April 5, 2021

Daily Market Commentary

Canadian Headlines

  • Air Canada dropped its takeover of vacation operator Transat AT Inc. because it couldn’t convince European regulators to approve the deal on acceptable terms. Canada’s largest airline said it offered a “significant package of remedies” to satisfy the European Commission’s concerns that the merger would reduce competition on flights between EU countries and Canada. “It has become evident, however, that the EC will not approve the acquisition based on the currently offered remedy package,” Air Canada said in a statement Friday. The Montreal-based airline said “providing additional, onerous remedies, which may still not secure an EC approval, would significantly compromise Air Canada’s ability to compete internationally.”

World Headlines

  • U.S. futures edged higher while most Asian stocks climbed as investors digested Friday’s unexpectedly strong jobs report. Bonds steadied from earlier losses. S&P 500 futures rose 0.1%, adding to Friday’s gains when payrolls data showed U.S. employers added the most jobs in seven months. Treasuries pulled back from a selloff last week, with the benchmark 10-year yield steadying around 1.71%. The pound appreciated to a two-week high against the dollar as Prime Minister Boris Johnson pushed ahead with plans to reopen the economy. Investors are following the debate over U.S. President Joe Biden’s $2.25 trillion infrastructure proposal, as Republicans expressed guarded support for a more limited plan. The response so far in bond markets has been muted, with inflation concerns easing amid doubts over the viability more-generous spending, even as central banks remain committed to keeping interest rates lower for longer.
  • A benchmark of Asian stocks advanced, with increases in Japan and South Korea. Shares in India slumped the most in five weeks with more than 100,000 new Covid-19 cases recorded in 24 hours. Many markets were closed for holidays, including China and Hong Kong, as well as much of Europe.
  • Oil fell after OPEC+ decided to increase output from next month and coronavirus cases in India surged, potentially sapping demand in the world’s third-biggest importer. West Texas Intermediate and Brent both dropped as much as 2.4%, paring gains on Thursday, the last day of trading due to a holiday on Friday. OPEC+ opted last week to raise production by more than 2 million barrels a day between May and July. Crude has rallied this year as vaccine rollouts help major economies reopen. The decision by the Organization of Petroleum Exporting Countries and its allies was seen as a vote of confidence in the outlook for energy demand. The U.S. also added more than 900,000 jobs in March, the most in seven months.
  • Gold dropped as investors weighed further signals of an economic rebound, the latest being Friday’s better-than-expected U.S. jobs data. Employers in the U.S. added the most jobs in seven months in March, amid a rollout of coronavirus vaccinations and an easing of business restrictions. Nonfarm payrolls increased by 916,000 from February, according to the Labor Department. Commodity traders are also watching the progress of U.S. President Joe Biden’s $2.25 trillion infrastructure-spending proposal. Republicans, wary of the tax increases needed to fund it, have said they may support a smaller plan.
  • New infections in India climbed to more than 100,000 over the last 24-hours and Mumbai authorities asked private offices to switch to work from home after the financial hub emerged again as a viral epicenter. Everyone in England will be urged to take a coronavirus test twice a week as a new system of Covid passports is assessed for wide-scale use, under Prime Minister Boris Johnson’s plan to reopen the economy after lockdown. China is ramping up its Covid-19 vaccination push, aiming to be twice as fast as the U.S. as the lagging rollout threatens to undermine the advantage secured by effectively wiping out the virus. President Joe Biden issued an Easter message casting vaccinations as a “moral obligation, one that can save your life and the lives of others.” Republican opposition to vaccine passports grew as Mississippi’s governor said they were not “a good thing to do in America.”
  • The U.S. is pressing ahead with plans to hit six nations that tax Internet-based companies with retaliatory tariffs that could total almost $1 billion annually. Goods entering the U.S. — ranging from Austrian grand pianos and British merry-go-rounds to Turkish Kilim rugs and Italian anchovies — could face tariffs of as much as 25% annually, documents published by the U.S. Trade Representative show. The duties are in response to countries that are imposing taxes on technology firms that operate internationally such as Amazon.com Inc. and Facebook Inc. In each of the six cases, the USTR proposes to impose tariffs that would roughly total the amount of tax revenue each country is expected to get from the U.S. companies. The cumulative annual value of the duties comes to $880 million, according to Bloomberg News calculations.
  • Apollo Global Management Inc. is leading a group of investors aiming to buy a roughly $10 billion stake in Saudi Aramco’s oil pipelines, people familiar with the matter said. The buyout firm’s consortium will include U.S. and Chinese investors and has been shortlisted to make a final offer, the people said, asking not to be identified as the matter is private. Aramco, Saudi Arabia’s state energy company, has narrowed the pool of bidders and Canada’s Brookfield Asset Management Inc. and BlackRock Inc. are no longer involved, the people said. While the Apollo consortium is currently seen as a leading contender, another bidder could still emerge as the winner, the people said.
  • Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the 22nd straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $3.44 billion in the week ended April 1, compared with gains of $957.9 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $21.9 billion.
  • GameStop Corp. fell early on Monday after the company said it may sell up to $1 billion worth of additional shares an at-the-market equity offering program. Shares of the video game retailer declined more than 19% to $156 as of 6:50 a.m. in New York. Jefferies will manage the offering of up to 3.5 million shares, according to a statement, and proceeds will be used to further accelerate its corporate transformation. The company signed a deal in December with Jefferies to sell as much as $100 million in stock, according to a filing.
  • KKR & Co. agreed to acquire a 20% stake in Sempra Energy’s infrastructure unit for $3.37 billion. This deal values Sempra Infrastructure Partners at about $25.2 billion, including expected asset-related debt, Sempra said Monday in a statement. Sempra said the move is one of a series of transactions designed to simplify its non-utility bushinesses, which include Sempra LNG and Mexico’s IEnova.
  • Almost six months after Goldman Sachs Group Inc. recommended shorting the dollar, it’s calling it quits on the trade. In a note titled “tactical retreat,” Goldman’s currency team closed its recommended short greenback position against a basket of Group-of-10 commodity currencies, including the Australian and New Zealand dollars. The firm joins hedge funds and other investors in capitulating on bearish dollar bets after surging Treasury yields triggered a rebound in the U.S. currency, capsizing one of the world’s most crowded macro trades. “Although we still expect these currencies to appreciate versus the dollar over the coming quarters, firm U.S. growth and rising bond yields may keep the greenback supported over the short-term,” strategists including Zach Pandlwrote in a note Friday. “After a choppy few months we are closing our recommended dollar short trade.”
  • Ship congestion outside the biggest U.S. gateway for Asian imports remained elevated with the wait to offload containers lengthening to eight days, adding costs and complications for companies trying to stay well-stocked in an accelerating economy. A total of 28 container ships were anchored awaiting entry into the neighboring ports of Los Angeles and Long Beach, California, as of Sunday, compared with 26 a week earlier though still below a peak of 40 in early February, according to officials who monitor marine traffic in San Pedro Bay. Another 16 are scheduled to arrive over the next three days, with seven of those expected to drop anchor and join the queue. The average wait for berth space climbed to 8 days, compared with 7.9 days a week earlier, according to the L.A. port. That’s about triple the average delay in November.
  • Russia backed off a threat to block Twitter Inc., saying the social media platform has sped up efforts to remove content that local regulators deemed illegal. Twitter had a video conference with Russian regulators on April 1 and is now deleting content that promotes illegal activity or pornography at a faster rate, internet watchdog Roskomnadzor said in a statement Monday. In a move that raised fears of tighter controls over the internet, the regulator last month made content on Twitter slower to load and threatened to fully block the service within a month if it doesn’t delete flagged content.
  • Tesla Inc.’s estimate-smashing deliveries of electric vehicles in the first quarter suggest boss Elon Musk’s bet on growth in China and Europe is starting to pay off. The results marked a strong start to a year in which Musk, the company’s chief executive officer, is counting on global operations to help scale-up production and sales. The shares jumped after Palo Alto, California-based Tesla said it delivered184,800 cars worldwide in the year’s first three months. The figures trounced the 169,850 average estimate in a Bloomberg survey of analysts and beat the fourth-quarter figure by about 4,000 vehicles. The quarter was “a massive home run in the eyes of the bulls,” Dan Ivesat Wedbush wrote in a research note Friday. On Sunday, he upgraded Tesla to outperform from neutral, and raised his 12-month price target for the stock to $1,000, from $950. Tesla’s shares could hit $1,300 in a long-term bull case scenario, he said.
  • Iran said Tuesday’s talks to salvage its nuclear deal with world powers won’t succeed unless they lead to the full and guaranteed removal of U.S. sanctions. Iran’s Foreign Ministry spokesman, Saeed Khatibzadeh, said it was up to the European Union, China and Russia to ensure that Washington “corrects” its path and provides the guaranteed and verifiable removal of bruising penalties on Iran’s economy imposed by former President Donald Trump. “If we can reach an agreement on the comprehensive lifting of sanctions with the P4+1 and they can guarantee U.S. commitments, the path will be opened,” Khatibzadeh said. He was referring to the four permanent members of the United Nations Security Council plus Germany that remain party to the accord.
  • Credit Suisse Group AG leaders are discussing replacing chief risk officer Lara Warner while sparing Chief Executive Officer Thomas Gottstein as they tally losses that could reach into the billions from the collapse of Archegos Capital Management, according to people briefed on the matter. The bank is set to give investors an update on the Archegos fallout, including the fate of top executives such as investment bank chief Brian Chin, two of the people said. They also said the Swiss firm is planning a review of its prime brokerage business, which is housed in the investment bank. “I think it is unfair at this stage to put this on Mr. Gottstein,” David Herro from Harris Associates, one of the bank’s top shareholders, said in a Bloomberg TV interview last week.  “He attempted and has been attempting to reorganize Credit Suisse, but Rome wasn’t built in a day. Unless we see evidence to the contrary, I think he is the right person to continue to lead the organization.”
  • What would you do if someone offered to let you buy dollars for 99 cents and walk away with a billion-dollar profit? That’s the opportunity, at least in theory, presented by underwater SPACs. Some 300 special purpose acquisition companies debuted in the first quarter of this year, creating an oversupply with at least 302 that hadn’t bought anything yet and were trading for less than the cash raised in their public offering. They’re also facing an eventual deadline to liquidate if they don’t come up with a deal. Typical discounts as of March 31 averaged around 1.22%, with some selling for as little as 96 cents on the dollar, according to data compiled by Bloomberg. Count up all those pennies plus interest earned by SPACs on their idle cash, and the potential take amounts to a cool $1.09 billion.
  • Pinterest Inc. is expanding its advertising business to Latin America, rolling out ads in Brazil this week in an effort to generate more sales from outside the U.S. Almost 79% of Pinterest users are international, but only 17% of revenue came from beyond America’s digital shores last year. Brazil, with a population over 210 million, has long been an attractive market for U.S. tech companies looking to expand. Facebook Inc. has made the country a key part of its international strategy. Jon Kaplan, global head of sales at Pinterest, said Brazil is one of the company’s largest non-U.S. markets, based on the number of users. After bringing ads there, Pinterest plans expand its marketing offerings to Mexico later this year, followed by Argentina, Colombia and Chile.
  • When Bette Korber, a biologist at Los Alamos National Laboratory, spotted the first significant mutation in the Covid-19 virus last spring, some scientists were skeptical. They didn’t believe it would make the virus more contagious and said its rapid rise might just be coincidence. Now, 11 months later, the D614G mutation she helped discover is ubiquitous worldwide, featured in the genomes of fast-spreading variants from the U.K., South Africa and Brazil. Meanwhile, new mutations are popping up in increasingly complicated patterns, spurring a drive by top biologists to devise new ways to track a fire hose of incoming genomic data. The goal: Quickly detect variants that can lessen the effectiveness of vaccines for a pathogen that’s unlikely to be eradicated any time soon. The SARS-CoV-2 virus could settle down and become a mere nuisance like the common cold. Or much like influenza, it could retain its ability to cause severe disease in some segments of the population, a scenario that could require regular booster shots.
  • A greater share of people with low credit scores has been falling behind on their car payments in recent months, a sign of stress among consumers whose finances have been hit hard by the pandemic. Some 10.9% of subprime borrowers with outstanding auto loans or leases were more than 60 days past due in February, up from 10.7% in January and 8.7% a year prior, according to credit-reporting firm TransUnion. It marked the sixth consecutive month-over-month increase and the highest level in monthly data going back to January 2019. The missed payments are increasing in what has otherwise been a period of relatively low consumer delinquencies, with stimulus payments, unemployment benefits and other measures keeping many borrowers afloat. The rising subprime delinquencies point to an uneven economic recovery and a deep divergence between those who can navigate the coronavirus downturn and those who can’t.
  • The U.S. bond tantrum is sending a chill through indebted countries which have for years paid less to borrow more. As the American economy powers ahead, government bond yields from Australia to Italy are taking the cue and following those of the U.S. upwards. Those higher costs threaten to undermine a flagging recovery in Europe, which is losing control of the pandemic and extending curbs. They’re also unwelcome for emerging markets reliant on dollar funding. “This is something investors are watching,” said Thomas Wacker, head of credit at UBS Global Wealth Management. “Any increase in interest rate costs reduces countries’ fiscal headroom and adds to future deficits when it could have been spent on investments and reforms. Debt sustainability is a valid concern.”
  • Warren Buffett’s Berkshire Hathaway Inc. kicked off amulti-tranche yen bond deal on Monday, several months after announcing investments in Japan’s biggest trading companies. Berkshire Hathaway is offering yen notes for a third straight year, targeting a four-part yen deal that may price Thursday, according to an email from JPMorgan Chase & Co., one of the bookrunners on the deal. The proceeds will be used for general corporate purposes. The conglomerate sold 430 billion yen ($3.89 billion) of the securities in its inaugural deal in 2019, which was one of the largest-ever sales by a foreign issuer in yen. The U.S. firm said in August that it had acquired stakes of about 5% in Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co. and Sumitomo Corp. Buffett, chairman and chief executive officer of Berkshire Hathaway, didn’t make any major investment in 2020, but the company bought up its own stock and is sitting on $138 billion of cash.

“Waste no more time arguing what a good man should be. Be One.” – Marcus Aurelius

*All sources from Bloomberg unless otherwise specified