October 23rd, 2020

Daily Market Commentary

Canadian Headlines

  1. Canadian stocks closed higher Thursday after turning negative earlier in the session, snapping a four-day losing streak. The S&P/TSX Composite Index gained 0.3%, with communication services leading the way. Rogers Communications rallied 12% after it reported earnings and said it plans to review its investments in Cogeco if the company won’t accept a takeover bid led by Altice USA. National Bank of Canada Chief Executive Officer Louis Vachon expects a new burst of mergers and acquisitions to help fuel earnings in the bank’s capital-markets business, continuing the strength it showed in the early days of the pandemic. Meanwhile, Canada will start offering Covid-19 tests to travelers upon arrival in Alberta as part of a pilot program to reduce quarantine times and give the beleaguered province a boost.
  2. Canada’s main stock index is still about 10% lower than its February high. With its largest trading partner heading to the polls in 11 days, investors are bracing for more volatility — no matter who the winner is. With just 11 days until the election, Joe Biden is leading Donald Trump by just under 8 points in the RealClearPolitics average of national poll. Democrats are also trying to win back the Senate. For Canadian traders, there’s a lot at stake on the outcome, from the oil sector to marijuana and beyond. A new stimulus package, corporate tax rates, climate change rules, trade policy and infrastructure spending are some of the big themes in play. The S&P/TSX Composite Index has produced an average gain of 10% and has been positive nine out of 11 times in the year after the inauguration of the U.S. President, said Brooke Thackray, an analyst at Horizons ETFs Management (Canada) Inc., citing data going back to 1976. The two exceptions: 1982, when the North American economy was in a deep recession, and 2002, when it was reeling from 9/11 and the tech bust.

World Headlines

  1. European stocks rose after four days of declines as investors focused their attention on the earnings season. The Stoxx Europe 600 Index added 0.7% by 10:24 a.m. in London. Cyclicals including banks and autos outperformed, with Barclays Plc and Nordea Bank Abp climbing on better-than-expected earnings. Renault SA rose 2.1% after its sales topped forecasts. European equities have had a turbulent week as concerns over the rise in virus cases across the region as well the absence of a deal on U.S. fiscal stimulus weighed on the sentiment for four sessions in a row. Growing bets of a win for Democrat Joe Biden in the Nov. 3 U.S. election have spurred a rotation into cyclicals and out of defensive equities as the new administration is expected to accelerate economic support measures.
  2. Treasuries pared earlier gains and the dollar turned lower as risk sentiment improved, though gains in S&P futures were modest. In U.S. pre-market trading, chip bellwether Intel Corp. slumped after a surprise drop in data-center sales. Gilead Sciences Inc. jumped on its antiviral therapy becoming the first drug formally cleared to treat Covid-19.
  3. Japanese stocks rose, helped by the latest sign of a U.S. economic recovery and after a relatively smooth presidential debate. Trading companies were the biggest boost to the Topix index, which capped a weekly gain of 0.5%,. Financials rose after U.S. Treasury yields reached the highest level since early June overnight. American initial jobless claims fell for the third time in four weeks. Both the Topix and Nikkei 225 Stock Average fluctuated before the final debate between President Donald Trump and Joe Biden, but moved higher in afternoon trading. Still, the Mothers Index slid for a second day, paring its gain for the year to 39%. Otsuka said the small-cap gauge may have overextended itself.
  4. Oil rose as strong European manufacturing data helped offset demand concerns as a second coronavirus wave spread across the continent. Crude futures traded up 0.4% in New York, but headed for a weekly decline. Curfews in Europe widened amid virus outbreaks. Yet European factory figures beat expectations, showing industrial activity is holding up well despite restrictions on the movement of people. The dollar also slumped, boosting oil. With futures stuck below $41 a barrel, attention is turning to the next major events on the horizon: the imminent U.S. election and an OPEC+ meeting at the end of next month. On Thursday, Russia indicated for the first time that it’s open to delaying an oil-output hike planned for January. Meanwhile, American presidential candidate Joe Biden said fossil fuels need phasing out over time, a comment seized on by Donald Trump as a dangerous threat to the industry.
  5. Gold edged up as the dollar weakened in the face of improved risk sentiment, sparked by German data that showed factories were recovering solidly from lockdowns earlier this year. While gold has mostly traded sideways in recent weeks, exchange-traded funds backed by the metal are poised for the first back-to-back weekly outflow this year. ETF investors may be selling because they view a Joe Biden election victory — expected to be bullish for gold — as largely priced in, limiting potential upside, said Saxo Bank A/S’s Ole Hansen.
  6. Copper hovered near the highest in more than two years as the dollar declined and traders focused on ongoing stimulus talks in the U.S. Copper was little changed at $6,915.50 a ton on the London Metal Exchange at 11:55 a.m. in London. Prices are heading for a 2.6% weekly gain, after hitting a two-year high above $7,000 a ton on Wednesday. Other metals were mixed, with most trading flat or lower.
  7. The U.S. Food and Drug Administration approved Gilead Sciences Inc.’s antiviral therapy remdesivir on Thursday, making it the first drug to obtain formal clearance for treating the coronavirus. Regulators had granted an emergency-use authorization for remdesivir earlier this year, and since then the drug has become a widely used therapy in hospitalized Covid-19 patients. It was given to President Donald Trump this month when he was diagnosed with the virus. The approval of remdesivir, sold under the brand name Veklury, will allow Gilead to market the drug and talk about its benefits to doctors, nurses, and patients. That could help solidify its position as a go-to medicine for Covid-19 patients even as other drugs for the disease begin to reach the market.
  8. President Donald Trump turned in a more composed and disciplined debate performance Thursday night, offering a marked contrast to the chaos and fury that defined his first battle with Democratic nominee Joe Biden. But even as the president earned credit for engaging in a more civil exchange of views — and maybe even brought a few doubters back into his camp — there was little reason to think he had scored the kind of dramatic victory he badly needed to turn around a race polls show he’s losing. Trump’s supporters had spent more than a week teeing up an attack on the foreign business dealings of Biden’s son Hunter, but standing next to Biden during the final presidential debate in Nashville, Trump failed to make it stick. Biden managed to flip it back on Trump, pointing out news reports showing it was the president’s company that had a bank account in China, not him.
  9. The Swiss National Bank could be forced to sell a chunk of its more than $100 billion U.S. stock portfolio as part of a campaign to ban it from investing in defense companies. A poll by gfs.bern for public broadcaster SRG on Friday showed 54% of voters in favor of the proposal, which goes to a national vote on Nov. 29. Such an outcome would forbid the central bank or pension funds from providing financing for a company that derives more than 5% of revenue from arms sales.The SNB estimates it’d have to sell stakes in 300 companies, which together are worth 11% of the value of its portfolio of global stocks.
  10. Cellnex Telecom SA, the Spanish telecommunications tower operator, has agreed to pay Iliad SA 804 million euros ($950 million) to acquire masts in Poland. Cellnex will purchase a 60% stake in a portfolio of 7,000 towers in a deal with Iliad and Poland’s Play Communications, according to separate filings from Cellnex and Iliad Friday. The towers currently belong to Play Communications, which is in the process of being acquired by Iliad. The deal follows Cellnex’s entry into Portugal earlier this year, and would mark the Barcelona-based operator’s ninth market. In July, the company, which has grown aggressively through takeovers and acquisitions over the past five years, held a capital increase of about 4 billion euros to raise funds for acquisitions.
  11. The U.S. Treasury has been sitting for weeks on a roughly $1.7 trillion pile of cash it can deploy if and when the on-again-off-again stimulus negotiations between the White House and Congress conclude with an agreement. The near-record cash hoard — more than double what historically has been deemed necessary to ensure there’s enough on hand to pay the bills — will allow Treasury Secretary Steven Mnuchin to quickly cut checks if a deal gets done. “There’s still very high uncertainty over the size and trajectory of Treasury’s outflows,” said Jonathan Cohn, strategist at Credit Suisse. “Treasury, like most strategists, had expected some clarity on fiscal stimulus. That has not come, so risk management suggests a wait-and-see approach and keeping the balance stable.”
  12. Prospects for a U.S. stimulus package passing Congress before the Nov. 3 election are fading fast as House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin dicker over the details of a nearly $2 trillion aid package. With the pace of talks dragging, resistance from Senate Republicans is building and President Donald Trump’s ability to twist arms into supporting a deal appears to be waning. Now some House Democrats are telling Pelosi that they don’t want to vote on legislation before the election if the Senate won’t do so, according to a party official. Putting off votes on a stimulus package until after the election raises the risk that the Trump administration will be less inclined or able to push a package through the GOP Senate. That likely would be amplified if Trump loses to Democrat Joe Biden and Republicans lose their Senate majority — leaving action on stimulus for the pandemic-stricken U.S. economy until late January at the earliest.
  13. Tesla Inc. is recalling about 30,000 imported Model S and Model X vehicles in China because of suspension problems, a setback for the U.S. electric-car maker just as it faces intensifying competition in the world’s largest auto market. The company is recalling vehicles made between Sept. 17, 2013, and Jan. 15, 2018, according to a statement by the State Administration for Market Regulation on Friday. There are two different suspension defects, and some of the recalled vehicles potentially have both of them, the authority said. The recall applies to the bulk of imported vehicles the company sold in China in recent years. Tesla started manufacturing in Shanghai around the start of 2020, and after that, sales of imported models have only typically been a few hundred vehicles a month.
  14. Barclays Plc Chief Executive Officer Jes Staley’s drive to make investment banking the centerpiece of his strategy paid off in the third quarter, with equities trading in a volatile market beating the bank’s Wall Street peers. The shares approached a two-month high. The London-based bank’s equity trading income jumped 40% and foreign-exchange, rates and credit trading rose 23%, helping the company beat earnings estimates. Barclays also posted lower-than-expected impairments from the pandemic that’s roiling its key markets. Staley said he plans to stay as CEO for “a couple of years,” quelling speculation about his future amid longtime criticism from an activist investor who has campaigned for his ouster and dubbed investment banking a poor use of capital.
  15. The U.K. financial regulator is investigating 14 firms and six individuals over their roles in the tax scandal known as Cum-Ex, according to a person with direct knowledge of the cases. The Financial Conduct Authority is looking at firms that operated dividend stripping schemes in Denmark, Germany, France and Italy, said the person, who declined to be identified because the investigations are private. The regulator has been quiet about its plans since February, when one official said a decision on whether to pursue Cum-Ex cases was imminent.
  16. The U.K. signed a trade deal with Japan on Friday, its first with a major economy since Brexit, as the clock runs down on British efforts to reach an agreement with the European Union by the end of the year. In a ceremony in Tokyo, U.K. International Trade Secretary Liz Truss and Japanese Foreign Minister Toshimitsu Motegi put their names to the pact, which was reached in principle in September, about three months after formal negotiations began. The deal largely preserves the terms under which the U.K. traded with Tokyo as a member of the EU, according to Japan’s Ministry of Foreign Affairs. It’s expected to boost Britain’s GDP by 0.07% compared to 2018 levels over the next 15 years, the U.K. government has said.
  17. Brilliance Auto Group Holdings Co. failed to repay a yuan bond worth $150 million, Caixin reported. Brilliance Auto, the parent of BMW AG’s joint venture partner in China, was unable to repay a 5.3% three-year 1 billion yuan ($150 million) note which was due end of Friday because of funding difficulties, Caixin reported, citing a company source. At least two bondholders have yet to receive the repayment as of 5 p.m. in Hong Kong, people familiar with the matter told Bloomberg. The people are not authorized to speak publicly and asked not to be identified. An official from Brilliance Auto’s financial office declined to comment when contacted by Bloomberg. Calls to China Merchants Securities Co., the bond trustee, went unanswered.
  18. Steven Cohen’s Point72 Asset Management will begin a search for a new Asia-Pacific head as incumbent Marc Desmidt plans to leave the firm, according to an internal memo seen by Bloomberg News. Desmidt, who joined in early 2016 from BlackRock Inc., will stay through an unspecified transition period while the firm finds his replacement, Cohen said in the memo. Tiffany Galvin-Cohen, a Point72 spokeswoman, declined to comment. Desmidt didn’t respond to a call for comment. Point72 oversees $17.2 billion globally and employs more than 220 people in the region, putting it among the largest international hedge fund firms in Asia.
  19. Freeport-McMoRan Inc.’s boss says the world’s largest publicly traded copper producer is committed to “sticking to our guns” on considering a merger of equals — at least for now. “Conceptually, you can identify circumstances where mergers of equals make sense,” Chief Executive Officer Richard Adkerson said Thursday when asked about the idea on his company’s third-quarter earnings call. But Phoenix-based Freeport is less than 60% of the way to achieving full volumes at Grasberg — the massive copper-and-gold flagship mine in Indonesia that it’s retooling — and copper is bound to become more valuable going forward, Adkerson said.
  20. Automakers are investing billions of dollars to bring new electric vehicles to consumers in the U.S. and other global markets, but their success hinges on securing the most critical and expensive component: the battery. A handful of companies based in China, Japan and South Korea make automotive-grade battery cells, which has upset the traditional dynamic between carmakers and parts suppliers. These battery giants — though little known to the general public and relatively new to the auto industry’s sprawling supply chain — are key to manufacturers’ goals of bringing dozens of new EV models to U.S. showrooms by 2025. “There are not enough batteries to fulfill the automakers’ near-term promises,” said Sam Jaffe, managing director of Cairn ERA, an energy-storage consulting firm in Boulder, Colorado. “A lot of new battery factories are being built. But there is a battery-supply problem in the near term. All of the incumbent automakers are scrambling at this point.”
  21. T. Rowe Price Group Inc., UBS Asset Management and FMR LLC, the parent of Fidelity Investments, are among the money managers angling for a piece of Ant Group Co.’s blockbuster initial public offering, a person familiar with the matter said. Each of the firms is considering investments worth several billion dollars in Ant’s Hong Kong-listed shares, though they’ve yet to finalize plans and there’s no guarantee they’ll get an allocation, the person said, asking not to be identified discussing private information. Ant is expected to start taking orders for the Hong Kong portion of its dual listing on Oct. 26 and price shares as soon as Oct. 29, people familiar with the matter said. The company may raise about $35 billion in Hong Kong and Shanghai combined, plus another $5 billion after it exercises so-called greenshoe options, the people said, adding that the numbers and timeline are subject to change. That would give Ant a valuation of around $320 billion, making it bigger than JPMorgan Chase & Co.
  22. American Express Co. cardholders are sticking with the company — even if they’re not using as many rewards. Customers are canceling their cards at a lower rate than last year even though the firm set aside just $2 billion for rewards programs in the third quarter, a 23% drop from a year earlier, AmEx said Friday in a statement. AmEx customers found other ways to part with their money beyond flights and hotels. Still, spending on the firm’s cards dropped 19% to $248.7 billion in the quarter, topping the $247 billion average of analyst estimates, as consumers opened their wallets for groceries and home-improvement projects.
  23. The Big Ten finally kicks off its 2020 season on Saturday — 71 days after punting on fall football because of the pandemic and 35 days after reversing course under heated criticism and presidential concern. The late start is a blessing and a curse for one of college football’s most prominent conferences. The delay has given the conference a chance to learn from the mistakes made by its collegiate counterparts, who have clumsily navigated a tangle of Covid-19 outbreaks, depleted rosters and postponed games to make it this far into the season. The Big Ten hopes its more stringent safety protocols will help it stay on track. But it has also waited long enough that new coronavirus infections are surging to record highs in many of the Midwestern states with Big Ten universities. On three campuses — Michigan State, Minnesota and Nebraska — infection rates in the general population top 5%, a threshold that would trigger suspension of athletic activities in the Big Ten were it to occur within a roster.
  24. Wild weather is wreaking havoc on crops around the world, sending their prices skyrocketing. On wheat farms in the U.S. and Russia, it’s a drought that’s ruining harvests. The soybean fields of Brazil are bone dry too, touched by little more than the occasional shower. In Vietnam, Malaysia and Indonesia, the problem is the exact opposite. Torrential downpours are causing flooding in rice fields and stands of oil palm trees. The sudden emergence of these supply strains is a big blow to a global economy that has been struggling to regain its footing after the shock of the Covid-19 lockdowns. As prices soar on everything from sugar to cooking oil, millions of working-class families that had already been forced to scale back food purchases in the pandemic are being thrust deeper into financial distress.
  25. Wells Fargo & Co. is exploring the sale of its asset-management unit, a business that could fetch more than $3 billion, according to a person briefed on the matter. The bank, which has been reviewing its strategy, began discussing a possible deal with other asset managers and private equity firms last month, according to the person, who said a divestment isn’t certain. Wells Fargo expects to receive bids on the unit this month, said the person, who asked not to be identified because the talks are private. Chief Executive Officer Charlie Scharf, who took over last October, is preparing to lay out his vision for turning around the lender after scandals under his predecessors. He told analysts this month he’s exploring a wide range of options and that he would provide more information to investors in January. The San Francisco-based company’s stock has slumped 57% this year.
  26. The Covid-19 pandemic caused the deepest U.S. recession since at least World War II. Gross domestic product shrank at an annual rate of 31.4% in the second quarter. Covid-19 is infecting more than 50,000 Americans a day, the most since early August. Somehow, though, the economy has roared back. On Oct. 29, according to economists surveyed by Bloomberg, the government is likely to report that GDP rose an annualized 30% in the third quarter—also a postwar record.
  27. President Donald Trump seized on Joe Biden’s pledge Thursday to eventually replace fossil fuels with renewable energy, turning the Democratic nominee’s remarks into a warning for swing state voters that oil and gas jobs could be at risk. Biden’s comment came in response to a question from Trump during Thursday’s debate in Nashville about whether he would shut down the oil industry. The former vice president, in one of his starkest comments of the campaign on the issue, said “I would transition from the oil industry, yes.” That response carries risk for Biden heading into the final days of the race. For weeks, Biden has been wooing voters in Pennsylvania with assurances that his pledges to ban fracking are limited to federal land and would not amount to a wholesale destruction of the oil and gas sector. He plans to campaign there Saturday.

*All sources from Bloomberg unless otherwise specified