September 23rd, 2020

Daily Market Commentary

Canadian Headlines

  1. Canadian equities rallied Tuesday after a weak Monday, led by consumer staples and tech shares. The S&P/TSX Composite Index rose 1%, with all eleven sectors gaining. Toronto’s consumer staples index closed at a record high. Shares including Metro Inc. and Empire Co. both gained more than 3%. Meanwhile, Transat AT Inc. fell to an eight-year low as investors bet against a travel recovery and the completion of a takeover by Air Canada. Ford Motor Co. reached a tentative contract agreement with the union representing its Canadian production workers that saves its only vehicle-assembly plant there.
  2. Prime Minister Justin Trudeau’s lofty ambitions for “building back better” after the pandemic have come crashing into the reality of an apparent second wave of the virus in Canada. As case numbers climb, Trudeau’s government has made a sharp pivot from talk of boldly transforming the nation’s economy and social programs to the immediate task of tackling the coronavirus and the recession. The rhetorical volte-face will be evident in a key policy speech Wednesday. It’s another forced turn for a prime minister keen to be more activist but wary of the political costs of overreaching. Since he lacks a majority in the legislature, Trudeau is only a parliamentary vote away from facing the electorate and Canadians may have little stomach for anything but a focus on jobs and staying healthy.

World Headlines

  1. European equities climbed for a second day, helped by strong manufacturing data and lower valuations following Monday’s selloff, while U.K. stocks got a boost from a weaker pound. The Stoxx Europe 600 Index added 1.5% as of 10:46 a.m London time. While the euro area’s composite PMI data for September came in worse than forecast amid services weakness, manufacturing beat estimates. The export-heavy FTSE 100 Index surged 2.3% as the pound extended declines to a two-month low on investor anxiety about the risk of a new lockdown. Concern over the possibility of further virus-related restrictions in some countries sent shares sliding on Monday, with the Stoxx 600 falling below its shorter and longer-term averages. Mikhail Zverev, head of global equities at Aviva Investors, is more optimistic, saying that more is now known about the virus and how to handle it.
  2. Futures contracts on U.S. equity indexes jumped, signaling Tuesday’s rebound will be extended after the recent correction. Tesla Inc. fell 4.8% in premarket trading as the goals announced at Tuesday’s “Battery Day” event disappointed some followers. Meanwhile, Russia’s largest internet company Yandex surged 9.2% in premarket after it said it’s in talks to buy TCS Group Holding Plc for about $5.48 billion. Investors are waiting on speeches from Federal Reserve Chairman Jerome Powell and other policymakers later in Washington. Powell will appear before the House Select Subcommittee on the coronavirus to discuss the central bank’s response.
  3. Japanese shared closed slightly lower, paring sharp morning losses on the latest signs of progress in the search for drugs to combat Covid-19. Fujifilm Holdings Corp. said it would seek regulatory approval in Japan to market its flu drug Avigan as a treatment for the coronavirus, after a trial showed it helped patients with mild cases test negative more quickly. Fujifilm shares rallied 4.9%, one of the biggest boosts to the Topix index, which finished down 0.1% after falling by as much as 0.8% earlier.
  4. Oil edged higher as positive European manufacturing data and rising equity markets gave some respite to recent demand worries. Futures in New York for November delivery rose to over $40 a barrel. The German economy continues to recover thanks to stronger-than-expected manufacturing figures, data showed, while equity markets in Europe are also stronger. Citgroup Inc. said it remains bullish on the outlook for oil, though the market is undergoing a fitful rebalancing. The American Petroleum Institute reported crude stockpiles increased by nearly 700,000 barrels last week, while gasoline inventories shrunk by 7.7 million barrels, according to people familiar, ahead of government data later.
  5. Gold dropped to the lowest level in six weeks amid a resurgent dollar, with investors weighing comments from Federal Reserve Chair Jerome Powell and Chicago Fed President Charles Evans on the economy and interest rates. Silver extended a slump. The U.S. economy has a long way to go before fully recovering from the coronavirus pandemic and will need further support, Powell told the House Financial Services Committee on Tuesday. He’s due to appear before the House Select Subcommittee on the virus to discuss the central bank’s response on Wednesday. Separately, Evans said the Fed’s new guidance on interest rates doesn’t preclude tightening before inflation averages 2% for some period of time. A gauge of the dollar hit a fresh high on the day following his remarks Tuesday.
  6. Applications for loans to purchase homes jumped to an 11-year high, with Americans eager to take advantage of low mortgage rates. The Mortgage Bankers Association’s purchasing index jumped 3.4% in the week ended Sept. 18, hitting the highest level since January 2009. The index plunged earlier this year when the pandemic hit the U.S., but has bounced back in recent months with strong demand for housing boosting the broader economy.
  7. U.S. Supreme Court Justice Brett Kavanaugh remains anathema to many liberals. The death of Justice Ruth Bader Ginsburg means he also may soon be their best hope to save abortion rights and Obamacare. Kavanaugh, who prefers narrower rulings than some of his conservative colleagues, would find himself at the court’s ideological center if President Donald Trump succeeds in replacing Ginsburg with a staunch conservative. From there he could decide how far, and how quickly, it turns to the right on some of the country’s most divisive issues.
  8. The dollar is heading for its longest winning streak since June as currency traders are starting to bet on a volatile end to the year. The prospect of the most contentious U.S. election in history may actually be driving flows back to the dollar, not away from it. That could be because the market sees the aftermath of the vote coinciding with a pick-up of Covid-19 cases globally. This view is reflected in speculative investors buying options that look for the dollar to strengthen in coming months, mainly versus the euro and the pound, according to traders who asked not to be identified because they aren’t authorized to speak publicly. And a gauge of the dollar, which rose as much as 0.3% Wednesday, is on the verge of sending a technical signal that another 2.5% advance is in the making.
  9. Just a few days ago, the TikTok deal looked like a win for China. Now its state-run media are denouncing it as “an American trap” and a “dirty and underhanded trick.” The quick shift in sentiment shows the complications of concluding an agreement that is about much more than finding a proper valuation for an addictive video app that has enthralled teenagers around the world. It also has big ramifications for how the world’s biggest economies handle security threats related to new technologies that will drive growth over the next few decades. For China, the political stakes are similar to the marathon trade talks that ended with a phase-one deal in January. Any agreement that makes it look like the Trump administration forced China’s hand could hurt President Xi Jinping, who has repeatedly hailed the Communist Party’s emergence as a great power in contrast to the humiliations suffered under colonial powers centuries ago.
  10. Johnson & Johnson has begun dosing up to 60,000 volunteers in a study of its Covid-19 vaccine, marking the first big U.S. trial of an inoculation that may work after just one shot. J&J is the fourth vaccine maker to move its candidate into late-stage human studies in the U.S. If enrollment goes as expected, the trial could yield results as soon as year-end, allowing the company to seek emergency authorization early next year, should it prove effective, Johnson & Johnson Chief Scientific Officer Paul Stoffels said Tuesday. “We are convinced that the single dose could be very efficacious,” he said on a call with the press, citing promising results from earlier research.
  11. The Trump administration has shifted billions of dollars previously allocated to public-health programs into its Operation Warp Speed vaccine push, reflecting the U.S. government’s increasing focus on a medical solution to ease the Covid-19 pandemic. The transfers, disclosed in a government audit, reported by Bloomberg News and described by congressional aides, have grown the budget of the Warp Speed program to as large as $18 billion, much larger than the $10 billion figure the administration has routinely cited in public. One of the biggest transfers came in August, with $6 billion pulled from $16.7 billion that had been allocated to the U.S. Strategic National Stockpile, which buys, holds and distributes crucial medical supplies in times of national crisis.  The money had originally been meant to replenish stocks of medical protective gear, ventilators, and Covid-19 testing supplies, all of which have experienced shortages at points during the pandemic.
  12. Banks from Goldman Sachs Group Inc. to HSBC Holdings Plc paused plans to return workers to the office in London after Prime Minister Boris Johnson urged Britons to work from home to curb Covid-19. The euro area’s economic recovery stalled as consumers fretted about a resurgence of the virus and governments reinstated some restrictions. Singapore, meanwhile, will allow more people to head back to the office as community cases in the city-state remain low. Johnson & Johnson has begun dosing as many as 60,000 volunteers in a giant study of its vaccine, the first big U.S. trial of an inoculation that may work after one shot.
  13. Jack Ma’s Ant Group Co. is aiming to raise $17.5 billion in its Hong Kong share sale and won’t seek to lock in cornerstone investors, confident there will be plenty of demand for one of the largest equity deals in the financial hub, according to people familiar with the matter. The fintech giant has assessed investor interest, betting it can pull off the Hong Kong portion of the initial public offering without cornerstone investors that are often needed for large deals, according to the people. Ant is leaning toward inviting these big investors for the Shanghai sale to mitigate price fluctuations, the people said, asking not to be identified because the matter is private. The Hangzhou-based firm is planning to issue new stock equal to about 11% to 15% of the shares outstanding and split the float evenly between Hong Kong and Shanghai, the people added. Ant is mulling what could be the world’s largest IPO, seeking to raise about $35 billion in the dual listing at a valuation of about $250 billion, people familiar have said.
  14. Tesla Inc.’s highly anticipated “Battery Day” fell short of expectations that helped fuel its $320 billion surge in market value this year, with Elon Musk outlining grandiose goals that will take time to pull off. The chief executive officer laid out a plan Tuesday to build a $25,000 car and cut battery costs in half over the next three years. While the technology and manufacturing breakthroughs outlined were impressive, Robert W. Baird’s Ben Kallo wrote, Tesla’s valuation already reflected its ability to disrupt. “With the Battery Day in the rearview, we think there is a lack of upcoming catalysts and are cautious about demand given the recessionary environment,” Kallo wrote in a report naming Tesla a bearish “fresh pick.”
  15. FWD Group Ltd., the Asian insurer backed by billionaire Richard Li, has picked banks for its planned Hong Kong initial public offering that could raise as much as $3 billion, according to people familiar with the matter. FWD has selected Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley to work on the potential share sale, said the people, who asked not to be identified as the information is private. HSBC Holdings Plc is also working on the offering, which could take place as soon as next year, the people said. Deliberations are at an early stage and details of the offering could change, the people said. Representatives for FWD, HSBC, JPMorgan and Morgan Stanley declined to comment, while a representative for Goldman Sachs didn’t immediately respond to requests for comment.
  16. Banks from Goldman Sachs Group Inc. to Citigroup Inc., and HSBC Holdings Plc have hit pause on plans to return workers in London after Prime Minister Boris Johnson appealed to Britons to work from home to help tame a resurgent coronavirus. Goldman Sachs is encouraging its London employees to go back to working remotely if possible, though its Plumtree Court office will remain open for those who need it. Deutsche Bank AG, HSBC and Citigroup will pause the return of some teams to its U.K offices. Barclays Plc, Societe Generale SA and insurance marketplace Lloyd’s of London have told some U.K. staff to return home, according to the BBC. Meanwhile, Mizuho Financial Group Inc. is looking further ahead, with plans to trim space in London on the expectation that some staff will keep working from home even when the pandemic is over.
  17. BNP Paribas SA is shutting its Swiss commodity trade finance business, exiting a sector it once dominated and which was hit by massive fraud. The plan could impact as many as 120 employees in its Geneva offices, the French bank said in a statement late Tuesday. Closing the business had been under consideration since at least the summer, people familiar with the situation told Bloomberg at the time. The former Paribas investment bank’s office in Geneva helped pioneer the use of letters of credit to finance oil trading in the 1970s, and became one of the leading lenders to the industry. However, BNP Paribas had been shrinking in commodity trade finance since 2014, when it was fined $8.9 billion for violating U.S. sanctions.
  18. The British government is warning of 7,000 truck-long queues in Kent in a “reasonable worst case” scenario due to Brexit, a stark assessment of the potential chaos when the U.K. leaves the European Union’s single market and customs union at the end of the year. In a letter to Britain’s border industry, Cabinet Office Minister Michael Govesaid the flow of freight between Dover and Calais — a vital trade artery — could be reduced by as much as 80% from normal levels. The government’s worst-case assessment is that as many as 70% of trucks traveling to the EU may not be ready for new border controls, according to the letter.
  19. JPMorgan Chase & Co. is moving about 200 billion euros ($230 billion) from the U.K. to Frankfurt as a result of Britain’s exit from the European Union, a shift that will make it one of the largest banks in Germany. The U.S. bank plans to finish the migration of the assets to its Frankfurt-based subsidiary by the end of the year, people familiar with the matter said. The change could boost its balance sheet enough to become the country’s sixth-largest bank, based on the assets of the biggest commercial lenders last year.
  20. The long, stale and jargon-filled communiques that come out of the marathon European Union summits in Brussels are not an easy read. Intentional or not, the prose is a barrier obscuring what the leaders of what is effectively the world’s third-biggest economy are up to. Investors and the common folk alike usually ignore them. They shouldn’t. A chunk of next week’s summit deliberations will be dedicated to industrial policy, and the draft of the joint statement points to the direction of things in the years ahead. The central themes are “autonomy” and “sovereignty,” two terms repeated throughout the text.


*All sources from Bloomberg unless otherwise specified