October 6, 2021

Daily Market Commentary

Canadian Headlines

  • Justin Trudeau is poised to announce details of the vaccine mandate for federally regulated industries he used as a wedge issue in his successful bid for a third term in Canada. The prime minister and his deputy, Chrystia Freeland, will make an announcement on the “Covid-19 situation” on Wednesday morning in Ottawa, according to itineraries released by their offices. A technical briefing with reporters will be held by officials from Transport Canada and the Treasury Board prior to their appearance. Before triggering an election in which he hoped to regain majority control of the legislature, Trudeau announced his government would make Covid-19 vaccines mandatoryfor for airline and rail passengers, transportation workers and federal employees. The incumbent Liberals attempted to use the issueagainst the rival Conservatives during the campaign, though were held to another minority in the Sept. 20 vote.

World Headlines

  • European stocks slumped Wednesday as investors worried that a rise in bond yields could hamper the economic rebound and weigh on higher-valued areas of the equity market. The Stoxx Europe 600 index was down 2% as of 10:23 a.m. in London, trading at its lowest level since July 20. Technology — one of the sectors seen as most-sensitive to interest rates — was among the biggest decliners, along with several cyclical industries. Banks outperformed on an expected boost to interest income, though all the sectors were lower. After rallying to a record high in August, European equities have trended lower as economists predicted a jump in inflation would accompany a bounce back in the economy following the pandemic, meaning central bankers would need to raise interest rates. A surge in energy prices has further fueled inflation worries, and overnight the U.S. Treasury 30-year yields climbed to the highest level since June.
  • U.S. futures fell with stocks as surging energy prices stoked inflationary pressures ahead of a key U.S. employment report. Treasury yields extended an advance. S&P 500 and Nasdaq 100 contracts declined, with tech giants such as Apple Inc. and Facebook Inc. down in premarket trading. European equities slid to a two-month low, with natural gas prices soaring even as the European Union pledged swift action to ensure the spiking costs don’t stifle the economy. Markets have turned more volatile since global stocks hit a record last month, with the energy supply crunch adding to investor worries about inflation, slowing growth and the prospect of reduced Federal Reserve stimulus. A private U.S. payrolls report later today may offer clues on the country’s labor market ahead of Friday’s keenly-watched government data.
  • Asian stocks headed for their longest losing streak since August as a selloff in the heavyweight tech sector deepened amid rising Treasury yields. The MSCI Asia Pacific Index declined as much as 0.8%, in its fourth day of decline, with Samsung and Tencent among the biggest drags. A benchmark tracking Chinese technology stocks in Hong Kong closed at a record low. Japan’s Nikkei 225 and South Korea’s Kospi were the biggest losers, sliding more than 1% each. Investors have yet to digest issues such as the inflation outlook, among other concerns including gridlock over the U.S. debt ceiling and higher global energy prices. The MSCI Asia Pacific Index is approaching year-to-date lows seen in August.
  • Oil erased an earlier gain to trade little changed as wider markets were pressured by risks to global growth. Futures in New York were down 0.6% after earlier climbing towards $80 a barrel. The dollar jumped and equity markets fell as investors weighed the outlook for economic growth before a key U.S. employment report, hampering crude prices. The American Petroleum Institute also reported a rise in U.S. crude stockpiles ahead of government inventory figures later. Saudi Aramco, which says the gas crunch is already boosting oil demand, cutprices for all its crudes destined for Asia. At least four Asian buyers will request full supply of November-loading cargoes, according to people at refineries who asked not to be identified due to the sensitivity of the negotiations. The nominations are due on Wednesday.
  • Gold dropped a second day as Treasury yields and the dollar extended rallies amid concerns a growing energy crisis could hamstring economic growth and add to inflationary pressures. The 10-year Treasury yield rose above 1.5%, reducing the appeal of gold, which doesn’t earn interest. Bond rates have been rising around the world in recent weeks amid speculation resurgent energy prices will push up costs for businesses and consumers at a time when central banks are moving toward tightening monetary policy. European equities sank at the open, along with U.S. futures, as investors weighed the energy crisis’s risk to the economic recovery. Gains in the dollar curbed gold’s appeal as a haven.
  • Most base metals edged lower on signs the global growth outlook is worsening and as accelerating inflation will lead to tighter monetary policy. Investors are bracing for a slower but still robust economic recovery from the pandemic and gradual monetary-policy tightening, as inflation concerns take hold. Climbing raw-material prices are feeding into worries about rising costs, with a Bloomberg gauge of commodities including energy, metals and crops soaring to an all-time high this week. The dollar held gains, while the breakeven inflation rate on 10-year U.S. Treasuries topped 4% for the first time since 2008.   Worries over the demand outlook have so far centered largely on China, where manufacturers are facing a power crunch, but signs of a slowdown are emerging in Europe too. Germany’s factory orders slumped 7.7% in August, in the third-biggest drop in the past 30 years, official data showed. Meanwhile, surging gas prices continue to heap pressure on industrial firms throughout Europe, with futures surging a further 40% to fresh all-time highs on Wednesday.
  • The bond-market selloff has driven yields on U.S. Treasuries to the highest levels in three months as surging energy costs fan concern that inflation is about to take an even stronger hold on the global economy. Benchmark 10-year yields rose as much as five basis points to 1.57% Wednesday, while 30-year yields jumped the same amount to 2.15%. The 10-year breakeven rate, a gauge of expectations of consumer prices derived from the difference in yield between Treasuries and inflation-linked securities, increased to 2.51%, the highest since May. Bond yields have been rising around the world in recent weeks amid speculation resurgent energy prices will push up costs for businesses and consumers at a time when central banks are moving toward normalizing their monetary policies. Oil reached a seven-year high this week as the crude market tightened amid the global economic recovery.
  • Travel is becoming increasingly difficult without immunization. The budget airline AirAsia Group will only allow vaccinated passengers onto its Malaysia unit’s flights and Canadian Prime Minister Justin Trudeau prepared to detail a mandate for people using air and rail. German Health Minister Jens Spahn urged citizens to get flu shots in addition to Covid-19 ones. Singapore set another record for daily infections, Russia reported record deaths and Macau closed gyms and bars to stem the spread of the virus. New Zealand will hold a “national day of action” to boost vaccination rates. UnitedHealth Group Inc. and Mondelez International Inc. will require employees to be vaccinated. Rio Tinto will do the same in Western Australia.
  • The White House is trying to broker a deal to scale back Joe Biden’s ambitious economic agenda, weighing liberal policy priorities against centrist concerns about inflation and tax hikes in a recalibration of strategy for the legislation. The president, meanwhile, is seeking to drum up public support for the plan — and pressure its opponents — in trips to political battlegrounds. Biden’s strategy to enact two packages — a roads-and-bridges focused infrastructure plan and a trimmed-back social-spending bill — is evolving after a tense week of negotiations that yielded ill will between liberal and centrist factions of the Democratic Party. After congressional leaders had to indefinitely postpone votes on the measures, one Democratic operative said he hadn’t seen such vitriol between members of his own party since Biden took office.
  • The Japanese government will sell about $8.5 billion worth of shares in Japan Post Holdings Co., in the ongoing privatization of the postal and financial-services giant six years after its initial public offering. The state will offload about 1 billion shares to Japanese and overseas investors, according to a statement Wednesday. Japan Post also plans to buy back its own shares worth up to 100 billion yen, or 3.5% of the total outstanding amount. The share sale will be priced between Oct. 25 and 27. The 952 billion yen value is based on Bloomberg calculations using today’s closing price of 926.6 yen. Shares in Japan Post have dropped 7.6% since Sept. 28, when Bloomberg first reported the sale plans.
  • TUI AG will raise 1.1 billion euros ($1.3 billion) by selling new stock, making it the latest travel company to tap investors for cash to reduce a giant pandemic debt pile. The share sale, at a discount price of 2.15 euros each in a rights offering, will allow the world’s biggest tour operator to reduce its draw on a state-backed rescue loan to zero, TUI said Wednesday in a statement. Airlines have selling stock to firm up balance sheets as easing border restrictions begin to revive bookings. Deutsche Lufthansa AGsaid it would raise 2.14 billion euros in a rights issue to help pay down a 9 billion-euro government bailout package, while EasyJet Plcannounced a 1.2 billion pound capital raise last month.
  • Investment firm Storskogen Group AB’s initial public offering raised 13.4 billion kronor ($1.5 billion), adding to what is shaping up to be a record year for Swedish listings. The shares gained as much as 2.9% in their Stockholm trading debut on Wednesday. The fixed-price IPO, at 38.50 kronor a share, valued the company at 64.4 billion kronor. The offering is the largest in Stockholm this year, but not for long. Before the end of October it could be overtaken by Volvo Car Group AB, which is seeking to raise 25 billion kronor in Sweden’s biggest share sale since 2000. Proceeds from both deals are set to push the country’s IPO haul this year to a fresh record high.
  • Democrats and Republicans must decide in the next day or two how far to take their deadlock over the U.S. debt limit, which is pushing the country perilously close to a catastrophic default. Wall Street strategists are taking notice of the political turmoil, warning there is growing danger for financial markets as the clock ticks closer to Oct. 18, the date by which Treasury Secretary Janet Yellen expects the country to reach its limit on sovereign debt. A debt ceiling breach is getting “a little too close for comfort,” TD Securities strategists Priya Misra and Gennadiy Goldberg wrote in a note to clients Tuesday.
  • Facebook Inc. Chief Executive Officer Mark Zuckerberg addressed a recent series of negative stories about the company for the first time by saying accusations that it puts profit over user safety are “just not true.” “It’s difficult to see coverage that misrepresents our work and our motives. At the most basic level, I think most of us just don’t recognize the false picture of the company that is being painted,” he wrote in a note to employees on Tuesday that he also posted publicly. It came shortly after whistle-blower Frances Haugen, a former employee, testified in a Senate hearing about her experience there and internal research she said showed the company prioritized profit while stoking division. Haugen appeared on “60 Minutes” Sunday night, saying Facebook routinely made decisions that put business interests ahead of user safety.
  • Florida Governor Ron DeSantis, who has feuded with school districts over mask mandates, is temporarily forgoing $2.3 billion of federal education aid because the state has failed to submit a plan for how it would spend the money. DeSantis’s government said it doesn’t need the money, even as the U.S. Department of Education noted it was the only state to take such a position. In a letter dated Monday, the U.S. Department of Education told Florida Commissioner of Education Richard Corcoran that the federal government couldn’t release the latest tranche of school funds made available under the American Rescue Plan without the document. The department said it was the only state that had failed to provide the required proposal.
  • A market-based measure of expected inflation in the U.K. over the next decade topped 4%, bolstering wagers for tighter monetary policy. The so-called 10-year breakeven rate climbed as much as 10 basis points to 4.08%, the highest since 2008. The move was spurred by a spike in energy costs with U.K. natural gas prices surging to a record, threatening to fuel higher consumer prices.  In response, money market have almost fully priced a rate hike from the Bank of England as soon as December, in what would be its first increase in over three years.
  • India is considering giving some tax exemption to foreign investors settling sovereign bond purchases on Euroclear to speed up the inclusion of its debt in global indexes, according to people with knowledge of the matter. Authorities are looking at a proposal to exempt overseas investors from capital gains tax, the people said, asking not to be identified before a final decision is taken. Policymakers are still looking at how transactions involving a resident would be treated, they said. Settlement of Indian bonds on Euroclear, an international securities settlement platform, is a key demand from index providers such as JPMorgan Chase & Co. for the inclusion of the nation’s debt on indexes. Other countries listed on Euroclear don’t charge capital gains tax on bond transactions, the people said.
  • India is pushing state-run Coal India Ltd., the world’s top miner of the fuel, to boost production to help power plants navigate a supply squeeze and to meet longer-term ambitions to curb imports. The nation, which relies on the fuel for about 70% of electricity generation, has already seen signs of power shortages, and needs to lift deliveries to avert the risk of blackouts. It’s also seeking to minimize short-term impacts on energy-hungry industrial users including producers of aluminum, cement, bricks and paper. In addition to short-term risks of a power crisis, India is seeking to accelerate efforts to eliminate imports of thermal coal by 2024, according to Jain. The nation imported 215 million tons of coal in the year ended March, down almost 14% from the previous 12 months. Imports accounted for nearly a quarter of total demand.
  • After a monthlong selloff, an elite group of technology stocks is now cheaper than it’s been versus the broad market in almost three years. The NYSE FANG+ Index is priced at about 27.6 times estimated earnings for the coming year versus 20.2 times for the S&P 500 Index. That’s the narrowest spread since December 2018, when markets slumped because of a U.S.-China trade war, a hawkish Federal Reserve and falling earnings expectations. Fast forward to 2021 and the picture looks similar, with the Fed at the brink of pulling back on economic stimulus and the pace of earnings upgrades in the slow lane. One key reason the tech index’s valuation has fallen from almost 37 times earnings in February: Its two Chinese stocks, Alibaba Group Holding Ltd. and Baidu Inc., have plunged because of increasing regulation in their home countries. They’re now the cheapest stocks in the benchmark at less than 15 times earnings.
  • European gas prices surged again, bringing their gains over just two days to 60%, as the impact of soaring energy costs rippled through equity and bond markets and the European Union sounded the alarm. Dutch and U.K. gas futures continue to hit fresh records along with rising power prices. Rocketing energy costs are stoking inflationary pressures and fueling concern that economic growth will slow, prompting a slump in European stocks.
  • Boston Scientific said it has agreed to buy Baylis Medical Company for an upfront payment of $1.75 billion, subject to closing adjustments. The acquisition will expand the Boston Scientific electrophysiology and structural heart product portfolios to include the radiofrequency NRG and VersaCross Transseptal Platforms as well as a family of guidewires, sheaths and dilators used to support left heart access. Baylis Medical is expected to generate net sales approaching $200 million in 2022, having achieved double-digit year-over-year sales growth during each of the past five years.
  • President Biden has invited the leaders of some of the nation’s biggest banks to the White House for a meeting Wednesday to discuss what administration officials say would be the devastating consequences of failing to lift the debt ceiling, three people familiar with the plans said. Bank of America CEO Brian Moynihan and JPMorgan Chase CEO Jamie Dimon are expected to attend, as are other leaders of large financial institutions, the people said. The meeting is intended to underscore the financial danger of defaulting on the U.S. debt. Also expected in attendance — either virtually or in person — are Treasury Secretary Janet L. Yellen, Commerce Secretary Gina Raimondo and White House senior adviser Cedric L. Richmond. Chief executives of Citibank, the Nasdaq Composite index, Intel and AARP are also expected to participate, the people said.
  • Francisco Partners, a technology-focused private-equity firm, plans to hit the fundraising trail later this year with the aim of collecting some $10 billion for its seventh flagship fund, according to people familiar with the situation. The San Francisco-based firm’s latest fundraising push comes a little more than a year after it raised nearly $10 billion across three separate funds to back technology companies focused on sectors that include healthcare, cybersecurity and finance. Those funds included a $7.45 billion main fund, a $1.5 billion fund focused on smaller deals and a $750 million debut credit strategy, The Wall Street Journal previously reported. If Francisco reaches its $10 billion goal, the latest fund would be the firm’s largest yet and comes at a busy time for tech investors. As of Sept. 22, financial sponsors announced 428 technology deals valued at $175.96 billion, according to data provider Dealogic. Throughout all of last year, private-equity firms struck 512 deals valued at about $102.7 billion, the data show.
  • Elemy, a provider of in-home and online pediatric behavioral care, has vaulted to unicorn status after raising $219 million in a funding round led by SoftBank Vision Fund 2. The San Francisco-based company, formerly known as Sprout Therapy, was valued at $1.15 billion in the round, which included participation from Goodwater Capital LLC, billionaire Azim Premji’s Premji Invest, Chelsea Clinton’s Metrodora Ventures, Amity Ventures, Avidity Partners, Whale Rock Capital Management LLC and Ashton Kutcher and Guy Oseary’s Sound Ventures, according to Elemy Chief Executive Officer Yury Yakubchyk. That marks a roughly elevenfold jump from the $104 million Elemy was valued at in October 2020, he said.
  • GN Store Nord A/S agreed to buy SteelSeries for an enterprise value of 8 billion kroner ($1.2 billion) from private equity firm Axcel Management A/S to add a popular maker of gaming gear to its portfolio of brands. Denmark’s GN, a maker of intelligent hearing, audio and video systems, is paying for the acquisition in cash though didn’t give details of the amount of money changing hands in its statement Wednesday. The 8 billion-kroner sum represents the deal’s valuation including SteelSeries’ debt. As a result of the purchase, GN will pause its share buyback program. The acquisition helps GN, whose assets include Jabra headphones, get a foothold in the upscale gaming gear market and expand its position in the premium audio market. SteelSeries designs and sells a range of peripherals such as mechanical keyboards, specialized gaming mice and mouse pads and surround-sound headphones. The company has a history of sponsoring esports tournaments and teams as well as branding collaborations with the likes of Valve Corp. for game-specific editions of its wares.
  • Nvidia Corp. made early concessions to European Union regulators examining its bid for U.K.-based chip developer Arm Ltd. The European Commission extended its deadline to rule on the deal until Oct. 27. It didn’t say what the company had offered. While an offer to divest operations or make changes to the business can sometimes allay regulators’ concerns, the EU is likely to extend its review by at least another four months. That may also give it the chance to negotiate more complicated concessions. Lengthy regulatory reviews look set to see the company miss its initial target to close in March 2022, which can be extended until September. Rivals and chip customers have criticized the $40 billion deal after it was announced more than a year ago.

“Spend each day trying to be a little wiser than you were when you woke up.” – Charlie Munger

*All sources from Bloomberg unless otherwise specified