing reduced shipments from OPEC nations since the cartel cut output, U.S. refiners turned to Russian oil in 2020 to fill the gap. The buying spree, combined with sharply lower Saudi shipments, catapulted Russia into the position of third-largest oil supplier to the U.S. last year. The feat for the Kremlin has been the talk of the oil market, but surprisingly it hasn’t been discussed much in diplomatic circles. “Russia’s move into third place has not attracted any attention in Washington,” says Bob McNally, a former senior White House policy adviser who now runs Rapidan Energy Group, a consulting firm in Washington.
• Last time several regional banks tried to do big deals, their investors weren’t always on board. Now, regional bank M&A is back and shareholders are cheering on the activity in a sector long ripe for consolidation. Shares of four of the five of the U.S. regional banks that have announced transactions worth at least $1 billion in the past year are trading above their pre-deal prices, according to data compiled by Bloomberg. That’s a turnabout from several years ago, when markets frowned on deals and sent acquirers shares lower, the data show. The warm reception reflects general optimism around bank stocks as the U.S. economy rebounds from the Covid-19 pandemic, with bank stocks and the economy tending to go hand in hand. The KBW Bank Index — the industry benchmark — is up about 19% this year. It also shows how investors are eager for transactions as the industry grapples with low-interest rates and competition from tech-savvy upstarts.
• Carrefour SA is buying Walmart Inc.’s former Brazil unit to cement its position as the country’s largest supermarket operator two months after being the target of a failed takeover bid. Advent International and Walmart agreed to sell Grupo BIG Brasil SA for about 1.1 billion euros ($1.3 billion), Carrefour said Wednesday. Brazil is already the French retailer’s second-largest market, and the deal would make that business almost as big as its European operations outside of France. Chief Executive Officer Alexandre Bompard is embarking on his biggest acquisition to date after the French government blocked a takeover attempt by Canadian convenience store operator Alimentation Couche-Tard Inc. The Brazilian business has been one of Carrefour’s most successful units in recent years, despite high inflation. Adding Grupo BIG strengthens Carrefour in the northeast and south of Brazil as the country grapples with a surge in Covid-19 cases.
• Chancellor Angela Merkel dropped plans for a five-day Easter shutdown amid massive criticism in the latest setback for Germany’s pandemic fight. Merkel backed off the proposal in a hastily-arranged video conference with the heads of Germany’s 16 states, according to a person familiar with the discussions. The meeting followed marathon talks earlier this week that produced no new policies to contain the disease as a third wave of infections grips Europe’s largest economy. The Easter lockdown was the only fresh initiative after more than 11 hours of tense discussions between Merkel and state leaders that ended early Tuesday, but the proposal spurred widespread criticism, caught officials off guard and created confusion over the implementation.
• Apax Partners is set to acquire Rodenstock Group, becoming the German eyeglass-lens maker’s fourth private equity owner in less than 20 years. Compass Partners reached a deal to sell the business to Apax after five years of ownership, according to a statement Wednesday, which confirmed an earlier Bloomberg News report. The transaction could value Rodenstock at about 1.5 billion euros ($1.8 billion) including debt, people with knowledge of the matter said, asking not to be identified because the information is private. That makes the Rodenstock purchase the largest acquisition in Germany so far this year, according to data compiled by Bloomberg. Rodenstock is betting on a trend for costlier individualized eyewear, saying it’s the first company to measure the shape and size of each of a person’s eyes to tailor their lenses.
• The U.K. government said it has reached an agreement with the country’s oil and gas industry that will help safeguard jobs as the nation strives to achieve net-zero emissions of greenhouse gases. The North Sea transition deal published on Wednesday sets out a path to attract investment into renewable energy, carbon-capture and storage, and hydrogen. Spending of as much as 16 billion pounds ($22 billion) by 2030 — shared between the government and industry — should reduce emissions and create as many as 40,000 jobs across the supply chain, according to a statement from the Department of Business, Energy and Industrial Strategy. As part of the agreement, the U.K. will also introduce a process later this year called “dynamic checkpoint,” which will ensure future oil and gas exploration and production licenses are only granted if they don’t undermine the nation’s climate goals. The government also said it will no longer provide financial support for fossil fuel projects overseas from March 31, “with very limited exceptions.”
• India’s government is considering resuming fresh bankruptcy filings after the current suspension expires on March 25, people with knowledge of the matter said. The lifting of the halt would come even as a resurgence in virus cases threatens the nascent economic recovery. It could spark a wave of new insolvencies, pent up from last year when businesses were hurt by India’s first economic contraction in decades. Prime Minister Narendra Modi’s government last year halted the process of initiating most fresh insolvency proceedings to insulate cash-strapped borrowers hit by the pandemic for six months starting March 25, and that was extended twice during the year.
• Some traffic through the Suez Canal should resume today or tomorrow after progress in efforts to move a giant ship that was blocking the waterway. The Ever Given, a container ship longer than the Eiffel Tower that ran aground in the southern part of the canal in Egypt, has been partially moved and is alongside the bank, said Ahmed Mekawy, the deputy manager for the Suez Canal for GAC, which is a provider of port-agent services. It’s expected that it’ll be re-floated shortly, then the Suez Canal Authority will work on resuming the transit for all waiting ships, Mekawy said. The SCA hasn’t yet commented on whether the ship has been moved.
• Insurance broker Acrisure LLC raised more than $3.45 billion in capital from investors including Byron Trott’s BDT Capital Partners. BDT led a $3 billion investment in senior preferred stock, while a different group put $454 million of new capital into junior preferred stock, according to a statement Wednesday. The transactions give Acrisure an implied enterprise value of $17.5 billion, the company said. Acrisure, led by Chief Executive Officer Greg Williams, sells products including insurance for businesses, auto and home policies and employee benefits. Now the company has plans to add products and services beyond insurance to its lineup, Williams said, without being more specific.
• Exxon Mobil was dealt another reputational blow as its debt was downgraded after the pandemic slashed oil demand and a borrowing spree deteriorated its financial leverage. Longer-dated high-grade debt is likely to remain well supported, according to JPMorgan. Moody’s cut Exxon one notch to Aa2 late Tuesday. It’s the second downgrade in less than a year, after Moody’s stripped the oil major of its highest rating in April. S&P rates Exxon one step lower at AA-
• China’s government has proposed establishing a joint venture with local technology giants that would oversee the lucrative data they collect from hundreds of millions of consumers, according to people familiar with the matter. The preliminary plan, which is being led by the People’s Bank of China, would mark a significant escalation in regulators’ attempts to tighten their grip over the country’s internet sector. It envisions the creation of a government-backed entity along with some of China’s biggest e-commerce and payments platforms, the people said, asking not to be identified as the discussions are private. The online firms would be initial shareholders in the joint venture, though top executives would need to be approved by the regulator, the people said. The central bank didn’t immediately respond to a request for comment.

“It is the pursuit of happiness that thwarts happiness.“ – Viktor Frankl

*All sources from Bloomberg unless otherwise specified