May 18, 2021

Daily Market Commentary

Canadian Headlines

  • Canadian National Railway Co.’s proposal to buy Kansas City Southern will be judged under stricter rules adopted in 2001, the industry’s U.S. overseer said Monday, mapping the path to the first major rail merger in more than 20 years. The Surface Transportation Board also denied Canadian National’s initial request to use a voting trust for the transaction, saying the petition was incomplete because it referred to a merger agreement that wasn’t provided. The merger rules for Canadian National’s $30 billion bid are different from how the STB plans to handle a competing $25 billion proposal from smaller Canadian Pacific Railway Ltd. The STB said Canadian Pacific’s merger proposal falls under the older, less strict rules because it would “result in the fewest overlapping routes” and its voting trust was already approved.

World Headlines

  • European equities rose near record highs as traders weigh-up prospects for economic growth, driven by vaccine programs, against concerns about inflation and valuations. The Stoxx Europe 600 index was up 0.4% at 9:32 a.m. in London as energy shares rose with crude futures and technology and utilities also gained. Telecoms fell as Vodafone Group Plc and Iliad S.A. both slumped following earnings reports, while health care and real estate underperformed. After rising by more than 10% in the early months of 2021, European shares have traded in a tight range as signs of rising inflation across supply chains fueled concerns of higher interest rates to follow, hitting areas of the market with more expensive multiples, in particular technology. Still, Tuesday’s rise leaves the Stoxx 600 a whisker away from the record reached earlier in May.
  • U.S. futures rose with stocks Tuesday as optimism that economic reopenings will boost growth outweighed concern about a pick-up in virus cases in parts of Asia. The dollar dipped and oil gained. Contracts on all three U.S. equity benchmarks advanced, led by those on the Nasdaq 100 Index after tech shares slid Monday. Home Depot Inc. climbed in premarket trading after its results beat estimates, while AMC Entertainment Holdings Inc. jumped 10%, extending its longest rally since 2019. The dollar fell toward a four-month low, while U.S. 10-year Treasuries were steady as investors awaited key housing data ahead of minutes due Wednesday from the Federal Reserve’s last meeting. Brent crude at one point topped $70 a barrel in London for the first time since March on signs that reopenings are boosting demand.
  • Brent oil topped $70 a barrel with optimism building about the demand outlook in key regions such as the U.S., and on signs that a glut built up last year has been whittled away. The global benchmark added as much as 1.1% reaching its highest since March 8, while U.S. crude futures briefly topped $67 a barrel. The global benchmark hasn’t had a sustained period above $70 since 2019. Oil has joined other commodities in a blistering rally this year, emerging as a hedge for growing rates of inflation, and with demand rebounding from the depths of the pandemic. Most recently that has been led by the U.S., where even the lagging aviation industry is showing signs of picking up, and Europe. That’s despite the ongoing spread of the virus in parts of Asia, most notably India.
  • Gold rose to the highest in more than three months, breaking out of a downtrend its held since August, as growing inflation concerns and assurances on monetary policy brought investors back to the metal. Bullion, which was dogged by higher bond yields at the start of the year, has staged a second-quarter turnaround. That recovery was driven by repeated assurances from Federal Reserve officials that they aren’t considering raising rates or scaling back bond buying anytime soon, even as inflationary pressures emerge in commodity markets.
  • U.S. lumber futures tumbled from a record high for the sixth straight session, pushing some builders to the sidelines while they wait for even lower prices during North America’s boom in home construction. The price of lumber for July delivery has dropped 23% from its May 10 peak of $1,733.50 per 1,000 board feet — a level then that was more than four times higher than a year ago. Prices have fallen for six straight days, marking the longest streak for declines since September. Futures were “overvalued as scrambling began for upcoming jobs to get covered, creating an unsustainable market,” said Joy Robles, who trades lumber on the cash market for Sherwood Lumber on Long Island, New York.
  • The pandemic is wiping out “entire families” in villages in India, where more people are saying the scale of the crisis is much bigger than official numbers reveal. The number of deaths in the country reached a record on Tuesday, though the daily infection count fell. Britain will approve Johnson & Johnson’s one-dose vaccine “very imminently,” according to the U.K. drugs regulator. Singapore will lengthen the time between vaccination doses in an effort to stretch out limited supply and will authorize the Pfizer Inc. shot for children as young as 12.
  • President Joe Biden’s infrastructure proposal includes billions of dollars tied to improving cybersecurity, an area of intensified interest after the ransomware attack on the Colonial Pipeline Co. sent U.S. gasoline prices soaring last week. But the exact amount that will be spent on improving cyber defenses remains to be seen. The $2 trillion American Jobs Plan, as the infrastructure proposal is known, includes $20 billion for state, local and tribal governments to modernize their energy systems contingent upon meeting cybersecurity standards, as well as $2 billion for grid resilience in high-risk areas that will be contingent on meeting cybersecurity targets, the White House said in a fact sheet obtained by Bloomberg News ahead of its release Tuesday.
  • Amazon (AMZN) is in negotiations to acquire MGM Holdings, the parent company of film studio Metro-Goldwyn-Mayer, according to media reports. The deal could cost the e-commerce giant $9 billion, according to the Financial Times and Variety. In a separate report, website The Information said that the deal could fetch between $7 billion to $10 billion. Mike Hopkins, senior vice president of Amazon Studios and Prime Video, is in direct talks with Kevin Ulrich, MGM’s board chairman, Variety said, citing unnamed sources. Ulrich’s hedge fund, Anchorage Capital, is the largest shareholder of the film studio, according to the entertainment publication.
  • Huitongda Network Co., a Chinese e-commerce platform serving the country’s rural areas, is weighing a Hong Kong initial public offering that could raise as much as $1 billion, according to people familiar with the matter. The company, which counts Alibaba Group Holding Ltd. among its backers, is working with advisers on the prospective listing and is considering going public as soon as the second half of this year, the people said, asking not to be identified as the information is private. Deliberations are ongoing and details such as fundraising amount and timeline could still change, the people said. A representative for the company did not respond to phone calls or emails seeking comment.
  • SUSE SA’ initial public offering in Frankfurt raised 1.1 billion euros ($1.34 billion), opting to price the deal near the bottom end of expectations amid a global selloff in technology assets. The enterprise software developer will receive proceeds of $500 million euros from the listing, while its private equity owner EQT AB sold existing stock worth about $400 million euros in the IPO. The share sale priced at 30 euros apiece, according to a statement Monday. SUSE adds to the more than $10 billion raised through tech and internet listings in Europe this year, the most for this period since the height of the dotcom bubble in 2000, data compiled by Bloomberg show. Still, some recent IPOs have been caught up in a global slump in tech stocks, with semiconductor company Alphawave IP Group Plc sinking 9.8% on its first day of trading in London last week.
  • Magnit PJSC, Russia’s largest grocery chain, plans to acquire Dixy Holding Ltd. convenience-store network in a 92.4 billion ruble ($1.25 billion) deal, a move that will boost its presence in Moscow and St. Petersburg. The price may be adjusted on net debt and net working capital changes as of the closing date, according to a statement Tuesday. Pending regulatory approval, the deal is expected to close by Aug. 31, though that may be extended. Russia’s biggest retailers, including Magnit and X5 Retail Group NV, are increasingly focused on low-income customers as incomes have stagnated since 2013, bolstering the success of hard discounters.
  • President Joe Biden began Monday to make good on his promise that the U.S. would be an “arsenal” of coronavirus vaccines for the world, announcing he’d share FDA-authorized shots after criticism that his administration had hoarded hundreds of millions of doses. But he also signaled that he intends for U.S. manufacturers to hold or grow their share of the global market for vaccines, casting his decision to begin supplying other countries as an engine for American jobs. He cautioned that American contributions alone won’t resolve the crisis. Biden on Monday announced that the U.S. would soon send at least 20 million shots made by Pfizer Inc., Moderna Inc. and Johnson & Johnson to other countries for the first time, on top of a previous promise to share 60 million doses of the AstraZeneca Plc vaccine that the Food and Drug Administration hasn’t cleared for U.S. use.
  • The U.K. government is locked in an internal debate over a trade deal with Australia as it tries to balance a desire for greater access to new markets against potential ramifications for domestic business. Britain and Australia agreed the bulk of a free-trade agreement in April and have signaled they want to conclude the pact by the G-7 summit in June. A contentious issue in the negotiations is the amount of access given to Australian farmers, with Britain’s National Farmers Union warning many farms would face ruin if exposed to cheaper imports from overseas. “There’s a balance to be struck between your commercial interests and your desire to open up new markets,” George Eustice said on Sky News on Tuesday after the Financial Times reported that the government is divided over whether to do the deal. “In any discussion on any part of government policy there will be issues where different government departments have a shared interest and we have a discussion to establish a consensus.”
  • Heineken NV, the world’s second-largest brewer, is in talks about a deal for South African wine and spirits maker Distell Group Holdings Ltd. Heineken approached Distell about a potential acquisition of the majority of its business, the South African company said in a statement Tuesday, confirming an earlier Bloomberg News report. Distell is considering its options “through its normal course of reviewing inorganic growth opportunities,” spokesman Frank Ford said by phone. Distell shares jumped as much as 10% in Johannesburg, hitting an intraday record. They were up 5.6% at 9:25 a.m. Tuesday in Johannesburg, giving the company a market capitalization of 33.6 billion rand ($2.4 billion).
  • China is pushing ahead with behind-the-scenes talks to join a major trade deal that originally aimed to exclude Beijing and cement U.S. economic power and trade ties in the Asia-Pacific region. Officials from Australia, Malaysia, New Zealand and possibly other nations have held technical talks with Chinese counterparts on details of the Comprehensive and Progressive Trans-Pacific Partnership, or CPTPP. That’s according to officials from four member countries with knowledge of the discussions, who asked not to be named as they weren’t authorized to comment on the talks. China announced in February it had held informal talks with some of the members, but didn’t release details. It’s not clear how far China has progressed in preparing an application, but the people see Beijing as seriously interested in joining, with multiple officials pointing to comments last year from President Xi Jinping as an indication of intent.
  • Hon Hai Precision Industry Co. signed an agreement to partner with Jeep maker Stellantis NV, one of the world’s biggest automakers, on a joint venture to jointly develop digital car cockpits. The main assembler of Apple Inc.’s iPhones and the carmaker formed from the merger of Fiat Chrysler and PSA Group said in a statement Tuesday they reached a non-binding deal to form Mobile Drive, a joint venture that could supply both Stellantis and other auto manufacturers. The tie-up between the flagship unit of Foxconn Technology Group and the carmaking giant has the potential to become one of the more significant alliances in the rapidly converging worlds of tech and autos. Hon Hai also has ambitions to supply underpinnings for electric vehicles and has signed deals with Chinese startup Byton Ltd. and U.S.-based Fisker Inc.
  • Walmart Inc. posted strong quarterly sales growth and boosted its profit outlook, an impressive feat as the retailer was facing a difficult comparison with last year’s pandemic-fueled stockpiling. The shares rose in premarket trading. Comparable sales increased 6% for U.S. Walmart stores, excluding fuel, compared with an expected 2% gain, according to estimates compiled by Bloomberg. It now expects earnings per share to rise by a high single-digit percentage this year, compared to earlier estimates for a slight decline. In the second quarter, that same metric will fall by a low single-digit percentage, but that’s still better than the mid-to-high single-digit drop it had been expecting earlier.
  • Home Depot Inc. posted stronger-than-expected results for the first quarter, a signal that the home-improvement trend has room to expand even as the pandemic subsides. Same-store sales in the U.S., a key metric in retail, rose 29.9% in the period ending May 2, the company said Tuesday in a statement. That beat the 22.1% average of estimates compiled by Bloomberg.
  • Rivian Automotive Inc. will soon set off on an aggressive sprint to upend the electric-vehicle business, with plans to start selling three models — a pickup truck, SUV and delivery van — in a matter of months. For this ambitious effort, it has harnessed powerful weapons: Former Tesla Inc. engineers who launched the company’s Model 3 sedan. Charly Mwangi, Rivian’s manufacturing chief, and Nick Kalayjian, head of engineering, played key roles in bringing Tesla’s lowest-priced car to market in 2018. Each briefly worked at other startups before being lured to Rivian by the unique thrill of launching new vehicles, including the R1T, a truck geared to outdoor enthusiasts, that will go on sale in June. They are not alone. Bloomberg has identified more than 50 high-level roles at Rivian occupied by former Tesla employees, from director to executive vice president. Including senior managers, that number rises to more than 100. In dotting its leadership ranks with veterans of the industry’s preeminent incumbent, Rivian has moved to improve its chances of emerging as the most credible challenger to Elon Musk’s electric car empire.
  • Over the course of the pandemic, Texas Children’s Hospital has cared for more than 150 young patients with a rare and sometimes deadly inflammatory condition linked to Covid-19. The Houston institution is one of more than a dozen children’s hospitals in the state.  Yet for all of Texas, the U.S. Centers for Disease Control and Prevention has tallied fewer than 100 cases of  children with the condition, called multisystem inflammatory syndrome in children, or MIS-C.
  • President Joe Biden’s visit to a Ford Motor Co. plant in Michigan on Tuesday will highlight the potential and peril of electric vehicles as the White House looks to build support for its $174 billion proposal to transform the automobile industry even as a global chip shortage hinders production. Biden will get a sneak peek at the F-150 Lightning — an all-electric version of the pickup that has been the best-selling vehicle in the U.S. since the Reagan administration — during his visit to Ford’s new Rouge Electric Vehicle Center in Dearborn. Ford has heralded the new model, which is to go on sale next year, as a turning point in the electric-vehicle revolution, and the White House is hoping the rollout can strengthen Biden’s push to spend billions of dollars on tax credits and charging stations.
  • A cohort of chart watchers on Wall Street say Bitcoin’s deepest selloff since crypto mania kicked off last year looks set to intensify. Evercore ISI’s Rich Ross reckons prices are destined to fall back to the 200-day moving average, following a path of other speculative assets, which would put Bitcoin back at $40,000 compared with just under $45,000 currently.
  • Bristol Myers Squibb Co. has agreed to pay Agenus Inc. as much as $1.56 billion for the rights to a new kind of experimental drug that uses the body’s immune system to combat cancer. Under the terms of the deal, Agenus will receive $200 million upfront and could net as much as $1.36 billion in additional payments if the treatment, called AGEN1777, meets certain development, regulatory and commercial targets, the companies said on Tuesday. The agreement is Agenus’s largest-ever licensing pact for a single program. Cancer-fighting immunotherapy drugs have generated billions in sales for pharmaceutical giants. Blockbusters like Merck & Co.’s Keytruda and Bristol Myers’s Opdivo are used to treat a wide range of tumors, including advanced non-small cell lung cancer, melanoma and kidney cancer.
  • Buying a home is getting more and more expensive and every release of housing data presents a challenge not just for those seeking a place to live, but for investors in mortgage securities. Call it a buying frenzy. The National Association of Realtors recently announced its measure of single-family home prices rose 16.2% during the first quarter compared to the previous year, hitting a record $319,200. That would be a bargain price in California, where the median home price reached an astounding $814,000 in April, according to the California Association of Realtors. Home prices there are 34.2% higher from the same time in 2020 — and the traditional home buying season has only just begun.
  • While Apple Inc.’s attentions turned to a California court clash with Epic Games Inc., Europe’s top antitrust enforcer issued a reminder that the tech giant’s legal battles across the Atlantic are also heating up. EU Competition Commissioner Margrethe Vestager warned that a probe into the company’s Apple Pay product is moving ahead on top of an investigation — escalated last month — into how the iPhone maker requires software developers to use its in-app purchasing system. Apple Chief Executive Officer, Tim Cook, is slated to testify as soon as this week in the high-stakes trial with Epic Games, which could upend the multibillion-dollar marketplace for apps which run on mobile phones around the world.
  • Russia is planning its longest euro-denominated bond, sending a defiant signal just a month after the U.S. slapped sanctions on its local debt. The Finance Ministry will offer 15-year bonds in the common currency as well as re-opening an existing euro note due in 2027, according to a person familiar with the details, who asked not to be identified because they aren’t authorized to comment publicly. VTB Capital, Gazprombank and Sberbank CIB have been hired for a possible sale, the ministry said in a statement.

Time is the friend of the wonderful company, the enemy of the mediocre.” — Warren Buffet

*All sources from Bloomberg unless otherwise specified