April 2nd, 2020

Daily Market Commentary

Canadian Headlines

• After suffering its worst quarter since the global financial crisis, Canadian stocks slumped on Wednesday as investors digested worsening U.S. coronavirus figures and assessed the pandemic’s impact on corporate profits. The S&P/TSX Composite Index lost 3.8% on the first day of the second quarter, with 10 out of its 11 sectors in the red. Gold stocks rallied as market jitters led to a surge in haven assets. Montreal-based Dollarama Inc. suspended its fiscal 2021 guidance, saying “it is impossible to forecast the impact of the pandemic,” while mining firm Teck Resources Ltd. withdrew its financial forecasts and said it was considering a full shutdown of the Fort Hills mine to cut costs as local oil prices hit record lows.
• Real estate listings are drying up, open houses have been canceled, and buyers are staying home. One more pillar of the Canadian economy is under threat from the coronavirus pandemic. What was a roaring start to the spring house-hunting season has ended in a whimper. By the time the dust settles on what’s likely to be months of disruption, Canada could see resales plunge 30% to a 20-year low and the first nationwide drop in prices since 2009, according to Royal Bank of Canada. Real estate, along with residential building construction, accounted for almost 15% of Canada’s output last year, ahead of energy at about 9%. It has been a key driver of growth in Toronto, Vancouver and Montreal, where an influx of immigrants has fed a boom in activity in everything from architecture and design to insurance and lending.
• Oil companies are turning to rail cars to stash the crude they can’t sell, as the world runs out of places to store a growing glut of cheap barrels. North American producers, refiners and traders are now looking to store excess oil in rail yards in Texas, Saskatchewan and Manitoba amid the crude market’s historic plunge and collapsing demand, according to people familiar with the matter. With oil for May delivery trading at a steep discount to future months — a structure known as contango — more firms are hoarding barrels rather than sell at a loss. But crude tanks and supertankers are filling up fast, with the world projected to run out of storage space by the middle of the year, according to IHS Markit. In Canada, tank-tops could be breached within two to three weeks, Goldman Sachs Group said, while U.S. stockpiles last week rose for the 10th week, increasing by the most in three years.
• Canadian auto sales were nearly halved in March compared to a year earlier, highlighting the distressing economic landscape the country’s businesses are enduring. Sales of cars and trucks fell to around 95,000 in March, according to estimates released Wednesday by DesRosiers Automotive Consultants. That’s a 48% collapse compared to the same month a year ago and marks the largest decline in data back to 1997. The sales are far below the 150,000 historical average for the month.

World Headlines

• European equities rebounded from Wednesday’s drop, helped by a rally in energy shares after China planned to boost its oil reserves. The Stoxx Europe 600 Index rose 0.6% as of 11:53 a.m. in London. Oil & gas shares were the best performers among sectors as crude climbed following the report that China is moving forward with plans to boost its emergency reserves. Declines in utilities and travel & leisure shares tempered the benchmark’s advance. European stocks are coming off their worst quarterly slump since 2002 on worries about the fallout from the virus outbreak that has spurred sweeping restrictions across the region. While the Stoxx 600 has bounced off its mid-March low amid unprecedented stimulus measures and signs of the infection stabilizing in Italy, investors and strategists are split on whether the market has bottomed.
• U.S. stock futures rose after the S&P 500 had its biggest decline in two weeks, with investors assessing the pandemic’s impact on the slowing American economy. Contracts on the S&P 500 gained 2.1% to 2,498.5 as of 9:31 a.m. in London. The underlying gauge sank 4.4% during the regular session. It plunged 20% in the first three months of the year, the most since 2008. Stocks started the second quarter under pressure on news that the virus is rapidly advancing in the U.S. and likely to have a devastating effect on lives and livelihoods. The damage will mandate large-scale shutdowns remain in place for longer periods than had been anticipated, forcing widespread layoffs and rekindling concern that the worst of the stock rout is not over.
• Stocks in Asia were mixed, with losses in Japan and Australia and gains in South Korea and China. Treasuries edged lower and the dollar was little changed. After enduring their worst quarter since 2008, stocks are struggling for traction as companies move to slash dividends and more U.S. states enact severe restrictions on movement to curb the coronavirus pandemic across the world’s biggest economy. Fatalities rose in France and Spain, while Italy and Germany took steps to extend lockdown measures and Florida ordered people home. New York and New Jersey said deaths have doubled in the last three days.
• Brent oil surged as China planned to start buying up cheap crude for its strategic reserves, while U.S. President Donald Trump said he thought Saudi Arabia and Russia would resolve their differences in the oil price war that has added to the market’s malaise. Futures rose as much as 13% in London as Beijing instructed government agencies to start filling state stockpiles after oil plunged 66% over the first three months of the year, while the global benchmark’s nearest timespread also rallied strongly. President Trump painted a more optimistic tone in the price war between Saudi Arabia and Russia, saying he thought the two would work out the differences. Despite that, Saudi Arabia has been ramping up output to record levels in recent days.
• Gold holdings in exchange-traded funds advanced to a fresh record as the coronavirus pandemic fueled demand for a haven, even as spot prices of the metal steadied. Investors added to ETFs for eight straight days though Wednesday, according to initial data compiled by Bloomberg. Still, the demand increase is flashing a warning sign for DoubleLine Capital’s Chief Investment Officer Jeffrey Gundlach, who cautioned against the products on Tuesday.
• China rejected the American intelligence community’s conclusion that Beijing concealed the extent of the coronavirus epidemic, and accused the U.S. of seeking to shift the blame for its own handling of the outbreak. Foreign Ministry spokeswoman Hua Chunying on Thursday defended as “open and transparent” China’s response to the virus first identified in December in the central Chinese city of Wuhan. She was responding to a Bloomberg News report saying that the U.S. intelligence community had concluded in a classified report to the White House that Beijing under-reported both total cases and deaths from the disease.
• Southwest Airlines Co. intends to apply for federal aid, becoming the second U.S. carrier saying it will seek government assistance after being battered by a collapse in travel demand because of the new coronavirus. The airline will file an application “to discuss the specific details regarding possible grants that could boost liquidity and provide job security for its employees,” according to a U.S. regulatory filing Thursday. The Dallas-based carrier joins American Airlines Group Inc., which has said it would apply for as much as $12 billion in aid. U.S. airlines have slashed flying capacity, parked planes, frozen hiring and taken other steps to cut spending as the virus’s spread has cut travel by more than 90%. Southwest is “in intensive care” and losing money on every flight, Chief Executive Officer Gary Kelly told employees March 30. The airline will cut 40% of its daily flights starting in early May and will evaluate further reductions.
• Boeing Co. offered voluntary buyouts to eligible employees, in a bid to quickly shed costs and adjust its work force of 161,000 to a coronavirus crisis that’s quickly undermined the outlook for aircraft sales. “When the world emerges from the pandemic, the size of the commercial market and the types of products and services our customers want and need will likely be different,” Chief Executive Officer David Calhoun said in a message to employees Thursday. “It’s important we start adjusting to our new reality now.” The move will preserve much-needed cash at Boeing, which is facing a sharp contraction in demand along with its European archrival Airbus SE. Airline customers around the world have slashed schedules, with some parking their entire fleets as the coronavirus pandemic guts travel. About 44% of aircraft across the globe are in storage, according to an estimate by Cirium, and with virus cases approaching 1 million worldwide, there’s no telling when carriers will return to normal schedules, no less buying planes.
• EasyJet Plc’s founder escalated his feud with the board, calling for the ouster of a director in a bid to pressure the discount airline into canceling a 4.5 billion-pound ($5.6 billion) aircraft order. Stelios Haji-Ioannou, EasyJet’s biggest owner with a 34% stake, proposed a general meeting to remove director Andreas Bierwirth, according to a letter sent late Wednesday to the airline’s chairman, John Barton. He threatened to challenge one non-executive director every seven weeks, tying up the board with a series of cumbersome and divisive general meetings until it succumbs. Haji-Ioannou, who has long opposed buying new aircraft, this week turned up the heat on a low-simmering campaign to halt the purchase of more than 100 Airbus SE narrow-body jets. The 53-year-old entrepreneur, emboldened by the coronavirus crisis that’s suddenly turned large spending commitments into a millstone, on Sunday demanded the deal for A320-family planes be terminated.
• SoftBank Group Corp. is scrapping an agreement to spend $3 billion to buy WeWork stock from former Chief Executive Officer Adam Neumann and other shareholders, despite threats of legal action from some members of the company’s board. SoftBank had agreed to buy the shares from Neumann, Benchmark Capitaland others as part of a bailout package last year, but notified stockholders in mid-March that conditions for the deal hadn’t been met. The deal’s deadline is 11:59 p.m. New York time.
• China is moving forward with plans to buy up oil for its emergency reserves after an epic price crash, according to people with knowledge of the matter. The world’s biggest importer is taking advantage of a 60% plunge this year to snatch up cheaper barrels for its stockpiles, a source of considerable speculation in the oil market because of the government’s reluctance to release information about their formation, size or use.
• Germany’s efforts to limit the economic damage from a prolonged coronavirus shutdown are gathering steam, as aid applications pour in and officials seek a path to restart all-important auto production. Under a government program aimed to providing strapped businesses with financial liquidity, 2,500 companies have requested a total of 10.6 billion euros ($11.6 billion) in aid, according to state development bank KfW. “In such a situation, in which companies are really experiencing a massive collapse in sales, there is certainly a measure of panic in the air,” said Guenther Braeunig, head of the bank, which is responsible for the loan program worth tens of billions of euros, adding that he expects a “significant increase” in applications in the next few weeks.
• Investment-grade companies from Europe, Middle East and Africa seeking to refinance almost 9 billion euros ($10 billion) of loans due in the second quarter face higher costs to do so amid the coronavirus pandemic. Insurance giant Axa SA, Bank of China Luxembourg and commodity trader Mercuria Energy Trading SA are among borrowers with loans maturing during the period, according to data compiled by Bloomberg. About three-quarters of those deals come due in June, including the five biggest credit lines. Borrowers attempting to refinance will face higher costs and greater competition to secure new funding arrangements because companies around the world have tapped banks for funds to weather disruptions caused by virus crisis. International lenders have been swamped by more than $250 billion of draw-downs from existing credit lines and new loans in the past month.
• Spain reported an increase in coronavirus deaths and new cases, suggesting severe containment measures have yet to bring the outbreak under control. The Health Ministry recorded its deadliest day on Thursday, with 950 fatalities lifting the total to more than 10,000. The country is dealing with the second-most severe outbreak in Europe after Italy and the government has struggled to check the spread of the disease. A wave of infections has stretched the health service to breaking point and led to a shortage of beds in intensive-care units, while the army has been deployed to assist in its biggest domestic peacetime operation. The number of confirmed cases increased by 8,102, a bigger gain than Wednesday’s 7,719, to 110,238. The daily death toll in Italy — where more than 13,000 have died — dropped to 727 on Wednesday, the lowest in six days, and the number of new cases is below highs in mid-March.
• Royal Dutch Shell Plc, Total SA and Equinor ASA are selling $12 billion of bonds as the combined effect of the slump in oil prices and the collapse in demand threaten to sap cash flows for months. Big Oil, already under pressure from shareholders before the coronavirus crisis to improve returns, has moved swiftly to defer projects, cut spending and halt share buybacks. They are seeking to protect dividends as the economic slump and a price war led by Saudi Arabia undermines profits. Anglo-Dutch oil giant Shell is selling $3.75 billion of bonds while its French peer Total is tapping the market with 3 billion euros ($3.3 billion) of debt. Equinor sold $5 billion of notes maturing between 2025 and 2050, the Norwegian company said Wednesday in a statement.
• Japanese Prime Minister Shinzo Abe said the country can hold off for now on declaring an emergency over the coronavirus pandemic despite an increase in infections that has raised worries of an explosive spread of the disease. Abe told parliament Thursday he will work with local governments to tackle the infection as he decides whether to grant them more powers to control the flow of materials and people by declaring an emergency. He added that he was considering how to inform lawmakers before the emergency is declared. Japan has had the fewest confirmed infections among the Group of Seven leading countries at about 2,400 — compared to about 217,000 in the U.S. — despite being one of the first places outside of original epicenter in China to get confirmed cases. Abe’s government has said what could tip the scales would be infection numbers shooting up and strains appearing in the medical system.
• Norway’s sovereign wealth fund lost a record 1.17 trillion kroner ($113 billion) in the first quarter as the coronavirus pandemic roiled stock markets. The loss comes as the fund for the first time faces forced asset sales to cover emergency spending by the government to weather the pandemic’s impact on the richest Nordic economy.
• T-Mobile’s bond sale for Sprint may price as soon as today, in what’s expected to be a $10 billion offering. The worst is likely yet to come for high-yield bonds as more defaults loom, according to Goldman Sachs. T-Mobile is looking to refinance at least part of a $19 billion bridge loan with the offering, which will include dollar bonds maturing from five to 40 years
• Walgreens Boots Alliance Inc. posted better-than-expected results for its second quarter, but the drugstore retailer said that the Covid-19 pandemic makes the future uncertain. For now, Walgreens said it would update its guidance in its next quarterly report. Previously, it had projected roughly flat growth in adjusted earnings per share.
• Qatar, the world’s biggest exporter of liquefied natural gas, hired banks to raise more than $5 billion in bonds as early as next week to shore up its finances against the global coronavirus pandemic and oil-price war. The gas-rich Gulf state mandated banks including Standard Chartered Plc, JPMorgan Chase & Co., Barclays Plc and Deutsche Bank AG for the sale, according to people with knowledge of the matter who asked not to be identified because the discussions are private. The nation is planning the bond to support its finances as low oil prices and the impact of the coronavirus pandemic weighs on Gulf Arab states, one of the people said. Gas prices are closely tied to the cost of oil, which has dropped more than 50% over the past month.

*All sources from Bloomberg unless otherwise specified