April 17th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian equities retreated Thursday despite multiple attempts at breaking upward. Concerns remain regarding the economic impact of the nation’s shutdown. Ontario Premier Doug Ford said Canada should keep its borders closed to the U.S. until the coronavirus pandemic is contained. The S&P/TSX Composite Index fell 0.4%. Information Technology outperformed, climbing 3.9%, with BlackBerry Ltd. and Shopify Inc. both gaining more than 5%. Canadian Prime Minister Justin Trudeau said Thursday his government will broaden its fiscal rescue plan to include commercial landlords and plans to lend more to small businesses. First Capital Real Estate Investment Trust is among firms with the most exposure to small business, BMO Capital Markets told clients.
• The Canadian government has delivered C$16 billion ($11.6 billion) in income support to workers over the past month, in what represents the first major installment of Prime Minister Justin Trudeau’s stimulus package. The government has paid out C$7.9 billion in unemployment insurance benefits from new claimants since March 16, according to a person familiar with the matter who spoke on condition they not be identified because the figures are not public. Another C$8.4 billion has been sent to residents not eligible for jobless insurance through the Canada Emergency Response Benefit (CERB), which pays C$2,000 a month. The money, which amounts to about 20% of what would typically be earned by Canadian workers in one month, represents a badly needed injection of income to buffer the effect of the pandemic — providing effectively a floor to the sharpest economic contraction on record in Canada. The government has also begun issuing one-time payments to low income individuals through a sales tax credit, estimated to provide another C$5.5 billion.
• How low can you go? That seems to be the question bothering the world’s big-three oil forecasting agencies as they grapple to come to terms with the size of the slump in oil consumption triggered by the international response to the Covid-19 virus. The International Energy Agency, the Organization of Petroleum Exporting Countries and the U.S. Energy Information Administration have all updated their oil market forecasts in the past week and they make grim reading. As recently as February, all three saw the world’s thirst for oil increasing by close to 1 million barrels a day this year. Now they are projecting a drop in annual average demand of anywhere between 5 million barrels a day and more than 9 million.

World Headlines

• European equities were set to enter a bull market on Friday, boosted by optimism that major economies will soon start to ease their lockdowns and amid signs of medical progress in the fight against the coronavirus pandemic. The Stoxx Europe 600 Index was up 3.3% at 1p.m. CET, extending its rebound since a low on March 18 to 20%. It’s taking European stocks longer than the U.S. to climb out of a bear market. The S&P 500 returned to its bull territory last week as the Fed stepped up its response to the fallout from the pandemic.
• Tentative steps toward progress in the economy and the fight against the coronavirus helped push U.S. stock futures higher. Contracts on the S&P 500 climbed 3.3% as of 6:37 a.m. in London. Shares of Boeing Co. surged 8.8% in afterhours trading after saying it will resume commercial plane production at a plant near Seattle next week. Gilead Sciences Inc. jumped 16% on a report describing anecdotal evidence of shortened hospitalizations in Covid-19 patients being treated in Chicago with the company’s experimental drug remdesivir. The Dow Jones Industrial Average saw its futures rise 3.7%, while contracts on the Nasdaq 100, which earlier erased its loss for 2020, rallied 2.4%. President Donald Trump unveiled guidelines on reopening the U.S. economy that could allow states and employers to abandon within four weeks most social distancing practices to curb the outbreak.
• Meanwhile, traders largely shrugged off data showing China’s gross domestic product shrank 6.8% in the first quarter from a year ago, the worst performance since at least 1992 and below the consensus forecast of a 6% drop. The yuan edged higher offshore and Chinese shares gained. The Nikkei 225 gained over 3%, pushing its gain from its March 19 low to 20%, meeting the technical definition of a bull market. The blue-chip gauge is still 17% below its Jan. 20 high. The biggest boosts were Fast Retailing Co. and SoftBank Group Corp., which advanced more than 6% each. Electronics and automakers powered the benchmark Topix index into the green for the week.
• Oil fell below $19 a barrel in New York as a wave of gloomy demand forecasts and a cratering physical market outweighed an unprecedented deal to cut output. China’s economy suffered a historic slump in the first quarter as the coronavirus outbreak threatened global markets for its goods. Meanwhile OPEC predicted demand for its oil will fall to the lowest in three decades. Refiners from Japan to Indonesia are canceling or delaying crude purchases, and European processors have requested big cuts in Saudi supply next month. Near-term prices for U.S. crude are trading at huge discounts to later-dated contracts on concern stockpiles at the storage hub of Cushing, Oklahoma, will fill to capacity. That has seen prices disconnect from Brent futures in London.
• Gold dropped, with spot prices tumbling below $1,700 an ounce, as investors weighed the outlook for the haven given the potential restart of the American economy and a report of progress in developing a drug to treat the coronavirus. President Donald Trump unveiled guidelines on reopening the U.S. that could allow states and employers to abandon most social-distancing practices within four weeks. Investors were also assessing a report that Gilead Sciences Inc. is seeing improvements in patients taking its drug.
• The rapid deterioration in the U.S. economy at the hands of the global health crisis is placing a premium on high-frequency data, and several datasets from Federal Reserve regional banks are providing quicker insight into the harm unleashed by the pandemic. While weekly initial jobless claims can offer a snapshot of the labor market and economy, the majority of the government’s reports are monthly and dated when it comes to gauging the real-time economic impact of the coronavirus. Nimble private companies can often take the biggest steps toward data improvement, but the Fed and other government agencies are stepping up and providing policy makers with fruitful information as well.
• Procter & Gamble Co.’s organic sales rose 6% as the coronavirus pandemic prompted panic-buying of the type of household staples in which the company specializes. Demand for Charmin bath tissue and Bounty paper towels helped drive a double-digit gain in the family care division during the fiscal third quarter, P&G said Friday in a statement.
• Gilead Sciences Inc. shares climbed in early trading Friday after a report that a group of patients being treated in Chicago were “seeing rapid recoveries in fever and respiratory symptoms.” The report, from the medical news publication Stat, cited a video made by a researcher at the University of Chicago who is helping conduct a trial of Gilead’s drug remdesivir. The researcher, infectious disease professor Kathleen Mullane, said that most patients had been discharged from the hospital and only two had died, according to Stat. Gilead’s drug is one of the most-watched therapies being studied for treatment of Covid-19 patients. It’s conducting two trials of the drug in moderate and severe patients, with the goal of enrolling 4,000 people in the trials. The University of Chicago enrolled 125 patients, most of whom had severe disease, according to Stat.
• Days after insisting he had absolute authority to steer the country’s economic recovery from the coronavirus outbreak, President Donald Trump instead handed over the keys to governors and businesses. Trump issued guidelines on Thursday for states to consider as they decide whether to relax stay-at-home orders and other social-distancing measures enacted to curb the spread of the virus. The brief document lays out a three-stage process and leaves many difficult decisions to statehouses. The president set no deadlines, demanded no particular action and offered little federal assistance. One page of the document says that states undertaking a resumption of normal life should plan to “independently” secure protective gear and medical equipment for their hospitals. Businesses are advised to come up with their own protocols for temperature checks, protective gear, sanitation and testing.
• Apple Inc. could see the number of iPhones sold slump by more than a third in the second quarter of the year, Goldman Sachs estimates, downgrading its recommendation on the stock to sell from neutral. Unit sales for iPhones are set to drop by 36% year-on-year in the second quarter as the economy takes a hit from the pandemic, before recovering to just a 2% decline by the fourth quarter of this year, analysts including Rod Hall wrote in a note. Weakness for average selling prices is also likely to linger, he said. Hall cut his price target on Apple to $233 from $250, the second-lowest among analysts tracked by Bloomberg.
• Few countries in the world have been spared from the devastating economic consequences of the coronavirus outbreak. But no economy will have a bigger impact on global growth than the U.S. The leader in confirmed Covid-19 cases, the U.S. is expected to account for 31% of this year’s decline in worldwide gross domestic product, according to Bloomberg calculations using International Monetary Fund data. That’s more than twice the country’s share of global output. Overall, the IMF forecasts the global economy will contract 3%, the most in almost a century, before soaring almost 6% in 2021.
• With the coronavirus pandemic driving up demand for protective gear, profiteers and unscrupulous middlemen have taken advantage. Now, one of the biggest manufacturers of the products is fighting back. 3M Co. , the maker of the coveted N95 mask that drew criticism from President Donald Trump over their availability, has filed four lawsuits in the past week against alleged price-gougers in New York, California, Texas and Florida. The firms were seeking to sell 3M respirator masks to the Strategic National Stockpile, New York City government and a California medical center at prices as much as six times the normal cost — while 3M said it has not increased its prices.
• Saudi Arabia and Russia signaled they may be open to further output cuts after the latest OPEC+ deal to curb global oil supplies failed to stem crude’s downward spiral. The two nations will “continue to closely monitor the oil market and are prepared to take further measures jointly with OPEC+ and other producers if these are deemed necessary,” Russian Energy Minister Alexander Novak and his Saudi counterpart Prince Abdulaziz bin Salman said in a joint statement published after a phone call. Oil has plunged about 17% in New York since the group on Sunday agreed to trim worldwide production by an unprecedented 9.7 million barrels a day, as lockdowns aimed at containing the coronavirus cause the biggest demand slump in history. Prices hit a fresh 18-year low below $19 a barrel on Friday.
• Kyiv is suffering from one of the worst bouts of air pollution in the world, partly as a result of a forest fire in the Chernobyl nuclear fallout zone that resumed on Thursday. In contrast to the dramatic improvement in air quality brought by lockdowns in large cities around the world, pollution in the Ukrainian capital of 2.9 million people has surged as a result of several fires in surrounding regions. Authorities are blaming the local custom of burning dry grass in the spring, which has been exacerbated by a severe drought. The fire in Chernobyl has been contained, Kyiv Mayor Vitaliy Klitschko told reporters on Friday. Ukraine’s emergency service earlier said that radiation levels remain within the normal range and that it didn’t threaten the power plant, even as smoke reaches the city about 130 kilometers (80 miles) away.
• Germany has pledged 2 billion euros ($2.2 billion) to help its beleaguered startups, but the policy has stalled after the country’s governmental departments failed to agree on who has to pay. More than two weeks after the aid plan has been announced, Germany’s finance and economy ministries are yet to find common ground over who is responsible for paying the short-term financial assistance, according to people familiar with the situation. A spokesman for the economy ministry said both departments are working intensively on the package and details are still being worked out. A representative for the finance ministry declined to comment.
• Boris Johnson’s plan to let Huawei Technologies Co. help build the U.K.’s fifth-generation mobile networks is under threat from mounting opposition to the Chinese company in his ruling Conservative Party, government officials say. The government had hoped to win over Tory rebels with an information campaign about Huawei ahead of an as-yet-unscheduled vote in Parliament on the company’s involvement in the country’s 5G infrastructure. But two people familiar with the government’s thinking now believe that a hardening of positions among rank-and-file Conservative MPs will make it difficult — if not impossible — to get the legislation passed.
• Norsk Hydro ASA, one of the world’s largest aluminum producers, is working with Goldman Sachs Group Inc. as it considers a potential sale of its aluminum rolling business, people with knowledge of the matter said. The Norwegian company plans to gauge interest from potential buyers including private equity firms later this year, according to the people, who asked not to be identified because the information is private. The unit could fetch around $1 billion, though the current market turmoil makes it difficult to value the business, the people said.
• India’s central bank governor laid the ground for more interest rate cuts as he took a number of steps to boost liquidity and support lenders amid a nationwide lockdown that’s brought the economy to a virtual standstill. Governor Shaktikanta Das kept the benchmark repurchase rate unchanged at 4.4% on Friday, but signaled that inflation will ease to below the central bank’s mid-term target of 4%, providing policy room to address risks. That space “needs to be used effectively and in time,” he said in a livestreamed address.
• Among all the major asset classes, cash is king right now. Weekly flow data from Bank of America Corp. and EPFR Global continue to show a clear investor preference for money-market funds. Assets under management in this category have swelled to $4.5 trillion following seven week of inflows that added $877 billion to the cash pile. Labeled a “mountain of cash” by BofA strategists led by Michael Hartnett, money-market funds have seen steady additions as investors shun risk assets amid concerns about the deadly pandemic’s impact on global economic growth. The fund manager survey from early April showed that institutional investors now hold the most cash since the 9/11 terrorist attacks.
• The coronavirus pushed China’s economy into its first contraction in decades in the first quarter, with the spread of the disease around the world now leaving the nation reliant on fragile domestic demand to spur a recovery. Gross domestic product shrank 6.8% from a year ago, the worst performance since at least 1992 when official releases of quarterly GDP started and missing the median forecast of a 6% drop. China’s economy hasn’t contracted on a full-year basis since the end of the Mao era in the 1970s. The country’s top leaders pledged greater easing measures including interest rate cuts to boost domestic demand, China Central Television reported Friday evening after a meeting chaired by President Xi Jinping. The nation will keep liquidity “reasonably ample” by cutting the amount of reserves banks need to hold, the report said, without providing details.
• European banks are seeking to avoid setting aside billions of euros to cover bad loans after the coronavirus outbreak, in a departure from U.S. competitors collectively taking a $25 billion hit. European lenders are set to report comparatively small increases in loan loss reserves in the first quarter and plan a similar approach during the rest of the year, according to senior bankers and regulators, who asked not to be identified because the earnings figures have yet to be released. They have the blessing of regulators to be flexible applying rules to avoid a spike in provisions. Banks are in talks with auditors and rivals to determine which economic forecasts can be justified to avert stashing large amounts of money, people with knowledge of the matter said. Using forecasts that are less severe would reduce the amount they need to set aside, while massive government guarantees are also making it easier for banks to assume lower default risks, the people said. European banks will likely try to spread out provisions over a period of 18 months, according to one of the people.
• Schlumberger Ltd. reduced its dividend for the first time in more than 40 years as the world’s biggest oil-services provider sifts through the wreckage of an historic crude market crash. Quarterly payouts were reduced to 12.5 cents per share, the Houston- and Paris-based company said in a statement Friday. It’s the first dividend reduction since at least 1977, according to data compiled by Bloomberg. The oilfield-services titan also recorded an $8.5 billion pre-tax charge in the first quarter. Demand for Schlumberger’s crews, expertise and equipment plunged in March and the company now predicts project spending by oil explorers will sink by 40% this year in North America and 20% worldwide. First-quarter sales were down or flat in every business as the Covid-19 outbreak affected the company on four continents and 3 billion people were put on lockdown.
• Investments in U.S.-listed commodity exchange traded funds almost doubled last week for the fourth straight week of inflows. Precious metals ETFs led the inflows. Energy ETFs had the biggest change from the previous week. Net inflows to ETFs that focus on commodities totaled $4.8b in the week ended April 16, including the effect of leveraged funds, compared with $2.47b the prior week.

*All sources from Bloomberg unless otherwise specified