October 15th, 2019

Daily Market Commentary

Canadian Headlines

• Pot legalization was supposed to eliminate the black market, boost Canada’s economy and enrich investors. It hasn’t quite turned out that way. A year after the country became the first major economy to legalize recreational cannabis, pot stocks have lost more than half their value, retail prices are nearly double those in the illicit market, sales are well below expectations and most companies are losing money. To be sure, creating a national market from scratch was never going to be easy and the highly regulated model has attracted plaudits from around the world. But few in the industry are prepared to call the first year a success, and plenty of challenges lie ahead as new products like vapes and edibles join dried flower on store shelves in December.
• In a tight Canadian election that will be remembered for Prime Minister Justin Trudeau’s self-inflicted wounds, one thing that seems clear is that neither of the two main parties is poised to win enough seats to form a majority government. Trudeau, leader of the Liberal Party, would have to join forces with the Green Party or the left-leaning New Democrats to stay in power for a second term. If the opposition Conservatives can muster the most seats by a good margin, their leader, Andrew Scheer, could cozy up to the Quebec separatists to form a government. The horse trading would start in earnest after the Oct. 21 vote.

World Headlines

• The Stoxx Europe 600 Index rose, with 18 of 19 sectors advancing led by retailer shares. The pound strengthened as British negotiators submitted a revised set of Brexit plans to Brussels amid growing optimism that a deal could be struck this week. The euro edged lower as data showed investor confidence in Germany’s economic outlook remains weak. Crude oil futures dropped and gold steadied.
• U.S. equity-index futures rose with stocks in Europe as major Wall Street names began reporting earnings for the third quarter. Treasuries climbed amid concern Beijing and Washington remain far apart on trade. As the U.S. earnings season begins in earnest, investors will closely analyze the reports, given the global backdrop of slowing growth and a host of unpredictable macro risks from the impeachment investigation into Trump and the trade war to Brexit and Turkey’s incursion into Syria.
• Futures earlier trimmed some of their advance as Bloomberg reported China may struggle to buy the volume of American goods proposed in the “phase one” trade deal. Earlier Japan’s gauge had jumped 1.6% as trading resumed after a long weekend during which President Donald Trump announced progress on an interim deal with China. Markets elsewhere in Asia were mixed.
• Oil fell again as a deteriorating outlook for the global economy weighed on demand, while estimates of increased American crude stockpiles suggested that supplies remain abundant. Futures fell as much as 2.2% in New York after declining the same amount on Monday. Investor confidence remained weak in Germany amid concern the nation has slipped into recession, while the ongoing struggle between the U.S. and China to hammer out even a limited trade deal prolonged fears their trade war will crimp growth. U.S. inventories rose by 3.1 million barrels last week, according to the median estimate in a Bloomberg survey before official data due on Wednesday.
• The next push in gold prices will come from retail investors as risks remain skewed to the upside, according to Standard Chartered Bank. Having already rallied to the highest in more than six years, bullion will still benefit from safe haven flows, according to Suki Cooper, precious metals analyst at the bank. Prices will average $1,510 an ounce in the fourth quarter of 2019 and $1,570 in the same period next year, she said.
• JPMorgan Chase & Co.’s traders and investment bankers emerged from a messy third quarter with a few surprise wins. Fixed-income trading jumped 25% and investment-banking fees posted an unexpected increase, the company said Tuesday in a statement. That led the corporate and investment bank division to its best third quarter in three years. JPMorgan seized on some late-quarter volatility in fixed-income markets, pushing trading revenue higher than what Chief Executive Officer Jamie Dimonhad forecast just a few weeks earlier.
• The European Union struck a more optimistic tone about the prospects of a Brexit deal on Tuesday after the U.K. sent revised proposals in a bid to meet a midnight deadline. As the hours tick down, officials from the two sides worked late into Monday night in Brussels and resumed early this morning, racing to wrap up an agreement for leaders to rubber stamp at a summit this week. If a deal is reached, Prime Minister Boris Johnson can present it to the U.K. Parliament on Saturday and avoid having to seek another delay beyond Oct. 31.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week, ending two weeks of outflows that reached $788.8 million. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $71.2 million in the week ended Oct. 11, compared with losses of $770.6 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totaled $122 million.
• BlackRock Inc. reported a decline in fixed income inflows from the previous quarter as clients moved some money back into equities. The world’s largest asset manager posted fixed income flows of $34.99 billion in the third quarter, a drop of 68% from the previous quarter. But it was an improvement from the 2018 period, when those products brought in $22.91 billion. Equity net inflows rose 68% from the second quarter.
• Stakes in Colombian toll roads worth as much as $3 billion are expected to come up for sale in the coming months as construction companies look to cash out and invest in a new wave of infrastructure projects, according to people familiar with the sales. Developers are considering selling their ownership in more than a dozen projects, which generate revenue through tolls and government guarantees, according to the people. Those companies were awarded decades-long concessions by the government to build and operate the roads in Colombia.
• Johnson & Johnson raised its sales and earnings forecast, giving a rosier outlook to investors concerned by the mounting legal pressure across the health-care giant’s portfolio of drugs, consumer products and medical devices. Third-quarter adjusted earnings were $2.12 a share, topping analysts’ $2.01 estimate. The company raised its 2019 adjusted earnings projection to $8.62 to $8.67 a share, up from $8.53 to $8.63. It’s the second raise this year.
• WeWork’s bankers are pitching investors on what would be one of the riskiest junk-debt offerings in recent years — potentially giving the venture’s top private shareholders a final chance to avoid having their stakes severely diluted. A roughly $5 billion financing package led by JPMorgan Chase & Co. is the company’s preferred option, rather than selling a controlling stake in itself to SoftBank Group Corp., according to people with knowledge of the matter. The structure and terms under discussion may change depending on investor appetite. Notably, the financing may include at least $2 billion of unsecured payment-in-kind notes with an unusually hefty 15% coupon, one person said.
• China will struggle to buy $50 billion of U.S. farm goods annually unless it removes retaliatory tariffs on American products, and doing so would require reciprocal action by President Donald Trump, people familiar with the matter said. Beijing is willing to start purchasing more U.S. agricultural products as part of the “phase one” trade deal, but it is not likely to reach the $40 billion to $50 billion touted by Trump under current circumstances, the people said. The people asked not to be identified discussing the private negotiations.
• Volkswagen AG decided to delay a decision on a 1.3 billion-euro ($1.4 billion) car plant in Turkey due to the political upheaval caused by the country’s military action in northern Syria. The German carmaker had established a Turkish unit in the western city of Manisa early October, paving the way to start making cars in the country. “The decision on building a new plant was postponed by the board of management,” VW said Tuesday. “We’re closely monitoring the situation and are concerned about the current developments.”
• Paytm is close to scoring $2 billion of new financing from investors including Jack Ma’s Ant Financial and SoftBank Group Corp., a person familiar with the matter said, describing a mega-deal that will raise the temperature in India’s increasingly heated financial payments arena. Rob Citrone’s Discovery Capital Management is also in discussions to join a funding round that values the country’s top online financial services firm at $16 billion, the person said, asking not to be identified talking about a private deal. The funding will be split evenly between equity and debt and is aimed at helping Paytm fend off an influx of rivals, the person said. Talks are in their final stages but the terms could still change, the person added.
• The Bank of Japan is on course for a historic turning point that would see its bond holdings shrink next year for the first time in a decade, according to a Bloomberg News analysis. It is a remarkable prospect for a central bank that has refused to drop guidance for boosting government debt holdings by 80 trillion yen ($740 billion) annually, even as it steadily tapers purchases since pivoting to yield-curve control in 2016. The long-term implications for the world’s second-largest sovereign bond market will be far reaching if — as the analysis suggests — the BOJ’s debt holdings start to shrink from next August. According to Bloomberg calculations, that is when the central bank’s purchases will fall short of redemptions, theoretically reducing downward pressure on yields.
• Donald Trump is facing a new dilemma in the expanding Ukraine probe: whether to cement his bond with personal attorney Rudy Giuliani or distance himself from the confidant whose own legal peril threatens to ensnare the president. As Trump’s personal emissary to Ukraine, Giuliani has been privy to the president’s thinking, strategy and behind-the-scenes efforts to push President Volodymyr Zelenskiy’s government to investigate Joe Biden and his son Hunter. That makes him a key potential witness in the House Democrats’ impeachment inquiry.
• The United Auto Workers union called leaders from its locals around the U.S. to assemble in Detroit for a meeting on Thursday, but General Motors Co. and labor leaders do not have a tentative agreement, people familiar with the matter said. It’s customary for the union to call its local presidents and chairmen into Detroit for a meeting to review tentative agreements reached with carmakers for a procedural vote on taking the deal to the membership for ratification. In this case, while no agreement has been reached yet, union leaders may ask members for input on key issues as the UAW and GM inch toward a deal, one person said.
• PT Champ Resto, Indonesian operator of restaurant chains including Gokana Ramen & Teppan, is weighing an initial public offering in the largest nation in Southeast Asia that could raise about $150 million, according to people with knowledge of the matter. The firm, which is backed by Indonesian private equity firm Capsquare Asia Partners, is working with advisers on the planned first-time share sale, said the people, asking not to be named as the information is private. The restaurant operator aims to list as soon as in the first quarter, the people said.
• Blackstone Group Inc. and a rival consortium led by KKR & Co.are considering bids for the cement unit of Indian cosmetics to paper conglomerate Emami Group, according to people with knowledge of the matter. TPG Capital is also weighing a bid for Emami Cement Ltd. and could look for a local partner, said one of the people, who asked not to be identified as the discussions are private. KKR is in talks to team up with Nirma Ltd., a maker of detergents, the people said.

*All sources from Bloomberg unless otherwise specified