September 9th, 2020

Daily Market Commentary

Canadian Headlines

  1. Canadian equities fell for a third-straight session Tuesday, led by a drop in information technology stocks. Weak crude oil prices helped push energy shares lower. The S&P/TSX Composite Index lost 0.7%, with seven of eleven sectors lower. Investors found safe havens in utilities and materials. Crude in London tumbled below $40 a barrel for the first time since late June and futures in New York also sank in the wake of faltering demand and weaker equities dampening market sentiment. The Bank of Canada will probably brush off the economy’s stronger-than-expected rebound and stick to its narrative of a long and bumpy recovery that will require extraordinary support for years to come.
  2. The Bank of Canada will probably brush off the economy’s stronger-than-expected rebound and stick to its narrative of a long and bumpy recovery that will require extraordinary support for years to come. Governor Tiff Macklem pledged in July to keep the central bank’s policy interest rate at 0.25% for at least two more years, and he’ll almost certainly reiterate that commitment in a decision due at 10 a.m. Wednesday in Ottawa. That’s along with a promise to purchase at least C$5 billion ($3.8 billion) a week in Canadian government bonds to keep borrowing costs low across the yield curve, and to provide even more stimulus if needed. The measures are part of the central bank’s whatever-it-takes approach to help Canada emerge from the deepest downturn since the Great Depression. Policy makers aren’t likely to stray from that stance even amid signs the economy has snapped back more quickly than anticipated.
  3. Bank of Montreal’s top executive says it’s a “myth” that his company’s commercial lending business is taking big risks and argues the bank will come through the recession with fewer loan losses than rivals. “I’ve got skeptics against me out there right now that there’s going to be a shoe to drop in our commercial bank because of loan impairments that will be higher in a Covid recession than they might be in other recessions,” Chief Executive Officer Darryl White told Bloomberg in an interview. “I’m happy to take them on because I predict that we will continue in this environment to have lower loan losses than our peers.” Bank of Montreal’s emphasis on commercial lending has helped the Toronto-based firm increase earnings in recent years while expanding in the U.S., where the company owns Chicago-based BMO Harris Bank and has an investment-banking presence. About 57% of its loans were to businesses and governments in the fiscal third quarter, higher than the 41% average for Canada’s six biggest lenders, according to the banks’ financial disclosures.

World Headlines

  1. Shares climbed broadly in Europe while AstraZeneca Plc slipped on news it paused trials of a leadingexperimental Covid-19 vaccine when a participant got sick. Treasuries and the dollar steadied. The pound headed for its longest declining streak since March on worries that talks could collapse over changes to the Brexit withdrawal deal.
  2. U.S. equity futures climbed with European stocks as optimism crept into markets that Tuesday’s tumble drew a line under the recent selloff. S&P 500 and Nasdaq 100 contracts advanced in the wake of large declines in America that were led by tech shares. On Wednesday, computer chip and hardware makers rose in the premarket including Advanced Micro Devices Inc. and Apple Inc. The rebound extended to Tesla Inc., which clawed back a fraction of the value it lost a day earlier. Global investors are grappling with the recent market turbulence, assessing whether the pullback for equities is a sign of market health or the start of a larger drawdown that has further to go. There was a powerful force of resistance across assets from the Nasdaq to gold and even Tesla Inc. shares, with slides halting around their 50-day moving averages.
  3. Oil in London moved back above $40 a barrel, as markets broadly rebounded from Tuesday’s sharp selloff. Futures rose 1.1% after a precipitous slump a day earlier that saw prices settle below $40 for the first time since June 15. While crude rallied along with other risky assets, it also found technical support on Wednesday. Brent dropped a few cents below its 100-day moving average, before turning sharply higher. Despite the rebound, prices remain below Tuesday’s open. Doubts linger over the strength of Asia’s demand recovery, U.S. consumption is set to ease with the end of the driving season and the easing of OPEC+ curbs on output are weighing on prices. The coronavirus pandemic is still raging and Bank of America Merrill Lynch said it will take three years for oil demand to fully recover from the outbreak even if there’s a vaccine.
  4. Gold nudged lower, still under pressure from a stronger dollar, as investors weighed whether the pullback in equities is a sign of market health. Focus is shifting to the European Central Bank policy meeting on Thursday, while traders continue to monitor simmering Sino-American tensions and digest news over a potential delay in the development of a Covid-19 vaccine. This year’s rally in bullion has lost steam after prices peaked above $2,000 an ounce in early August amid a resurgence in the dollar. Jeffrey Gundlach, the billionaire money manager and chief executive officer of DoubleLine Capital who has been a big fan of gold, said Tuesday that he is modestly negative for the short term, but bullish for the long term.
  5. Tesla Inc. rose premarket Wednesday, clawing back a fraction of the value it lost a day earlier when the electric-vehicle maker’s stock suffered its worst one-day decline in its history. The car company founded by Elon Musk plummeted 21% on Tuesday — its biggest drop since going public in 2010 — after it was passed over for inclusion in the S&P 500 Index Friday. The slump, which came amid a widespread selloff that saw tech firms leading the declines, wiped out $82 billion in Tesla’s market value.
  6. Democratic presidential nominee Joe Biden is proposing a 10% tax penalty on companies that move operations overseas and a 10% tax credit for companies that create jobs in the U.S. in a policy rollout Wednesday. Biden, who is launching a renewed focus on economic issues with a speech in Michigan, also will promise to reverse Trump administration policies that his campaign said amount to “loopholes” that allow offshoring to take place. The former vice president will also pledge to take executive action during his first week in office to direct the federal government to buy American goods and support American supply chains in their procurement processes, his campaign said.
  7. Global investors don’t seem to be taking the Nasdaq 100 Index’s 11% slide over three days as a sign of things to come. Most money managers are either looking to buy the dip or sticking to their stock bets on expectations that stimulus measures and an economic recovery will support stock prices and offset concerns linked to the U.S. election and the development of a successful coronavirus vaccine. If anything, Nasdaq 100 futures bounced back strongly on Wednesday, trading 1.9% higher at 10:47 a.m. in London. “With still significant amount of cash on the sidelines, coupled with still very easy monetary and fiscal policies, we reckon there should be buying on dips,” said Michael Foo, chief investment officer of HP Wealth Management (S) Pte. “Bottom line –- we do not believe this is the start of a bear market.”
  8. The European Commission reached a provisional agreement with BioNTech SE and Pfizer Inc. for the supply of 200 million doses of a successful Covid-19 vaccine. AstraZeneca Plc, meantime, paused its late-stage vaccine study after a participant became ill. Germany’s virus reproduction number held above a key threshold, more evidence of a resurgence in Europe, while the death toll in India continued to mount. The country surpassed Brazil in recent days to become second in Covid-19 cases globally. Prime Minister Boris Johnson is forbidding social gatherings of more than six people in England, while Ireland reported the most new cases since May. Los Angeles has banned traditional Halloween activities, such as trick-or-treating and haunted houses.
  9. Pfizer Inc. and BioNTech SE reached a preliminary agreement to supply 200 million doses of their experimental Covid-19 vaccine to the European Union — the biggest initial order yet for the U.S.-German partners. The European Commission has concluded exploratory talks and will now begin contract negotiations, according to a statement Wednesday. The deal would include an option for another 100 million doses. The EU didn’t disclose financial terms. Pfizer and BioNTech previously agreed to supply 120 million doses to Japan. The U.S. in July reached a deal to pay $2 billion for an initial 100 million doses, with an option for 500 million more.
  10. LVMH said it’s calling off a deal to buy jeweler Tiffany & Co., citing delays to the proposed $16 billion agreement stemming from a U.S. move to impose tariffs on French goods. The Louis Vuitton owner’s retreat followed Tiffany’s move to push back the closing date from a previously set November target, according to a statement from the French luxury giant. Tiffany countered with a lawsuit seeking to enforce the merger agreement. The French company has been seeking to leverage the U.S. protests against police brutality and the Covid-19 pandemic to seek a lower price, the jeweler said in a separate statement.
  11. KKR & Co. is in advanced talks to invest at least $1 billion in the retail business of Indian billionaire Mukesh Ambani, according to people familiar with the matter, in what could be another U.S. investment in the unit following Silver Lake’s deal. KKR is in discussions for a stake in Reliance Retail Ventures Ltd., a unit of the largest retailer in India, said the people, who asked not to be identified because the information isn’t public. The private equity firm could invest as much as $1.5 billion and an announcement could come as soon as this month, one of the people said. Separately, consumer-focused private equity firm L Catterton is also considering investing hundreds of millions of dollars in Reliance Retail, one of the people said. Negotiations are ongoing and could be delayed or fall apart, the people said. Representatives for L Catterton, KKR and Reliance didn’t immediately respond to requests for comment.
  12. Quantafuel AS, a Norwegian company turning plastic waste into motor fuels, jumped the most ever in Oslo trading after finally starting operations at its first plant. The company, which was founded in 2014, has more than tripled in value since listing on Oslo’s Merkur Market in February. It’s now valued at more than $1 billion. Quantafuel started production at its Skive plant in Denmark on Tuesday, it said in a statement. The delayed startup marks a milestone for the company, which is backed by oil-trading giant Vitol Group and chemicals maker BASF SE, as well as the Danish billionaires behind Lego.
  13. Sprinklr, a technology company focused on customer service software, has raised $200 million from private equity firm Hellman & Friedman, which will take a minority stake at a $2.7 billion valuation. Hellman & Friedman is investing an additional $300 million to buy out some existing investors, bringing its total bet on Sprinklr to $500 million, according to people familiar with the matter who asked not to be identified because it was private. The New York-based company also secured an additional $150 million in convertible notes from alternative asset manager Sixth Street Partners, according to a statement.
  14. TikTok, WeChat and Huawei Technologies Co. are just the beginning. What comes next has the potential to reshape the global economy for decades to come. President Donald Trump’s moves to prevent some of China’s biggest companies from accessing the private data of Americans — restrictions set to take effect this month — are part of a broader effort to create “clean networks” the Communist Party can’t touch. That initiative, involving everything from 5G networks to cloud services to undersea cables, is already impacting corporate deal-making and geopolitics, with both countries and companies pressured to pick sides. While the actions are intensifying in the middle of an election campaign, the question of what U.S. data can be accessed by Chinese companies — if any — cuts across partisan lines. Trump and his rival, Democrat Joe Biden, are both trying to appeal to voters frustrated by the Covid-19 pandemic as the “tough on China” candidate.
  15. California’s worst fire season on record is about to ramp up as a hot, dry autumn promises even more destruction, blackouts and evacuations. Already, 2020 has yielded three of the four largest blazes in state history, with wildfires torching an unprecedented 2.2. million acres and cutting power to hundreds of thousands of Californians. It’s going to get worse in October and November, as a conveyor belt of dry winds whip through the state, amplifying fire risk. The danger isn’t limited to disaster-weary California. Rising temperatures and an extreme mega-drought across the U.S. West are fueling fires from Washington to Arizona. Nationwide, 40,883 blazes have consumed 4.6 million acres this year and, for the first time, preemptive blackouts by utilities to prevent fires have spread beyond California to Oregon.
  16. Federal Reserve Chairman Jerome Powell makes no secret of his admiration for Alan Greenspan. And now, more than half-way through Powell’s four-year term, his Fed is looking a lot like that of the man once dubbed the monetary maestro. It is a Fed that, as pronouncements at the institution’s virtual policy symposium last month made clear, prioritizes flexibility in setting monetary policy as it grapples with a pandemic that has devastated the economy. There will be no hard-and-fast rules that determine when to raise interest rates and when to cut them.
  17. In a year that’s featured a global pandemic and a tidal wave of liquidity from central banks, investors are bracing themselves for a risk they’ve ignored for most of 2020: Brexit. The prospect of the U.K. and European Union reaching a trade agreement by an October deadline is looking less likely, with Britain saying this week it’s willing to walk away and break international law in the process. That risks the pound falling to a 35-year low, stocks that lag international peers, and bond yields turning negative for the first time amid bets on Bank of England interest-rate cuts, fund managers say.
  18. Boris Johnson is facing a backlash from the European Union and from within his own ruling Conservative Party after the U.K. government said it plans to break international law over Brexit. The prime minister will take questions in Parliament on Wednesday and is likely to be put under pressure by senior Tories who fear the move will undermine trust in the U.K. around the world. At the same time, the EU’s chief negotiator, Michel Barnier, will be seeking an explanation from his British counterpart David Frost as talks continue this week in London, an EU diplomat said. Johnson’s latest move could have huge negative consequences for the chances of reaching a deal this year on Britain’s future relationship with the EU, the diplomat added.
  19. With Chinese-American relations deteriorating, the U.S. is using trade rules to ratchet up pressure on Beijing over its alleged repression of predominantly Muslim minority groups in the northwestern province of Xinjiang, where more than 80% of China’s cotton comes from. As Kevin Cirilli reported Tuesday, U.S. Customs and Border Protection plans a so-called withhold release order (or WRO) that will cover all cotton, textile and tomato products from the Xinjiang Uighur Autonomous region. It said the Chinese Communist Party and its companies “maintain a pervasive scheme” in the area “that imposes forced labor” in making these goods, which China’s Foreign Ministry has denied.
  20. Chinese bank stocks: never this cheap, rarely so unloved. Weakened by the government’s call to sacrifice profitability, stung by ultra-low interest rates and the threat of souring loans, the country’s Hong Kong-listed banks have seen their market value contract by $194 billion in 2020 as of Wednesday. Their share of the MSCI China Index has shrunk to a measly 14%, near the lowest since 2005 and down from a 43% weighting in June 2015. Much of the recent focus has been on China’s big four state-owned lenders, which posted profit declines of at least 10% in the first half. Shares of Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd., Bank of China Ltd. and China Construction Bank Corp. are priced at half their estimated book value or less, the lowest on record. A gauge of Chinese banks in Hong Kong is down 24% this year, on pace for the worst slump since the global financial crisis.
  21. Zillow Group Inc. and Inc. are among companies pledging to add their first Black directors within the next year, as part of a corporate challenge launched Wednesday to encourage board diversity. United Airlines Holdings Inc. committed to add a second Black board member. The Board Challenge, a group of 43 companies, will advocate for corporate boards to draw from a wider pool of candidates to give more executives opportunities to serve. Some members, like United, Verizon Communications Inc. and Merck & Co. Inc., already have Black directors.
  22. The U.S. hunt for con men who allegedly spent pandemic relief on jewelry, strippers and at least two Lamborghinis is turning a spotlight to a less flashy realm: Community banking. JPMorgan Chase & Co.’s stark message to employees this week that it’s probing whether any of them helped people misuse aid programs is the strongest public acknowledgment yet that members of the banking industry are suspected of being complicit. The nation’s largest lender said it’s seen evidence of abuse among customers and possibly staff, and that it’s working with law enforcement. In less than half a year, banks have gone from being lambasted for being too slow to process applications for federal financing, to being on the receiving end of persistent questions about whether they did enough to safeguard taxpayer money. Yet the government broadly insulated the industry from being held liable if fraudsters tapped into aid including the Paycheck Protection Program for small businesses, because authorities wanted to rush the cash into the economy.

*All sources from Bloomberg unless otherwise specified