November 21st, 2018

Daily Market Commentary


Canadian Headlines

  • Recent turmoil in oil and financial markets aside, Canadian Finance Minister Bill Morneau’s budget update Wednesday will paint a rosy enough picture to finance tax breaks for corporations without fueling additional deficits. The federal government will probably revise revenue projections upward by at least C$7 billion ($5.5 billion) over three fiscal years beginning with the current one, according to Bloomberg calculations. That’s thanks to a better-than-expected economic outlook and signs of stronger tax collection, and excludes higher revenue from a new carbon tax on some provinces.
  • The legalization of cannabis in Canada may have diminished the need for criminal lawyers, but it’s created a booming business for the country’s most prestigious corporate law firms. The cannabis sector has seen 27 major deals worth $10.6 billion announced this year, according to data compiled by Bloomberg. Add in 127 stock sales worth $2.65 billion, and advice to clients on how to navigate a complex new regulatory environment, and it’s been a boon for Toronto’s biggest law firms, many of whom had regarded it with trepidation for years.
  • Canada’s government is willing to order an end to rotating postal strikes as retailers complain the dispute threatens the holiday shopping binge that begins after Thanksgiving in the U.S. “We strongly encourage both sides to reach a deal and are prepared to table legislation if we do not see a resolution over the next few days, a step we do not take lightly,” Labor Minister Patty Hajdu said in a statement late Tuesday. She and Prime Minister Justin Trudeau were more measured earlier in the day, saying the government was weighing its options.



World Headlines

  • European equities rebounded from a near two-year low as investors returned to the market amid optimism of a compromise over Italy’s budget. The FTSE MIB was the best performer among the main European markets, snapping a 1.2% gain. The Stoxx Europe 600 Index was up 0.5 percent after closing at the lowest level since December 2016 on Tuesday. Banks, steelmakers, miners and autos led the advance.
  • A slump in U.S. technology stocks, emerging signs of stress in the corporate credit market and diminishing hopes for a resolution to the ongoing China-American trade dispute have renewed the sell-off in global equities. The S&P 500 Index briefly slid 10 percent below its September record close on Tuesday before clawing back above the threshold. Wells Fargo Investment Institute strategists see the sell-off as a buying opportunity, writing that investors should deploy cash to selected equities now, or over the coming days.
  • Japanese stocks fell for a second day, led by energy-related shares after oil prices plummeted. All but two of the 33 industry groups on the Topix index declined, led by oil explorers after crude prices slid more than 6 percent in New York and London. Commodity trading houses including Mitsubishi Corp. and Itochu Corp. were among the biggest drags on the benchmark gauge. U.S. equities dropped on Tuesday as Apple Inc. led a continued plunge in tech hardware names, and Target Corp. led retailers lower after giving a disappointing outlook.
  • Oil recovered from a one-year low as industry data showing a drop in U.S. crude inventories allayed some of the concern that a new surplus is amassing in global markets. Futures in New York rose as much as 2.4 percent after plunging more than 6 percent on Tuesday. The American Petroleum Institute was said to report a 1.55-million-barrel drop in stockpiles last week, compared with a gain forecast in a Bloomberg survey before government data due Wednesday. U.S. President Donald Trump said Saudi Arabia has been “very responsive” to his requests to keep prices low, calling into question OPEC’s resolve to trim supply.
  • Gold’s gains might have slowed recently — even as financial markets have been rocked — but investors have steadily pushed bullion holdings in exchange-traded funds to a three-month high. While stock markets and oil tumbled Tuesday, gold prices showed no real signs of haven buying, ending the day little changed for a second session. But ETF holdings extended a six-week gain, rising to the highest since Aug. 10. Bullion prices were steady again Wednesday, with other precious metals outperforming.
  • China’s central bank refrained from adding cash to the financial system for a 19th day, the longest run in more than three months, as ample liquidity drags sovereign bond yields lower than in the U.S. The People’s Bank of China cited “reasonable and plentiful” cash supply as the reason for skipping open-market operations, according to an official statement Wednesday. The yield on one-year government notes has this month fallen below the U.S. equivalent for the first time in more than a decade.
  • German Chancellor Angela Merkel warned the U.K. it can’t set unilateral terms for leaving the European Union as Prime Minister Theresa Mayheads to Brussels to try to complete a contentious Brexit deal. Addressing lower-house lawmakers in Berlin, Merkel gave short shrift to Brexit while rattling off domestic achievements, pleading for stronger bonds between EU nations and criticizing go-it-alone policies as false patriotism. Her message to the U.K. reflected Merkel’s opposition to renegotiating the draft Brexit accord and the risk of last-minute obstacles ahead of an EU summit on Sunday.
  • The U.S. on Tuesday accused China of continuing a state-backed campaign of intellectual property and technology theft even as the world’s two largest economies have descended into a tit-for-tat tariff war. The new accusations came in a detailed 53-page report released by U.S. Trade Representative Robert Lighthizer’s office just 10 days before President Donald Trump is due to meet Chinese President Xi Jinping on the sidelines of a Nov. 30-Dec. 1 Group of 20 summit in Buenos Aires.
  • T-Mobile US Inc. is offering a revised rationale for buying Sprint Corp., a turn that critics say is a sign the carrier’s earlier arguments weren’t winning over U.S. officials who can bless or kill the deal. T-Mobile told the Federal Communications Commission in a filing earlier this month that it needs the Sprint merger to help it compete more vigorously against giants AT&T Inc. and Verizon Communications Inc. In September, the company focused on how the tie-up would give it an edge in quickly building an advanced wireless network known as 5G, a goal of the Trump administration.
  • French Finance Minister Bruno Le Maire and Renault SA’s interim Chief Executive Officer Thierry Bollore sought to provide reassurances on the three-company Renault-Nissan-Mitsubishi alliance, saying it’s vital for the future of the carmakers. The partnership is set to continue and will be deepened, Le Maire said at a press conference in Paris on Wednesday, the day after the French carmaker put in place temporary leadership to replace Chairman and CEO Carlos Ghosn, who was arrested in Japan.
  • Saudi Arabian oil production surged to a record near 11 million barrels a day this month after the kingdom received stronger-than-usual demand from clients preparing for a disruption in Iranian supplies, according to industry executives who track Saudi output. Riyadh has been pumping about 10.8 million to 10.9 million barrels a day of crude, the same executives said, asking not to be named to protect their commercial relations with the kingdom. On some days, more than 11 million barrels a day were supplied to the market by drawing down domestic and overseas stockpiles.
  • Germany’s industrial southwest, Switzerland and parts of France face a dearth of fuel supplies in the coming weeks just as freezing temperatures threaten to lift demand for heating oil. A prolonged drought this summer has led to record-low water levels on the Rhine river, closing many parts of the key transport artery to barge traffic. With little relief in sight, the German government is seeking to loosen rules on fuel transports by road to prevent shortages. The logistics bottleneck led to production halts at Covestro AG, contributing to a profit shortfall at the German plastics maker and sending the shares tumbling on Tuesday.
  • China has named the former chairman of Baoshan Iron & Steel Co. as president of rival Ansteel Group Corp., signaling its intention to merge the two parent companies and create a steel giant that would top ArcelorMittal as the world’s largest producer, according to people familiar with the matter. Shares in the groups’ listed units surged. Combining the two would help Baoshan’s parent and the nation’s biggest producer, China Baowu Steel Group Corp., hit its target of 100 million metric tons of annual output by 2021, and the government meet its goal of concentrating 60 percent of production in the hands of its top 10 mills by 2020, said the people, who declined to be identified as the information isn’t public. They didn’t give a time-line for the deal and said the plan could yet be subject to change.
  • Foxconn Technology Group, the biggest assembler of Apple Inc. iPhones, aims to cut 20 billion yuan ($2.9 billion) from expenses in 2019 as it faces “a very difficult and competitive year,” according to an internal company memo. The iPhone business will need to reduce expenses by 6 billion yuan next year and the company plans to eliminate about 10 percent of non-technical staff, according to the memo obtained by Bloomberg. The company’s spending in the past 12 months is about NT$206 billion ($6.7 billion). Foxconn did not immediately provide comment.
  • Deere & Co. delivered a financial-year earnings forecast that was broadly in line with expectations as the world’s largest tractor manufacturer sees demand remaining resilient to the U.S.-China trade war. For its fiscal fourth quarter, sales and earnings both came in below estimates amid cost pressure from raw materials such as steel, with shares falling before the start of regular trading. Its 2019 profit projection of $3.6 billion compares with the $3.7 billion average estimate.
  • Chrysaor Holdings Ltd. and Neptune Oil & Gas Ltd. are among the suitors weighing bids for a package of North Sea oil and gas fields from Chevron Corp., according to people familiar with the matter. The assets, mostly located in the central North Sea, could fetch as much as $2 billion, the people said, asking not to be identified as the information is private. Initial bids are due as early as next year, with private equity firms and rival explorers also likely to express their interest, the people said. The U.S. explorer is working with Morgan Stanley on the sale, they said.
  • The fate of Takeda Pharmaceutical Co.’s $62 billion acquisition of Shire Plc now rests with shareholders after Japan’s biggest overseas deal successfully cleared all the regulatory hurdles. The European Commission signed off on the deal Tuesday after the Japanese drugmaker agreed to sell an experimental treatment for inflammatory bowel disease from Shire to satisfy antitrust concerns. Europe was the final step after the takeover gained approval by other major markets from China to the U.S. The deal also got a boost as advisory groups Glass Lewis and Institutional Shareholder Services recommended that investors back the acquisition.
  • CK Group has formally walked away from its A$13 billion ($9.5 billion) bid to buy Australia’s biggest gas-pipeline operator, representing the first major setback for Chairman Victor Li since taking over the family empire from his father in May. Li dropped his pursuit of APA Group on Tuesday, confirming the end of what became a doomed deal on Nov. 7, when Australia effectively said it would block the transaction on national-security grounds. Had the purchase gone through, Li, 54, would have gained control over pipelines delivering about half of Australia’s gas, kicking off his reign by making the biggest overseas purchase the Hong Kong group had ever done — even under his deal-savvy father.
  • After months of setbacks, Mexico is now on the cusp of rolling out an automatic tax payment system that forms a key part of its effort to crack down on evasion. And the government scored a marquee name — Uber Technologies Inc. — to be its first participant, according to a person familiar with the negotiations. For Mexico, it’s a big get. The country has been looking for ways to boost tax collection that’s the worst among members of the Organisation for Economic Cooperation and Development, a result of an economy that remains largely informal. Uber is a key ally — it dominates more than 80 percent of the market in Mexico, according to Dalia Research, and it also likely has many drivers and restaurants who don’t properly report or pay income tax. For Uber, the once-combative tech giant, it’s a test to a new strategy of offering more gestures of cooperation to governments.
  • When it comes to U.S. banks’ lending risk, it doesn’t get much bigger than General Electric Co. The five biggest Wall Street firms have committed to lending at least $3.5 billion each to the industrial giant facing concerns about the sustainability of its debt. GE has almost $41 billion in credit lines it can draw from, according to its latest quarterly regulatory filing. If fully tapped, the two main credit facilities would rank as the largest loans to any U.S. company that go beyond next year, data compiled by Bloomberg show. GE had used only about $2 billion of the available credit by the end of the third quarter, leaving itself ample room to pull more if necessary.

*All sources from Bloomberg unless otherwise specified