May 27th, 2020

Daily Market Commentary

Canadian Headlines

  1. Royal Bank of Canada set aside a record C$2.83 billion ($2.06 billion) in anticipation of soured loans from plunging oil prices and the economic impacts of the coronavirus pandemic. The country’s largest lender by assets had the highest provisions among Canadian banks that have reported fiscal second-quarter results so far. Royal Bank’s set-asides contributed to a 54% decline in net income, which missed analysts’ estimates. U.S. banks benefited from a surge in trading earlier in the year as markets reacted to the Covid-19 outbreak, countering some of the pandemic’s damage to their first-quarter results. In Royal Bank’s fiscal quarter, which ended April 30, the firm gained from a similar experience, with trading revenue rising 15% to C$1.11 billion.
  2. Bank of Montreal followed other Canadian lenders in building up reserves for loan losses to brace for the aftershocks from plunging oil prices and a pandemic that’s caused a near economic standstill. Bank of Montreal, which has consumer-banking operations in Canada and the U.S., set aside a record C$1.12 billion ($813 million) in loan-loss provisions in the fiscal second quarter. The Toronto-based lender joins Bank of Nova Scotia and National Bank of Canada in posting a surge in provisions, which eroded earnings in results for Bank of Montreal that missed analysts’ estimates.

World Headlines

  1. European stocks extended their highest levels since March as the region’s governments continued to ease virus-related restrictions without experiencing a resurgence in cases, while prospects of fiscal stimulus also boosted sentiment. The Stoxx Europe 600 Index rose 0.8% as of 10:41 a.m. in London, on track for its best May performance since 2009. Cyclicals such as banks and carmakers led gains, while travel and leisure shares continued their ascent into a fourth day. European equities have now recovered about half the losses spurred by the initial reaction to the coronavirus outbreak in February-March. Adding to optimism about the restarting of economic activity, the European Union’s executive arm was said to propose a fiscal stimulus package of 750 billion euros ($823 billion). The Stoxx 600 is up 3.6% in May.
  2. U.S. equity futures and European stocks advanced as investors focused on progress in reopening economies and on the European Union’s final touches to its fiscal-stimulus proposal. The common currency strengthened, while Treasuries slipped. Contracts on the three main American equity gauges pointed to a firm opening on Wall Street as some of the stocks most punished by the coronavirus, from Carnival Corp. to United Airlines, jumped in the premarket.
  3. Meanwhile, Asian stocks closed mixed in wake of the latest Sino-American flare-up, and China’s yuan slipped, nearing its weakest level on record against the dollar. Investors are taking the new U.S.-China friction in stride, including possible sanctions over Beijing’s crackdown in Hong Kong, as they drive global stocks to levels not seen since early March on hopes that economies are beginning to recuperate after a deep downturn. The EU’s long-anticipated blueprint will be presented later Wednesday.
  4. Oil declined from the highest settlement in 11 weeks on signs Russia is supporting plans to start easing supply cuts from July, while tensions between the U.S. and China escalated amid the specter of sanctions. Futures fell 1% in New York. Moscow wants to scale back curbs in line with the OPEC+ deal, according to people familiar with the matter. A Kremlin spokesman had earlier said Russia would analyze the market before making any decision at a June 9-10 OPEC+ meeting. Meanwhile, the U.S. is considering a range of sanctions to punish China for its crackdown on Hong Kong, further deteriorating their relationship. Crude in New York has surged about 80% in May, clawing back the declines of the previous two months. The physical market has also recovered in recent days. Indian, Chinese and South Korean refineries are buying distressedcargoes in a sign of returning demand. The price differences between immediate contracts and those for later delivery are also narrowing, in a further indication of supply tightness.
  5. Gold slipped for a third day as signs of improvement in some economies rolled back haven demand, offsetting concern about deteriorating U.S.-China relations. The haven slid toward $1,700 an ounce as China’s economy continued its slow recovery in May from the coronavirus slump. In the U.S., JPMorgan Chase & Co. sees “pretty good odds” of a fast rebound starting in the third quarter. The European Union’s executive arm will propose a new fiscal stimulus package of as much as 750 billion euros in an unprecedented push to overcome the deepest recession in living memory, according to a tweet by European Commissioner Paolo Gentiloni.
  6. Cases soared in Brazil and police opened an investigation into Rio de Janeiro’s handling of the crisis, while Mexico had its deadliest day yet. The European Union will propose a fiscal package worth more than $800 billion and Japan is planning new economic stimulus valued in excess of $1 trillion. The euro-area is faring worse than hoped, facing a recession as bad as the European Central Bank’s more pessimistic forecasts. In Britain, pressure mounted on Prime Minister Boris Johnson to fire his chief aide and the government may look at lockdowns on a local level if cases flare. U.S. fatalities approached the 100,000 level, though infections rose at the slowest pace since March and President Donald Trump unveiled plans to increase testing. France said hydroxychloroquine, the malaria medicine touted as a treatment by Trump, can no longer be prescribed to Covid-19 patients.
  7. President Donald Trump threatened to regulate or shutter social media companies — a warning apparently aimed at Twitter Inc. after it began fact-checking his tweets. In a pair of tweets issued Wednesday morning from his iPhone, Trump said that social media sites are trying to silence conservative voices, and need to change course or face action. “Republicans feel that Social Media Platforms totally silence conservatives voices. We will strongly regulate, or close them down, before we can ever allow this to happen,” he said. In a second tweet, he added: “Just like we can’t let large scale Mail-In Ballots take root in our Country.”
  8. Russia is determined to start easing oil-output cuts in July, sticking to the terms of the OPEC+ deal reached in April, according to people familiar with the key producer’s position. OPEC and its partners struck a historic accord last month to slash supply as the coronavirus pandemic savaged demand. They agreed the cuts would taper from July. But Saudi Arabia has since sought to prop up the market with extra cuts and Gulf allies have followed suit. As OPEC+ prepares to meet in two weeks’ time, members are weighing up whether to extend the curbs or ease them. Three Russian officials and two people in the industry, speaking on condition of anonymity, said the nation’s position is to stick to the plan. Kremlin spokesman Dmitry Peskov told reporters on Tuesday the deal is “undoubtedly successful,” and said countries will look at how the situation develops before taking a decision at the June 9-10 meeting.
  9. The euro-area economy is faring worse than hoped, facing a recession as bad as the European Central Bank’s more pessimistic forecasts, according to President Christine Lagarde. Output in the region is set to shrink between 8% and 12%, she said, with estimates for a milder slump now “out of date.” Her remarks highlight the severity of the repercussions for Europe after many businesses were forced to close because of the coronavirus pandemic, costing hundreds of thousands of jobs and furloughing millions more. Both the central bank and governments have ramped up spending to offer companies and households support. The European Commission will announce a new fiscal stimulus package of as much as 750 billion euros ($823 billion) later on Wednesday, two-thirds of which is expected to be in the form of grants to hard-hit member states.
  10. The U.S. is considering a range of sanctions to punish China for its crackdown on Hong Kong, people familiar with the matter said, as the Trump administration weighs whether to declare the former colony has lost its autonomy from Beijing. The Treasury Department could impose controls on transactions and freeze assets of Chinese officials and businesses for implementing a new national security law that would curtail the rights and freedoms of Hong Kong citizens. Other measures under consideration include visa restrictions for Chinese Communist Party officials, according to two of the people. Inter-agency discussions are ongoing and no decision has been made on whether or how to employ the sanctions, said the people, who spoke on condition of anonymity because the moves are still under consideration.
  11. TikTok’s parent ByteDance Ltd. generated more than $17 billion in revenue and more than $3 billion of net profit last year, figures that show the world’s most valuable startup is still growing at a brisk rate, according to people familiar with the matter. The revenue for last year was more than double the company’s tally of about $7.4 billion in 2018, propelled by phenomenal growth in user traffic that’s drawn advertisers away from Tencent Holdings Ltd. and Baidu Inc.The people asked not to be identified because the financial details are private. ByteDance has emerged as one of the tech industry’s most surprising success stories, an innovative Chinese company that is challenging the global dominance of U.S. internet giants. It draws some 1.5 billion monthly active users to a family of apps that includes the TikTok short-video platform, its Chinese twin Douyin and the news service Toutiao. This month, the company poached Walt Disney Co. streaming czar Kevin Mayerto become chief executive officer of TikTok.
  12. ZoomInfo Technologies Inc., a business-intelligence platform owned by private equity firms, is seeking to raise as much as $801 million in a U.S. initial public offering. The Vancouver, Washington-based company is offering 44.5 million shares at $16 to $18 apiece, according to a regulatory filing Wednesday. BlackRock Inc., Fidelity Investments and Dragoneer Investment Group LLC have expressed interest in investing as much as $100 million apiece as cornerstone investors in the share sale, the filing shows. ZoomInfo follows Warner Music Group Inc. in returning to the U.S. IPO market this week. The easing of the lockdown to help prevent the spread of the coronavirus and the potential boost to the economy helped lift both the S&P 500 Index and Dow Jones Industrial Average on Tuesday.
  13. French building-materials maker Cie. de Saint-Gobain SA sold an almost 11% holding in Sika AG, following through on a plan to reduce its stake after settling a takeover feud with the adhesives maker. The 15.2 million-share offering raised a total of 2.56 billion Swiss francs ($2.7 billion), Saint-Gobain said in a statement on Wednesday. The stake dates back to Saint-Gobain’s failed attempt to take over Basel-based Sika that was settled last year. Selling it will provide the French company with added liquidity after the coronavirus crisis hurt economic activity across Europe. Over two years, the Sika stake generated a gain of 1.54 billion euros, the building-materials maker said.
  14. Sanofi will raise as much as $11.7 billion by selling almost all of its stake in Regeneron Pharmaceuticals Inc., capitalizing on an investment started 17 years ago to gain firepower for acquisitions. Regeneron shares will be sold for $515 per share, Sanofi said in a statement Wednesday, confirming a Bloomberg report on the pricing. That’s 5.5% below Tuesday’s closing price. Regeneron will buy $5 billion of that and underwriters led by Bank of America Corp. and Goldman Sachs Group Inc. will have an option to purchase some of the shares being sold. The Regeneron exit, part of Sanofi Chief Executive Officer Paul Hudson’s strategy to focus on fast-growing areas such as cancer and gene therapy, is sparking speculation he’ll hunt for more targets following a deal in December to buy biotech company Synthorx Inc. for $2.5 billion. The transaction will boost the French company’s war chest to $50 billion, according to Bloomberg Intelligence.
  15. Walmart Inc. is jumping into the fast-growing resale clothing market to give its apparel offering a shot in the arm and diversify its e-comerce business beyond groceries and consumer staples. The world’s largest retailer is partnering with ThredUp, an online secondhand apparel company, to sell used women’s and children’s clothing on its website. Accessories and handbags, as well as footwear, are also available, with brands ranging from Calvin Klein and Coach to Nike. Walmart will offer nearly 750,000 secondhand products online, and shoppers can return items at the retailer’s stores. Shoppers have shown more willingness to dip into the used market for apparel in recent years. Thredup’s own research suggest that more than two thirds of consumers purchased secondhand items or are willing to do so, according to the company’s upcoming 2020 annual resale report. That’s up from previous years, and since the study was carried out in April, it would seem that the preference is sticking in spite of the Covid-19 outbreak that has roiled daily life and changed consumer tendencies across the globe.
  16. The European Commission unveiled an unprecedented stimulus plan to tackle the worst recession in living memory and underwrite struggling Italy’s membership of the 27-nation bloc. The government in Rome stands to receive 82 billion euros ($90 billion) in emergency grants and up to 91 billion euros in low-interest loans from the package that could be worth as much as 750 billion euros in total, according to an official who asked not to be named. The program, which still needs to win the backing of member states, would be funded by joint debt issuance in a significant step toward closer financial integration, according to details of the proposal posted on the commission’s website.
  17. With European stocks rallying to the highest in almost three months, companies and big shareholders increasingly are deciding now is the time to sell. Sellers announced almost $5 billion of stock offerings after the close of trading Tuesday, with large shareholders taking advantage of rebounding indexes to offload stakes and companies raising money to shore up cash balances amid the coronavirus crisis. The sales are fueling worries that the nascent recovery in markets may be nearing its peak. Building-materials maker Cie. de Saint-Gobain SA sold its holding in Sika AG for 2.6 billion Swiss francs ($2.7 billion) in the largest equity offering in Europe this year, accounting for more than half of last night’s bonanza. Semiconductor company Infineon Technologies AG raised more than 1 billion euros ($1.1 billion) of fresh capital, the top shareholder in Italian payments firm Nexi SpAmarketed 781 million euros of stock and a German foundation pared its stake in Swiss train manufacturer Stadler Rail AG by 210 million francs.
  18. Several of Denmark’s biggest banks will see their so-called bail-in buffers come under intense pressure as the Covid-19 crisis triggers an historic economic slump. Stress tests published by the Danish central bank on Wednesday show that lenders may need to issue as much as 160 billion kroner ($24 billion) until 2022 to maintain a layer of capital known as MREL, which is designed to absorb losses and ensure taxpayers aren’t called on to bail out the industry. The central bank, which was forced to revise its testing due to the pandemic, also said some smaller banks will fall short of capital requirements if the economy sinks into a prolonged recession. Such a downturn is the most severe of the three scenarios envisioned by the bank.
  19. Renault SA and Japanese partners Nissan Motor Co. and Mitsubishi Motors Corp. unveiled a plan for deeper cooperation in developing and building vehicles as they seek to salvage their strained alliance and weather a collapse in car demand. The measures will help deliver savings of as much as 40% in model investments for jointly developed vehicles, the companies said Wednesday. Nissan will take the lead on autonomous driving, Renault on the body of electric cars and some electric powertrains while Mitsubishi Motors will work on plug-in hybrids, they said. Renault, Nissan and Mitsubishi Motors need each other more than ever after the global coronavirus pandemic forced automakers to shutter showrooms and factories. The industry is also facing a once-in-a-generation shift to electric vehicles and autonomous driving that will require significant investment. After coming under pressure last year, the partnership is seeking a fresh start, backed by new measures at the companies to improve profitability.
  20. India has moved additional troops along its northern border as it prepares for an extended conflict with neighbor China, after several rounds of talks failed to ease tensions between the nuclear-armed rivals. China has already placed about 5,000 soldiers and armored vehicles within its side of the disputed border in the Ladakh region, an Indian government official said, asking not to be identified citing rules. India is adding a similar number of troops as well as artillery guns along the border to fend off the continuing incursions by Chinese army, the official said. The standoff began on May 5, when troops clashed on the banks of Pangong Tso — a glacial lake at 14,000 feet in the Tibetan plateau — leaving scores of soldiers on both sides injured. Since then there has been a steady build up of troops amid continuing face-offs.
  21. Shares in Singapore Exchange Ltd. plunged after MSCI Inc. announced it will move licensing for derivatives products on a host of gauges to Hong Kong from Singapore. SGX’s stock fell 12%, the most since 2003, amid concerns over the loss of revenue. MSCI has struck an accord with a Hong Kong Exchanges & Clearing Ltd.unit to sell 37 futures and options contracts based on its Asian and emerging-market measures, according to a statement issued by the index provider. It will stop licensing indexes for most derivatives products with SGX early next year after the present agreement expires, the bourse said in a separate statement.
  22. Silver Lake has built up a 12% holding in Far Point Acquisition Corp., the blank-check company backed by Daniel Loeb’s Third Point, to help push through a merger with its portfolio company Global Blue, a filing showed Wednesday. Silver Lake is the controlling shareholder of Global Blue, which provides tax-refund services to tourists and agreed in January to merge with Far Point. It’s one of the many deals in danger of falling apart following a pandemic that has hurt the global economy.
  23. Investments in U.S.-listed fixed income exchange traded funds expanded 55% last week for the ninth straight week of inflows. Corporate bond ETFs led the inflows. Government bond ETFs had the second biggest change from the previous week. Net inflows to ETFs totaled $9.93b in the week ended May 26, including the effect of leveraged funds, compared with $6.42b the prior week
  24. Pressure is building on Prime Minister Boris Johnson to fire his chief aide, Dominic Cummings, with polls showing voters think he broke lockdown rules and members of Parliament calling for him to go. Johnson will face an hour and a half of sustained questioning from the senior members of Parliament who make up the so-called Liaison Committee on Wednesday from 4 p.m. London time. The subject is his handling of the coronavirus crisis in general, but the opening section will be his relationship with Cummings. In March, the aide drove his family 250 miles (400 kilometres) to his parents’ farm after his wife started to develop virus symptoms so that they could isolate there. Government lockdown rules forbade people going to second homes to self-isolate, but Cummings argued that he and his wife feared that if they were both sick, no one in London would be able to care for their son. He said this was permitted under the rules.

*All sources from Bloomberg unless otherwise specified