May 19th, 2020

Daily Market Commentary

Canadian Headlines

  • Canadian Headlines
    • Investors are often attracted to the primary market to buy new bonds to capture extra yield over an issuer’s existing debt, but that practice isn’t working so well in Canada lately as some recent transactions have struggled to perform amid record supply. Take Bell Canada Inc.’s new notes, for example. The company raised C$1.5 billion ($1.1 billion) in a two-part debt sale on May 11, with the 10-year portion pricing at a spread of 191.7 basis points over Canadian government securities. The bonds widened throughout last week and stood at about 212 basis points as of Friday, according to Bloomberg Valuation bid prices. Other new issues such as Great-West Lifeco Inc.’s 10-year notes have also weakened after pricing.

    World Headlines

    • European equities reversed gains after Monday’s surge as investors sold cyclical shares, such as miners and construction stocks, and gloomy car sales data weighed on autos. The Stoxx 600 Index was down 0.7% by 9:28 a.m. London time, as optimism over an aid package to shield the European Union from the coronavirus pandemic fallout and hope for a vaccine was overshadowed. Britain’s FTSE 100 benchmark was down 0.4% as the pound rose after the U.K. set out plans to cut tariffs after Brexit. The FTSE 250 Index gained 0.5%. Among individual stocks, catering firm Compass Group Plc fell as much as 4.8% after saying that it plans to raise 2 billion pounds ($2.5 billion) in new equity to help navigate the pandemic.
    • U.S. equity futures slipped while European stocks retreated on Tuesday as the risk-on mood that kicked-off the week faded. West Texas oil rose for a fourth straight day. Contracts for the S&P 500 pointed to a weak open following big gains on Wall Street a day earlier, though they came off session lows after earnings from Walmart Inc. beat forecasts.
    • Japan’s Topix index rallied to its highest in more than two months as an experimental vaccine offered tentative hopes in the global effort to combat the coronavirus pandemic. Electronics and auto makers provided the biggest boosts to the Topix, with all but one of 33 industry groups rising. A vaccine from U.S. biotechnology company Moderna Inc. showed signs that it can create an immune-system response to fend off the virus. A small sample study showed no major safety concerns.
    • Oil held near a two-month high of $35 a barrel as supply curbs tighten the market and demand rebounds in the world’s largest consuming countries. Prices for oil cargoes from Russia to Brazil have surged as fuel demand has recovered. Indian fuel sales have jumped in the first half of May and Chinese consumption has all but returned to where it was before the coronavirus outbreak. South Africa’s biggest oil refinery restarted operations as the country eases coronavirus-lockdown measures. Tuesday also marks the expiry of the June West Texas Intermediate futures contract. While prices plunged at the end of the May contract’s trading period, oil has since staged a stellar recovery as producers embarked on deeper-than-expected output cuts. In a sign that the market is finding a new equilibrium, the premium traders pay for bearish put options versus bullish calls fell to the lowest since early March.
    • Gold steadied along with industrial metals as investors awaited Federal Reserve Chairman Jerome Powell’s hearing before the Senate Banking Committee, weighing his prepared remarks together with optimism over early results for an experimental vaccine. Powell said Monday the central bank is committed to using its full range of tools and is expected to leave the benchmark lending rate near zero until the economy is back on track. Meanwhile, U.S. biotechnology company Moderna Inc. said its vaccine tests showed signs that it can create an immune-system response in the body to fend off the new coronavirus, offering tentative hopes in the global effort to combat the pandemic.
    • The European Union criticized President Donald Trump’s threat to permanently freeze U.S. funding to the World Health Organization, saying the fight against the coronavirus required global cooperation. China may look to target exports from Australia over its calls for a probe into the origin of Covid-19. Brazil is now the world’s fastest-growing coronavirus hotspot, accounting for 13% of new cases globally in the past week, while cases in India rose at the fastest pace in Asia to top 100,000. Deaths linked to the virus in Britain exceeded 40,000, making it the first country in Europe to reach that threshold. ssia’s prime minister returned to office three weeks after testing positive — a period that saw total cases in the country nearly triple to just under 300,000. Earlier, Trump said he is taking hydroxychloroquine, despite warnings of serious side effects.
    • U.S. President Donald Trump threatened to withdraw altogether from the World Health Organization, a move that would leave Chinese leader Xi Jinping as the most prominent voice leading the global fight against the pandemic. In a four-page letter detailing his grievances with the WHO, Trump called on the group to “demonstrate independence from China,” renewing a complaint that led him in April to temporarily suspend U.S. funding. He posted the letter on Twitter late Monday. “If the World Health Organization does not commit to major substantive improvements within the next 30 days, I will make my temporary freeze of United States funding to the World Health Organization permanent and reconsider our membership in the organization,” Trump wrote to Director General Tedros Adhanom Ghebreyesus.
    • Saudi Aramco is the first major global oil producer to see its stock recover to the level it traded at before the price war between Russia and Saudi Arabia. Aramco climbed 3.1% in Riyadh on Tuesday, advancing for a record sixth day alongside an extended increase in the price of crude. The stock has gained each session since the company announced it would retain dividend payouts, despite a drop in first-quarter profit. Aramco’s recovery has been achieved on much smaller share volumes than its international counterparts, with less than 2% of the Saudi company’s stock available for trading. An average of about $35 million worth of Aramco shares changed hands each session last week, rising to $100 million on Monday. That compares with yesterday’s Exxon Mobil Corp. share turnover of $1.4 billion.
    • Sony Corp. said it intends to take full control of its finance unit for about 395.5 billion yen ($3.7 billion), buying out one of its most lucrative businesses to inject more stability into a largely electronics and entertainment-focused operation. The Japanese giant will offer 2,600 yen a share for the part of Sony Financial Holdings Inc. it doesn’t already own, it said in a statement Tuesday. That’s a premium of about 26% to Monday’s close. Shares in the finance unit surged 19% Tuesday, while Sony itself gained more than 3%. Sony last week warned that operating profit could fall 30% or more this fiscal year because of the coronavirus pandemic’s impact on production and consumption. The financial services business, one of its most profitable, had seen a deterioration because its sales people can’t go out to pitch customers on insurance and other products, it said. The difficulty in projecting future performance for that unit affected Sony’s ability to give a companywide forecast for the year.
    • Moderna Inc. plans to raise as much as $1.3 billion through a sale of shares to fund manufacturing of a coronavirus vaccine seen as one of the frontrunners in the race for immunization against the widening pandemic. The U.S. biotechnology firm will sell 17.6 million shares priced at $76 a piece, according to a statement Tuesday. The price represents a 5% discount to Monday’s closing price. Morgan Stanley is the sole book-running manager for the offering that allows underwriters to buy an additional 2.64 million shares, the statement said. Bloomberg reported the share sale plan earlier.
    • Compass Group Plc plans to raise 2 billion pounds ($2.5 billion) in new equity to help navigate the coronavirus pandemic, in what could be one of the U.K.’s biggest share sales this year. The company, whose customers include Bank of America Corp., Coca-Cola Co. and Google, said last month it is suspending dividends and about 55% of its business is closed due to lockdowns in various countries. Revenue on an organic basis declined by 20% in March and 46% in April, the company said Tuesday in a statement. Compass runs corporate cafeterias and serves food at schools, hospitals and sports stadiums.
    • Home Depot shares fell 2.7% ahead of the bell on Tuesday following a mixed quarterly report that featured comparable sales growth that topped consensus estimates, but the outperformance failed to flow through to profitability, with Ebitda declining about 11% year-over-year. HD peer Lowe’s, which reports early Wednesday, is down in sympathy.
    • Nasdaq Inc. is planning new rules that would make initial public offerings more difficult for some Chinese companies, thrusting the U.S. exchange into the middle of an increasingly contentious debate over financial linkages between the world’s largest economies. The proposed regulations include minimum fundraising thresholds and stricter requirements for auditors, according to Nasdaq filings with the Securities and Exchange Commission seen by Bloomberg News. While the rules wouldn’t only apply to China, companies from there would be among the most affected. Nasdaq’s proposal follows a string of accounting scandals at Chinese firms that have burned some of the biggest names on Wall Street and drawn the attention of Donald Trump. The U.S. president said last week he’s “looking at” Chinese companies that don’t follow American accounting rules, while his administration moved to stop a federal retirement savings fund from investing in the Asian nation’s stocks. Relations between the superpowers have deteriorated in recent months across multiple fronts, from trade to the coronavirus.
    • Russia’s biggest liquefied natural gas producer is sending the fuel across the Arctic to China more than a month earlier than usual as the ice that typically blocks the route thaws. The Christophe de Margerie, an ice-class vessel serving Novatek PJSC’s-led Yamal LNG project, departed from the production plant in Sabetta, Russia, on Monday and is now headed east via the so-called Northern Sea Route, according to ship-tracking data on Bloomberg.
    • The U.K. government’s package of support for the economy has so far totaled almost 40 billion pounds ($49 billion), according to new figures published Tuesday. About 8 million jobs have been furloughed under the Treasury wage-subsidy plan, while another 2 million self-employed workers are also claiming support. That’s come at a cost of more than 17 billion pounds, while various loans programs have paid out in excess of 22 billion pounds.
    • Thyssenkrupp AG will shrink and focus on higher-margin businesses as the coronavirus pandemic speeds the break up of one of Germany’s last mega-conglomerates. The company said it’s considering the sale of units that make steel and submarines as it fights for survival. Once a byword for German engineering prowess, Thyssenkrupp will be gradually split apart as Chief Executive Officer Martina Merz follows the path taken by other behemoths from Siemens AG to General Electric Co. “CEO Merz is moving to a more aggressive mode, which will see some continued restructuring but also potential widespread corporate deals, which we believe are likely to transform the group rapidly,” Christian Georges, director of metals and mining research at Societe Generale SA, said in a note.
    • The Bank of Japan called for an emergency policy meeting later this week as it looks to quickly provide funding for struggling businesses and demonstrate its nimble stance on supporting the economy. Friday’s one-day gathering is not expected to deliver any show-stopping monetary policy moves, as the main agenda is to flesh out details of a lending program it alluded to at its last meeting. The BOJ will indirectly offer more cash for small companies striving to stay afloat during the coronavirus pandemic, but will stop short of the direct assistance for firms offered by the Federal Reserve through its main street lending program.
    • SoftBank Group Corp. is closing in on a deal to sell about $20 billion of its stock in T-Mobile US Inc., accelerating efforts to raise capital after record losses in its investment business, according to people familiar with the matter. The Tokyo-based company, which owns about 25% of T-Mobile US, plans to sell a slice of that stake to Deutsche Telekom AG so the German parent can own a majority and consolidate the unit’s financial results, said the people, asking not to be identified because the matter is private. SoftBank would then sell shares in a secondary offering to other investors and retain a smaller stake itself, one of the people said. The deal could be announced this week, the person said.
    • In the battle to keep millions of China’s smaller businesses afloat, banks are counting on being allowed another round of exceptions for borrowers falling behind on payments. The regulator and some lenders have discussed extending loan relief beyond a June 30 deadline for corporates hurt by the pandemic, said people familiar with the matter, asking not to be named as the talks are private. The guidance from Beijing is to offer flexibility on principal and interest payments, the people said. Banks would see a surge in bad loans in the second half without such measures, weakening their ability to keep credit flowing, according to bankers and analysts.
    • As the Federal Reserve pulls out all the stops to bolster credit markets, corporate America is gorging on debt. From Carnival Corp., Marriott International Inc. and Delta Air Lines Inc. to Gap Inc. and Avis Budget Group Inc., many of the companies hardest hit by the coronavirus outbreak have priced billions of dollars of bonds and loans in recent weeks. Never mind that profits have been wiped out, and that their business operations aren’t viable right now or likely anytime soon. As long as they’re propped up by the Fed, investors are willing to lend.
    • Walmart Inc. posted strong quarterly sales fueled by coronavirus-related stockpiling, showing how it’s one of the few retailers that’s thriving even amid the unprecedented carnage in the U.S. retail sector. Comparable-store sales, a key retail metric, increased 10% for U.S. Walmart stores in the period, compared with the 8.6% estimate compiled by Consensus Metrix. That’s the fastest pace of growth in almost two decades. Profit in the quarter also beat expectations.
    • Warren Buffett was willing to stand by Goldman Sachs Group Inc.’s side during the last economic crisis, at least for the right price. Now, he’s bailing out just as the pandemic throws the U.S. economy onto uncertain terrain. Berkshire Hathaway Inc. sold 84% of its Goldman Sachs stock in the first quarter, marking a reversal for an investor who generally holds large stakes in the banking sector. It was one of the most notable changes in Berkshire’s more-than $180 billion portfolio in the period, as the bank underperforms the broader U.S. market. Buffett traces his relationship with Goldman Sachs back to a meeting with the bank’s longtime head, Sidney Weinberg, in 1940. The billionaire investor routinely praised former Chief Executive Officer Lloyd Blankfein as he led the Wall Street firm through the last financial crisis. Then Berkshire started paring its stake during the last few months of 2019 — after David Solomon had succeeded Blankfein as CEO — and deepened that cut in the first quarter, nearly bringing the investment to an end.
    • Pier 1 Imports Inc. said it would seek bankruptcy court approval to wind down its retail operations after the coronavirus pandemic made it difficult for the U.S. retailer to find a buyer. The company said in a statement Tuesday it intends to sell its inventory and remaining assets, including its intellectual property and e-commerce business, through the court-supervised process. Pier 1 filed to begin an orderly wind-down “as soon as reasonably possible” after stores are able to reopen following government-mandated closures because of the pandemic.
    • U.S. Securities and Exchange Commission employees will have to stay away from the agency’s offices for at least two more months as Wall Street’s main regulator continues conducting much of its work remotely during the coronavirus pandemic. SEC Chairman Jay Clayton told employees in an email late last week that mandatory telework for the vast majority of the agency’s 4,000-plus employees will remain in effect until at least July 15. Clayton said the announcement, a copy of which was viewed by Bloomberg, was intended to provide some near-term certainty for staff.
    • China is considering targeting more Australian exports including wine and dairy, according to people familiar with the matter, in what would be a dramatic deterioration in ties as the key trading partners spar over the coronavirus outbreak. Chinese officials have drawn up a list of potential goods also including seafood, oatmeal and fruit that could be subject to stricter quality checks, anti-dumping probes, tariffs or customs delays, the people said, asking not to be identified as the discussions are private. State media could also encourage consumer boycotts, they said, adding a final decision on the measures had not been made. Australia, which is the world’s most-China dependent developed economy, has raised Beijing’s ire by calling for an investigation into the origins of the pandemic. President Xi Jinping’s government is sensitive to criticism of its handling of the outbreak and has a track record of using trade as a diplomatic cudgel, with South Korea, Japan and Taiwan all experiencing reprisals in recent years.
    • The Environmental Protection Agency is moving Tuesday to restrain how it uses memos, advisories and other informal statements to shape policy — with a proposal that could open the door to court review of those guidance documents. The EPA’s proposed rule would limit the scope of guidance documents and give the public a chance to weigh in on many of them. It would require the agency post such documents online — including some that have been locked away in file cabinets for decades. It also would create a formal process for the public to request that guidance documents be modified or withdrawn.
    • Car-sharing platforms, which have suffered during the Covid-19 lockdown, see an opportunity emerging: an increase in short-distance, local trips as U.S. consumers look for a different way of getting to work and running errands. Executives from Turo, GetAround and ZipCar are hoping their pitch to customers—a means of travel that is cheaper than car ownership and sanitary—will also win business from public transit users and Uber and Lyft riders. In addition to the uptick in shorter trips, the companies also report increased use by essential workers and health-care workers. “Customer confidence in travel safety can change their booking habits,” said Preeti Wadhwani, a research analyst with Global Market Insights. “Health-care providers or first responders are relying on car-sharing companies such as Turo to commute to work.”

*All sources from Bloomberg unless otherwise specified