March 6, 2019

Daily Market Commentary


Canadian Headlines

  • The Canadian economy’s sudden slowdown at the end of last year is set to keep the Bank of Canada from raising interest rates Wednesday, with investors looking for clues as to whether it pushes Governor Stephen Poloz off his hiking path altogether. All 25 analysts surveyed by Bloomberg see policy makers leaving the benchmark overnight rate at 1.75 percent in a decision at 10 a.m. in Ottawa. The more important question will be whether last week’s disappointing economic data prompt the central bank to reconsider the merits of adding to its five interest rate increases since mid-2017. Until now, Poloz has stuck to his conviction that rates are still likely heading higher, even as other central banks including the Federal Reserve take a more dovish tilt and markets bet he is largely done. His assumption has been that the economy would rebound from its current soft patch and capacity constraints would re-emerge.
  • Huawei Technologies Co. Chief Financial Officer Meng Wanzhou begins her battle Wednesday against extradition to the U.S. to face fraud charges, aided by a phalanx of lawyers gearing up for a full-blown legal offensive. The Supreme Court of British Columbia in Vancouver is expected to set the date of her first extradition hearing — the start of a politically explosive proceeding that could take years and has entwined the fate of two Canadians detained in China. Meng has been under house arrest at her Vancouver mansion since she was arrested Dec. 1 while en route to Mexico.
  • The biggest political crisis yet faced by Justin Trudeau originated in his home province of Quebec. That’s also where voters, who hold the key to his re-election this year, may be the most forgiving. Trudeau’s former attorney general alleges the Canadian prime minister and his aides put heavy political pressure on her to help Montreal-based construction company SNC-Lavalin Group Inc. settle fraud and corruption charges. The scandal escalated on Monday with another key female cabinet minister quitting in protest, while Trudeau’s former senior aide Gerald Butts, who quit amid the saga, is due to testify Wednesday.

World Headlines

  • European shares were little changed in early trading with the lack of an obvious catalyst to point the direction. The Stoxx Europe 600 Index was little changed, with the auto & parts sector the worst performer, down 1.1 percent. Schaeffler AG abandoned its earnings targets for 2020 while also planning to cut 900 jobs. Meanwhile, focus remains on the financial sector with several banks now drawn into money-laundering allegations centered on dirty Russian money. Investigations into the scandal are under way in the Baltic nations, the U.S., the U.K. and the Nordic countries.
  • U.S. equity futures slipped and Asian benchmarks were mixed Wednesday as investors awaited fresh catalysts on trade and monetary policy. The dollar advanced for a sixth day as Treasuries edged higher. Trade remains high on the agenda, with investors looking for firm details about a possible deal between the U.S. and China. Meanwhile, the bond market signals more caution and Morgan Stanley is now predicting Treasury yields will drop as low as 2.35 percent by the end of the year. Traders will also get plenty to ponder from the European Central Bank’s policy decision and the monthly U.S. jobs report later in the week.
  • China’s stock market hasn’t seen such a high proportion of companies looking overheated since May 2015. About 60 percent of equities on the Shanghai and Shenzhen benchmarks are trading above the relative strength index’s 70 level that some analysts consider overbought. Chinese stocks have been on a tear, with the Shanghai gauge adding 24 percent since December and sending turnover to the highest in more than three years, amid optimism over U.S. trade talks and government stimulus to support the economy.
  • Oil declined after an industry report showed a massive increase in U.S. crude stockpiles, ahead of more comprehensive data from the government. Futures fell by about 1 percent in New York, after closing lower on Tuesday. U.S. inventories swelled by 7.29 million barrels last week, the American Petroleum Institute was said to report. If Energy Information Administration data due Wednesday confirms that, it would be the biggest increase in six weeks. The OECD cut its outlook for global growth again amid trade tensions and political uncertainty.
  • Gold held near a five-week low as investors exited from exchange-traded funds backed by the metal on improved risk sentiment amid prospects for a U.S.-China trade deal. Global holdings in bullion-backed ETFs dropped to lowest since Jan. 10. Holdings have dropped for four consecutive weeks in a sign of cooling sentiment toward the metal. Platinum fell after the World Platinum Investment Council released its quarterly report showing that the metal’s surplus would widen this year as supply growth offsets increased demand.
  • The European bond market is the latest to get pushed aside by the boom in U.S. high-yield debt. This year’s largest buyout financing, the $10 billion cross-border deal for the car-battery unit of Johnson Controls International Plc, will be dominated by U.S. dollar junk bonds. European investors had anticipated a bigger share would be issued in the euro market than the planned $750 million-equivalent of senior secured bonds. Bankers finalizing the capital structure of Power Solutions are now raising approximately $4 billion from American bond investors. The U.S. bond sale will be split between $2 billion of secured notes and $1.95 billion of unsecured ones. The loan portion of the deal had already been pared back to $5.45 billion in favor of more bonds last week with $3.2 billion to be sold in the U.S. and a $2.25 billion-equivalent issue in Europe.
  • The OECD slashed its forecast for the Italian economy to a 0.2 percent contraction this year, reflecting the effects of the global trade slowdown. Italy fell into recession at the end of 2018, and is still battling the slump despite a recent increase in exports, fixed investment and domestic consumption. Premier Giuseppe Conte’s government has been dismissive of economists’ negative outlooks, saying output will increase later this year.
  • President Donald Trump is pressuring U.S. trade negotiators to cut a deal with China soon in hope of fueling a market rally, as he grows increasingly concerned that the lack of an agreement could drag down stocks, according to people familiar with the matter. As trade talks with China advance, Trump has noticed the market gains that followed each sign of progress, said the people, who requested anonymity to discuss internal deliberations. He watched U.S. and Asian stocks rise on his decision to delay an increase in tariffs on Chinese goods scheduled for March 1, one of the people said. The world’s two largest economies are moving closer to a final agreement that could end their almost year-long trade war, an outcome that would also provide a boost to his efforts to seek reelection in 2020. A new trade accord that would provide Trump with a much-needed win after the collapse of his summit with North Korean leader Kim Jong Un.
  • The global economy is suffering more than expected from trade tensions and political uncertainty which are clouding prospects particularly in Europe, according to a gloomy report from the OECD. As these are the organization’s first forecasts in almost four months, it’s partly playing catch-up with developments since then. In that period, little has gone right for the world’s biggest economies: Weakness in the euro area and China are proving more persistent, trade growth has slowed sharply and uncertainty over Brexit has continued.
  • Investors withdrew from fixed-income exchange-traded funds in the past week. ETFs that invest in government bonds led the decline, along with funds that focus on corporate debt securities. Outflows from U.S.-listed bond ETFs totaled $983 million in the week ended March 5, compared with deposits of $477 million in the previous period, according to data compiled by Bloomberg. Government bond funds had $1.03 billion of losses, compared with $63.2 million of inflows the previous week. Corporate bond funds had outflows of $755 million, compared with inflows of $1.37 billion a week earlier. High-yield funds declined $969 million and investment-grade ETFs were down $32.7 million. Broad bond-market ETFs gained $424 million.
  • Severely depressed patients will have a new, fast-acting treatment option after the U.S. approved a breakthrough drug that has the potential to upend how the condition is treated. The Food and Drug Administration on Tuesday greenlighted Johnson & Johnson’s nasal spray Spravato, a close chemical cousin of the anesthetic ketamine that works quickly to alleviate symptoms of depression.
  • British American Tobacco Plc shares rose after the head of the U.S. Food and Drug Administration resigned, spurring speculation that the agency might water down proposals to restrict the sale of menthol cigarettes, the source of about a quarter of the U.K. company’s profit. FDA Commissioner Scott Gottlieb, who called menthol a “significant problem,” will leave his post sometime next month, President Donald Trump said Tuesday on Twitter. BAT shares gained as much as 5.8 percent, the most since Jan. 29, in London on Wednesday.
  • Deutsche Lufthansa AG may be “very interested” in bidding for EasyJet Plc, according to analysts at Kepler Cheuvreux who said a takeover would be a good fit and should overcome regulatory hurdles. The German airline has said that it’s building up reserves for consolidation opportunities and a move for EasyJet, Europe’s second-biggest low-cost carrier, would make the most sense among available options, analysts including Ruxandra Haradau-Doser said in an investor note Wednesday.
  • Chinese researchers are watching the U.K.’s impending exit from the European Union to see what kind of arrangements are put into place to allow regions with separate economic and regulatory policies to have an integrated financial market. The future of the U.K. as a European financial services hub after Brexit is of interest as China seeks to develop a cross-border economic union of Hong Kong, Macau, and cities in Guangdong province, according to Xing Yujing, the head of the People’s Bank of China’s Shenzhen Central sub-branch.
  • The U.S. urged Ukraine to dismiss its anti-corruption prosecutor and revive efforts to tackle graft, signaling displeasure at the government’s current course from its biggest international backer. The U.S. embassy in Kiev, the capital, said late Tuesday that Nazar Kholodnytskyi should be fired, legislation should be passed to replace the recent removal of punishments for illegal enrichment and 31 judges whose reputations are in question should be blocked from joining the Supreme Court.
  • Japanese banks’ quest for yield is creating more turbulence, with Mizuho Financial Group Inc. announcing another round of losses on its foreign-bond holdings as part of a surprise writedown that will severely curtail full-year profit. Mizuho slashed its net income forecast by 86 percent on Wednesday after booking 680 billion yen ($6.1 billion) of charges tied to business restructuring and securities losses. Chief Executive Officer Tatsufumi Sakai said he will forfeit his performance-related pay to take responsibility for the writedown. The charge underscores the challenges faced by Japanese banks as rock-bottom interest rates at home prompt them to look abroad for returns. It also reflects Mizuho’s plans announced in November 2017 to eliminate branches and jobs over a decade in a bid to counter headwinds including financial technology disruption and tepid credit demand from a shrinking population.
  • A new gas supply deal between the U.S. and China that’s expected to be part of a broader trade agreement has been in the works since before the trade war began and was put on ice after tensions flared, according to people with knowledge of the matter. A deal between Cheniere Energy Inc. and China’s Sinopec, expected to be worth $18 billion, has been cited as a new concession China would make to help end the eight-month spat. But the two had been in talks for about a year only to see progress stall when the Trump administration intensified trade issues in August, according to the people, who asked not to be identified as the information is private.
  • Deutsche Bank AG estimates that its equities trading unit lost about $750 million last year, according to people with knowledge of the matter. The U.S. equities unit hasn’t turned a profit for many years, the people said. The bank at one point considered closing its entire equities operation, the people said, asking not to be identified discussing the matter. Deutsche Bank Chief Executive Officer Christian Sewing last year decided to slim down the equities business, especially the part that caters to hedge funds. The decision came after a sweeping review of the investment-banking division that included a hard look at equities, Bloomberg News reported one year ago. The bank at some point considered dismissing about 20 percent of U.S. staff, people familiar said at the time.
  • Aon Plc said it’s no longer pursuing a combination with rival insurance brokerage Willis Towers Watson Plc, a day after confirming that it was considering a tie-up. The company said on Tuesday that it was in the early stages of exploring an all-share tie-up with Willis Towers after Bloomberg reported the potential plans. The companies held preliminary talks and Aon was preparing to submit a bid in the coming weeks, people familiar with the matter had said, asking not to be identified as the details aren’t public. Aon shares fell 7.8 percent in New York on Tuesday, its biggest decline since 2009. A potential combination with Willis — which gained 5.2 percent and had a market value of $23.5 billion at the close of trading — could have been the industry’s largest-ever merger. Willis’s shares declined about 4 percent in early trading Wednesday.
  • Blackstone Group LP is considering an acquisition of Chamtime Plaza, a Shanghai commercial property complex, in a deal that could be worth more than 10 billion yuan ($1.5 billion), people familiar with the matter said. The private equity firm is in early stages of studying the potential purchase, according to the people, who asked not to be identified because the information is private. Chamtime Plaza, which includes a shopping mall and five office towers, is located around a tech hub in the Zhangjiang area of eastern Shanghai’s Pudong district.
  • IWG Plc has appointed Rothschild & Co. to advise on potential deals to sell parts of its business, as the serviced-office provider tries to bring its market value into line with rival WeWork Cos. Chief Executive Officer Mark Dixon said in an interview that IWG, which operates the Regus brand, had hired Rothschild as it explores selling some operations and expanding a franchise model to more markets. This would see the company join forces with investors capable of injecting capital into those businesses, allowing IWG to focus its spending on other areas.
  • Sea Ltd., operator of Southeast Asia’s biggest gaming platform, has raised $1.35 billion after increasing the size of a follow-on stock offering. The Singapore-based internet company sold 60 million American depositary shares at $22.50 apiece, or about a 6.5 discount to its last close in New York. An affiliate of Tencent Holdings Ltd. as well as a separate firm linked to one of Sea’s directors are expected to buy 6.3 million of those shares at those terms, Sea said in a statement. Sea is adding to the $14.2 billion Asian-Pacific firms have raised through equity offerings in the U.S. over the past 12 months, according to data compiled by Bloomberg. Chinese e-commerce operator Pinduoduo Inc.priced a $1.6 billion follow-on offering in February after raising a similar amount in a July initial public offering, the data show.

*All sources from Bloomberg unless otherwise specified