May 4th, 2020
Daily Market Commentary
- Air Canada reported adjusted loss per share for the first quarter of C$1.49 vs. earnings per share C$0.06 y/y. The airline said it will take “at least three years” to return to 2019 levels of revenue and capacity, given the pandemic. “We expect that both the overall industry and our airline will be considerably smaller for some time, which will unfortunately result in significant reductions in both fleet and employee levels,” CEO Calin Rovinescu says
- It’s a feat even the U.S. market hasn’t achieved. Canadian stocks have risen for six straight weeks — and now equity strategists are calling time. Some say the S&P/TSX Composite Index’s 36% rally from a March low should be seen as a natural market bounce, after a ferocious drop in reaction to the economic damage of the Covid-19 pandemic. Thursday and Friday’s sessions were not pretty. The benchmark posted its biggest two-day slump since the March 23 low. That will stoke the debate on whether investors who’ve pushed up stock prices have appropriately accounted for a financial landscape utterly changed by the pandemic.
- European equities dropped on Monday, catching up on Friday’s losses when many markets were closed for a holiday, as investors assessed U.S.-China tensions, the hit to manufacturing data and risks from the lifting of lockdowns in major economies. The Stoxx Europe 600 Index slid as much as 2.6%, led by oil & gas and automaker shares. Freenet AG tumbled 12% after proposing a dividend suspension. Thyssenkrupp AG fell 16% after a report that it expects that its financial leeway from the proceeds of the sale of its elevator unit will be much smaller than anticipated because of the impact of the coronavirus.
- U.S. equity futures dropped with stocks in most of the world, in another sign the risk-off move that hit markets at the start of this month may have further to run. The dollar climbed and Treasuries edged higher. Contracts on the three main American equity indexes all fell, with Delta Air Lines Inc., American Airlines Group Inc. and United Airlines Holdings Inc. among the biggest pre-market decliners. Warren Buffett said over the weekend Berkshire Hathaway Inc. sold out of the four top U.S. airlines, opining that the business has “changed in a very major way.”
- Shares in Hong Kong saw the bulk of losses in Asia, as traders caught up after a long weekend. China and Japan were closed for their own holidays. The Chinese yuan held most of Friday’s slide in offshore trading amid concern tensions with the U.S. would increase. Euro-area bonds declined. West Texas oil futures dropped, halting a 60% rally over three days.
- Oil fell after a three-day rebound as a number of funds shifted away from near-term contracts, fearing a repeat of the meltdown last month that saw prices plunge below zero. Futures fell 8% toward $18 a barrel in New York as investors worried that a massive supply overhang while the coronavirus shatters demand will send the market tumbling again. The manager of a $500 million oil exchange-traded fund in Hong Kong said its broker refused to let it increase holdings of crude futures. S&P Global Inc., which is behind the most closely followed commodity index, said it will rollWest Texas Intermediate futures for July into August, while the United StatesOil Fund LP said it will halve holdings in the July contract.
- Gold held steady, with the gap between New York futures and spot prices in London narrowing after reaching multi-year highs in preceding weeks. “Things are settling down,” said David Govett, head of precious metals trading at Marex Spectron. The market will probably see some volatility in spreads for a while, “but nothing like we have seen over the past month,” he said. Spot gold traded above $1,700 an ounce, supported by renewed concerns over U.S.-China trade deal and tensions between North and South Korea. Gains were capped by a stronger dollar and as the pace of new coronavirus infections slowed in the U.S. Investors are also awaiting at least 11 central bank interest rate decisions this week.
- Warren Buffett struck some of his famous deals — taking lucrative stakes in Goldman Sachs Group Inc. and General Electric Co. — by swooping in when others panicked during the last financial crisis. He’s treading more carefully this time around. With a record $137 billion of cash piled up at his Berkshire Hathaway Inc., Buffett fielded questions over the weekend from shareholders who wanted to know why he hadn’t acted as companies clamored for liquidity amid the pandemic-related shutdowns. This crisis is different, Buffett said. “We have not done anything because we don’t see anything that attractive to do,” Buffett said at his annual shareholder meeting, which was held by webcast. The deals in 2008 and 2009 weren’t done to make “a statement to the world,” he said. “They seemed intelligent things to do and markets were such that we didn’t really have much competition.”
- Europe is gingerly trying to get back to business, with restrictions loosening across the continent as the spread of the coronavirus slows. The German Spy Museum in Berlin opened its doors for the first time in weeks, and bars in central Rome began offering takeaway services. In Vienna, shaggy-haired Austrians flocked to barbers’ shops when they reopened on Saturday and students with final-year exams are returning to school. With Italy, Spain, Greece, Portugal and Germany all relaxing some of their restrictions on Monday, Europe is settling down to a new normal as it returns to public life. But it’s slower and less dynamic than before and some restrictions will remain in place for weeks or even months.
- Some of London’s most influential investors are giving U.K. companies extra time to find new board members because of the coronavirus crisis, potentially offering a group of long-standing chairmen an unexpected extension to their careers. Legal & General Investment Management will allow London-listed companies an additional 12 months to replace directors coming to the end of their recommended tenures, it said in response to Bloomberg queries. That could affect companies ranging from wireless giant Vodafone Group Plc to $5 billion packaging producer DS Smith Plc, whose chairmen are close to the maximum nine-year length of service laid out in the U.K.’s guidebook for strong governance.
- Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week. This was the 11th straight week of outflows. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $523 million in the week ended May 1, compared with losses of $1.67 billion in the previous week, according to data compiled by Bloomberg. So far this year, outflows have totalled $12.5 billion.
- The trade agreement President Donald Trump signed with China less than four months ago has gone from a cornerstone of his re-election bid to a potential political liability as the pandemic sours the relationship between the world’s two biggest economies. The phase-one pact, which took effect in mid-February, is falling short on a number of fronts, including Beijing’s promises of large agriculture and energy purchases. But the Trump administration so far has been hesitant to ramp up the pressure or back away from the deal altogether, even as the rhetoric on both sides heats up. In a Fox News interview on Sunday night, Trump raised concerns of a resumption economic hostilities with China, calling tariffs “the ultimate punishment” for its response to the pandemic and threatening to withdraw from the trade deal if Beijing’s purchase pledges come up short.
- Telefonica SA and John Malone’s Liberty Global Plc have never been closer to finally creating the U.K.’s biggest telecom operator after flirting with various combinations over the years. Racing for a potential announcement as early as this week, talks hinge in part on striking equal control for the merger of O2 and Virgin Media, while structuring a deal that’ll help the Spanish giant pay down its huge debt pile, according to people familiar with the matter, asking not to be identified because the talks are private. In a statement Monday, Telefonica confirmed that talks are ongoing “on a potential integration of their respective telecommunications businesses in the United Kingdom” and there is no guarantee that an agreement can be reached.
- Norwegian Air Shuttle ASA shareholders approved a restructuring plan that hands almost all of the company’s equity to its creditors, after the coronavirus crisis pushed the struggling airline to the brink of survival. The plan converts almost $1 billion of debt into stock, qualifying the low-cost carrier for state loan guarantees that, along with the sale of new shares will keep it afloat for at least several months. The vote capped a dramatic race against the clock over the past weeks for Norwegian Air, which clinched a last-minute deal with creditors in talks that went through the weekend. Yet the airline’s near-term future remains insecure, with a market in shambles because of the Covid-19 pandemic, and it could need to seek new funds as soon as this year.
- Blackstone Group Inc.’s talks about a potential investment in Chinese property developer Soho China Ltd. have stalled, people with knowledge of the matter said. The private equity firm’s discussions are no longer progressing after the coronavirus outbreak made it difficult to assess the developer’s business outlook, said the people, who asked not to be identified as the information is private. Recent turmoil in the debt market introduced concerns about arranging financing for a deal, the people said. Blackstone’s discussions around an investment in Soho China were at an early stage, and could resume once conditions have stabilized, said the people.
- Japan extended its nationwide state of emergency until May 31, with Prime Minister Shinzo Abe saying the country’s coronavirus measures need more time to reduce infection rates. Abe told a task force Monday that experts would reexamine the situation around May 14 and that the government was prepared to remove some areas from the state of emergency early, if possible. Abe had indicated last week that he would probably prolong the measures beyond the original May 6 end date. While Japan hasn’t experienced the surge in cases seen in some countries, experts have warned of the risks of letting its guard down too soon, as limited testing makes it hard to assess the scale of infections. The state of emergency enables regional governors to request businesses to close down and ask people to stay at home as much as possible.
- J. Crew Group Inc. filed for bankruptcy, unable to revive flagging sales of its preppy clothing line amid the coronavirus pandemic and crushed by debt rooted in a long-ago leveraged buyout. The retail chain reached a deal with a majority of its lenders to convert $1.65 billion of debt into equity, J. Crew said in a statement Monday. Lenders led by Anchorage Capital Group, Blackstone Group Inc.’s GSO Capital Partners and Davidson Kempner Capital Management are providing $400 million of financing that will allow the company to maintain operations during the Chapter 11 restructuring, according to the statement.
- The coronavirus pandemic spurred a turn toward nationalism around the world. Now banks are in the vanguard of the movement, central to government rescue efforts in the face of the worst recession since the Great Depression. Intesa Sanpaolo SpA, headquartered in Milan, is reinforcing an “Italy first” lending policy. Beijing-based Bank of China is retreating to its home market after a big push into the Middle East. In Frankfurt, Deutsche Bank AG put Indian expansion plans on hold while throwing resources at Germany. Bank of America, with its head office in Charlotte, North Carolina, is among several U.S. institutions being more selective in their European lending.
- Senator Elizabeth Warren is questioning whether the Pentagon’s policy of increasing payment rates for contractors — intended to keep assembly lines humming during the coronavirus outbreak — has sufficient oversight and is helping the companies which need it most. Warren, who raised her doubts in an April 30 letter, is the first lawmaker on a congressional defense committee to publicly question the rationale for the increased rates, and whether the Pentagon will ensure payments flow to subcontractors. The higher payment rates the Pentagon instituted in April “may be a cash subsidy that largely benefits big defense companies that can better withstand the economic shock caused by coronavirus,” Warren wrote Pentagon acquisition chief Ellen Lord in the previously undisclosed letter.
*All sources from Bloomberg unless otherwise specified