May 14, 2021
Daily Market Commentary
- Kansas City Southern said it intends to accept a revised merger offer from Canadian National Railway Co. but will give its other suitor, Canadian Pacific Railway Ltd., until May 21 to come up with a higher bid. Canadian National’s binding $33.6 billion offer is “superior” to the proposal by its Canadian rival, Kansas City Southern said in a statement Thursday. The revised offer was adjusted to add more stock, but remains equivalent to $325 a share. Canadian National also agreed to reimburse Kansas City Southern for a breakup fee that would be owed to Canadian Pacific. “We are delighted that KCS has deemed CN’s binding proposal superior, recognizing the many compelling benefits of our combination and expressing confidence in CN’s ability to obtain the necessary approvals and successfully close the transaction,” Canadian National Chief Executive Officer Jean-Jacques Ruest said in a separate statement.
- European stocks gained on Friday as optimism about the economic recovery countered ongoing concerns over rising inflation, trimming its worst weekly decline since February. The Stoxx Europe 600 Index was up 0.5% as of 10:25 a.m. in London, with most sectors advancing, led higher by banks and technology shares. Energy stocks also rose, reversing earlier declines as the oil price climbed. But miners fell for a second day, as iron ore futures tumbled after China’s top steel-making hub stepped up efforts to control surging prices. The region’s stocks tracked gains in the U.S. after a drop in jobless claims refocused investors’ attention to prospects for a robust economic recovery and distracted them from signs of a growing wave of inflationary pressure. Adding to the optimism, the U.K. may bring forward second vaccine doses for millions of people. Still, the Stoxx 600 is heading for a negative return in a volatile week, set for its biggest weekly decline since the end of February, and for some this could provide the opportunity to buy-the-dip.
- U.S. equity futures rose with stocks as more-tempered commodity prices helped allay concerns about inflation risks. Treasuries advanced. S&P 500 and Nasdaq 100 contracts signaled a market recovery was gaining momentum, after a bruising week that saw gathering price pressures hit equities. Gains in European stocks were led by banks, while miners fell amid a retreat in some raw-material prices. Markets appear to be regaining their equilibrium at the end of their biggest retreat in 11 weeks, with the focus of the benefits of an economic rebound overriding worry about the negative side-effect of inflation, for now. That may help to reinvigorate the reflation narrative of picking value shares tied to economic growth over pandemic stay-at-home favorites.
- Asian stocks bounced back as this week’s selloff in global equities eased, with the regional benchmark snapping a three-day slump that plunged it into a technical correction. The MSCI Asia Pacific Index rose 1.2%, with equities in China and Japan leading the region. Technology stocks, which have been at the forefront of the recent rout, were the biggest boost to the gauge’s advance. The rebound comes after the Asian index lost 4.9% in a three-day slide that was its worst since June last year, owing to rising investor concern over inflation and a resurgence in virus infections in many countries. Sentiment worsened further after data showed U.S. consumer prices climbed in April by the most since 2009, with the Asian equities gauge extending its losses from a mid-February peak to more than 10% as of Thursday.
- Oil rose above $64 a barrel in New York, aided by a recovery in equities and a softer dollar. West Texas Intermediate increased 1%, reversing some of Thursday’s slump as the dollar’s drop makes commodities priced in the currency more attractive. Prices are still headed for a weekly fall with the spread of Covid-19 in Asia menacing demand. Singapore will reimpose curbs, Japan plans to extend restrictions and China saw its first coronavirus infections in about a month. Key oil importer India continues to report more than 300,000 cases a day.
- Gold edged higher as the dollar weakened, while investors weighed signs of inflationary pressures against assurances from Federal Reserve officials that these risks were likely to prove transitory. Risk appetite was broadly improved Friday, helping European stocks and U.S. futures gain after a chaotic selloff earlier in the week. The dollar declined amid the more confident mood in markets, adding support to bullion. Prices paid to U.S. producers rose in April by more than forecast, with the index for final demand up 0.6% from the prior month after a 1% gain in March, according to data from the Labor Department Thursday. This followed a report Wednesday which showed consumer prices increased last month by the most since 2009.
- Israel’s ground forces fired artillery into the Hamas-run Gaza Strip early Friday after a blistering four-day air assault failed to quell militant rocket attacks, sweeping aside international appeals for de-escalation and possibly preparing for an assault by troops. Prime Minister Benjamin Netanyahu has been warning that an extended campaign was in the offing. The decision to escalate with heavy aircraft, tank and artillery fire came at a uniquely sensitive time, as Israel grappled with the worst outbreak in years of violence between Arabs and Jews inside its borders. The military said it hadn’t sent troops into Gaza. The death toll and devastation from the fighting mounted. More than 100 Palestinians and nine Israelis have died, with hundreds of buildings damaged or in ruins. An envoy from Egypt, which traditionally has been involved in ending Israel-Gaza violence, arrived Thursday to talk to both sides as part of a broader international peace effort.
- The U.K. may bring forward second vaccines doses for millions of Britons and local restrictions could be put in place to curb the spread of a Covid-19 variant from India. India’s Prime Minister Narendra Modi said the virus is spreading rapidly to India’s rural areas. The country has reported more than 300,000 daily infections for 22 straight days. Singapore is reverting to the kind of lockdown conditions it last imposed a year ago as a resurgence in cases also puts a highly-anticipated travel bubble with Hong Kong in jeopardy. In more positive developments, Germany’s restrictions could ease further after the contagion rate fell below a key level for the first time in nearly two months and the country set a new daily immunization record. President Joe Biden’s administration took its biggest step yet toward declaring victory over the pandemic — announcing Thursday that fully vaccinated Americans can ditch their masks in most settings.
- As the semiconductor shortage hobbling the global automotive industry has worsened, its cost as a hit to sales has almost doubled to $110 billion, up from an earlier estimate of $61 billion. That’s the latest assessment of AlixPartners, a global consulting firm closely monitoring the widening crisis. It also now says the world’s carmakers will lose 3.9 million vehicles of production to the chip shortage this year, more than its prediction four months ago of 2.2 million. That’s about 4.6% of the 84.6 million vehicles that AlixPartners had projected in total production for 2021. Automakers issued warnings in earnings reports in recent weeks that the chip shortage would get worse before it gets better. Ford Motor Co. and General Motors Co. each predicted the second quarter would be the worst of the calamity, as they are forced to idle factories for lack of the essential components. But the industry isn’t likely to see signs of recovery until the end of the year, according to the AlixPartners assessment.
- Alibaba Group Holding Ltd. forecast better-than-expected revenue and pledged to invest in new growth arenas, signaling its intention to move past a Chinese antitrust probe that triggered its first loss in nine years. Jack Ma’s flagship e-commerce firm swung to a 5.5 billion yuan ($852 million) net loss — its first since 2012 — after the company swallowed a $2.8 billion fine for monopolistic behavior imposed by Beijing. It now intends to refocus on its business, plowing “all incremental profit” back into technology and hotly contested areas like community commerce, Chief Executive Officer Daniel Zhang pledged on Thursday. Its shares fell more than 6% in Hong Kong after Citigroup and CICC slashed their price targets on fears that prioritizing growth will hammer profits.
- Steinhoff International Holdings NV raised 4.1 billion zloty ($1.1 billion) by listing its European discount retailer Pepco Group NV in Poland, giving the South African company cash it can use to pay down debt as it recovers from a 2017 accounting scandal. The offering priced at 40 zloty a share, in the lower half of an initial range, according to a statement Friday, valuing the company at 23 billion zloty. Steinhoff sold 102.3 million existing shares, while Pepco didn’t raise any money in the IPO. The new stock starts trading in Warsaw May 26. Steinhoff has been selling assets to raise funds after the scandal pushed the company to the brink of collapse. The retailer, which still owns chains including Mattress Firm in the U.S. and parts of European furniture seller Conforama, needs cash to service its 9.5 billion euros ($11.5 billion) of debt, and it also is working on a $1 billion legal settlement.
- Sasol Ltd. agreed to sell a 30% stake in a natural gas pipeline running from Mozambique to South Africa for as much as 5.1 billion rand ($361 million) in order to pay down debt. The deal rounds out an accelerated asset-sale program that has helped Sasol reduce borrowings that ballooned amid cost overruns at a giant U.S. chemicals project and call off a proposed $2 billion share sale. The company started hunting for a buyer for its pipeline shares last year as it examined ways to bolster its finances amid mounting pressure from creditors. Sasol will sell part of its stake in the Rompco pipeline to a group of buyers including a unit of South African financial-services firm Old Mutual Ltd., it said in a statement Friday. The fuel and chemicals maker will retain a 20% holding and continue to operate and maintain the 865-kilometer (540-mile) link.
- JD Logistics Inc. has attracted SoftBank Vision Fund and Temasek Holdings Pte as cornerstone investors in its Hong Kong initial public offering, people with knowledge of the matter said, as the warehousing and shipping firm is set to kick off one of the year’s biggest share sales in the city. Blackstone Group Inc. and Tiger Global also committed to buy stock in the offering, the people said, asking not to be identified because the information is private. SoftBank Vision Fund is set to invest $600 million in the offering, accounting for 40% of the $1.5 billion worth of shares the company has set aside for about seven cornerstone investors, the people said. That would make the prolific investor one of the largest shareholders in the company after its parent, JD.com Inc.
- Japan Post Holdings Co.’s insurance unit plans to buy back up to 29% of its shares for about 358.9 billion yen ($3.3 billion) as its parent company reduces its stake, giving the insurer more freedom to expand its business. Japan Post’s stake in the insurance unit will fall to 49.9%, according to a statement Friday. The acquisition of the stock will improve capital efficiency, boost shareholder returns and advance the privatization of the postal service, the statement said. Investors had been anticipating a buyback as Japan Post Insurance Co. builds its business following a sales scandal in 2019 that resulted in the resignation of senior management. The company, which is currently governed by a strict privatization law that limits new product sales and any merger activity, will see restrictions ease if the holding company’s stake falls to 50% or less.
- Tyson Foods Inc. is selling its pet treats business to General Mills Inc. for about $1.2 billion. The deal adds the Nudges, Top Chews and True Chews brands to General Mills’s product portfolio, and Tyson will continue to provide meat ingredients for the business after the sale, according to statements on Friday. The treats division includes a factory in Iowa and had sales of more than $240 million in the year ended April 3, according to Tyson. Tyson said the deal should be completed by the end of its 2021 fiscal year, subject to regulatory approval and other conditions.
- Dogecoin jumped on renewed support from Elon Musk, adding to a volatile week for digital currencies that’s been whipped up largely by the Tesla Inc. chief executive officer himself. After Musk tweeted on Thursday that he is working with Dogecoin developers to “improve system transaction efficiency,” the Shiba-Inu-themed token with no practical uses surged from about 43 cents to 51 cents in a matter of minutes. It’s up by about 30% in the past 24 hours, according to Coinmarketcap.com. Bitcoin fluctuated on Friday, and was trading at around $50,500 as of 6 a.m. in New York. The largest digital token is on course for a weekly slump of more than 10%.
- U.K. ministers may bring forward second vaccine doses for millions of people and local restrictions could be imposed to curb the spread of a Covid-19 variant from India. Cases of the B.1.617.2 strain have risen to 1,313 from 520 over the past week, Public Health England said Thursday, assessing the strain to be “at least as transmissible” as the so-called Kent variant that took hold in December, precipitating the U.K.’s third lockdown in January. The government is ruling nothing out on tackling the spread of the variant, including the possibility of local lockdowns in the worst-hit areas, Vaccines Minister Nadhim Zahawi told broadcasters Friday. The vaccination program could also be altered to give people their second doses more quickly, so they are fully protected sooner, or to roll first doses out to younger people faster.
- PAI Partners and Baring Private Equity Asia are weighing selling World Freight Company in a deal potentially valuing the airline cargo management business at about $1.5 billion, people with knowledge of the matter said. The buyout firms are currently working on refinancing WFC’s debt ahead of the prospective divestment, said the people, who asked not to be identified as the information is private. The sale could begin as soon as the fourth quarter, the people said. Formed in 2004, WFC invests in general sales and services agencies specializing in air cargo. These agencies act as third parties representing airlines to manage the sale of their air freight capacity, as well as supervise local operations and handle services such as tracking and invoicing.
- The group of rich government creditors known as the Paris Club is willing to delay a $2.4 billion debt payment from Argentina due this month if the nation meets certain conditions, potentially averting a damaging default, according to three people with direct knowledge of negotiations. The club will spare Argentina from default if it misses the May 31 payment in the hope that the country can rework a $45 billion agreement with the International Monetary Fund, said one of the people, who asked not to be named because the talks are private. An agreement with the IMF may not come until after Argentina’s midterm elections in October, the person said, declining to specify the conditions that the group is demanding.
- As the U.S. economy rebounds from the ravages of Covid-19, the country’s biggest corporations find themselves in need of workers, putting upward pressure on pay. Retail giants, fast-food chains, and ride-hailing companies are offering higher wages and cash payments. Referral and signing bonuses, rarely needed before to fill entry-level, low-wage jobs, are now commonplace. These incentives represent a slow but steady march toward a goal that lawmakers and labor activists have pursued for years, with limited success: a higher minimum wage, approaching $15 an hour. McDonald’s Corp. announced Thursday it will raise hourly wages by about 10%, bringing the average wage at its restaurants to more than $13 an hour. Chipotle Mexican Grill Inc. said earlier this week it will set hourly starting wages at $11 to $18. Target Corp. and Costco Wholesale Corp. have increased theirs to $15 and $16, respectively.
- Mortgage investors have inflation on the mind, which is no surprise with CPI and PPI rising at the fastest annualized pace in over a decade. Yet, while this price surge is likely transitory, it’s the longer term that looks more threatening. Inflation is not kind to fixed income securities as it reduces the present value of future cash flows and pressures interest rates higher. Bond prices and yields are inversely correlated. Mortgage bonds, which allow homeowners a prepayment option, can be particularly sensitive to rising rates. So far this millennium, CPI has largely behaved itself; it has seen annual growth of 4% or higher in just 17 of the past 256 months. Over that time period, the Bloomberg Barclays U.S. MBS index has gained an average excess return versus Treasuries of +0.03% each month.
- China threatened further retaliation against U.S. journalists, in a sign of growing frustration with the Biden administration over a high-profile diplomatic dispute. “If the U.S. continues to deliberately make things hard for our journalists, then we will have no choice but to take countermeasures, although we haven’t done so thus far,” Chinese Foreign Ministry spokesperson Hua Chunying said at a regular briefing Friday in Beijing. “What will happen next will be completely up to the U.S.” China said after a March meeting of the nations’ top diplomats in Alaska that the two sides had agreed to hold talks on the dispute over reporters. There’s been no improvement in the situation since then, and earlier this week Hua announced a journalist from the official Xinhua News Agency was recently forced to leave the U.S. because a visa wasn’t extended
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*All sources from Bloomberg unless otherwise specified