October 18, 2021

Daily Market Commentary

Canadian Headlines

• Hexo said co-founder and CEO Sebastien St-Louis has left the company, effective immediately, as it “completes a strategic reorganization.” The Special Committee of the Board for Succession is in advanced discussions with a preferred CEO candidate and expects to make an announcement in the coming days.

World Headlines

• European stocks retreated after their best weekly gain since March, as data showed China’s economic growth slowed, fueling fears about further setbacks in recovery. The Stoxx Europe 600 fell 0.4% as of 9:15 a.m. in London as retail and consumer products stocks fell the most. Luxury shares dragged on the gauge after a reported speech by China’s President Xi Jinping included plans to advance legislation on property taxes. Basic resources and utilities were among the few sectors making gains. European equities have rebounded over the past two weeks after slumping through September over concerns about slowing global growth and the impact of energy costs on inflation.
• Global bond yields rose and most stocks fell on Monday as surging energy prices cemented worries about inflation and reinforced bets on policy tightening. The benchmark came under pressure on Monday after data showed China’s housing slump and electricity shortages weighed on economic growth last quarter, while property curbs remain. U.S. index futures fell, while crypto and mining companies advanced in pre-market trading. Tesla Inc. also rose. Investors continue to grapple with worries that energy shortages and supply-chain disruptions will drive up living costs in most economies. At the same time, the recovery remains patchy and central bankers are inching closer to paring back stimulus. U.S. consumer sentiment fell unexpectedly in early October, but retail sales advanced.
• Asian equities fell, putting them on track to snap a three-day rally, as China’s economic growth slowed and prospects of higher bond yields weighed on some tech shares. The MSCI Asia Pacific Index fell as much as 0.4%, with tech and consumer staples shares setting the pace for declines. TSMC and Sony Group were among the biggest drags. Official data showed that China’s economy weakened in the third quarter amid tighter restrictions on the property market and China Evergrande Group’s debt crisis. For Asia stock traders, the concerns about China are adding to persistent inflation worries and energy shortages, which are sending bond yields higher.
• Oil rose higher on Monday following an eighth weekly gain, spurred on by the energy crunch as winter approaches. Futures in New York were above $83 a barrel after adding 3.7% last week, capping the longest run of weekly gains since 2015. A shortage of natural gas is creating extra demand for oil products like fuel oil and diesel from the power generation sector. That’s coincided with key economies rebounding from the pandemic. Meanwhile, Iran has said that talks about a nuclear deal could last for several more rounds. The OPEC member could increase production by 1.3 million barrels a day if U.S. sanctions were lifted, the International Energy Agency said last week.
• Base metals are heading toward record highs, with prices of copper and aluminum soaring as a global energy crisis deepens the supply crunch. Copper rose above $10,000 a metric ton and is trading toward $10,747.50, the record high hit in May, as London inventories plunged in a dramatic escalation of a squeeze on global supplies. Aluminum is about 5% below its 2008 record as the most-energy intensive sector is hit by power restrictions from China to Europe. LMEX Metals Index, which tracks six base metals, hit a record last week led by zinc’s surge, as European top producers announced output cuts on rising power prices. The supply disruptions come at a crucial juncture for the global economy, threatening to add more strain to creaking supply chains and fanning concerns that inflation risks may linger for longer than previously expected. The supply curtailments have spread from China to Europe and are also creating demand worries as record raw material costs threaten manufacturing sectors around the world.
• China is seeing a new cluster in its northwestern provinces, with eight infections detected since Sunday. Former U.S. Food and Drug Administration Commissioner Scott Gottlieb called for “urgent research” following a surge in U.K. cases with the new delta variant.  Australia’s Queensland outlined plans to reopen its borders to the rest of the nation, following pressure from Prime Minister Scott Morrison on states to do so by Christmas. Myanmar is preparing to welcome foreign tourists again early next year. New Zealand extended a lockdown in Auckland for at least another two weeks, but a vaccination target will be introduced to signal when curbs could be eased.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week, ending three weeks of outflows that reached $1.9 billion. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $720.7 million in the week ended Oct. 15, compared with losses of $1.11 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $37.9 billion.
• Softline Holding Ltd., an IT services and cybersecurity provider founded by Russian businessman Igor Borovikov, set a price range for its initial public offering in London and Moscow that values the company at as much as $1.93 billion. That’s the top end of the $7.50 to $10.50 per share range proposed to investors, the company said in a statement on Monday. The bookbuilding process is expected to be completed around Oct. 26 with the final price announced the following day. The company plans to raise about $400 million selling new shares and will use the proceeds for acquisitions and development, it said. Based on the price range, Softline expects a market capitalization of between $1.49 billion and $1.93 billion.
• Blue Owl Capital Inc. agreed to buy Oak Street Real Estate Capital in a deal worth as much as $1.6 billion, as the private capital firm forges into the property business. The company will pay $950 million in cash and stock, with another $650 million subject to earn-out provision over time, according to a statement. Oak Street Real Estate managed $10.8 billion at the end of June, primarily in the sale-leaseback business. Blue Owl, formed through a merger of Owl Rock Capital Partners and Dyal Capital Partners, is making its first acquisition since going public through a blank-check company earlier this year. It’s now forging into a new space after primarily focusing on private credit and taking stakes in other fund managers.
• Jive Investments, Brazil’s largest distressed-asset manager, plans to raise as much as 7 billion reais ($1.3 billion) next year, looking to capitalize on opportunities created by the coming presidential election. “There may be a credit contraction and less appetite for Brazil among international investors, so we want to be prepared to allocate a lot of investment during this election scenario,” Guilherme Ferreira, a Jive partner, said in an interview. A polarizing election next October between President Jair Bolsonaro and former President Luiz Inacio Lula da Silva could bring volatility to markets, putting pressure on the exchange rate and inflation. A decline in Bolsonaro’s popularity is intensifying risks for government creditors, because he is seeking to divert funds in the budget toward poverty programs.
• Goldman Sachs Group Inc. won approval to take 100% ownership of its securities joint venture in China, a key step to expand in the country even as growing political tension and a Beijing-led crackdown on the private sector has ratcheted up risks. The move gives the firm free rein to pursue a clearer growth strategy that includes doubling its workforce in China to 600 and ramping up in asset and wealth management. The U.S. bank has already added 116 staff onshore this year, boosting the total to more than 400, a spokesman said. Global banks are pushing to gain a bigger foothold as China’s market opens, jostling to capture a share of billions of dollars in potential profits. The approval from China Securities Regulatory Commission means the end of its 17-year joint venture with Chinese banker Fang Fenglei, who set up Gao Hua Securities with a loan from Goldman in 2004.
• Bitcoin resumed its ascend toward all-time highs with asset manager ProShares poised to launch the first Bitcoin futures exchange-traded fund.  The largest cryptocurrency gained as much as 5.5% and was trading at about $61,032 as of 7:44 a.m. in New York. It fell both Saturday and Sunday to nearly $59,000. Bloomberg News reported Thursday that the SEC isn’t likely to block the products from starting to trade this week, according to people familiar with the matter. Bitcoin has more than doubled since the start of the year, though the ride has been volatile as the market confronts narratives from increasing institutional adoption and greater asset-class maturity to a crypto crackdown in China and concerns about energy usage. Other cryptos also gained Monday, with second-largest Ether up about 3.4%. Binance Coin has retaken the third spot in crypto market value after a 17% rally in the past seven days, according to CoinGecko.com.
• Ford Motor Co. will invest as much as 230 million pounds ($316 million) to start making electric-vehicle components at an existing plant near Liverpool after the U.K. government pledged financial support. The Halewood facility will be retooled to start building electric power units from 2024 to gradually replace manufacturing of combustion-engine transmissions and safeguard jobs at the site, Ford said Monday. Earlier this year, the U.S. carmaker said it will sell only fully electric cars in Europe by 2030. Ford announced an ambitious overhaul of its European business comprising cars as well as vans and trucks in February, putting the carmaker’s electrification plans ahead of some of its larger competitors in the region. While the investment at Halewood is a win for the U.K.’s automotive industry, it pales in comparison to Ford’s decision to spend $1 billion to upgrade its sprawling factory in Cologne.
• Toyota Motor Corp. plans to invest $3.4 billion in the U.S. through 2030 to establish a new company and build its first U.S. battery plant, becoming the latest global automaker to accelerate the transition to electric vehicles through a battery push. Production would start in 2025 and at first focus on batteries for hybrid electric vehicles, creating 1,750 new jobs, the company said in a statement that didn’t disclose the location or production capacity. The investment is specifically for battery work and won’t be used to expand vehicle-assembly capacity, a spokesman said. The investment is part of Toyota’s global plan announced last month to spend 1.5 trillion yen ($13.1 billion) by 2030 on battery development and production. The world’s No. 1 automaker expects electric vehicles to account for nearly 70% of its U.S. sales by 2030, up from almost 25% currently.
• China is considering asking media companies from Tencent Holdings Ltd. to ByteDance Ltd. to let rivals access and display their content in search results, a move that could further eradicate online barriers and shake up the internet advertising arena. The Ministry of Industry and Information Technology is debating rules to make hundreds of millions of articles on Tencent’s WeChat messaging app available via search engines like Baidu Inc.’s, people familiar with the matter said. It’s also considering making short videos from ByteDance’s Douyin — TikTok’s Chinese cousin — show up in searches, one of the people said. Regulators are polling companies for feedback and it’s unclear whether they will go ahead, they said, asking to not be identified discussing private information. If implemented, the policy decision would mark a significant advance in Beijing’s campaign to break down barriers among China’s internet giants, especially Tencent and Alibaba Group Holding Ltd. The watchdog has already warned tech companies to open their so-called “walled gardens” by allowing links to rival services, part of a broader push to root out illegal activity across the world’s largest internet arena.
• The European Central Bank said lenders in the region will have to estimate the risk they could face from climate change in both their lending and trading operations when they undergo a stress test next year. Banks will have to predict how their balance sheets will evolve over 30 years as well as any related losses they could face in the transition to a more sustainable economy, according to a methodology published by the central bank on Monday.  In the stress test, to be run from March to July 2022, the ECB will take the most detailed look yet at the hit banks could face from climate mitigation policies that could put polluting companies out of business as well as from extreme weather. The watchdog faulted the industry earlier this year for being too slow in getting to grips with risks related to climate change, citing patchy data and a lack of attention by executives.
• Royal Philips NV lowered its growth and earnings guidance after supply-chain issues including a shortage of semiconductors weighed on sales as disruption spreads across manufacturers.  The medical equipment supplier now expects low single-digit sales growth for 2021, down from the low-to-mid-single digit increase it forecast previously. Philips sees just a “modest” increase in its profit margin, compared to the 60-basis-point improvement it anticipated previously.
• The City of London Corporation pledged to slash emission rates for its 3 billion pounds ($4.1 billion) of investments and hold fund managers more accountable as part of its plan to achieve net zero carbon by 2040. The governing body of London’s financial district outlined targets for 2025 as part of the longer-term strategy, in a statement Monday. They include cutting the assets’ emissions intensity by 24% and ensuring that managers comply with expectations such as support for climate change shareholder resolutions and requiring investee companies to set clear decarbonisation targets.  The City of London is the latest organization to announce ambitious net-zero emission targets ahead of the COP26 climate talks that Britain will host next month. An increasing number of financial institutions including banks and asset managers have committed to ambitious goals, though few have established how they will reach these targets.
• AirAsia Group Bhd.’s long-haul arm has offered to pay creditors just 0.5% of the more than $8 billion total debt they are owed and terminate all existing contracts as it tries to restructure, a document seen by Bloomberg shows. The carrier, AirAsia X Bhd., told creditors it is unable to meet immediate debt and other financial commitments based on its financial position and industry outlook. The low-cost airline has barely flown in 19 months, since the early days of the Covid-19 pandemic. Half of the 36.6 billion ringgit ($8.1 billion) liability is the cost of terminating orders with Airbus SE, its largest creditor, for 78 A330neo and 30 A321neo aircraft, according to the document.
• Tesla Inc. shares are staging a comeback as investors expect the Elon Musk-led electric carmaker to navigate the crippling semiconductor shortage better than rivals that have been severely disrupted. The stock gained as much as 0.9% to $850.99 in U.S. premarket trading on Monday, set for a 50% increase from a March 8 low of $563. That comes after eight weeks of gains, its longest winning streak since before the Covid-19 pandemic roiled markets. The rebound makes it the sixth-biggest publicly listed company in the U.S., firmly ahead of Berkshire Hathaway Inc. Tesla shares have been steadily climbing in recent months, aided by strong quarterly results that showed the company fared much better than traditional carmakers in handling the semiconductor shortage. Deliveries for the third quarter beat all estimates.
• Russia is keeping a tight grip on Europe’s energy market, opting against sending more natural gas to the continent even after President Vladimir Putin said he was prepared to boost supplies. Gazprom PJSC’s exports to its main markets fell in the first two weeks of October to the lowest since at least 2014 for the time of year, as domestic demand absorbed most of the production gains. The results of auctions for pipeline capacity in November gave no indication that Russia is planning to boost shipments to Europe.  The cap on supplies remains in place despite Putin’s insistence last week that the country is “prepared to discuss any additional steps” to stabilize energy markets. Soaring energy costs are already prompting companies from chemicals giant BASF SE to fertilizer producers Yara International ASA and CF Industries Holdings Inc. to cut output. Extra Russian gas is seen as the only way to avoid an even deeper supply crunch in the middle of the winter.
• Volvo Car AB is looking to raise 25 billion kronor ($2.9 billion) in a Stockholm initial public offering in a test for automakers amid the sector’s transition to electric vehicles. The Swedish carmaker, owned by China’s Zhejiang Geely Holding Group Co., is selling shares in a price range of 53 kronor to 68 kronor, according to a statement Monday. The deal values Volvo Cars at as much as 200 billion kronor. The IPO is set to be Europe’s largest since Polish parcel-locker provider InPost SA’s 2.8 billion-euro offering in January, according to data compiled by Bloomberg.
• Zillow Group Inc. shares fell as much as 6.8% in premarket trading Monday after the online real estate firm said it would stop buying new homes and work to clear a backlog of properties it already has. The Seattle-based company, which acquired more than 3,800 homes during the second quarter, has seen its stock price tumble about 27% this year after it nearly tripled in 2020 amid the pandemic-fueled housing market boom.
• Ares Management Corp., one of the largest players in private credit, has raised $5.1 billion for its second fund focused on junior capital tapping investor appetite for higher-yielding assets. The haul is above the $4 billion target Ares had set for the fund and 50% larger than the $3.4 billion raised by the first vintage in 2017. Both vehicles are part of Ares’s Private Credit Solutions series, which invests in subordinated loans as well as preferred or common equity of closely held companies. Direct loans like those offered by the PCS funds have become an increasingly popular source of capital for private equity firms to finance buyouts. In exchange for a slightly higher interest rate, they typically offer borrowers faster execution, greater confidentiality and more customized terms than are available in broadly syndicated loans in the bond market.

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*All sources from Bloomberg unless otherwise specified