May 22nd, 2020

Daily Market Commentary

Canadian Headlines

  • Canada’s six-biggest banks are poised to set aside C$8.9 billion ($6.4 billion) for souring loans in the fiscal second quarter — a record amount that will wipe out more than half the industry’s profits. The total is the average estimate of five analysts who attempted to calculate potential loan losses through a fog of uncertainty caused by the coronavirus pandemic and plunging oil prices. The total is three times higher than the first quarter and will be the key reason Canada’s biggest banks will see profits plunge in the period ended April 30. The six large lenders are expected to post a 44% earnings decline for the second quarter, the median of estimates compiled by Bloomberg Intelligence. That would be the biggest drop in 11 years, when banks were sideswiped by a global financial crisis.
  • Covid-19 is threatening to upend one of Justin Trudeau’s key environmental promises: tougher restrictions on plastics and chemicals. The Canadian prime minister announced plans to phase out single-use items like straws and plates last summer, joining governments in Europe, India and California. The ban, which is still intended to take effect in 2021, featured prominently his Liberal Party’s campaign platform for the fall election that saw Trudeau returned to power in part because of his appeal to green-minded voters. But the coronavirus has brought plastics back into favor. Manufacturers can’t produce personal protective equipment fast enough, including disposable gloves, masks, wipes and bottles of hand sanitizer. Most of it isn’t recyclable and crumpled up gloves and masks have become a common sight outside grocery stores and other retail locations, particularly as Canadian provinces begin to ease lockdown orders.
  • Brookfield Asset Management Inc. is in discussions with administrators for Virgin Australia Holdings Ltd. over rejoining the bidding for the airline after withdrawing from consideration, people familiar with the matter said. The Canadian asset manager had submitted a proposal before the May 15 deadline for indicative offers for the carrier, but withdrew over concerns about the competitive environment, said one of the people, who asked not to be identified as the discussions are private. Brookfield’s concerns about the process include that there are too many bidders and that the timeline is too short, both of which make it difficult to ascertain the key information they would need to firm up a bid, said the people.

World Headlines

  • European stocks fell for a second day, following a slump in Asian markets after China planned to impose a national security law on Hong Kong. The Stoxx Europe 600 Index dropped 1.6% as of 8:16 a.m. in London. All 19 industry groups fell, led by miners, energy shares and banks. China’s proposal is fueling concern of fresh protests in Hong Kong and threatens to escalate tensions with the U.S. That’s adding to risk-off sentiment in European equities, which have lost momentum after kicking off this week with strong gains on hopes of a vaccine against the coronavirus. The Stoxx 600 is heading for a weekly gain of 2.2%.
  • U.S. equity futures slipped alongside stocks on Friday as investors braced for tensions between Washington and Beijing to escalate after China announced plans to impose a national security law on Hong Kong. Treasuries climbed with the dollar while oil snapped a six-day winning steak. Contracts on all three main American equity gauges pointed to modest losses at the Wall Street open. Deere & Co., the world’s biggest tractor maker, bucked the trend, rising in premarket trading after it reported better-than-expected earnings.
  • Japanese stocks fell amid renewed tension over Hong Kong and concerns about China’s economy. The Topix index fell by the most in over a week, erasing an early gain. Electronics makers and banks were the biggest drags. President Donald Trump warned that the U.S. would respond to a planned move in Beijing to curtail protests and democratic movements in Hong Kong.
  • Oil retreated from the highest level in more than two months with doubts emerging over the strength of China’s economic recovery and as tensions rose between Washington and Beijing. Futures in New York fell 5.6%. Beijing won’t set a target for economic growth this year due to “great uncertainty” over the coronavirus, although it did announce some new stimulus spending. Equity markets from Asia to Europe fell on expectations that tensions between the U.S. and China will escalate on concerns over a new Hong Kong security law. In oil, there are warning signs that any recovery will be long and slow. The research unit of state-owned China National Petroleum Corp. said fuel demand in the country will drop by 5% this year. India’s consumption may not recover to pre-coronavirus levels for months.
  • Gold rebounded to trim a weekly loss as China’s plan to impose a national security law on Hong Kong suppressed appetite for risk assets. Beijing’s initiative added to worries over its relationship with the U.S. after President Donald Trump said his country would respond to the move, while China warned it will safeguard its sovereignty and interests. Investors are also tracking the economic damage from the pandemic even as lockdowns ease. China abandoned its decades-long practice of setting a target for economic growth, while the U.K. posted a record budget deficit in April. Spot prices for other precious metals remained under pressure on Friday, yet silver and platinum both held to weekly gains and continue to outperform gold so far in May.
  • Deere & Co. rose after the top tractor maker navigated coronavirus upheavals better than expected in the height of the pandemic. For the three months through April, sales fell less than analysts projected as agricultural — deemed essential in the lockdown era — proves more resilient than other industries. Lower costs helped Deere defend margins in a quarter that’s often its strongest, when farmers buy planting equipment for the growing season. Deere forecast full-year profit of $1.6 billion to $2 billion compared with the average analyst estimate of $2.1 billion. In March, Deere dropped full-year guidance and said it cut back operations due to uncertainties related to Covid-19.
  • Oxford University and AstraZeneca started recruiting subjects for advanced human studies of one of the fastest-moving experimental Covid-19 vaccines. Brazil had another record day of deaths and its government agreed to the terms of a financial aid package. Americans are expected to head to parks and beaches over the Memorial Day weekend after weeks of home isolation, prompting concerns of a spike in infections. Russia reported the most fatalities in a single day, though new cases steadied, while Australia’s most-populous state moved to relax limits. Earlier, Beijing abandoned a growth target for 2020 amid the uncertainty caused by the coronavirus, while central banks in Japan and India stepped in to help their economies. Britain posted a record budget deficit in April and retail sales slumped.
  • Britain posted a record budget deficit in April as the government unleashed an unprecedented package to prevent the collapse of the virus-stricken economy. The figures reflect the cost of interventions announced by Chancellor Rishi Sunak, including paying the wages of 8 million furloughed workers, a surge in welfare claims and the hit to tax revenue as the economy plunged into recession. The price may yet go higher the longer the lockdown restrictions last.
  • President Donald Trump credits his signature rallies for his improbable White House victory and the roaring economy he once presided over was his best argument for re-election. But with the coronavirus pandemic destroying both, he’s trying to compensate by turning official events into the next best thing. The visits, often to see manufacturers of medical equipment, feature the same themes and some of the same moves. The campaign play list goes with him. He ticks off similar talking points about pre-Covid economic achievements. There is no substitute for screaming fans waving signs and sporting MAGA hats, but Trump has been using some of his most popular campaign-style commentaries during those trips.
  • Retail landlords are sending out thousands of default notices to tenants, a situation that could tip already-ailing retailers into bankruptcy or total collapse. Department stores, restaurants, apparel merchants and specialty chains have been getting the notices as property owners who’ve gone unpaid for as long as three months lose patience, according to people with knowledge of the matter and court filings. “The default letters from landlords are flying out the door,” said Andy Graiser, co-president of A&G Real Estate Partners, whose firm works with retailers and other commercial tenants. “It’s creating a real fear in the marketplace,” Graiser said.
  • An Airbus SE jet operated by Pakistan International Airlines crashed with 107 people on board as it approached its destination of Karachi. Flight PK 8303, which took off from Lahore, was carrying 99 passengers and 8 crew, Pakistan’s Civil Aviation Authority said. The country’s army tweeted that troops had reached the site to conduct relief-and-rescue efforts. The A320 narrow-body jet built in 2004, data from Flightradar24 showed. It’s the second plane crash for the Pakistani carrier in less than four years. The airline’s chairman resigned in late 2016, less than a week after the crash of an ATR 42 turboprop killed 47 people. Friday’s crash happened on the first day of the Muslim festival of Eid al-Fitr, when many Pakistanis return home to celebrate.
  • British mortgage borrowers will be allowed to skip payments for three more months as regulators aim to ease coronavirus-driven stress on the economy. Simultaneously, the Bank of England signaled that banks have leeway not to mark these mortgages as bad loans. More than a million Britons have opted to delay their payments after the government imposed a lockdown to contain the pandemic, throwing many out of work and leaving small-business owners struggling to stay afloat. The original so-called payment holiday started in March and was set to end next month. The British state’s response to the crisis has aimed to soften the blow to people whose income has been interrupted, while also making sure the banks are able to keep credit flowing. Regulators are concerned that taking large provisions for impaired loans could inhibit the ability of lenders to support the economy.
  • Ukraine and the International Monetary Fund are finalizing a new $5 billion loan to ease the economic pain caused by the coronavirus pandemic. A so-called staff-level agreement was reached for the 18-month stand-by loan, which will “provide balance of payments and budget support,” Ivanna Vladkova Hollar, who led the staff team, said late Thursday in an emailed statement. The financing still requires approval from the IMF’s board, expected in the coming weeks. Ukraine met the Washington-based lender’s final condition this month by approving a law that protects the 2016 nationalization of its biggest bank from legal challenge by its former owners. Prime Minister Denys Shmyhal has said $3.5 billion could arrive this year from the IMF, while the deal will also unlock funding from the World Bank and the European Union.
  • Alibaba Group Holding Ltd. projected sales below expectations after reporting its slowest pace of revenue growth on record, reflecting the impact of China’s economic contraction across its online marketplaces. The Chinese e-commerce leader forecast growth in revenue this year of least 27.5% to more than 650 billion yuan ($91 billion), lagging the 657 billion yuan average of analysts’ estimates. It also reported a 22% rise in sales to 114.3 billion yuan in the March quarter. Net income was 3.2 billion yuan, down from a year ago when it booked an 18.7 billion yuan one-time gain on investments. Alibaba’s results demonstrate the world’s second largest economy has yet to fully shake off Covid-19, with consumers still hesitant about spending on big-ticket items. Asia’s largest corporation is tackling not just a record slowdown in its home market but also the rise of rivals such as ByteDance Ltd. and Pinduoduo Inc. Total e-commerce in China rose just 5.9% in the coronavirus-stricken period, less than a third of 2019’s pace, according to government data. But online shopping is on the rebound, the company said Friday.
  • On the first day of China’s biggest political event of the year, Xi Jinping sent a clear message to Donald Trump: We’re going to do what we want in Hong Kong, and we’re not scared of the consequences. China confirmed on Friday that it would effectively bypass the city’s legislature to implement national security laws, which have long been resisted by residents who fear they will erode freedoms of speech, assembly and the press. The announcement, which came on the same day China refrained from setting an economic growth target for the first time in decades, triggered immediate calls for fresh protests and sent the MSCI Hong Kong index to its worst loss since 2008.
  • Joe Biden’s campaign doesn’t have any staff in Arizona, a state many Democrats believe would give him a clear path to victory over President Donald Trump. He also hasn’t campaigned there, even virtually — while Trump has been to the state twice since mid-February. Biden’s campaign promises to make up ground quickly by adding staffers in coming weeks. And while the slow start might make Democrats anxious, polling shows that the former vice president is leading Trump in a possible Sun Belt antidote to the Democrats’ Rust Belt disappointments of 2016.
  • The Chinese government abandoned its decades-long practice of setting an annual target for economic growth amid the storm of uncertainty unleashed by the coronavirus pandemic, and said it would continue to increase stimulus. Speaking Friday morning at the National People’s Congress in Beijing, Premier Li Keqiang delivered an annual policy address that laid out a renewed focus on maintaining employment and investment. Against a backdrop of escalating tensions with the U.S., Li said Beijing remains committed to implementing the terms of the ‘phase one’ trade deal.
  • Donald Trump is escalating his long-running feud with the U.S. Postal Service, setting up a bitter political fight that could harm the president’s standing with key voters ahead of November elections. The partisan conflict centers on tens of billions of dollars postal leaders say they need to avert possible bankruptcy as soon as late September. Trump says the agency must first raise prices and cut costs. The president’s stance carries considerable political risks with millions more Americans and small businesses relying on home deliveries to keep goods flowing as strict social-distancing measures cripple economic activity. Democrats, large retailers and other postal service advocates say raising shipping costs now would simply harm consumers and small businesses that are struggling to survive.

*All sources from Bloomberg unless otherwise specified