May 6th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian stocks held on to gains amid worsening U.S.-China tensions and as Federal Reserve officials warned of more damage to the economy. The S&P/TSX Composite index rose 0.5% in Toronto, paring some of its earlier gains of as much as 1.4%. Tech was the best performing sector, with a further rally in Shopify Inc., which is reporting its earnings before the market opens Wednesday. Some analysts are skeptical that the e-commerce company’s outlook will be strong enough to justify a stock price that has surged to record levels. Meanwhile, More than a third of Canadians believe their discretionary spending won’t recover to pre-crisis levels after stores and businesses reopen, according to a Nanos Research survey conducted for Bloomberg News. Just over 5% of respondents expect their purchases to increase and 54% think they’ll spend the same amount on non-essential items.
• Shopify Inc. reported first-quarter revenue that topped analysts’ estimates as it brings more businesses online during the coronavirus pandemic. Sales grew by 47% to $470 million from the same quarter a year ago, Ottawa-based Shopify said in a statement Wednesday. Analysts had expected about $443 million, according to data compiled by Bloomberg. The key metric of gross merchandise volume, which represents the value of all goods sold on the platform, increased 46% or $5.5 billion to $17.4 billion from a year earlier. Analysts were expecting a 40% increase on a year-over-year basis to $16.9 billion.
• Suncor Energy Inc. is going further into a defensive crouch, cutting its capital-spending plans for a second time and shrinking its dividend payout, as the Covid-19 pandemic hammers crude demand. Capital spending this year will be C$3.6 billion to C$4 billion ($2.6 billion to $2.9 billion), down from an already-reduced range of C$3.9 billion to C$4.5 billion announced in late March, the Calgary-based company said Tuesday. The board also cut the company’s quarterly dividend to 21 Canadian cents a share, from 46.5 cents. Suncor is joining a parade of global oil producers that are hunkering down as record low crude prices cause steep losses. In the first quarter, Suncor was able to shift output to higher priced light crude and its refined-product mix to higher-value distillate. The moves helped the company post a better-than-expected loss, excluding some items, of 20 Canadian cents a share. Analysts estimated a loss of 34 cents, on average.

World Headlines

• European stocks eased on Wednesday as investors braced themselves for a slew of economic data for the eurozone, while earnings updates from the autos sector and banks underscored the virus’s disruption to businesses. The Stoxx 600 Index was down 0.1% by 8:05 a.m. London time, following a jump in the previous session. BMW AG shares fell 2.4% after the German carmaker lowered its profit outlook for the year due to the pandemic. French lender Credit Agricole SA saw its provision to cover souring loans surge, posting mixed results, while Italy’s UniCredit SpA fell 1.1% after reporting a second loss in a row due to virus provisions. A recovery in European stocks has been tentative following April’s rebound, though signs that some countries are easing lockdown measures, such as Spain and Italy, have buoyed sentiment. Some investors, however, remain cautious.
• U.S. equity-index futures gained on Wednesday after President Donald Trump pushed again to reopen the economy, while stocks in Europe turned higher as investors weighed mixed corporate earnings and more dismal economic data. The dollar climbed and Treasuries edged lower. President Trump said Tuesday Americans should begin returning to their everyday lives even if it leads to more sickness and death. Meanwhile, data from Germany provided further evidence of the pandemic’s devastating effect, as new cases in the euro area’s biggest economy rose ahead of talks on easing restrictions. Traders saw a glimmer of hope in corporate earnings from drugmakers and online grocers, though insurers, and banks and carmakers added to the chorus of companies taking a heavy hit.
• Shares in Shanghai rose as Chinese traders came back online after a five-day break. Australian equities fell, while Hong Kong and Korean benchmarks advanced. Japan was shut.
• Oil’s rally resumed — after prices doubled over five days — amid optimism that output cuts are easing a huge supply glut and demand losses have bottomed. Futures in New York rose above $25 a barrel after earlier breaking above their 50-day moving average for the first time since January. Russian oil production was down 16% in the first five days of May, Interfax reported, while Plains All American Pipeline LP sees close to 1 million barrels a day of Permian shut-ins in May. Output in North Dakota was down by 450,000 barrels a day, according to state data, though some shale drillers said they may restart output if prices rose above $30 a barrel.
• Gold is still attracting a stream of backers even as global equities advance and moves to ease lockdowns whet appetite for risk, with worldwide holdings in bullion-backed funds expanding to a fresh record. Holdings in exchange-traded funds surged above 3,000 tons to an all-time high, according to preliminary data compiled by Bloomberg. Year-to-date inflows of more than 420 tons have far eclipsed the volume added over all of 2019.
• President Donald Trump fixed his course on reopening the nation for business, acknowledging that the move would cause more illness and death from the pandemic but insisting it’s a cost he’s willing to pay to get the economy back on track. Trump shifted his rhetoric on Tuesday, removing cautionary caveats about when and whether states should reopen and instead presenting the imminent easing of stay-at-home rules as a fait accompli. As governors across the South and Midwest have begun returning people to work, Trump said he’s pivoting to “phase two” of the nation’s response to the pandemic, a step that will include disbanding the White House coronavirus task force, a group of public health experts that has been advising the administration on how to confront the outbreak.
• Regulators on both sides of the Atlantic have spent the better part of three years trying to kill the London interbank offered rate. Now, they’re looking to it once again to underpin hundreds of billions of dollars in loans as they seek to rescue their economies. U.S. policy makers last week changed tack and turned to Libor as the benchmark for their $600 billion Main Street Lending Program, which will buy debt from potentially hundreds of companies. The move came a day after U.K. officials granted banks a six-month extension to keep issuing loans tied to the beleaguered reference rate, which is supposed to be phased out by the end of 2021. The timetable to do away with the benchmark linked to trillions of dollars of financial assets appears increasingly at risk as central bankers lean on Libor to help expedite their massive stimulus efforts. As they lend legitimacy to the much-maligned rate, some market watchers say it’s highlighting the shortcomings of replacements, while others note it could ultimately lead to a more difficult transition down the road.
• Investors flocked to Germany’s first syndicated bond offering in five years, as the nation seeks funds in the face of the heavy burdens placed on European public budgets by the coronavirus. The European Union’s richest member, which is starting to ease its coronavirus lockdown, will raise 7.5 billion euros ($8.1 billion) of 15-year notes for the first time. It follows a 50% surge in debt sales from German states during April to help support the national economy through the global pandemic. Fellow EU members Italy and Spain also tapped the market last month.
• China’s leaders are considering the option of not setting a numerical target for economic growth this year. The European Union’s executive arm warned that the bloc is facing the deepest economic downturn in its history, threatening the future of the euro. President Donald Trump said Americans should begin returning to their everyday lives even if it leads to more sickness and death. Beijing fired back at U.S. Secretary of State Michael Pompeo, saying he has no evidence to back up claims that Covid-19 escaped from a lab in Wuhan.
• New York City’s average unemployment rate may triple to 12% this year, higher than the Great Recession, as plunging tax revenue opens an $8.7 billion budget gap, according to city Comptroller Scott Stringer. He predicted employment losses would spike by the end of June, with more than 900,000 losing their jobs — one in five working New Yorkers. Restaurants, hotels and retail will be the hardest hit. Stringer’s forecast, outlined Tuesday in a report on Bill de Blasio’s budget proposal, is more dire than the mayor’s prediction last month that the city would lose more than half a million jobs over the first three quarters of the year. The increase in the city’s jobless rate would be all the more jarring coming after a decade of steady, record growth. Before the new coronavirus struck, the city’s unemployment rate was 3.8%. New York City is the epicenter of the U.S. outbreak, with more than 171,000 cases, and has been under a state-ordered lockdown since March 22. Its reopening may be weeks away.
• Bandwidth Inc., a small technology company whose software is critical to some of the most popular video conferencing applications, has become a favorite pick for investors looking to cash in on coronavirus lockdowns. The stock has jumped 20% to a record since it raised its annual revenue forecast on April 30. Executives called out a surge in use of virtual meeting products from its customers, which include Zoom Video Communications Inc. The stock has now rallied 52% in 2020, making it among the best performers in the Russell 2000 Technology Index over that period and creating nearly $1 billion in market value. Bandwidth’s software interfaces help power voice and messaging functions and the company operates its own voice over internet protocol network. In addition to Zoom, its customers include Alphabet Inc.’s Google, Microsoft Corp., Cisco Systems Inc. and RingCentral Inc.
• Semiconductor Manufacturing International Corp. is planning a Shanghai share sale that could fetch billions of dollars for a Chinese chipmaker Beijing’s counting on to help reduce reliance on U.S. technology. The Hong Kong-listed company known as SMIC surged 11%, the most in more than two years, after its board approved plans to float as many as 1.69 billion new shares on a Shanghai market created to host fast-growing enterprises. It could end up raising more than $3 billion based on its closing value of more than $11 billion. SMIC is one of several chip companies that embody Beijing’s hope of creating a self-reliant and world-class semiconductor industry. It plans to use the proceeds to develop next-generation chipmaking to try and compete with Intel Corp. and Taiwan Semiconductor Manufacturing Co. That effort comes at a time the Trump administration may tighten restrictionson the sale of technology to China, threatening to deny domestic companies like SMIC or Huawei Technologies Co. access to crucial components and circuitry.
• Airlines and airports must adopt even more measures against the spread of Covid-19, some of which would imply major new costs for an industry already suffering steep losses, a public health expert will tell lawmakers. Passengers should be screened for elevated temperatures and all employees should be required to wear masks and gloves, according to prepared testimony by Hilary Godwin, dean of the University of Washington’s School of Public Health. In-flight seating, she said, must be arranged so that people aren’t too close together, and airports have to be reshaped to promote social distancing. The air-travel industry and government agencies overseeing it must allow public health considerations to “play a far greater role than before this pandemic,” Godwin said in the remarks. She is among four witnesses scheduled to appear Wednesday before the Senate Commerce Committee in a hearing on the state of the airline industry during the coronavirus pandemic.
• HSBC Holdings Plc and BNP Paribas SA‘s risk limits were repeatedly breached in March after unprecedented market volatility blew out estimates on how much they could lose or gain on their trading desks. Europe’s two biggest banks exceeded their value-at-risk limits — a measure of risk used to calculate how much capital they need to hold against potential losses — more times in March than over several years during calmer times, according to first-quarter filings. In March alone, HSBC’s trading models breached the daily expected profit-and-loss threshold 12 times. BNP Paribas reported nine such incidents during the quarter, close to a third of all such instances reported since 2007. London-based HSBC and French lender BNP have almost $6 trillion in combined assets.
• Equinor ASA sold its remaining minority stake in Lundin Energy AB for 3.3 billion kroner ($336 million), further bolstering its cash position amid an historic crisis in the industry. The sale of the 4.9% holding in Lundin came after it had largely recovered from losses over the past two months, when the whole industry was dragged into an unprecedented slump. Equinor sold its shares at a 6.2% discount to the closing price on Tuesday.
• The uneasy truce that settled over oil markets this month as some of the world’s largest producers began cutting output belies the raging competition among exporters seeking to preserve their share of a diminished market. Saudi Arabia, the world’s biggest exporter, appears to be winning the fight for sales as it slashes prices for its crude. Producers globally are struggling to retain customers as the coronavirus destroys demand for fuel. After flooding the market in April, producers are now scaling back shipments as part of the deal by OPEC+ suppliers to soak up the glut in oil. For evidence of where the Saudis have been winning, look no further than last month’s crude exports. Saudi Arabia was the only one of OPEC’s top four producers to boost sales to India in April, according to Bloomberg tanker tracking. The kingdom’s shipments to China doubled, and its exports to the U.S. reached 1 million barrels a day, the most since August 2018.
• China’s leaders are considering the option of not setting a numerical target for economic growth this year given the uncertainty caused by the global coronavirus pandemic, according to people familiar with the matter. What may instead be unveiled at the upcoming National People’s Congress later this month is a description of the goal for gross domestic product growth, one of the people said. Last year the target was a range of between 6% and 6.5%. A final decision hasn’t been made on how to characterize the target, the people said, who asked not to be identified discussing confidential policy deliberations. The government work report, which usually contains the GDP target, is typically revised repeatedly in the lead up to the conference.
• It’s been left for dead more than once, written off as nothing but a bubble and denounced as rat poison by one of the world’s most famous investors. Yet Bitcoin is once again staging a comeback reminiscent of the token’s glory days, with evangelists pegging their hopes on a technical event as the new catalyst. True believers say the gains are driven by Bitcoin’s upcoming halving, when the rewards miners receive for processing transactions will be cut in half as soon as May 12. The internet is glutted with second-by-second countdown clocks and the mania is even spurring a hike in hiring by crypto firms worldwide. Bitcoin has rallied to more than $9,000 in anticipation from around $6,000 just a month ago.
• Walt Disney Co. investors got a taste of just how bad the coronavirus pandemic will be for the world’s largest entertainment company. The crisis cost Disney as much as $1.4 billion in lost profit last quarter, the company said Tuesday, with $1 billion coming from shuttered theme parks alone, and nearly every part of its business taking a hit. Earnings plunged by more than half to 60 cents a share in Disney’s second quarter, excluding some items. That trailed the 86-cent average of analysts’ estimates. Revenue rose 21% to $18 billion, but that was driven by the acquisition of 21st Century Fox’s entertainment assets last year. It’s only going to get worse. Disney has already lost more than a full month of parks business and cruises in the current quarter, along with the shutdown of movie theaters and the loss of live sports on its flagship ESPN cable networks. Analysts predict the company will lose hundreds of millions of dollars this period, with revenue in free fall.
• Investments in U.S.-listed fixed income exchange traded funds expanded 76% last week for the sixth 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 $7.63b in the week ended May 5, including the effect of leveraged funds, compared with $4.34b the prior week
• It took a thousand extra servers, new trenches for fiber-optic lines and a bunch of rooms at the Four Seasons resort in Palm Beach, Florida, for one of the world’s biggest trading shops to cope with the pandemic — all accomplished in less than a week. That’s part of how billionaire Ken Griffin’s Citadel Securities has kept humming at a record pace as Covid-19 upends finance, mostly abandoning its New York and Chicago offices and shifting dozens of employees and their families to a work-from-resort bubble. Others are at another emergency facility in Connecticut. The company doesn’t appear to have missed a beat, in March trading 3.3 billion U.S. shares a day and digesting a 90% jump in electronic Treasuries volume even as liquidity dried up in many places.

*All sources from Bloomberg unless otherwise specified