November 20th, 2020

Daily Market Commentary

Canadian Headlines

  1. Moody’s Investors Service upheld Canada’s top credit rating ahead of a fiscal update from Prime Minister Justin Trudeau’s government expected to show soaring debt. The country’s economic strength and “policy effectiveness” give it a “very high degree of resilience to shocks,” Moody’s analysts including William Fostersaid in a report Thursday that affirmed the Aaa rating with a stable outlook. Moody’s said historically low interest rates mitigate the impact of this year’s sharp rise in spending to counter the Covid-19 pandemic, which will produce the largest budget deficit since World War II. Finance Minister Chrystia Freeland is due to release updated government projections in coming weeks. Moody’s expects Canadian gross domestic product to contract by about 6% this year, followed by growth of 5% and 3.5% in 2021 and 2022, respectively. That’s a sharper decline this year but a swifter rebound than the median estimate in Bloomberg’s latest survey of economists.

World Headlines

  1. European stocks climbed anew, extending a rally fueled by optimism about coronavirus vaccines, as investors resumed a rotation into economically sensitive sectors. The Stoxx Europe 600 Index added 0.7% at 10:44 a.m. in London, with miners leading gains as metal prices looked set to finish the week on a strong note on hopes of a demand recovery next year. Energy shares also outperformed, while real estate lagged behind. The benchmark is poised for a third straight weekly gain, its longest winning streak since July. While the rally paused yesterday after stocks reached an almost nine-month high, traders on Friday looked past disputes over stimulus programs in Europe and the U.S. Hopes of a return to economic normalcy have spurred a sharp rotation into cyclicals and value shares in November, pushing the Stoxx 600 toward its biggest monthly gain since 2009.
  2. U.S. stock index futures fell after Treasury Secretary Steven Mnuchin and the Federal Reserve publicly disagreed Thursday over whether to extend the central bank’s emergency pandemic lending programs. December contracts on the S&P 500 dropped 0.5% at 2:49 p.m. in Tokyo. Futures declined 0.7% on the Dow Jones Industrial Average and were little changed on the Nasdaq 100 Index. Mnuchin sought a 90-day extension for four of the central bank’s emergency lending programs, but requested other programs expire on schedule on Dec. 31 and the Fed return $455 billion to the Treasury so Congress can spend the money elsewhere. But the central bank pushed back and said the programs served a vital role.
  3. Japan’s Topix erased a morning loss to cap a third week of gains despite a renewed increase in coronavirus cases. Automakers were the biggest boost to the benchmark gauge while insurers fell. The Nikkei 225 Stock Average closed lower but also posted its third-straight weekly advance. New infections topped 500 for a second day in Tokyo, which has raised its virus alert to the highest level but has so far avoided reimposing tough restrictions on travel or entertainment. “Japan cannot go into a strict lockdown, and with the GoTo campaign still in place this ‘third wave’ of infections isn’t upsetting the market,” said Takahiro Kusakari, chief investment officer of Sawakami Asset Management Inc. “If new cases grow exponentially, or if severe cases begin to impact medical facilities then it would increase the chances of limiting activities. That would make it hard for Japanese stocks to maintain current levels.”
  4. Oil rose, heading for a third weekly gain, as positive Covid-19 vaccine developments offered bulls encouragement about the market’s prospects despite lockdown measures to combat the disease’s spread. Brent rose as high as $44.78 a barrel. A string of positive vaccine statements has put prices on course for the longest run of weekly gains since June. Still, Americans are being urged not to travel for Thanksgiving, and European road use is once again being depressed because of lockdowns. As prices push toward the top of a range they’ve been in for months, many of the biggest moves have been in timespreads — the difference in price between futures contracts — that give a sense of traders’ views on how the market might evolve.
  5. Gold steadied after the longest losing run since March, as a sell-off in exchange-traded funds that was triggered by optimism over a coronavirus vaccine continued. Prices are heading for a second weekly drop and are near the lowest since July following positive news over shots being developed by companies including Pfizer Inc. Global bullion ETF holdings — which were crucial to gold’s rally to a record in August — are now at the lowest in more than two months. While ETF investors have typically tended to take a long-term view of the market, the high cost of rolling futures contracts forward may have brought in more short-term traders, like hedge funds into ETFs, said Marcus Garvey, head of metals and bulks commodity strategy at Macquarie Group Ltd. That has led to more “fast money” in the products, meaning a quicker response to changes in gold’s outlook.
  6. Copper surged to a fresh two-year high on Friday, and is set for its longest run of weekly gains since September, as investors weighed concerns about rising coronavirus cases against promising news on vaccines that could hasten an economic recovery. Base metals have climbed this month on signs of progress in developing a drug to combat Covid-19, which would help economies reopen and global growth recover. But there are still immediate fears that fresh lockdowns — especially in the U.S. — could bring renewed pressure on economic activity. The Trump administration moved Thursday to end several emergency pandemic lending programs at the Federal Reserve. Nevertheless, materials including metals are heading for a prolonged bull market driven by structural changes including a shift to more commodity-intensive economic growth, Goldman Sachs Group Inc. said in a note earlier this week.
  7. The European Union warned that the U.K. hasn’t moved sufficiently to overcome the main obstacles to a post-Brexit trade deal as three of the bloc’s leaders called for contingency plans to be stepped up in case there is no agreement. At a meeting in Brussels on Friday, Secretary General of the Commission Ilze Juhansone told envoys from the EU’s 27 member states that negotiations could now slip into December as progress has been slow, according to people in the meeting who asked not to be identified because they weren’t authorized to speak publicly. The pound trimmed its earlier gains. The talks were roiled this week by the disclosure that a member of the EU team had tested positive for coronavirus. Face-to-face negotiations have been now suspended, and Michel Barnier, the bloc’s chief negotiator, is to go into quarantine just as time to reach a deal runs out.
  8. OneWeb is set to emerge from bankruptcy after the British government completed its acquisition of the troubled satellite operator, signaling a more interventionist industrial strategy after Brexit. Completion of the $1 billion deal is expected to be announced on Friday afternoon after the deal cleared regulatory hurdles, according to people familiar with the matter who asked not to be named. A new chief executive officer and a target date to resume launches in mid-December are also set to be announced, they said. The U.K. in July teamed up with an arm of Indian telecommunications tycoon Sunil Mittal’s Bharti Enterprises Ltd. to win an auction for the bankrupt company. It pushed the buyout through quickly in the face of concern among civil servants that the investment could sour.
  9. The European Union could pay more than $10 billion to buy hundreds of millions of doses of vaccines from Pfizer Inc. and its German partner BioNTech SE, and CureVac NV, Reuters reported. South Australia plans to lift its lockdown early and immediately allow outdoor exercise. Hong Kong’s health chief said the city had “probably entered into a new wave of cases,” and authorities will ask more students to stay home. India hit 9 million total Covid-19 cases.
  10. Japan is continuing its efforts to diversify its supply chains and beef up factories at home after Covid-19 and trade wars exposed the risk of being too concentrated in outside markets including China. The government announced the distribution of 146 subsidies totaling 247.8 billion yen ($2.4 billion) to businesses fortifying their domestic supply chains, the trade ministry said Friday. Some 57 applications received 57.4 billion yen in an earlier round of payments this summer as part of a program launched earlier this year. The program makes no mention of China, but economists say policy makers are conscious of the risks posed by keeping too much production in China, given the trade war between Beijing and Washington, and also the potential for disruption to key medical supplies.
  11. Gland Pharma Ltd. rallied in its trading debut on Friday after the initial public offering of the Chinese-owned drugmaker raised $873 million in India’s biggest-ever IPO by a pharmaceutical firm. Shares of the unit of Shanghai Fosun Pharmaceutical (Group) Co. ended at 1,819.55 rupees in Mumbai, up about 21% from the IPO price of 1,500 rupees. They reached as high as 1,850 earlier. Gland Pharma joins this year’s record wave of listings by health care and pharmaceutical companies in Asia, helped in large part by a surge in investor interest in the sector amid the coronavirus pandemic. Its IPO is also India’s second biggest in 2020 after SBI Cards & Payment Services Ltd.’s $1.44 billion offering in February, according to data compiled by Bloomberg.
  12. The Bank of Japan purchased 1.2 billion yen of exchange-traded funds, according to a statement on the central bank’s website. The central bank bought 1.2 billion yen of Japanese real estate investment trusts. The bank buys ETFs and J-REITS as part of its large-scale easing program to stimulate the economy and prices. The BOJ says the purchases help lower the risk premiums of asset prices. The smaller ETF capex purchases provide funds to companies for investment in physical and human capital. The BOJ started its ETF lending facility in June 2020 to help improve liquidity in the buying and selling of ETFs by loaning out some of its holdings to market participants.
  13. China sold its first negative-yielding bonds via a large euro-denominated offering this week, underscoring the benefits of cheap offshore borrowing costs at a time of higher domestic interest rates and a strong yuan. The country’s Ministry of Finance priced its 4 billion euro ($4.75 billion) offering Wednesday across five, ten and 15-year maturities, the first such sale in about a year. The 750 million euro five-year tranche fetched a reoffer yield of -0.125%, marking the first time that China’s sovereign debt was sold at a negative yield, according to data compiled by Bloomberg. That is in stark contrast to the sovereign’s borrowing cost in the domestic market. The yield on China’s yuan-denominated onshore 10-year government debt is now at 3.35%, an 18-month high and the highest among major economies, Bloomberg data show. The world’s second-largest bond market has come under pressure in recent months, amid fading hopes for further monetary easing and rising corporate defaults.
  14. A rally in global credit markets sparked by unprecedented stimulus since the start of the pandemic will be tested by the prospect of an end to Federal Reserve backstops. U.S. Treasury Secretary Steven Mnuchin on Thursday requested that emergency liquidity including primary and secondary market corporate credit facilities introduced earlier in the year expire as scheduled on Dec. 31. The central bank objected to the instruction. Credit-default swaps in Asia rose 1 to 2 basis points Friday after the news, traders said. Gauges of corporate default risk fell in Europe, however, where stimulus from governments and central banks continues to underpin sentiment for now.
  15. BioNTech SE and Moderna Inc. could receive conditional European Union marketing authorization for their Covid-19 vaccines in the second half of next month, according to the head of the EU’s executive arm, putting the bloc on track to start distributing the shots at the same time as the U.S. The European Medicines Agency is in daily contact with the U.S. Food and Drug Administration about the evaluation of the vaccines in order to “synchronize” assessment, said European Commission President Ursula von der Leyen. The EMA has said conditional approval could come as early as the second half of December, von der Leyen told reporters after EU leaders discussed the Covid-19 pandemic via video conference on Thursday.
  16. Hershey Co. is taking the unusual step of directly sourcing a large amount of cocoa through the ICE Futures U.S. exchange instead of buying beans in the physical market, according to people familiar with the matter who asked not to be named because the deal is private. The massive trade has sent December-delivery futures to a record premium over the next contract. The purchases were so large that they required special permission from the exchange, the people said. The trade comes after top cocoa growers Ivory Coast and Ghana added a hefty premium for their beans in a move they say will boost farmers’ incomes. While most cocoa changes hands via private deals around the world, the purchase through the exchange allows Hershey to obtain cheaper supplies, saving millions. That’s because beans sourced from exchange stockpiles don’t incur the premium, currently about 15% of the futures price.
  17. The World Trade Organization said the strong rebound in global trade during the third quarter may slow in the closing months of the year as nations battle a resurgence of the Covid-19 virus, according to a report issued Friday. The Geneva-based trade body’s quarterly goods trade barometer rose to 100.7 last quarter, a dramatic improvement from a reading of 84.5 released in August. A level of 100 indicates growth over the next quarter that’s in line with medium-term trends. Despite the stronger performance, the virus continues to create uncertainty on the global trading system, and the movement of goods is likely to slow in the fourth quarter as pent-up demand is exhausted and inventory restocking is completed, the WTO said. A new wave of the virus is spreading, particularly in the U.S. and across Europe’s big economies. The latest spikes in infections are prompting some governments to impose mask mandates, curfews and other restrictions like lockdowns that are both boosting international e-commerce and straining the capacity of supply chains.
  18. It’s not just Boeing Co.’s 737 Max that needed repairs. The U.S. Federal Aviation Administration, which approved what officials acknowledge was a flawed design implicated in two deadly crashes of the jetliner, found itself facing criticism from regulators around the world — a stunning turnabout for an organization accustomed to global deference. In the wake of the disasters, the FAA is revising how it reviews new aircraft after panels of outside experts cited organizational deficiencies. Congress, which conducted its own investigations, is poised to cut the FAA’s reliance on inspectors working for manufacturers such as Boeing and may provide money for the agency to hire more engineers.
  19. Republican Senator Mitt Romney on Thursday denounced President Donald Trump over his continuing campaign to reverse his defeat to Joe Biden in the presidential election. “Having failed to make even a plausible case of widespread fraud or conspiracy before any court of law, the president has now resorted to overt pressure on state and local officials to subvert the will of the people and overturn the election,” Romney, a Utah Republican, said in a statement posted on Twitter. “It is difficult to imagine a worse, more undemocratic action by a sitting president.” The blunt criticism by Romney, the 2012 Republican presidential nominee who has often been at odds with Trump, stands in stark contrast to most congressional Republicans who have remained silent as the president continues to issue unsubstantiated accusations about voting fraud on Twitter.
  20. Pfizer Inc. and BioNTech SE plan to file for an emergency use authorization Friday that could allow their Covid-19 vaccine to be used in the U.S. in December. Roche Holding AG will be able to make its first deliveries of Covid antibody treatments in the first quarter of 2021. Madrid will shut its border for traffic for 10 days in December. Portugal is likely to extend existing restrictions to more than 200 municipalities from 191 regions. Singapore will tighten border measures for travelers who have been to Malaysia or Japan.
  21. Tesla Inc.’s already impressive stock market rally might be on the verge of a further massive boost. The electric carmaker’s scheduled Dec. 21 inclusion in the S&P 500 Index could result in $8 billion of demand from active U.S. large-cap mutual funds, analysts at Goldman Sachs Group Inc. wrote in a note on Friday. “Of the 189 large-cap core funds in our universe, 157 funds that manage around $500 billion in assets under management did not hold Tesla on Sept. 30,” the analysts wrote. Assuming those funds chose to hold the carmaker at benchmark weight, they would need to buy $8 billion of the stock, or about 2% of Tesla’s market value, the analysts said. The shares were 0.5% lower U.S. pre-market trading, but set for a 22% weekly gain after Thursday’s all-time high. Tesla is the best-performing large-cap stock in the U.S. this year, soaring about 500%, as investors show increasing confidence that electric cars, trucks and buses will dominate the future of the auto and transportation industries.
  22. The top two U.S. economic policymakers clashed over whether to preserve emergency lending programs designed to shore up the economy — a rare moment of discord as the nation confronts the risk of a renewed downturn spurred by the resurgent coronavirus. The disagreement erupted late Thursday when outgoing Treasury Secretary Steven Mnuchin released a letter to Federal Reserve Chair Jerome Powell demanding the return of money the government provides the central bank so it can lend to certain markets in times of stress. Minutes later, the Fed issued a statement urging that “the full suite” of measures be maintained into 2021. “This is a significant and disturbing breach at a critical time for the economy,” said Tony Fratto, who worked at the Treasury and the White House during the George W. Bush administration. “We need all the arms of government working together and instead we’re seeing a complete breakdown,” he said, noting that Washington remains at an impasse on fiscal stimulus as well.
  23. Billionaire Paul Singer’s Elliott Management Corp. has made a fresh takeover bid for ailing Swiss baking company Aryzta AG, people with knowledge of the matter said. Elliott proposed an offer of about 0.80 Swiss francs per share in recent weeks and reiterated its interest in the past few days, the people said, asking not to be identified because the information is private. That price would represent a 32% premium to Thursday’s close and value Aryzta at about 794 million francs ($872 million), data compiled by Bloomberg show. The U.S. investment firm has conducted due diligence and lined up financing for the potential acquisition, the people said. Aryzta shares rose as much as 21% on Friday, making it the biggest gainer on the benchmark Swiss Performance Index. They were up 17% at 12:46 p.m. in Zurich, giving the company a market value of 703 million francs.
  24. TUI AG needs a capital raise of at least 3 billion euros ($3.6 billion), according to Citigroup Inc. analysts — an amount that’s bigger than the ailing travel firm’s market value. Analyst James Ainley raised his prediction for required funding from 2 billion euros after lowering his earnings estimates again. Despite promising news on coronavirus vaccines, Citi’s prior assumption of a normalized summer next year “seems optimistic” when allowing time for a rollout of inoculations, Ainley wrote in a note to clients. Web traffic data has shown only slightly better recent momentum, while Citi also expects surplus air and hotel capacity to weigh on prices. TUI should have about 600 million euros of liquidity at the end of December, Ainley wrote, and “without the normal surge of booking activity in January/February, the group could run out of capital in less than two months based on current cash burn estimates.”
  25. Equity funds had $27b inflows in the week through Nov. 18, with $21.3b going into ETFs; while bond funds had $11.9b inflows, cash funds saw $9b in additions, while precious-metals/gold funds posted their largest outflows ever at $4.1b, according to BofA note, citing EPFR Global data. Highlights among equity regions include U.S. stock funds with third week of inflows at $9.4b, Japan with $1.2b inflows, Europe with $0.3b outflows, marking a sixth week of redemptions, and EM stock funds seeing fifth-largest inflow ever at $7.2b
  26. Vodafone Idea Ltd., the debt-strapped Indian wireless carrier, sold its stake in a telecommunications tower firm for 37.6 billion rupees ($506 million), as part of efforts to shore up its strained finances. The local arm of Vodafone Group Plc disposed of the 11.15% holdings in Indus Towers Ltd. to existing shareholders, the company said in a filing late Thursday. After the transaction, Bharti Infratel Ltd. will own 36.7% of Indus Towers, British operator Vodafone 28.1%, with the rest held by investors including KKR & Co. and Canada Pension Plan Investment Board. However, Vodafone Idea won’t receive all that cash. It owes the tower operator 24 billion rupees, which will be deducted from the total consideration, according to the statement.
  27. Nomura Holdings Inc. plans to introduce flexible work on a permanent basis for its overseas staff, the latest global financial firm to consider such a move as the pandemic reshapes office life. While the planning is at an early stage, Nomura sees both an “appetite and ability to support an operating model in which 50% of our Corporate workforce across our international offices will work remotely at any one time,” the company said in an internal memo seen by Bloomberg. Japan’s biggest brokerage joins banks including Standard Chartered Plcand Deutsche Bank AG that are considering keeping flexible work arrangements even after the health crisis subsides. Such a move might allow Nomura to cut office space, Chief Executive Officer Kentaro Okudasaid earlier this year.
  28. PMorgan Chase & Co is passing on a chunk of its credit risk to two European pension giants, in a deal that provides the Wall Street bank with capital relief and gives the investors a chance for above-average returns. Swedish pension fund Alecta and Dutch pension investor PGGM agreed with JPMorgan to take on the risk on about $2.5 billion in loans originated by the U.S. bank’s Corporate & Investment Banking unit, Alecta said on Thursday. The agreement represents a type of financial engineering that’s gaining traction as banks look for ways to adapt to higher capital requirements, while pension funds figure out how to generate extra returns in an ultra-low interest rate environment.

*All sources from Bloomberg unless otherwise specified