October 30th, 2020

Daily Market Commentary

Canadian Headlines

    1. Prime Minister Justin Trudeau’s government is considering allocating billions in annual permanent spending for new programs that may be disclosed as early as next month, according to a senior government official. Finance Minister Chrystia Freeland’s fiscal statement at the end of November could include details on government funding plans for child care, prescription drugs and other long-term priorities, the official said, speaking on condition they not be identified because they aren’t authorized to discuss the plans in public. The person said the finance department is seeking to determine the available fiscal room, but that the government hasn’t settled on any one number. They cited C$20 billion ($15 billion) as an example, which would represent just under 1% of economic output. A spokesperson for the finance department declined to comment.

World Headlines

    1. European equities erased most of their declines on Friday as oil companies advanced on earnings, with the benchmark index still set for its worst drop since the March selloff amid concerns about new lockdowns and upcoming U.S. elections. The Stoxx Europe 600 Index was 0.2% lower by 10:22 a.m. in London, paring a drop of as much as 0.9%. Total SE gained after posting third-quarter profit that exceeded the highest analyst estimate and Royal Dutch Shell Plc rose after yesterday promising more cash for shareholders. European stocks have been under pressure this week as new lockdowns and restrictions in Germany and France risk halting the nascent economic recovery. Investors may also be taking profit ahead of the Nov. 3 U.S. election amid fears that the result may be disputed, fueling market volatility and uncertainty. At the same time, Morgan Stanley strategists today said that European stocks may be nearing a trough similar to the one in March if investors start focusing on the future reduction in Covid-19 cases.
    2. Nasdaq 100 contracts fell as much as 2.7% after Apple Inc.’s iPhone sales and Twitter Inc.’s user growth both missed estimates. Both stocks sank in premarket trading. The futures later pared the loss to about 1.2%. The scene was not entirely bleak, with Alphabet Inc. jumping after hours after reporting a rebound in digital advertising. Weakness in technology shares is adding to volatility that’s likely to remain elevated heading into next week’s U.S. election. Global equities are on course for the worst weekly decline since March as lockdown measures in some countries and the lack of an agreement on U.S. stimulus dent sentiment. New U.S. coronavirus cases topped 89,000, setting a daily record.
    3. Japanese stocks fell, with the Topix sliding to its lowest level since early August, amid news of rising U.S. coronavirus cases as well as angst over major technology companies’ results and valuations. Technology and chemical stocks were the biggest contributors to the benchmark measure’s drop, with all industry groups in the red. The Topix fell for a fifth-straight day, its worst streak since June, losing 2.8% on the week. The Nikkei 225 Stock Average suffered its worst daily drop since July 31.
    4. Oil is heading for its largest monthly decline since March as concerns grow that a resurgent pandemic in the U.S. and Europe will keep people hunkered down, crimping demand for auto and aviation fuel. Futures edged higher on Friday but are on track for a 7.8% fall this month. Infections surged to a record in the U.S. Midwest, while parts of Europe tightened restrictions to stem second waves. As prices have fallen this week, there are signs that both road use and airline capacity in Europe have dwindled. Still, it’s a hodge-podge picture for consumption, where booming freight markets and improvements in China and India could still offer a lifeline. All the while, the market is looking ahead to next week’s U.S. election and an OPEC+ meeting at the end of November.
    5. Gold is poised for a third consecutive monthly drop — the longest run of declines since early 2019 — as investors favor the dollar as a haven in the final days before next week’s pivotal U.S. presidential election. Uncertainty remains high before the Nov. 3 vote, lifting the dollar’s appeal as a safe asset over bullion while a resurgence in coronavirus cases rips through the U.S. and Europe. The spread of Covid-19 is intensifying in the U.S., where new cases topped 86,000 to set a fresh daily record. In Europe, countries have begun to impose new restrictions in an effort to stem the crisis.
    6. The U.K.’s drug regulator has started accelerated reviews of Covid-19 vaccines under development from Pfizer Inc. and AstraZeneca Plc, as Britain gets ready to approve the first successful shot as quickly as possible. The U.K. Medicines and Healthcare Products Regulatory Agency started a so-called rolling review of the Pfizer vaccine in recent weeks, according to a person with knowledge of the situation who didn’t want to be identified because the procedure hasn’t been announced publicly. The agency is also conducting an expedited review of Astra’s vaccine, which the company is co-developing with the University of Oxford, a spokesman for Astra confirmed.
    7. Prosus NV plans to buy back a combined $5 billion of shares in itself and its South African parent Naspers Ltd. in a move designed to boost shareholder value and narrow a discount between the e-commerce giant and its stake in Tencent Holdings Ltd. The group will aim to pick up $1.37 billion of its own stock and $3.63 billion of Naspers, Amsterdam-based Prosus said in a statement on Friday. The purchase will start following the release of half-year earnings on Nov. 23. “Over the years, our group has achieved improved financial flexibility. It has built a portfolio of e-commerce assets with significant cash-flow generating capabilities,” said Prosus Chief Financial Officer Basil Sgourdos in a statement. “The group is now in a position to both invest in its asset portfolio, and to purchase its own stock when it makes sense from a returns perspective.”
    8. The biggest initial public offering of all time has unleashed an investor frenzy for the record books. Jack Ma’s Ant Group Co. attracted at least $3 trillion of orders from individual investors for its dual listing in Hong Kong and Shanghai, enough money to buy JPMorgan Chase & Co. 10 times over. Bidding was so intense in Hong Kong that one brokerage’s platform briefly shut down after becoming overwhelmed by orders. Demand for the retail portion in Shanghai exceeded initial supply by more than 870 times. The stampede is fueling predictions of a first-day pop when Ant is due to start trading on Nov. 5, even as skeptics warn of risks including the U.S. election, tightening regulations in China and rising Covid-19 infections worldwide. Whether Ant surges or not, the Chinese fintech behemoth’s $35 billion-plus IPO represents a major vote of confidence in a company that could end up shapingthe future of global finance. It also underscores China Inc.’s ability to marshal huge amounts of capital without tapping American markets, a win for Beijing as it tries to reduce its vulnerability to the threat of U.S. financial sanctions.
    9. Chinese financial technology firm Lufax Holding Ltd. raised $2.4 billion in a U.S. initial public offering priced at the top of an indicative range, just days after U.S. stocks suffered their biggest drop since June. The company sold 175 million American depositary shares for $13.50 each, it said in a statement Friday. The amount raised makes Lufax’s offering one of the biggest IPOs by a Chinese company in the U.S. this year. Lufax, which is backed by China’s largest insurer by market value, Ping An Insurance Group Co., marketed its American depositary shares for $11.50 to $13.50 each. Two ADS represent one ordinary share.
    10. Volvo AB has agreed to sell its UD Trucks unit to Isuzu Motors Ltd. for an enterprise value of 20 billion kronor ($2.2 billion) as part of a strategic alliance with the Japanese firm. The agreement between the two companies entails creating a technology partnership including a focus on autonomous driving, connectivity and medium- and heavy-duty electrical vehicles, Volvo said in a statement on Friday. Shares in Volvo gained as much as 2.2%, while Stockholm’s main index traded slightly lower. Analysts at Citi said in a note that the deal strengthens Volvo’s balance sheet, some of which may be channeled back to shareholders.
    11. Banca Monte dei Paschi di Siena SpA is holding preliminary talks with the Italian government over a potential capital increase of about 1.5 billion euros ($1.75 billion). Officials at the Italian Treasury and Monte Paschi Chief Executive Officer Guido Bastianini have reviewed options to boost the bank’s capital, said people familiar with the discussion, who asked not to be named as the matter is private. Discussions are at an early stage and the review may result in a decision against a further capital injection. A spokesman for Monte dei Paschi declined to comment. A representative for the Italian Treasury didn’t have an immediate comment.
    12. Chevron Corp. posted a surprise profit as the oil supermajor slashed capital spending to cope with the pandemic-driven collapse in crude demand. The California oil titan posted adjusted per-share earnings of 11 cents for the third quarter, outperforming the average 27-cent loss expected by analysts in a Bloomberg survey. Production from the company’s crude and natural gas wells tumbled to the lowest in more than two years, partly because of intentional decisions to curtail operations that couldn’t turn profits as prices cratered. Things are bad for the industry, Chief Executive Officer Mike Wirth said in a statement, and he provided no prediction for when the outlook may brighten. Severance costs alone are expected to drain half a billion dollars from the company’s coffers during the current quarter.
    13. A Joe Biden victory on Nov. 3 would have a sweeping impact on mergers and acquisitions as he sets his sights on a higher corporate tax rate, new regulation and increased antitrust scrutiny. The biggest loser might be private equity dealmakers. If firms don’t offload assets before the end of the year, they could have to pay almost double the current rate of capital gains tax on any profits — a hit that may also dissuade founder-backed companies from pursuing a sale. But it could be a busy year for deals in the fossil-fuel industry, where companies are likely to continue consolidating and divesting assets that would have little opportunity to grow under a Biden administration.
    14. The U.K.’s drug regulator is said to have started accelerated reviews of Covid-19 vaccines under development from Pfizer Inc. and AstraZeneca Plc, with Europe grappling to control a renewed surge in the disease. Global infections surpassed 45 million. The so-called rolling review would potentially allow British authorities to move ahead of European peers on clearing a vaccine. German cases exceeded 500,000 after a gain of more than 19,000 through early Friday, confirming a trend that Chancellor Angela Merkel has characterized as a “dramatic situation.” Economies rose by more than forecast in Germany, France and Italy during the summer months, but officials warned of headwinds to a recovery from new restrictions.
    15. KKR & Co. deployed a record amount of capital in the third quarter, taking advantage of turmoil spurred by the Covid-19 pandemic. The New York-based firm invested about $6.2 billion in markets across private equity, infrastructure and real estate, the company said Friday in a statement. That figure surpassed its previous peak of $5.5 billion in the prior quarter. KKR has been one of the industry’s busiest dealmakers during the pandemic and has said the the crisis will be an inflection point for its business. In July, the firm agreed to buy retirement and life insurance provider Global Atlantic Financial Group in a deal that could be valued at more than $4 billion, giving it a major presence in the insurance industry and adding long-term capital.
    16. Many of the best-performing investment ideas in 2020 hinged on what the Federal Reserve was doing to fight the economic fallout from the coronavirus. As 2021 approaches, a new theme is emerging: Finding ways to profit from — or at least survive — the eventual unintended consequences of the central bank’s unprecedented monetary accommodation and heavy hand in debt markets. Near zero rates for potentially a decade raise the specter of financial stability risks. Fund managers are once again predicting asset bubbles and stock “melt-ups,” a debased U.S. dollar and a destabilizing acceleration in inflation, reigniting a debate about the dark side of easy monetary policy that raged after the 2008 crisis. There is already evidence that some of the risks are materializing with investors now questioning the classic 60/40 asset allocationstrategy amid concerns that holders of long-term Treasuries could be in store for major pain.
    17. Apple Inc. shares fell 4.5% in early trading on Friday, the day after it reported iPhone sales that missed Wall Street estimates and said revenue in China slumped. The company gave no forecast for the key holiday quarter, disappointing some analysts who were hoping for guidance. However, Chief Executive Officer Tim Cook said the new iPhone 12 line has been well received. Sales of Macs and Services also reached all-time highs in the fiscal fourth quarter.
    18. Hertz Global Holdings Inc. will receive multiple bids for a potential $4 billion financing package that would fund new cars for its rental fleet, the attorney leading the company’s bankruptcy case said. Tom Lauria made the announcement at a court hearing, held by telephone earlier today, he said in an email. During the same hearing Hertz got approval from the judge overseeing the company’s reorganization in Wilmington, Delaware to borrow $1.65 billion to fund its bankruptcy case and begin buying new cars. Hertz filed for bankruptcy in May when the near-total shutdown of the global travel industry caused rentals to drop dramatically. The company has been selling many of its older cars as prices on used vehicles have climbed in recent months.
    19. Days after taking office, President Donald Trump cleared the way for construction of an oil pipeline in the Midwest that had been the focus of months of opposition by climate activists, celebrities and Native Americans. Now opponents of the Dakota Access Pipeline are pressuring Joe Biden to take the extraordinary step of returning the favor should he win the White House. Analysts said they couldn’t recall a president shutting down an operating pipeline before, which is why its being viewed as a litmus test of how far he’d go to appease environmentalists who have supported him. The project’s construction near the Standing Rock Indian Reservation was the scene of months of protests starting in early 2016 with opponents camping out along its proposed route and that arguing it would damage culturally significant Native American sites and pose an environmental hazard where it crosses the Missouri River. It became a rallying point for the anti-fossil fuel movement, and drew the support of film actors such as Ben Affleck, Leonardo DiCaprio, Susan Sarandon and Mark Ruffalo.
    20. Donald Trump and Joe Biden are scrambling to secure Farm Belt victories with sweeping promises to protect corn-based ethanol’s place in the U.S. fuel mix. The winner will oversee a “reset” of the congressional mandate to blend biofuels with gasoline. This new phase of the Renewable Fuel Standard, created in 2005 to curb oil consumption and greenhouse gases, could determine ethanol’s role alongside oil in a low-carbon energy economy. Unless lawmakers come up with new policy, the Environmental Protection Agency will begin calling the shots on yearly biofuel-gasoline blend quotas in 2023. The law outlines annual targets only through 2022.
    21. Facebook’s third-quarter results topped estimates on a strong advertising performance, yet this was overshadowed by some caution on the social media giant’s cost outlook. Despite the strong results, Facebook shares dropped 2.2% in pre-market trading in New York. The fall mirrors the declines for Apple and Amazon.com after solid numbers, as megacap tech names were unable to meet high investor expectations. Twitter also tumbled after it missed user growth estimates. Analysts said Facebook’s revenue was comfortably ahead of estimates, despite expectations having been raised by the robust recent updates from social media plays Snap and Pinterest. But its 2021 spending guidance was higher than anticipated, offsetting some of the benefits from the positive revenue momentum.
    22. President Donald Trump ran for office pledging to rewrite the U.S. economic relationship with China, which he blamed for hollowing out America’s manufacturing base and impoverishing its workers. His four years in the White House have shown limited impact on the metrics he laid out. American companies cite much the same concerns — and the same growth objectives — with regard to China today as they did when Trump took office. The unprecedented trade war he launched, breaking Republican free-trade orthodoxy along the way, ended up costing American factory jobs, not creating them, economists say. The state support for Chinese enterprises that Trump pledged to confront remains intact. Trump’s term has, however, had a notable impact on American attitudes toward China. In time, that could prove the dynamic that affects economic ties in ways the current president has struggled to achieve. And it underscores that Washington’s China policy is forever changed, regardless of who wins the Nov. 3 election.

*All sources from Bloomberg unless otherwise specified