May 11, 2021

Daily Market Commentary

Canadian Headlines

• Justin Trudeau’s debt-financed spending plan earned a stamp of approval from at least one former Bank of Canada governor amid a simmering debate over whether the budget can propel long-term growth. Stephen Poloz, whose term as the nation’s central bank chief ended last June, said in an interview that he believes the government produced a sustainable fiscal plan that addresses pandemic-related needs, while avoiding major new taxes. Finance Minister Chrystia Freeland is also taking steps to improve Canada’s long-term economic outlook, and that will help the country pay down its debt in the future, Poloz said. Her debut budget, released last month, has plenty of new spending over the next few years for dozens of initiatives, but the funding is mostly temporary.
• Alstom SA boosted provisions for the rail unit it acquired from Bombardier Inc. to 1.08 billion euros ($1.3 billion) as the French company reviews potential risks to contracts it took over earlier this year. The train maker booked an additional 632 million euros in provisions during the quarter that ended in March, according to a statement Tuesday. That adds to the 451 million euros already on Bombardier Transportation’s balance sheet as of December. The acquisition of Bombardier’s business in January to create the world’s second-largest rail equipment maker got off to a rocky start after a dispute broke out about a major Paris commuter train order that Alstom also bid for prior to the deal. While the legal wrangling has ended, the episode was a sign of complications integrating two companies that competed for contracts for decades.

World Headlines

• European equities dropped the most since December, as inflation concerns fueled an investor exit from technology shares and other frothier parts of the market. The Stoxx Europe 600 index was down 2.3% by 11:45 a.m. in London, the deepest single-day drop since Dec. 21, with tech shares leading the retreat. ASML Holding NV and SAP SE were among the biggest decliners. All the sectors were in the red. The slump in European equities follows the Monday retreat on Wall Street as investors sold riskier assets on the fears that a spike in inflation and commodity prices may lead central banks to tighten monetary policy. A shift away from an accommodative regime may curb the appeal of stocks trading at elevated valuations based on future earnings growth expectations.
• A technology-led selloff that started on Wall Street reverberated across the world as worries over inflation pushed investors to dump expensive stocks. Treasuries were steady while the dollar erased its gains. The tech-heavy Nasdaq 100 Index futures extended a slump that sent the underlying gauge down 2.6% on Monday. A smaller drop in S&P 500 contracts signaled the index will extend a retreat from all-time highs. Debate rages over whether the expected jump in price pressures will be enduring enough to force the Federal Reserve into tightening policy sooner than current guidance suggests. A measure of U.S. inflation expectations reached the highest level since 2006. Among the biggest pandemic winners, tech stocks whose valuations often depend on earnings prospects far into the future are now at the center of the inflation-fueled selloff. That was epitomized in Cathie Wood’s Ark Innovation ETF, which dropped down more than 3% in pre-market trading after plunging5.2% yesterday.
• Asian stocks were poised for their lowest finish in six weeks, dragged down by a selloff in the region’s chipmakers amid renewed concerns of rising global inflation. The MSCI Asia Pacific Index dropped as much as 2.2% at one point as a slump in information-technology stocks weighed on the market. Taiwan Semiconductor Manufacturing, Samsung Electronics and SK Hynix were among the top contributers to the measure’s decline. The Philadelphia semiconductor index, or SOX, tumbled the most in two months on Monday on concerns inflation was likely to surge in coming months. The drop in the tech gauge came ahead of the release of the U.S. CPI report due Wednesday, which is expected to show prices continued to increase in April.
• Oil fell with global equities after a recent rally that has taken some commodities to record high levels brought on concerns over inflation. U.S. crude futures were down 1.2%. Gasoline and heating-oil markets were also weaker with the hacked Colonial Pipeline system in the U.S. returning operations at one section of the key link. Full services are expected by the end of the week, though some Gulf Coast refiners are already cutting processing. While the pipeline halt is causing some retail gasoline shortages, U.S. crude oil prices remain capped near $65 a barrel. The market’s structure has weakened in recent days, suggesting coronavirus-induced demand concerns are returning, particular as the virus spreads afresh across parts of Asia. Still, consumption in the U.S. and Europe has been recovering.
• Gold held near the highest level in three months as investors weighed rising inflation expectations and comments from Federal Reserve officials for clues on monetary policy going forward. Bond market expectations for the pace of inflation over the coming half decade surged on Monday to the highest level since 2006. The jump in the five-year breakeven rate comes amid a run-up in commodities and adds to a longer-term uptick in inflation bets that’s been fueled by improving prospects for growth and pandemic-related stimulus measures.
• The discrepancy between the most vaccinated countries and those lagging behind is growing starker. England reported no deaths from Covid-19 in its latest daily update, and Germany’s health minister expressed optimism about falling infection rates. Meanwhile, Thailand Prime Minister Prayuth Chan-Ocha warned that local cases may increase over the next few weeks and Taiwan banned large gatherings. Malaysia shuttered schools and India’s capital extended its lockdown. Hong Kong, which is struggling to persuade people to get shots, backtracked on a controversial requirement that all foreign domestic workers be vaccinated before seeking visas. Bali moved closer to a target of inoculating 70% of its population by July so it can welcome tourists.
• Gas stations along the U.S. East Coast are starting to run out of fuel as North America’s biggest petroleum pipeline fights to recover from a cyberattack that has paralyzed it for days. From Virginia to Florida and Alabama, fuel stations are reporting that they’ve sold out of gasoline as supplies in the region dwindle and panic buying sets in. The White House said it was aware of shortages in the Southeast of the country and was trying to alleviate the problem. Four days into the crisis, Colonial Pipeline Co. has only managed to manually operate a small segment of the pipeline — as a stopgap measure — and doesn’t expect to be able to substantially restore service before the weekend. The risk is that by that point drivers or airlines may already be suffering severe fuel shortages, while refineries on the Gulf coast could be forced to idle operations because they have nowhere to put their product.
• Tesla Inc. shares slumped in early trading as fresh signs of trouble emerged for its China business while Elon Musk polled Twitter followers on whether the carmaker should accept Dogecoin. China’s Passenger Car Association said Tuesday that Tesla sold 25,845 locally made vehicles in April, a 27% drop from March. Reuters reported separately that the Model 3 maker decided against acquiring more land next to its Shanghai plant, as U.S.-China trade tensions undercut plans to turn the site into an export hub. While Musk has been playing damage control during what has been a turbulent few months in China, he’s also been preoccupied with Dogecoin, the cryptocurrency started years ago as a joke that has gained value in part thanks to the billionaire’s attention. The token spiked to about 54 cents from 46 cents after Musk asked his almost 54 million followers whether Tesla should accept it as the company has with Bitcoin.
• Soaring Eagle Acquisition Corp. gained as much as 4% in premarket trading after agreeing to buy Ginkgo Bioworks for about $15b in base equity consideration in the form of New Ginkgo common stock at the time of the merger, plus about 180m earn-out shares. Transaction is expected to provide as much as $2.5b in primary proceeds, including Soaring Eagle’s $1.725b of cash in trust and $775m from PIPE transaction. Ginkgo shareholders would receive earn-out shares in four equal tranches during five-year period if trading price of New Ginkgo Class A common stock exceeds certain levels.
• Apple Inc is facing a London lawsuit over claims it overcharged nearly 20 million U.K. customers for App Store purchases, yet another legal headache for the tech giant fighting lawsuits across the world. Apple’s 30% fee is “excessive” and “unlawful” the claimants said in a press release Tuesday. The claim, filed at London’s Competition Appeal Tribunal on Monday, calls for the U.S. firm to compensate U.K. iPhone and iPad users for years of alleged overcharging. They estimate that Apple could face paying out in excess of 1.5 billion pounds ($2.1 billion). “Apple is abusing its dominance in the app store market, which in turn impacts U.K. consumers,” Rachael Kent, the lead claimant in the case and a professor at King’s College London. She teaches the ways in which consumers interact and depend upon digital platforms.
• A U.S. Coast Guard ship accompanying a guided-missile submarine and other vessels near the Strait of Hormuz fired warning shots after a group of 13 Iranian fast boats approached them in an “unsafe” manner on Monday, the Pentagon’s spokesman said. The group of fast boats controlled by the Islamic Revolutionary Guard Corps came as close as 150 yards (137 meters) to the U.S. ships when a Coast Guard cutter, the Maui, fired about 30 warning shots from a .50-caliber machine gun, spokesman John Kirby told reporters. He said the Iranian vessels were behaving “very aggressively.” As they neared the U.S. vessels, two of the 13 fast boats “broke away from the larger group, transited to the opposite side of the U.S. formation and approached Maui and Squall from behind at a high rate of speed (in excess of 32 knots) with their weapons uncovered and manned,” the U.S. Navy said in a statement. The Squall is a Cyclone-class patrol ship.
• Australia will run its economy even hotter, joining the U.S. and Europe in holding open the fiscal spigot in tandem with monetary policy as they try to drive down unemployment and revive inflation. Treasurer Josh Frydenberg’s 2021-22 big budget spend aligns both economic orthodoxy and the political needs of a government with an election due in a year. The deficit in the 12 months through June 2022 will be A$106.6 billion, or 5% of gross domestic product, exceeding economists’ A$80 billion estimate. That reflects higher outlays for infrastructure, aged care and tax breaks.
• President Vladimir Putin moved to withdraw from the Open Skies treaty already abandoned by the U.S., as Russia said it hopes summit talks with President Joe Biden will focus on strategic stability. The Kremlin sent a bill to the lower house of parliament Tuesday formally repudiating the treaty, saying remaining bound by its terms would be a “threat to the national interests of the Russian Federation.” State Duma Speaker Vyacheslav Volodin said lawmakers would act quickly to consider the proposal. Russia has to withdraw because otherwise the U.S. will continue to receive information via its North Atlantic Treaty Organization allies that are also signatories to the agreement, Kremlin spokesman Dmitry Peskov told reporters on a conference call. “Russia won’t receive this information” about the U.S., he said.
• Despite making new pledges to eliminate their net carbon emissions by 2050, the annual shareholder meetings of Europe’s oil companies are once again being dominated by clashes with environmental groups. On Tuesday, it was the turn of Nordic energy giant Equinor ASA, which was named “Norway’s biggest greenwasher” by a coalition of five environmental organizations. The company has set climate goals for 2030, 2040 and 2050, when it intends to achieve net-zero including emissions from fuels its sells to customers. It has been an early mover relative to its peers in offshore wind.
• The City of London lost 2.3 trillion pounds ($3.3 trillion) of its lucrative derivatives trading business in March alone, with Wall Street trading platforms gaining the most from Brexit. U.S. swap-execution facilities took market share in trades in euros, pounds and dollars at London’s expense that month compared to last July, while venues in the European Union also gained, according to an estimate by Deloitte and IHS Markit Ltd. In March, U.K. platforms hosted about 10% of euro-based swaps carried out on venues — down from almost 40% in July, the month the researchers picked to illustrate pre-Brexit activity. The multitrillion-dollar notional value of lost trades is the latest tally of the mounting costs for London’s financial industry since the U.K. left the EU at the start of the year. The EU blocked firms based inside its borders from using London derivatives platforms, pushing many into the U.S. where they can continue to trade.
• Norway is relying on its $1.3 trillion sovereign wealth fund more than ever, as the country ratchets up spending without turning to bond markets to provide economic relief from the pandemic. The government of Prime Minister Erna Solberg, facing an election in September, is raising this year’s so-called structural non-oil fiscal deficit by more than 9% to 403 billion kroner, or almost $50 billion, it said on Tuesday. Government withdrawals, as a share of the world’s biggest wealth fund, will reach 3.7%, compared with the central bank’s estimate of 3.3%.
• Schaeffler AG and Timken Co. are among suitors considering bids for the mechanical power transmission business being sold by Swiss engineering firm ABB Ltd., people familiar with the matter said. The rolling bearing makers are working with advisers as they evaluate potential offers for ABB’s Dodge unit, said the people, asking not to be identified because discussions are private. The business could fetch about $1.5 billion in a sale, they said. ABB has sent out marketing materials to potential bidders and asked for offers by the end of this month, the people said. The business could also attract interest from other industrial companies including RBC Bearings Inc. as well as buyout firms, the people said.
• China’s factory-gate prices surged more than expected in April, fueled by rapid gains in commodity prices, adding to global inflation concerns. The producer price index rose 6.8% from a year earlier, its fastest pace since October 2017, following a 4.4% gain in March, the National Bureau of Statistics said Tuesday. The median forecast was for a 6.5% increase. Consumer prices increased 0.9% on year, slightly below the 1% gain projected by economists. The commodities boom, fueled by rising global demand and supply shortages, has stoked concerns about inflation around the world. With China being the world’s biggest exporter, its rising cost pressures for the nation’s factories pose another risk to global inflation as manufacturers start passing on higher prices to retailers.
• Daqo New Energy Corp., a key supplier to the solar industry, has shortlisted three global auditors to assess its operations amid international allegations over the use of forced labor in the western Chinese region of Xinjiang. The New York-listed company, which operates in the region, has denied that it’s involved in the practice or in work programs that the U.S. and others say are used to oppress the local Muslim Uyghur minority. Executives discussed the plan as the firm opened up a Xinjiang plant this week to a small group of investors, analysts and media. Two specialist U.S. auditing firms — as well as one of the world’s biggest — were being considered to carry out a review of the business that’s intended to address those concerns, Chief Financial Officer Ming Yang said Tuesday in an interview. The work would likely last about six months and cost several million dollars, Yang said, declining to name the auditors under discussion.
• Better HoldCo Inc., a mortgage and real estate startup, agreed to go public through a blank-check merger in a deal backed by SoftBank Group Corp. The transaction gives Better HoldCo an implied equity value of about $6.9 billion, the companies said Tuesday in a statement. Better HoldCo offers mortgage, real estate and homeowners’ insurance products through an online platform that eliminates origination fees and commissions. The company will go public by combining with Aurora Acquisition Corp., a special purpose acquisition company that completed its initial public offering in March. As part of the transaction, a subsidiary of SoftBank committed to a $1.5 billion private investment in public equity, or Pipe, when the deal is completed.
• The move came after takeover bids for the retailer were lower than expectations for a separate listing. L Brands has decided to spin off Victoria’s Secret rather than sell it, DealBook is first to report. The company said last year it was considering separating Victoria’s Secret from the rest of its business, and we previously reported that it was testing private equity’s interest. Ultimately, sources say, L Brands has decided to split itself into two independent, publicly listed companies: Victoria’s Secret and Bath & Body Works. The deal is expected to close in August. Bids didn’t match what Victoria’s Secret expects to get in a spinoff. DealBook hears that L Brands received several bids north of $3 billion. It turned them down, because it expects to be valued somewhere between $5 billion and $7 billion in a spinoff to L Brands shareholders. Analysts at Citi and JPMorgan recently valued Victoria’s Secret as a stand-alone company at $5 billion.
• China’s births fell to their lowest in almost six decades amid the coronavirus pandemic last year, putting the country’s population on course to peak within the next five years and adding pressure on Beijing to step up reforms to maintain economic growth as the workforce shrinks. There were 1.412 billion people in China last year, according to the results of a once-a-decade census, up 5.38% from a decade before, but slightly below previous official projections. The annual average population growth of 0.53% in the past decade was the slowest since the 1950s.
• Expect another active calendar in the U.S. primary markets after Amazon issued the second-largest investment-grade deal this year and the junk market recorded its busiest first half on record. Increasing concern that inflation will push up financing costs is prompting a rush of bond issuance to lock in low rates globally. CDX spreads are wider for a second day. Amazon priced $18.5 billion across eight parts on Monday, leading the single largest day by volume in more than a year as eight issuers sold $27.85 billion, writes Bloomberg’s Brian Smith.
• International Business Machines Corp. is rolling out a new product that will help businesses automate tasks, capitalizing on the rise of chat bots and virtual assistants during the pandemic and taking another step in its pivot toward cloud services and artificial intelligence. The tool, called Watson Orchestrate, uses artificial intelligence to select and sequence the prepackaged skills needed to perform a task across sales, human resources, or operations functions. It will be compatible with Slack Technologies Inc. and email as well as connect to business applications like Salesforce.com Inc., SAP SE and Workday Inc. The product is expected to be available later this year.

“When everything seems to be going against you, remember that the airplane takes off against the wind, not with it.” – Henry Ford

*All sources from Bloomberg unless otherwise specified