May 5, 2021

Daily Market Commentary

Canadian Headlines

  • Canadian equities fell Tuesday after mixed earnings reports, while U.S. Treasury Secretary Janet Yellen ruffled markets with a comment that interest rates will likely rise. The S&P/TSX Composite Index fell 0.1%. Ballard Power Systems Inc. tumbled 20% after weak earnings, while Bausch Health Cos Inc. lost 11%. The Bloomberg Commodity Spot Index, which tracks prices for 23 raw materials, rose 0.8% Tuesday to its highest since 2011. The gauge has climbed more than 70% since reaching a four-year low in March of last year.
  • Toronto’s housing market last month posted the sharpest drop since the early weeks of the Covid-19 crisis, as buyers and sellers took a breather from a frenetic pace amid surging infections and renewed lockdown measures. The number of properties changing hands in Canada’s largest city declined 20% in April on an annualized basis from the month before, while the average price for a home fell 3.6% to C$1.05 million ($855,000), according to data released Wednesday from the Toronto Regional Real Estate Board. Both declines were the steepest since April 2020, the month after the World Health Organization declared the coronavirus outbreak a global pandemic. The slowdown comes after months of ever-more frenzied activity in real estate markets in Toronto and across Canada. Surging demand prompted warnings from the government’s own national housing agency that risks of a bubble were growing, and prominent economists have called for policy makers to step in to slow it down.
  • Barrick Gold Corp., the world’s second-largest bullion producer, delivered a seventh straight earnings beat and said it was on track to achieve annual production guidance. While The Toronto-based company produced less gold in the first quarter than in the fourth quarter last year, output is expected to be higher in the second half. A key mine in Papua New Guinea is set to restart later in the year after reaching an ownership agreement with the government.
  • Canada’s oil demand isn’t bouncing back like it is in the U.S. as the country fights to contain the coronavirus, the chief executive of Suncor Energy Inc. said. Gasoline demand in Eastern Canada is 15% to 20% below normal and is down 5% to 10% in Western Canada, said Mark Little, the head of Canada’s biggest oil sands producer, a company which also operates refineries in Quebec, Ontario, Alberta and in the U.S. state of Colorado. While a swift recovery in demand in places like the U.S., China, and the U.K. is underpinning a comeback in global oil markets, Canadian provinces are tightening lockdowns amid surging cases and a more sluggish vaccine rollout. Ontario is halfway through a month-long stay-home order that is expected to be extended. In Alberta, the worst affected province, schools are closed and restaurants can only serve food outdoors or as takeout.
  • Caisse de dépôt et placement du Québec will buy a 30% stake in American Tower Corporation Europe in a deal valued at more than €1.6 billion. Implies enterprise value of more than €8.8 billion for ATC Europe. CDPQ will obtain seats on ATC Europe’s board and some governance rights. Partnership positions companies to benefit from 5G deployments and demand for communications infrastructure in European markets.

World Headlines

  • European equities rebounded from Tuesday’s selloff, boosted by upbeat earnings reports and gains in miners, energy and technology stocks. The Stoxx 600 Index was up 1.3% by 9:58 a.m. London time, with all sectors in the green. Data confirming an expansion in euro-area services also boosted sentiment. Tech shares bounced back after slumping yesterday amid a rotation out of pricier sectors, while gains in oil and base metals propped up miners and energy shares. While European stocks have dipped following a series of record highs in April, some investors remain positive on the region’s equities as the vaccination program against Covid-19 gathers pace, paving the way for summer tourism. Travel and leisure shares also outperformed Wednesday.
  • Technology stocks led a rebound in U.S. futures and European shares on Wednesday as focus turned to positive earnings and signs of economic recovery from the pandemic. Contracts on the Nasdaq 100 outperformed and the Stoxx 600 Index jumped more than 1%, with tech stocks pacing gains after tumbling on Tuesday. Miners and energy shares climbed as commodities prices hit a decade high spurred by the reopening of major industrial economies. Copper rallied back above $10,000 a ton and oil topped $66 a barrel. Stocks regained a measure of calm after Treasury Secretary Janet Yellen rattled markets on Tuesday with comments that interest rates may have to rise moderately to keep the economy from overheating, though she later softened the remark. Coupled with stock valuations near the highest in two decades, it was enough to deliver the worst day for the Nasdaq 100 since March, even as the Federal Reserve has assured markets that interest rates will remain at current lows throughout the recovery.
  • Asian shares swung between gains and losses as rallies in materials and finance shares were offset by a decline in the region’s technology sector. Markets in Japan, China and South Korea are shut for holidays. The materials sector was the best performing in Asia on Wednesday, with an MSCI industry gauge rising 0.6%. The rally in the region’s metal miners, cement producers and steel makers, set to outperform the benchmark for a fourth month, came as global commodity prices surged to their highest level in almost a decade. The ample liquidity provided by central banks, Wall Street’s bets on commodities to hedge the risks of inflation and China’s “voracious” commodity appetite are among factors behind the commodity price rally, according to a note from Rabobank. “One thing we can be sure of — prices seem to be moving significantly higher, and not just due to the expected base effects,” the bank said.
  • Oil extended a rally after U.S. stockpiles fell and reopening drives in the U.S. and Europe showed signs of boosting demand. Brent neared $70 a barrel and West Texas Intermediate climbed for a third day. Gasoline futures surged to the highest since July 2018. The American Petroleum Institute reported crude supplies fell by 7.69 million barrels last week, according to people familiar with the data. If confirmed by government figures on Wednesday, that would be the largest drop since late January. The API report also showed lower gasoline and distillate inventories.
  • Gold held a drop after Treasury Secretary Janet Yellen clarified comments on borrowing costs and inflation that had earlier ruffled financial markets. Yellen said Tuesday afternoon she wasn’t forecasting interest-rate increases to rein in any inflation spurred by President Joe Biden’s proposed spending. Earlier in the day, the former Federal Reserve Chair caused a stir when she said that “it may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat.” Still, her rowback wasn’t enough to save gold, which sank on talk of monetary tightening. The episode highlights just how sensitive assets such as bullion are to any prospect of U.S. rate hikes after a year of ultra-easy money.
  • Copper rallied back above $10,000 a ton, closing in on a record high as the reopening of major industrial economies sparks a blistering rally across commodities markets from iron ore to lumber. As a global economic bellwether, copper has been one of the best performers in the broader rally in raw materials that has lifted crops, energy and other metals. The Bloomberg Commodity Spot Index climbed on Tuesday to its highest since 2011 as growth bets boost demand, while poor weather hurts crop prospects and transportation bottlenecks crimp supplies. Brent crude extended gains toward $70 a barrel. While the commodities rally shows the strength of the economic recovery in industrial powerhouses including China, the U.S. and Germany, copper has wavered in recent sessions as investors questioned whether central banks will be forced to raise rates to prevent overheating. A surge in Covid-19 cases in India and Brazil is also sparking alarm.
  • A meeting of top Group of Seven diplomats in London risked being derailed after India’s foreign minister said he would self-isolate over possible exposure to the coronavirus. The announcement could swiftly shut down the high-profile event that marked the G-7 debut of U.S. Secretary of State Antony Blinken and is being hosted by the U.K. Meanwhile, new research suggests deaths from Covid-19 in India may double from current levels. Singapore is reviewing its travel bubble with Hong Kong as it cracks down in response to a flareup linked to the variant first identified in India. India’s central bank announced new loan-relief measures and pledged to inject $6.8 billion of liquidity to cushion the blow on the economy from the virus outbreak.
  • The biggest uncertainty for investors watching the Federal Reserve in coming months may not be the rate of inflation but turnover at the top of the U.S. central bank. Chair Jerome Powell and vice chairs Richard Clarida and Randal Quarles could all potentially be replaced in the coming year, depending on how much President Joe Biden wants to reshape its leadership. And while Fed chairs always matter, the choice right now is even more critical. Fed officials are deliberating under a new policy framework adopted last year with Powell’s stewardship. It grants great discretion over when to reduce support for the U.S. economy as it recovers from Covid-19.
  • One of the world’s biggest wind turbine makers Vestas Wind Systems A/S will hike its prices as the costs of steel and transportation increase amid a global commodities boom that’s contributing to a rising risk of inflation. It’s an early sign that the surge in commodities prices and disruptions in supply chains could interrupt a trend of perpetually falling costs for green energy. Benchmark prices for steel in China, the world’s top producer, have gained 25% this year, pushing up the cost of one of the main materials in wind turbines. At the same time, Vestas has seen freight rates soar, increasing the cost of transporting its products to its customers around the world.
  • Walmart Inc.’s sale of a majority stake in Asda is poised for approval by U.K. antitrust regulators, finally allowing for an exit from Britain’s grocery sector after more than two decades. The Competition and Markets Authority said it was likely to accept an offer from the consortium of TDR Capital and the Issa brothers, the sibling duo behind the convenience-store operator EG Group to sell 27 gas stations. The regulator previously said there were potential competition concerns in some local areas.
  • Nissan Motor Co. sold its entire stake in Daimler AG for 1.15 billion euros ($1.4 billion), joining its partner Renault SA in generating funds for turnaround efforts. Nissan sold about 16.4 million shares at 69.85 euros each, according to a statement on its website Wednesday. Renault shed its Daimler stake in March, bringing in 1.14 billion euros. Daimler shares closed at 72.41 euros on Tuesday. Like Renault, Nissan is trying to restore profitability and overhaul its portfolio after the 2018 arrest of their long-time leader Carlos Ghosn threw the alliance into disarray. Projects the two companies started with Daimler just over a decade ago were among the endeavors showing signs of stress before Nissan insiders orchestrated the former chairman’s downfall almost three years ago.
  • A.P. Moller-Maersk A/S, the world’s largest container line, said it plans to buy back up to 31 billion kroner ($5 billion) of its own shares as it generates excess cash amid “exceptional” demand for shipping services. The Copenhagen-based company will also accelerate an existing program of up to 10 billion kroner, of which the remaining 6.7 billion kroner will be bought by the end of September, according to a statement on Wednesday. The new buyback program, which will run over two years, will start after that.
  • The years-long U.S. baby drought worsened last year, with births dropping 4% from 2019 to the lowest level since 1979. The provisional data for 2020, at 3.6 million births, marks the sixth annual drop in a row. The decline will likely continue in 2021, when the brunt of the impact from the pandemic will be recorded — with a nine-month delay. Fears of contracting the virus while pregnant, or while in hospital to give birth, combined with job insecurity and government measures limiting social contact and business activity, dissuaded Americans from having babies, according to surveys by Ovia Health, a women’s health technology company.
  • Billionaire Sam Zell’s Equity Commonwealth agreed to buy Monmouth Real Estate Investment Corp. in an all-stock deal worth about $3.4 billion including debt, increasing the firm’s exposure to fast-growing industrial real estate in the U.S. Monmouth investors will get 0.67 shares of Equity Commonwealth for every share they own, or about $19.40 based on Tuesday’s closing price, the companies said in a joint statement. That’s a 6.3% premium for Monmouth holders. Chicago-based Equity Commonwealth, part of Zell’s Equity Group Investments LLC, will hold about 65% of the combined entity, and will add about 120 industrial properties across 31 U.S. states with the acquisition.
  • Tesla Inc. is about to lose one source of the regulatory-credit revenue that’s been crucial to its almost two-year run of consecutive quarterly profits. Stellantis NV, the automaker formed through the merger of PSA Group and Fiat Chrysler, is exiting a European emissions-credit agreement with Tesla in a move that will have a positive impact on earnings this year. Chief Executive Officer Carlos Tavares first announced the plan in an interview with the French weekly Le Point. “Stellantis will be in a position to achieve CO2 targets in Europe for 2021 without open passenger-car pooling arrangements with other automakers,” the company said in an emailed statement Wednesday. A Tesla representative didn’t immediately respond to a request for comment.
  • The European Union is setting out strategies to counter state-funded Chinese takeovers and repatriate the production of semiconductors, just as the U.S. seeks to persuade the world’s biggest economies to harden their stance against Beijing. The overlapping initiatives to push back against the Asian giant are part of a plan to ensure the bloc has more control over its future and stands up for its values. The European Commission, the EU’s executive arm, is due to propose measures on Wednesday on competition and industrial strategy while the ratification of an investment agreement with China is on hold due to a tussle over tit-for-tat sanctions.
  • Steinhoff International Holdings NV is looking to raise as much as 4.6 billion zloty ($1.2 billion) by listing its European retail arm Pepco Group NV in Poland, capitalizing on increased demand for discount goods amid the coronavirus crisis. The South African retailer and other holders plan to sell 101.3 million existing shares, the company said in a statement on Wednesday. Pepco won’t receive any proceeds from the offering. Shares will be marketed at 38 zloty to 46 zloty apiece. At the top end of the range, the offering would be the sixth largest-ever in Warsaw. The deal, which values Pepco at as much as 26.4 billion zloty, will be priced on May 14, with the new stock set to start trading in Warsaw on or about May 26.
  • Thailand is planning to spend billions of dollars in providing financial relief to low-income groups to cope with the economic hit from the biggest Covid-19 outbreak sweeping the nation since the pandemic began. The cabinet gave in-principle approval on Wednesday for fiscal stimulus measures including extension of two cash handout programs by a month at a cost of 85.5 billion baht ($2.8 billion). It also proposed 140 billion baht worth of spending for co-payment and e-voucher programs and more cash handouts to welfare cardholders and special groups to stimulate domestic consumption, officials said.
  • Mondelez International Inc., the maker of Ritz Crackers and Trident gum, wants to start welcoming workers back to office this summer, though with a caveat — they must be fully vaccinated against Covid-19. It’s a thorny issue for many companies as some workers are hesitant about getting the shots, and Mondelez hasn’t finalized its plan. Yet for Chief Executive Officer Dirk Van De Put, vaccines are a way to ensure safety while restoring workplace culture and camaraderie. Vaccines loom large as U.S. companies dial up plans to bring more workers back to the office and cities ease Covid-19 restrictions, with New York City Mayor Bill De Blasio vowing a full reopening of the nation’s largest metropolis by July 1. The New York Stock Exchange has begun opening further for traders who can prove they’re fully vaccinated and Goldman Sachs Group Inc. has formulated a plan to get U.S. employees to return to the office next month now that shots are widely available.
  • The parent of the Office Depot retail chain plans to split into two publicly traded companies, reshaping the company as rival Staples pursues an acquisition. ODP Corp. said it would retain its retail consumer and small business products and services, while separating its Business Solutions Division contract unit and independent regional office supply distribution operations. The transaction, expected to be completed in the first half of 2022, will occur through a distribution of shares of the new company as a tax-free dividend to ODP’s shareholders, according to a statement Wednesday. The move, which ODP said will allow for more targeted investment, comes as Sycamore Partners-backed Staples continues to pursue an acquisition. The rival office-supply chain had made an offer earlier this year, which ODP said wasn’t likely to overcome regulatory hurdles. Still, the Office Depot parent said it was open to reworking the terms of a deal.
  • The surge in home prices may be starting to crimp purchase activity. The Mortgage Bankers Association’s purchase index dropped 2.5% in the latest report, the fifth decline over the last six weeks. The index is at its lowest since Feb. 26. However, the average purchase loan size jumped 2% to $408,100, highest since March 19. It hit a record high of $418,000 on February 19. The flight from urban areas since early 2020 has sent home prices 12% higherover the past year, the fastest pace since 2006. Existing home sales have dropped over the last two monthly reports, with sparse inventory and surging prices fingered as the cause. While historically low mortgage rates make it easier to purchase a higher-priced house on credit, eventually the price tag may just not make sense. After all, the nation-wide collapse in home prices at the end of the Great Moderation took place just over a decade ago — memories are still fresh enough to be heeded.
  • Allied Universal may price its three-part deal to help buy rival U.K. security firm G4S after shuttling $325 million between two tranches. The dollar bond transaction remains $2.96 billion overall, and is part of a broader financing package that also includes euro and sterling bonds as well as leveraged loans. Marketing for the $1.17 billion loan to help fund the leveraged buyout of hair-dryer and kitchen-appliances maker Conair gets underway on Wednesday

“The secret to investing is to figure out the the value of something – and then pay a lot less.” — Joel Greenblatt

*All sources from Bloomberg unless otherwise specified