April 15th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian equities advanced Tuesday as leaders across Europe weighed steps to exit quarantines, with Denmark set to reopen daycare centers and primary schools. Meanwhile, Spain, Germany and Italy all reported fewer infections, suggesting the crisis continues to ease. Canada’s Prime Minister Justin Trudeau said Tuesday the domestic economy is still weeks away from being reopened. The S&P/TSX Composite Index rose 1.3% in Toronto to its highest level since March 11. All 11 sectors closed higher, with information technology leading the gains. Oil declined as projections for the steepest recession in almost a century outweighed planned output cuts from the world’s biggest producers. Gold extended its rally to hit the highest in more than seven years on concern that the coronavirus pandemic will have a deep effect on the global economy.
• As Stephen Poloz goes into his penultimate policy decision as Bank of Canada governor on Wednesday, economists are trying to gauge how much of a buying mood he’s in. With the country suffering one of its sharpest downturns since the Great Depression, Poloz is widely expected to dig deeper into his unconventional toolkit, whether that’s at the April 15 meeting or later. His term expires June 2, which means he’ll also oversee deliberations for the central bank’s next statement on June 3. The central bank has already cut interest rates to near zero and injected C$150 billion ($108 billion) into financial markets with a program of asset purchases. Additional measures could include following the Reserve Bank of Australia’s recent move into yield curve control, introducing more explicit forward guidance on future policy intentions, or broadening asset purchases to include long-term provincial securities and corporate debt.
• The world-wide coronavirus pandemic that’s caused oil demand to plummet has turned the Canadian oil patch’s biggest problem on its head. Rather than having too few oil pipelines, the province now has too many. The collapse in oil demand caused by people staying home has reduced U.S. demand for Canadian crude, leaving pipelines struggling to stay full. After more than a year of rationing space, Enbridge Inc. announced it had additional space on its Mainline pipeline system for both heavy and light crude in April. TC Energy Corp. also issued a call for crude on its Keystone pipeline running from Alberta to the U.S. Midwest.

World Headlines

• European stocks declined, snapping a five-day winning streak, as energy shares tumbled with crude prices on mounting worries over the outlook for demand. The Stoxx Europe 600 Index dropped 1.7% as of 9:55 a.m. in London, after coming within a whisker of a bull-market entry on Tuesday. Energy shares slumped 5% as WTI crude hit a 2002 low after the International Energy Agency said an oil glut may overwhelm storage despite production cuts agreed upon by OPEC and its partners.
• American equity-index futures fell on Wednesday along with stocks in Europe as a risk-off mood took hold while investors scoured corporate earnings to gauge the impact of the coronavirus outbreak. The dollar and Treasuries gained. Contracts on all three major U.S. gauges retreated after the S&P 500 closed at a one-month high on Tuesday. Bank of America Corp. and Goldman Sachs Group Inc. fell in pre-market trading after following rivals in setting aside billions of dollars for loans likely to sour amid an extreme U.S. economic shutdown.
• Shares in Tokyo were little changed, Chinese and Hong Kong stocks slipped, and Australian equities dropped as a record slump in consumer confidence reminded investors of the impact of the pandemic on spending. The yuan dipped after China’s central bank eased policy further. Currencies of commodity producers, including Russia’s ruble, Australia’s dollar and Norway’s krone weakened.
• Oil fell below $20 a barrel after the International Energy Agency said demand would slump by a record this year despite a historic production cut deal. Futures fell as much as 4.5% in New York to the lowest since 2002. Oil demand will drop by over 9 million barrels a day this year, wiping out a decade of consumption growth, the IEA said, exhausting storage by mid-year. While Saudi Arabia and other Gulf producers have pledged to cut supply starting next month, they continue to flood the market in April. Stockpiles are rising everywhere and weakening key physical market gauges. New York oil futures moved deeper into contango, signaling an expanding glut, while swap prices indicate North Sea cargoes are trading at bumper discounts.
• Gold traded near the highest close in more than seven years, supported by predictions for the deepest global recession in generations; expectations for prolonged, debt-fueled intervention by central banks and governments; and another charge by investors into bullion-backed funds. Spot bullion held its ground after a four-day surge, with the International Monetary Fund twinning a warning that the pandemic-induced global recession will be the deepest since the Great Depression with a plea for more even more stimulus. Later Wednesday, U.S. retail sales data for March will add more detail on the damage from the outbreak as earnings season rolls on.
• Bank of America Corp. followed two big rivals in setting aside billions of dollars for loans likely to sour amid an almost total U.S. economic shutdown. Profit plunged 45% as the company allocated $4.76 billion for loan losses, the most since 2010, as businesses and households reel from the coronavirus pandemic. The bank joins competitors JPMorgan Chase & Co. and Wells Fargo & Co., which posted their highest provisions in a decade Tuesday. The three lenders have collectively stashed away more than $17 billion to cover defaults. Banks are trying to get ahead of loan losses they expect to come from the pandemic bringing large swaths of the global economy to a virtual standstill. While defaults haven’t yet spiked in a meaningful way, bank efforts to build up their reserves show they’re bracing for a severe recession.
• Goldman Sachs Group Inc. has Wall Street’s biggest investment portfolio, a boast that became a liability in the first quarter as fallout from the coronavirus weighed on the firm’s holdings. The business took an almost $900 million hit that contributed to a 46% decline in profit, even as it included gains from pending private-equity sales. A strong showing in the trading operations, the firm’s biggest division, helped counter the damage as market volatility boosted demand for trading services. Goldman’s large investment portfolio has helped drive some of its most profitable quarters. But it also leaves it more exposed to market gyrations, and executives have said they’re moving away from taking stakes with the firm’s own money to focus on raising more client funds. The company said it had “significant net losses” in its debt securities and mark-to-market hits on its stock portfolio.
• Germany is poised to agree on an extension of most restrictions on public life into next month, underlining how European governments are struggling to balance reactivating their economies against fears of a resurgence of the coronavirus. Chancellor Angela Merkel is expected to announce a new May 3 expiry date later on Wednesday after talks with leaders from the country’s 16 states, according to a government official who asked not to be identified discussing confidential information. Contact restrictions were imposed more than three and a half weeks ago and they are currently set to remain in place through Sunday.
• The European Commission has drawn up plans for a partial lifting of restrictions, but warned that some restrictions will remain until a vaccine or cure is found. Germany is set to extend curbs even after new cases fell for a sixth day. Earlier, China criticized U.S. President Donald Trump’s move to halt funding to the World Health Organization and pledged to support the global health body. Beijing said it had updated the WHO in a “timely” manner. South Korea’s ruling party may have won an outright majority in the biggest election since the pandemic spread around the globe. Indonesia is set to bring 34 million people under a partial lockdown, while India may ease some curbs as the economy faces its first contraction since 1980.
• Home-sharing leader Airbnb Inc. lined up $1 billion in debt, adding to last week’s same-size haul and boosting a financial cushion it can use to grow and pay bills as the global coronavirus pandemic crushes demand for travel and diminishes the prospect of an initial public offering. Airbnb is raising cash by issuing first-lien debt, which has priority on the company’s assets in case of a default, and it comes from a group of more than 20 investors, including Silver Lake, the largest participant, according to people with knowledge of the matter. Other investors are BlackRock Inc., Eaton Vance Corp., Fidelity Investments and T. Rowe Price Group Inc., said the people, who asked not to be identified discussing a private deal.
• Global oil demand will plunge by a record 9% this year due to coronavirus lockdowns, thwarting efforts by OPEC+ to contain the resulting glut of crude, the International Energy Agency said. A decade of demand growth will be wiped out in 2020, when consumption will slump by just over 9 million barrels a day, the agency said in its monthly report. April will suffer the hardest hit, with fuel use contracting by almost a third to the lowest level since 1995.
• U.S. airlines reached preliminary deals with the Treasury Department to access billions of dollars in aid, securing a temporary lifeline as the industry waits for customers to start flying again. The agreements cover all major airlines, the Treasury said in a statement Tuesday, and position the government to start doling out $25 billion in assistance allocated for passenger carriers in the $2.2 trillion stimulus package signed into law March 27. American Airlines Group Inc. said it would get $5.8 billion in support, while Delta Air Lines Inc. said it would receive $5.4 billion. The aid gives U.S. carriers room to limp along as the Covid-19 pandemic and government travel restrictions erase most demand for commercial flying and plunge the world’s airlines into their worst-ever crisis. In the U.S., the industry is projected to burn through $10 billion to $12 billion a month, according to trade group Airlines for America, and carriers have cut capacity as much as 80% while parking thousands of planes.
• Republicans are ratcheting up efforts to paint China as the villain in the coronavirus pandemic, seeking to shift blame as President Donald Trump faces increased criticism of his handling of a crisis that has shuttered the U.S. economy. The Trump campaign on Tuesday sent out a fundraising email that accused China of “lying” about the outbreak and saying the country must be held accountable, language that is harsher than the president has used himself. Senator Josh Hawley, a Missouri Republican, introduced a bill that would make the Chinese government liable for civil claims in U.S. courts if it’s found to have withheld information related to the virus. And House Republicans’ election committee issued a statement calling a freshman Democrat who flipped a Republican-held seat in 2018 a “Chinese asset.”
• Amazon.com Inc. threatened to stop activity at its fulfillment centers in France after a court order banned the sale of non-essential goods, concluding the retailer isn’t doing enough to protect staff from the Covid-19 pandemic. The $1.1 trillion company was given 24 hours on Tuesday to comply with the ruling to reduce its activity to sell only essential items such as food and hygiene products, and to upgrade its health security procedures. The company faces fines of 1 million euros ($1.1 million) for each day’s delay. Amazon said it was considering lodging an appeal but such a move wouldn’t suspend the order that will be enforced on Wednesday early afternoon. Amazon said the court’s ruling “leaves us perplexed” since it said it has provided employees with security measures.
• Indonesia expanded a partial lockdown to more areas near Jakarta, the epicenter of the country’s coronavirus cases, as authorities stepped up efforts to restrict movement of people ahead of the nation’s biggest festive season next month. More than 15 million people living in Bekasi, Bogor and Depok — cities adjoining the national capital — were brought under large scale social distancing rules on Wednesday. The stringent measures include a ban on public gatherings of more than five people, religious and social events and mandatory use of masks.
• Mizuho Financial Group Inc. has vowed to phase out coal power financing over the next 30 years amid pressure from environmental groups and investors. The Tokyo-based bank will halve its 300 billion yen ($2.8 billion) in outstanding coal energy project finance by the year starting April 2030 and bring it to zero by 2050, it said in a statement Wednesday. It also plans to stop providing new loans for coal-fired power plants from June. Japanese banks, among the world’s biggest lenders to coal power developers, have faced criticism for continuing the practice as global rivals withdraw in a bid to combat climate change. Lenders including Mizuho are financing the construction of plants in Southeast Asia that could lock in coal use for decades, when climate scientists say the planet must stop using the fuel now.
• HSBC Holdings Plc along with a clutch of other banks have a combined exposure of at least $3 billion to Singapore’s Hin Leong Trading (Pte.) Ltd., and are in talks with the privately-held oil trader over shoring up its finances, according to people with knowledge of the matter. A group of about 10 lenders including HSBC, Singapore’s three largest banks, Standard Chartered Plc and Deutsche Bank AG held a virtual meeting with the oil trader and its advisers on Tuesday, the people said, asking not to be identified because they aren’t authorized to speak publicly. HSBC has the biggest exposure to Hin Leong at about $600 million, they added.
• President Donald Trump’s top economic adviser Larry Kudlow may get the war bonds he wants as the U.S. swells its debt pile to levels unlike anything seen since World War II. They won’t actually be called war bonds, an idea Kudlow says he discussed with Trump and Treasury Secretary Steven Mnuchin. They won’t actually be any different than the type of securities already being auctioned — beside a reboot of a maturity that was previously shelved — but they will be part of what the president calls his war with the “invisible enemy” of Covid-19. And they likely will cause the amount of U.S. debt to match the size of the economy for the first time since the 1940s. Mnuchin is already cranking up debt issuance to fund the widening budget deficit in the wake of a $2.2 trillion stimulus package, the largest ever passed. The aid was expected to keep the economy running for another eight weeks or so, according to Mnuchin’s own estimate when the law was enacted.
• Applications for home-purchase loans in the U.S. declined for a fifth straight week, highlighting the hit to the real estate market from the coronavirus crisis. The Mortgage Bankers Association’s purchasing index slipped 1.8% in the period ended April 10, holding at the lowest level since October 2015. The gauge has tumbled 35% in the past five weeks, data released Wednesday show. With the economy at a standstill and millions of Americans losing jobs, few people are in a mood to shop for homes. Mortgage rates near historic lows have provided an incentive, but even people with the means to buy are holding back because of stay-at-home orders aimed at curbing the spread of the virus.
• China’s central bank has given the green light for some commercial lenders to run trials of its digital currency, according to people familiar with the matter, bringing it a step closer to becoming the world’s first major monetary authority to issue its own digital tender. State-owned Chinese banks are conducting internal, hypothetical-use tests of a People’s Bank of China digital currency as if it were being used in Suzhou, Xiong’an, Chengdu and Shenzhen, the people said, asking not to be named as they’re not authorized to speak on the topic.
• UnitedHealth Group Inc. posted stronger than expected first-quarter earnings and sales and maintained its financial targets for 2020, as the health-insurance giant started to grapple with the coronavirus pandemic. The company, which also owns numerous medical practices across the country and runs a vast drug-benefit business, maintained its 2020 earnings forecast and reported adjusted earnings per share of $3.72, compared with $3.73 a year earlier. Analysts had expected $3.65 a share, on average, according to estimates compiled by Bloomberg. UnitedHealth is viewed as a bellwether for the broader health-insurance industry, and its results offer a first look at how the coronavirus pandemic affected the business in the early stages of the outbreak. The company said effects of the virus only began to emerge late in the quarter, which ended March 31.
• Automakers are anxious to get their assembly lines rolling again, especially since leaving factories idle is costing them billions of dollars by the week. But the experience many of them have had in China illustrates just how long a slog it’s going to be before plants are producing at anywhere near pre-shutdown levels. It took almost two months for most of China’s industry to return to some semblance of normalcy — and that was with the benefit of mobile apps the government installed on citizens’ cell phones to track their movements and potential exposure to Covid-19 infected people. North American factories may have the benefit of Apple Inc. and Google tryingto start a similar contract-tracing effort, but participation will be voluntary. And the tensions brewing already between President Donald Trump and state governors indicate U.S. government efforts won’t be nearly as centralized as China’s was, suggesting that already cash-strapped suppliers may also have to deal with a patchwork of state-by-state orders dictating when businesses can reopen.

*All sources from Bloomberg unless otherwise specified