September 10th, 2019

Daily Market Commentary

Canadian Headlines

• Suncor Energy Inc. plans to spend C$1.4 billion ($1.1 billion) to make its Oil Sands Base Plant more efficient at a time when growing production is stymied by a lack of export pipelines. Canada’s largest oil sands producer said it will build two electricity-making cogeneration units that use heat from the base plant’s existing operations to help offer 800 megawatts of generating capacity to Alberta’s power grid while reducing greenhouse gas emissions, according to Chief Executive Mark Little. The move should create C$250 million a year of incremental cash flow, he said by phone. The units will replace existing coke-fired boilers that have been in operation for nearly half a century.
• IWG Plc, the biggest operator of serviced offices globally, is exploring a sale of its Canadian business, according to a person with knowledge of the matter. The company is in talks with investment banks, according to the person, who asked not to be named because the discussions are private. A sale would include IWG’s existing Canadian operations, including its Regus and Spaces brands, as well as rights to open new locations under those brands, the person said. IWG would keep an ongoing cut of the revenue, according to the person. Switzerland-based IWG said last month that it is selling operations in various regions and signing franchise agreements — similar to the hotel industry — to capitalize on the boom in demand for flexible offices. IWG, which is listed in the U.K. with a 3.7 billion pound ($4.6 billion) valuation, hasn’t yet decided on a valuation of the Canadian business, and the plans are subject to change, the person said.

World Headlines

• European stocks fell for a second day as defensive sectors, which outperformed during last month’s sell-off, led losses. The Stoxx Europe 600 Index dropped 0.4% as of 8:23 a.m. in London. Utilities, health-care and food-and-beverage shares, deemed less sensitive to economic cycles, were among the worst performers, while banks and carmakers outperformed.
• U.S. equity futures fell with shares in Europe while Asian stocks were mixed as investors marked time before key central bank meetings in the coming days. Treasuries edged higher with the dollar. Contracts on the three main U.S. indexes signaled the benchmarks will open lower.
• China’s lifting of barriers for foreign investment in its stock and bond markets is a surprise gift for investors in the run up to the 70th birthday party of the People’s Republic. The Shanghai stock benchmark has climbed almost 10% in the past month, the best performer among global gauges. Rising turnover and increasing margin debt suggests investors are starting to flock back to equities after the trade war sparked a slump earlier in the year. Overseas investors pumped a net 28 billion yuan ($3.9 billion) into the nation’s shares via exchange links last week, the most since November.
• Oil extended its advance as U.S. stockpiles were estimated to have dropped and OPEC+ members gathered in the United Arab Emirates ahead of meetings this week. Futures rose for a fifth day in New York, the longest run of gains since late July. U.S. crude inventories probably declined by 2.8 million barrels last week, according to a Bloomberg analyst survey before government data due Wednesday. In Abu Dhabi, new Saudi Energy Minister Prince Abdulaziz bin Salman signaled a continuation of the kingdom’s policy of output restraint.
• Gold fell for a fourth day to the lowest in almost a month even as bullish bets pile up, with Citigroup seeing potential for a record above $2,000 an ounce in the next two years. The London-based manager of the Merian Gold & Silver Fund also said both gold and silver should rise to records as central banks loosen policy. Still, gold hovered below $1,500 an ounce on Tuesday following Monday’s global bond sell-off, which pared demand for the non-interest bearing metal.
• President Trump is ending a tumultuous summer with his approval rating slipping back from a July high as Americans express widespread concern about the trade war with China and a majority of voters now expect a recession within the next year, according to a new Washington Post-ABC News poll. The survey highlights how one of Trump’s central arguments for reelection — the strong U.S. economy — is beginning to show signs of potential turmoil as voters express fears that the escalating trade dispute with China will end up raising the price of goods for U.S. consumers.
• Germany is sticking to a balanced budget but is ready to act with “many billions” should its economy and that of Europe head into recession, Finance Minister Olaf Scholz said. In a speech to parliament Tuesday, Scholz confirmed Germany’s long-standing zero-deficit policy would stand for next year’s budget and allow already high investments to increase further. Yet Scholz also said the government will act if the current slowdown morphs into a genuine crisis and that Germany’s solid finances have given the nation a sizable breathing space.
• Bovis Homes Group Plc has restarted talks to buy Galliford Try Plc’s housing division after discussions earlier in the year broke down. The potential deal could see the Galliford’s housing business valued at 1.075 billion pounds ($1.3 billion), including debt, the company said in a statement on Tuesday. More work is still needed before the tie-up of Bovis and Galliford’s unit Linden Homes and Partnerships & Regeneration divisions could be completed, according to the statement. The two firms were in talks about a potential deal in May, but Galliford Try rejected the bid that valued the units at 950 million pounds, excluding debt. Fitzgerald was the chief executive officer of Uxbridge, Middlesex-based Galliford Try for 10 years before he left the company in 2015.
• Executives of WeWork and its largest investor, SoftBank, are discussing whether to shelve plans for an initial public offering of the money-losing co-working company, said people with knowledge of the talks. SoftBank is pressing WeWork to postpone the stock offering after investors expressed serious concerns about the business and its corporate governance, said the people, who asked not to be identified because the discussions are private. WeWork, which owns or leases office space and then rents it to companies typically needing short-term space, had planned to hold a roadshow to promote the offering as soon as this week, an executive told analysts last week. Representatives for SoftBank and We Co., the parent of WeWork, declined to comment.
• Ford Motor Co. was dealt a blow by Moody’s Investors Service, which cut the carmaker’s credit rating to junk on doubts that a turnaround plan by Chief Executive Officer Jim Hackett will generate earnings and cash quickly enough. Moody’s downgraded Ford to the highest junk rating, Ba1, saying the automaker’s cash flow and profit margins are below expectations and likely to remain weak over the next two years. The descent to junk status affects one of the largest corporate bond issuers in the U.S. outside the financial sector.
• Gold prices may rally to a record above $2,000 an ounce in the next two years, according to Citigroup Inc., which gave a laundry list of positive drivers including rising risks of a global recession and the likelihood that the Federal Reserve will reduce U.S. interest rates to zero. “We expect spot gold prices to trade stronger for longer, possibly breaching $2,000 an ounce and posting new cyclical highs at some point in the next year or two,” analysts including Aakash Doshi said in a note received Sept. 10. That would exceed the record of $1,921.17 set in 2011.
• After Parliament blocked his Brexit strategy, and then refused to give him the election he wanted, U.K. Prime Minister Boris Johnson is promising to work for a deal with the European Union. Monday night saw the British premier suffer his sixth consecutive defeat in a vote in the House of Commons, after his attempt to get approval for a snap poll was rejected for a second time. Johnson’s return after a long summer recess was a disaster. He pushed hard last week to get members of his own Conservative Party to endorse his strategy of guaranteeing to leave the EU on Oct. 31 — even if it meant doing so without a deal — but they refused, and he lost a key vote.
• Volkswagen AG and other carmakers warned that trade tensions risk dragging the global economy into a recession as the fallout starts to hit consumers. The gloom of the U.S. and China’s tit-for-tat tariffs cast a shadow over the Frankfurt Auto Show this week, where carmakers were seeking to whip up interest in critical new electric models. The geopolitical volatility adds another layer of uncertainty to an industry in the midst of a radical overhaul as the end of combustion-engine era looms.
• China removed one more hurdle for foreign investment into its capital markets almost 20 years after it first allowed access. Global funds no longer need approvals to purchase quotas to buy Chinese stocks and bonds, the State Administration of Foreign Exchange said in a statement on Tuesday. It removed the $300 billion overall cap on overseas purchases of the assets, about two-thirds of which remain unused. It’s the latest push by Chinese authorities to increase use of the yuan in international transactions, and comes as they seek out more foreign capital to balance payments. Scrapping the investment quota is also another step in policy makers’ efforts to open up China’s financial system to the world.
• Gold and silver will rally to records as central banks loosen policy and currencies from the dollar to the euro get debased, according to the London-based manager of the Merian Gold & Silver Fund, who says the push to all-time highs will draw in a powerful wave of investment demand. Both metals will be boosted as the Federal Reserve and other policy makers cut interest rates and employ additional stimulus, Ned Naylor-Leyland, manager of the $423.6 million fund, said in an interview. The jump will attract further allocations on investors’ rising fear of missing out, or FOMO, he said.
• California utility giant PG&E Corp. has issued its long-awaited plan for emerging from the largest utility bankruptcy in U.S. history: Raise debt, offer equity and cap the wildfire liabilities that led to its collapse at $18 billion — less than half of what victims and insurers have asked for. Within hours of its release, the plan had sparked outrage. The plan PG&E submitted in federal court on Monday kicks off the most contentious phase yet of a bankruptcy that has already attracted some of the biggest names in the financial world, including Pacific Investment Management Co. and Elliott Management Corp. Since the company’s collapse — what has been described as climate change’s largest financial casualty to date — wildfire victims, state politicians, activist investors and ratepayer advocates have clashed over the future of the company.
• Jack Ma is giving up the reins of Alibaba Group Holding Ltd.after presiding over one of the most spectacular creations of wealth the world has ever seen. The former English teacher steps down as executive chairman of China’s largest company on his 55th birthday after amassing a $41.8 billion fortune — a trove surpassed only by India’s Mukesh Ambani in Asia, according to the Bloomberg Billionaires Index. His record-breaking rise from a bootstrapped entrepreneur working out of his apartment in 1999 to jet-setting e-commerce mogul is one for the history books, mirroring China’s own evolution from technological backwater to world’s No. 2 economy.
• Hong Kong leader Carrie Lam pushed back against protester calls for the passage of U.S. legislation that would require annual assessments of the city’s special trading status and allow sanctions on Chinese officials. “The Hong Kong government doesn’t agree on foreign parliaments passing bills to intervene in Hong Hong affairs, and we feel deep regret,” Lam told a regular news briefing Tuesday before a meeting of the city’s Executive Council. She called any such foreign action “extremely inappropriate.” Tens of thousands of protesters marched to the U.S.’s Hong Kong consulate Sunday in an appeal for support from President Donald Trump, many waving American flags. The Hong Kong Human Rights and Democracy Act, backed by House Speaker Nancy Pelosi and other prominent U.S. lawmakers, calls for annual assessments on whether the former British colony is sufficiently autonomous from Beijing to continue its special trading status.

*All sources from Bloomberg unless otherwise specified