May 5th, 2020

Daily Market Commentary

Canadian Headlines

• Canada stocks rose on Monday, erasing earlier losses, led by rallies in Shopify Inc. and crude oil. The S&P/TSX Composite Index climbed 0.9% in Toronto. Tech was the best performing sector, while real estate was the worst. Shopify contributed the most to the index gain and had the largest move, increasing 7.6%. The e-commerce company was among stocks that got a price-target boost at KeyBanc on digital growth. Canadian business loans grew at the fastest pace since 1981 in March as companies tapped credit lines to get them through the coronavirus crisis. A report due Friday will likely show employment in Canada was decimated in April as a nationwide lockdown caused mass layoffs.
• Toronto home prices dropped in April as the coronavirus pandemic froze real-estate activity across the country. Sales in and around Canada’s largest city fell 66% to 2,347 from March on seasonally adjusted basis after open houses were cancelled, according to Toronto Regional Real Estate Board. The average price dropped 12% to C$789,274 ($560,400). Still, when compared to the year before, the market held up. Though transactions were down by two-thirds from April last year, the average selling price was little changed as new listings fell 64%. On a year-over-year basis, the benchmark price rose 10%.
• Bank of Montreal anticipates that as much as 80% of its staff — or about 36,000 employees — may adopt new flexible arrangements that blend working from home with going into the office even after the Covid-19 pandemic subsides. The virus prompted the bank to make a sweeping reappraisal of workplace policies, according to Mona Malone, chief human resources officer. She said the lender expects that 30% to 80% of employees may continue to work from home at least some of the time. The Toronto-based bank employed about 45,000 people as of Jan. 31.

World Headlines

• European stocks trimmed an advance after Germany’s top judges gave the European Central Bank three months to fix its asset-purchase program. The Stoxx Europe 600 Index was up 1.2% as of 10:28 a.m. in London, paring an ascent of as much as 2% after the German judges said that some parts of the quantitative-easing program aren’t backed by European Union treaties. All 19 European industry groups remained higher on Tuesday. Energy shares got a boost from surges in Total SA and Repsol SA following an earnings update in which the companies refrained from dividend cuts, while crude continued to rise on signs the worst of the supply glut may be over. Miners and banks also outperformed.
• U.S. equity futures climbed alongside European stocks on Tuesday, with sentiment buoyed as more economies moved toward easing their coronavirus lockdowns. Oil headed for its longest winning streak in nine months. S&P 500 futures pointed to more gains on Wall Street as investors digested the latest earnings, including a beat from chemical maker DuPont de Nemours Inc.
• China’s financial markets have some catching up to do after an extended holiday, and most of it is bad news. Mainland investors will have their first chance to react to the cautious shift in sentiment globally when onshore stock, currency and bond markets open Wednesday. International trading suggests a negative start to May: Chinese shares in Hong Kong sank more than 4% on Monday, while the offshore yuan is treading toward an all-time low. On the bright side, China’s market reopen is unlikely to look anything like February’s, when stocks fell as much as 9.1% and the yuan tumbled the most in six months. A long list of targeted support measures since have eased concern over cratering domestic demand, and markets have stabilized.
• Oil headed for the longest run of daily gains in more than nine months as the impact of production cuts indicated the glut may be beginning to ease. Futures in New York rose for a fifth day after Genscape reported an increase in inventories of only 1.8 million barrels at Cushing, Oklahoma, the delivery point for West Texas Intermediate crude. That would be the smallest weekly gainsince mid-March if confirmed by official data due Wednesday. Meanwhile, the discount on oil for June delivery relative to July narrowed to the least in a month, signaling that concerns of oversupply may be abating. The American oil benchmark has doubled from an intraday low near $10 a barrel last week as OPEC and its allies start reducing production. In addition, U.S. giants Exxon Mobil Corp., Chevron Corp. and ConocoPhillips plan combined curbs of as much as 660,000 barrels a day by the end of June, despite a Texas regulator pronouncing an effort to mandate output cuts dead on arrival.
• Gold swung between small gains and losses as more countries moved toward easing coronavirus restrictions and Swiss refineries ramped up production after curbing operations because of the pandemic. In Europe, the worst-hit countries moved to ease curbs as new infections declined, with Italy starting to reopen its economy after two months. Goldman Sachs Group Inc. and Morgan Stanley said there are signs the world economy is bottoming out. While gold is holding onto most of this year’s gains, prices are coming under pressure as risk-on sentiment improves.
• Hong Kong will ease curbs on social gatherings and reopen shuttered schools and Bavaria set out plans to reopen its economy in what may serve as a blueprint for the rest of Germany. The White House said an internal document projecting 2,500 U.S. deaths a day by June wasn’t in line with the projections of the president’s task force. China’s ambassador to the U.K. said British politicians who have called for a re-setting of the ties between the two nations risk poisoning the relationship. Earlier, Australia’s prime minister said the European Union will call for an independent probe into the origins of the coronavirus. The economic fallout from the outbreak continued. The downturn in the U.K. could be deeper than anything in living memory, India’s lockdown may have cost 122 million jobs and Spanish jobless claims surged again.
• The European Union will put forward a proposal to the World Health Assembly calling for an independent probe into the origins of the coronavirus. The EU is a co-sponsor of the plan that will be put forward at the assembly’s May 18 meeting, European Commission spokeswoman Virginie Battu-Henriksson said by email Tuesday. The bloc is consulting with World Health Organization members and regional groups on the wording of the proposal, she added. The meeting of the WHO’s decision-making body later this month is shaping up as a test of China’s diplomatic standing in the wake of the pandemic. In addition to calls for an independent probe, nations such as the U.S. are also pushing to reinstate Taiwan — which Beijing views as a province — as an observer to the assembly.
• Alexion agreed to buy Portola for $18/share in cash. The deal is worth about $1.4 billion, based on 78.5 million shares outstanding, according to Bloomberg data. Portola is a commercial-stage biopharmaceutical company focused on life-threatening blood-related disorders
• Pfizer Inc. has administered the first U.S. patients with its experimental vaccines to fight the disease caused by the novel coronavirus, part of a bid to shave years off of the typical time it takes to develop a new inoculation. The trials are being conducted at the NYU Grossman School of Medicine and the University of Maryland School of Medicine, the drugmaker said Tuesday. “The short, less than four-month time-frame in which we’ve been able to move from preclinical studies to human testing is extraordinary,” Chief Executive Officer Albert Bourla said in a statement.
• The European Central Bank can continue its bond purchases, but will have to justify its policies within three months after Germany’s top court expressed a number of concerns with the program. The critical language sets a hurdle for the ECB’s crisis-fighting, though the ultimate impact may be muted. The new 750 billion-euro ($813 billion) Pandemic Emergency Purchase Program, created in response to the fallout from the coronavirus outbreak, was explicitly excluded from the ruling. In a 7-to-1 ruling, the judges said that the quantitative easing program isn’t backed by European Union treaties. That’s why German authorities acted unconstitutionally by not challenging the 2.7 trillion euro plan.
• Covid-19 is now suspected of playing a role in the death of more than 32,000 people in the U.K., government data show. That’s higher than the number of fatalities in Italy and Spain, the other European countries hit hardest by the virus, though deaths there are recorded on a confirmed case basis. The U.K. statistics include all mortalities where the virus was mentioned on the death certificate, regardless of whether it was confirmed or not. The country has passed the peak of infection following a lockdown on March 23, though health officials caution that outbreaks will continue until a vaccine can be found.
• The Trump administration is escalating tensions with allies as it seeks to renew a UN arms embargo on Iran that’s set to expire this year, threatening to kill what’s left of the nuclear agreement the U.S. quit two years ago if countries don’t go along. Officials including Secretary of State Michael Pompeo are warning that the U.S. could try to force a “snapback” of sanctions against Tehran by all United Nations Security Council members as part of the 2015 Iran nuclear accord if the arms embargo is allowed to expire in October. “We are operating under the assumption that we will be able to renew the arms embargo,” Brian Hook, U.S. Special Representative for Iran, told reporters last week. If council members don’t go along, he warned, “we are well within our rights” to snap back all UN sanctions.
• On the eve of the biggest boom in U.S. bond sales since World War II, cracks are appearing in the exclusive Wall Street club responsible for ensuring the market functions smoothly. For decades, the firms, known as primary dealers, have sat at the nexus of the Treasuries market, buying newly issued bonds to disseminate throughout financial markets and trading directly with the Federal Reserve. This relationship has helped the Fed implement its policy goals, yet the implosions of recent months suggest that the group is under duress. Dominated by big banks like JPMorgan Chase & Co. and Goldman Sachs Group Inc., the 24 primary dealers struggled to keep money moving within the core of global finance during the coronavirus panic in March. The Fed deployed a series of unprecedented interventions in response, including trillions of dollars worth of emergency funds — and inadvertently fueled debate on the need for reform.
• Hertz Global Holdings Inc. is preparing to file for bankruptcy Tuesday if the company fails to rework its debt and can’t get lenders to extend a grace period on a missed payment. The rental-car company has been talking with some of its creditors about how to ease its burden without going through bankruptcy, but negotiations have been a struggle and the company is preparing to file for Chapter 11 court protection, according to people with knowledge of the matter. The situation is fluid and a filing isn’t definite, said the people, asking for anonymity to discuss the confidential talks. A representative for Hertz didn’t return an email and calls seeking comment. The company’s shares plunged by as much as 36% to $2.31 before the start of regular trading.
• Marriott International Inc. raised $920 million in cash through deals with co-branded credit card companies as it waits out the pause in travel due to the coronavirus. Marriott, the world’s largest hotel company, will get $570 million from JPMorgan Chase & Co. in the form of prepayment of future revenues and the early payment of a previously agreed to signing bonus. The hotel company, which has temporarily closed more than 1,000 hotels, is also getting $350 million from American Express in a pre-purchase of loyalty points through Marriott’s Bonvoy program. Marriott also said it had terminated a $1.5 billion revolving credit facility announced on April 14. The company replaced that facility with a bond sale the same day.
• Blackstone Group Inc. has agreed one of the largest office leases ever recorded in Germany, according to people with knowledge of the transaction. The private equity firm’s OfficeFirst unit has leased 90,000 square meters (about 970,000 square feet) to Germany’s pension insurance agency Deutsche Rentenversicherung, the people said, asking not to be identified because the deal isn’t yet public. Deutsche Rentenversicherung will move into Blackstone’s Treptowers complex, the former Berlin headquarters of Allianz SE, in 2023, they said. Berlin’s office market was red hot before the outbreak of the coronavirus pandemic, with vacancy near record lows. Even with the enforced shutdown that’s set to trigger a sharp recession, the nation’s office properties are among the best placed in Europe to withstand the shock, DWS Group said in a report Tuesday.
• Donald Trump’s campaign is changing its message to refocus voters’ attention on what it predicts will be a rosy post-coronavirus world. The president’s re-election effort is gripped by polls showing Americans broadly souring on Trump and his performance managing the virus outbreak and the economic fallout. To combat that, the Trump campaign is reupping the winning slogan of 2016, “Make America Great Again.” The new campaign message is that he can rebuild the economy better than presumptive Democratic nominee Joe Biden, who the Trump camp argues co-piloted a sluggish rebound from the 2008 financial crisis, according to two officials familiar with the strategy. They asked not to be identified discussing internal strategy.
• How much Treasury note and bond auctions are going to grow during the May-July quarter in each of the six existing maturities is a mystery that’s been deepened by this month’s planned addition of a seventh — the 20-year bond. Some diversity of opinion is normal regarding the U.S. government’s debt issuance plans, which are set to be revealed Wednesday at 8:30 a.m. in Washington. However, due to the planned resurrection of the 20-year bond and the steep increase in government borrowing needed to counteract the coronavirus pandemic, consensus is lacking in primary dealer forecasts for auction sizes over the next three months. That creates potential for the Treasury to surprise the market.
• The largest U.S. banks stepped up lending to dominate the U.S. government’s small-business rescue program after playing an undersized role in its early days. Banks with assets of $10 billion or more processed 68% of Paycheck Protection Program loans last week, data released on Sunday show, compared with about 40% during the program’s first round from April 3 to April 16. That translates to about $24 billion of PPP loans a day from the largest banks, more than double the daily pace set by that group in the first phase.
• Fiat Chrysler Automobiles NV swung to a loss in the first quarter after the carmaker’s sales and profits were hit by the virus outbreak in Europe and in the U.S., where plants have been closed since mid-March. Adjusted earnings before interest and taxes declined to 52 million euros ($56 million) in the first-quarter, while the net loss totaled 1.69 billion euros. North American plant lockdowns have starved Fiat Chrysler of revenue from its most profitable models, including the Ram pickup truck and Jeep Wrangler SUV.

*All sources from Bloomberg unless otherwise specified