May 25th, 2020

Daily Market Commentary

Canadian Headlines

  • Saks Fifth Avenue owner Hudson’s Bay denied allegations in a lawsuit that an internal restructuring amounted to a move to strip the company of its assets and impair collateral for a loan to subsidiaries of a real estate joint venture. In a memo filed Saturday in New York in response to the lawsuit by U.S. lenders, the company called it “a transparent attempt to gain leverage in negotiations” with the borrowers, who are landlords of 34 Saks and Lord & Taylor stores. Owned by a Hudson’s Bay joint venture, they defaulted on $7.4 million of payments of a $846 million loan as retailers stopped paying rent after the coronavirus pandemic forced them to close, according to the document.

World Headlines

  • European shares rose in a broad rally led by the real estate and construction sectors, while Bayer AG surged after a report it has reached deals on many cancer lawsuits linked to use of its Roundup weedkiller. The Stoxx Europe 600 Index was up 0.8% by 12:11 p.m. CET. The index extended its gains after Germany’s Ifo survey showed cautious optimism in May, with a gauge of expectations rising after the previous month’s plunge. Trading volumes are thin as markets in both the U.K. and U.S. are closed on Monday for a public holiday. Bayer jumped 8.1%. The company has reached verbal agreements to resolve a substantial portion of an estimated 125,000 U.S. cancer lawsuits related to Roundup, according to people familiar with the negotiations. Deutsche Lufthansa AG was up 5.5%, rallying after DPA reported that the troubled airline reached an agreement with the German government for an aid package. Airport operator Fraport AG was up 7.1%.
  • In Asia, Hong Kong shares inched higher after Friday’s slump, following police clashes at the weekend with protesters marching against China’s move to crack down on dissent. Benchmarks in Tokyo and Sydney led advances in the region’s stocks. Volumes may be light with holidays in the U.S., U.K. and Singapore. Treasuries weren’t trading, and futures on the 10-year note were little changed. China set its daily yuan reference rate at the weakest level since 2008 after the increasing tensions drove the currency to a seven-month low on Friday. A benchmark of emerging-market stocks headed for its first rise in three sessions.
  • Oil traded near $33 a barrel as an escalating war of words between the U.S. and China added to caution over the prospects for a global recovery in demand. China warned on Sunday that some in the U.S. were pushing the countries toward a new Cold War, stoking concerns that deteriorating relations between Beijing and Washington could complicate the market’s recovery from a historic demand crash. Futures edged higher in New York after falling earlier, with trading volumes thin due to holidays in the U.S., U.K. and Singapore. Crude has surged more than 75% this month and the boss of the International Energy Agency gave bulls further hope, saying in an interview that demand may well recover from an unprecedented shock caused by Covid-19. Even so, the return of U.S.-China tensions has soured risk sentiment and rekindled more-immediate demand concerns. There’s also concern that some supplies idled during oil’s rout will start to return.
  • Gold declined while copper followed equities higher as optimism around economies reopening outweighed concerns about rising geopolitical tensions between Beijing and Washington. The Japanese government was set to end its nationwide state of emergency by lifting the order for Tokyo, its surrounding areas and Hokkaido on Monday. Australia’s school kids went back to class today, while the Italian region hardest hit by Covid-19 reported zero fatalities for the first time.
  • The number of new coronavirus cases in Germany rose slightly, while a hard-hit region in Italy that includes the financial capital Milan reported zero fatalities for the first time. Japan ended its nationwide state of emergency by lifting the order for Tokyo and other regions as new cases tail off. U.K. Prime Minister Boris Johnson is facing intense political pressure after defending a top aide who broke lockdown rules. President Donald Trump said schools should be opened “ASAP,” while U.S. deaths approached the 100,000 mark. The U.S. will limit some travel from Brazil, a nation with the second-highest number of cases.
  • The U.S. will prohibit the entry of most non-U.S. citizens arriving from Brazil, where coronavirus cases have spiked to the second highest in the world, expanding restrictions already placed on visitors from China and Europe. The order begins at 11:59 p.m. on Thursday, at which point the entry of foreigners who’ve been in Brazil during the 14-day period before their arrival into the U.S. will be halted, White House Press Secretary Kayleigh McEnany said Sunday. The restrictions, foreshadowed earlier on Sunday by National Security Adviser Robert O’Brien, don’t apply to the flow of commerce between the U.S. and Brazil. Exemptions apply for various individuals.
  • The parent of Bharti Airtel Ltd. is seeking about $1 billion by selling a stake in the Indian mobile carrier after its share price hit a record on signs the years-long price war is about to end. Bharti Telecom Ltd. is selling 150 million Bharti Airtel shares at a floor price of 558 rupees each, according to terms of the deal obtained by Bloomberg. That implies a discount of about 6% to its close on Friday. Bharti Airtel shares climbed to a record 598.8 rupees last week after it posted a 14% increase in user revenue in the quarter through March. Investors have been betting the worst is behind the New Delhi-based operator as it faces fewer competitors than in the recent past.
  • Tencent Holdings Ltd. is buying a 20% stake in Japan’s Marvelous Inc., giving the smaller company capital to develop its game franchises and bolstering the content Tencent itself can offer users. China’s biggest game company, through affiliate Image Frame Investment, will spend about 7 billion yen ($65 million) to buy stock in the company, the Japanese games maker said in a statement. Marvelous will sell 8.62 million new shares for 576 yen apiece, while shareholders Amuse Capital and Nakayama Hayao will sell 2.83 million and 708,600 shares respectively at the same price.
  • Hertz Global Holdings Inc., the car-rental company which filed for bankruptcy late Friday, said the collapse in air travel amid the coronavirus pandemic hit its biggest source of rental revenue. “The overall impact of the COVID-19 crisis devastated our revenue,” according to a court filing dated Sunday signed by Jamere Jackson, an executive vice president and chief financial officer of Hertz. The company, whose counters are common in airports across the globe, said the pandemic not only hit its revenues but also placed “substantial new demands” on its cash. In April, the first full month after the health crisis took hold in the U.S., its global revenue dropped 73% from the same month in the previous year, according to Hertz.
  • Bayer AG has reached verbal agreements to resolve a substantial portion of an estimated 125,000 U.S. cancer lawsuits over use of its Roundup weedkiller, according to people familiar with the negotiations. The deals, which have yet to be signed and cover an estimated 50,000 to 85,000 suits, are part of a $10 billion Bayer plan to end a costly legal battle the company inherited when it acquired Monsanto in 2018, the people said. While some lawyers are still holding out, payouts for settled cases will range from a few million dollars to a few thousand each, said the people, who asked not to be identified because they aren’t authorized to speak publicly.
  • Germany is close to making a formal offer to bail out Deutsche Lufthansa AG even as talks to ensure swift approval from the European Union drag on, according to people familiar with the matter. The committee that manages Germany’s WSF Economic Stabilization Fund is set to meet later on Monday to discuss a 9 billion-euro ($9.8 billion) aid package, a person familiar with the matter said. The meeting — delayed repeatedly in recent days — is an indication that Germany is prepared to formalize an offer, though the situation remains delicate. The German government and Deutsche Lufthansa AG have reached an agreement in principle on a bailout package, German news agency DPAreported without citing the source of the information.
  • Europe’s leaders may be united on the need to throw money at economies during the coronavirus crisis, but they have yet to confront how to pay for it all. That reckoning could force governments across the region into tough choicesabout where to lay the burden among voters already disillusioned with political establishments — a decade after the global financial crisis presented them with previous bills to settle. Europe’s austerity experiments since then, from Greece to the U.K., provide cautionary tales of either the economic damage or electoral fatigue that spending cuts can cause. With those bitter experiences in mind, politicians are already fielding questions about tax hikes on either wealth or income — even if they too might threaten to hurt growth.
  • U.K. Prime Minister Boris Johnson is facing his most serious political crisis since his election victory last year, with politicians from all sides including his own demanding the resignation of his top aide over claims he breached lockdown rules. Johnson put his own authority on the line to back Dominic Cummings, his most powerful adviser, who is under attack for his decision to travel more than 250 miles (402 kilometers) to seek care for his 4-year-old child at a time when the official advice was to “stay home.” The premier said that while he understood the confusion and dismay over the episode, Cummings’s actions were “sensible and defensible.” But Johnson’s response did little to end the controversy. Monday’s national newspapers made grim reading for the premier, with even the normally Tory-supporting Daily Mail’s front page asking “What Planet Are They On?” Meanwhile, a growing number of politicians, including more than a dozen of Johnson’s own Conservatives, said Cummings must lose his job, with many warning of mounting anger from voters.
  • China’s first-ever convertible bond default is likely to happen within weeks, upending a market that became too hot for regulators only a year ago. A note sold by Jiangsu Huifeng Bio Agriculture Co., which hasn’t traded since late April, became China’s first listing suspension of the instrument on Monday. That means trading can’t resume unless Huifeng posts a profit for 2020; it’s had losses the past two years. More urgently, the company could be forced to repurchase the bond starting June 5 if shares remain below 5.40 yuan. Huifeng has repeatedly said it would struggle to find enough funds for early repayment, raising the risk for default.
  • Apple Inc. will begin reopening its retail stores in Japan this week, one of its most important markets, after the stores had been shuttered for months due to Covid-19. Two locations — the stores in Fukuoka and Nagoya Sakae — will reopen on May 27, according to the company’s retail website. Reopening dates for the country’s eight other Apple stores have not yet been posted. In September, Apple opened its latest and largest outlet in Tokyo’s Marunouchi business district, moments away from the historic Tokyo Station and the Imperial Palace. Tokyo remains under an official state of emergency, though Japan’s Economy Minister Yasutoshi Nishimura said on Monday that the government’s advisory panel had approved a plan to lift the measure later that day, a week ahead of schedule.
  • The U.S. should give up its “wishful thinking” of changing China, Foreign Minister Wang Yi said, warning that some in America were pushing relations to a “new Cold War.” “China has no intention to change the U.S., nor to replace the U.S. It is also wishful thinking for the U.S. to change China,” Wang said Sunday during his annual news briefing on the sidelines of National People’s Congress meetings in Beijing. He also criticized the U.S. for slowing its nuclear negotiations with North Korea and warned it not to cross Beijing’s “red line” on Taiwan. The U.S.-China relationship has worsened dramatically in the past few months as America became one of the countries worst hit by the coronavirus pandemic, which was first discovered in the Chinese city of Wuhan. The world’s two biggest economies have clashed on a range of issues from trade to human rights, with Beijing’s latest move to tighten its grip on Hong Kong setting up another showdown between U.S. President Donald Trump and China’s Xi Jinping.
  • Global oil consumption hasn’t peaked, the head of the International Energy Agency warned, throwing cold water on hopes the coronavirus will cap demand and reduce climate-changing emissions. “In the absence of strong government policies, a sustained economic recovery and low oil prices are likely to take global oil demand back to where it was, and beyond,” Fatih Birol said in an interview. The world consumed last year nearly 100 million barrels a day of oil, and some in the energy industry believe that could mark the peak for global demand. Their hypothesis is that the coronavirus outbreak will trigger changes, like widespread working-from-homeand less overseas travel, reducing consumption permanently.

*All sources from Bloomberg unless otherwise specified