April 20, 2021

Daily Market Commentary

Canadian Headlines

• Canadian equities dropped Monday led by a retreat in information technology stocks. The S&P/TSX Composite fell 0.8% to its lowest level since April 14. Shopify and Lightspeed POS led tech shares lower, both down over 3.5%. Ten of eleven sectors dropped.
• Kansas City Southern spiked as much as 24% on a report that Canadian National Railway Co. is preparing a $30 billion offer to snatch the U.S. company away from a rival suitor. The $325-a-share offer consists of $200 in cash and 1.059 Canadian National shares, the Wall Street Journal reported earlier. The bid is about 20% higher than a proposal from Canadian Pacific Railway Ltd.that Kansas City Southern accepted last month. That deal is valued at $25 billion in a cash and stock. At stake is control of a rail network that links the U.S., Mexico and Canada in the first year of a trade alliance between the three countries. Kansas City Southern’s sprawling Midwestern system connects farms in Kansas and Missouri to ports along the Gulf of Mexico. Its network also reaches deep into Mexico, which made up almost half of the Kansas City, Missouri-based rail operator’s revenue last year.
• Justin Trudeau’s government released a budget that promises big spending on new social programs and a return to small deficits by 2025, setting the stage for a possible election in Canada this year. After running one of the largest shortfalls of any developed country last year, Finance Minister Chrystia Freeland outlined plans Monday for a national childcare program, the centerpiece of C$101 billion ($80.6 billion) in new policy actions over the next three years. The budget also includes extensions of pandemic-relief programs as well as more cash for pensioners, low-income workers, subsidies for businesses, help for students, and billions for health care — more than 200 new measures in all. The nearly C$500 billion budget is a bet that voters will support Trudeau and Freeland’s vision for the government to play a bigger role in the economy over the long run, and trust them not to wreck the nation’s fiscal sustainability. Ultimately, the plan’s success hinges on robust growth and modest inflation — allowing for a windfall of tax revenue and low borrowing costs.

World Headlines

• European stocks slipped for a second day as rising virus cases spurred worries about the global recovery and tobacco shares tumbled on news of a U.S. nicotine curb. The Stoxx Europe 600 Index was down 1.1% at 10:46 a.m. in London, with value sectors such as banks and travel shares leading a broad-based decline. British American Tobacco Plc and Imperial Brands Plc slid more than 6% each after a report the U.S. administration is considering a rule to reduce nicotine levels in cigarettes. While European shares surged to fresh records last week, boosted by an investor shift into cheaper stocks exposed to the expected macroeconomic rebound, a Covid-19 resurgence from India to Japan is weighing on investor sentiment. Strategists on average see no further upside to the Stoxx 600 this year.
• U.S. futures fell with stocks as a growing tally of virus cases tempered enthusiasm for a global growth rebound. Bond yields fell. Contracts on both the S&P 500 and Nasdaq 100 slid Tuesday, with the biggest declines in premarket trading centered on the holiday industry, including United Airlines Holdings Inc., American Airlines Group Inc. and Carnival Corp. Even with this latest pullback in major indexes, global stocks are not far from record highs. That’s prompting concern markets may be overplaying bets on economic reopenings as countries in the developing world — India and Brazil in particular — struggle to contain a rising tide of infection.
• Asian stocks fell, set to end a five-day winning streak, with Japanese shares the worst performers in the region. The blue chip-heavy Nikkei 225 fell 2% as Tokyo and Osaka moved closer to declaring states of emergency amid rising Covid-19 infections. A strengthening yen hurt demand for Japan’s exporters. In Hong Kong, Meituan was the biggest contributor to the Hang Seng Index’s advance, which closed up 0.1%. The Chinese delivery giant’s shares rose 1.5% after it raised $9.98 billion from a record top-up placement and a convertible bond sale. The MSCI Asia Pacific Index fell 0.6%, poised to snap its longest winning streak in more than two months. Industrials and health care shares led losses on the gauge.
• Oil jumped above $64 a barrel, a year to the day after futures for the U.S. benchmark collapsed below zero, with the world’s most important commodity extending a powerful rally on bets for better demand. West Texas Intermediate advanced 1.3%, adding to Monday’s modest climb as the dollar weakened, while production in Libya fell below 1 million barrels a day amid a budget dispute. Oil’s forward curve also suggests growing confidence — particularly as U.S. demand recovers — with the spread between WTI’s contracts for December this year and 2022 at the widest backwardation in about a month. Yet there are still reasons to be cautious, with India suffering a fresh wave of coronavirus infections and refiners there starting to curb processing.
• Gold wavered near the highest level in seven weeks as Treasuries paused their recent rally. Palladium retreated after surging close to an all-time high. U.S. bond yields rose for a third day as investors rebooted the so-called reflation trade, betting that loose monetary policy and a deluge of fiscal aid will drive a swift bounceback in global economic growth. Bullion declined on Tuesday, cutting into gains made last week when Treasuries unexpectedly rallied amid a slate of good economic data. Stimulus measures are likely to stay in place, with the Federal Reserve, European Central Bank and Bank of Japan among the 16 institutions set to hold interest rates in 2021, according to Bloomberg’s quarterly review of monetary policy. More guidance is expected from the Federal Open Market Committee’s meeting on April 27-28.
• Credit Suisse Group AG paused the launch of a credit fund run by star trader Hamza Lemssouguer as it dials back risk in the aftermath of the twin implosions of Archegos Capital Management and Greensill Capital, according to people familiar with the decision. The pause marks a shift for Credit Suisse, which last year lured Lemssouguer back from Ken Griffin’s hedge fund Citadel and gave him a new role overseeing the launch of a credit strategy in the asset unit. The fund targeted as much as $500 million in assets, according to an investor update seen by Bloomberg News. The reversal comes as Credit Suisse is trying to move past a crisis of confidence triggered by the collapse of family office Archegos and the unraveling of supply-chain firm Greensill in quick succession. The debacles triggered sweeping changes by Chief Executive Thomas Gottstein, who cut the bank’s dividend, overhauled its leadership and is considering spinning off the asset management unit.
• Indian Prime Minister Narendra Modi faces growing criticism for holding large election rallies as the country’s health system reels from a deadly wave of cases. Indian vaccine maker Bharat Biotech International Ltd. will ramp up production of its shot. Italy aims to open the country to visitors in mid-May, pledging a range of safety measures as it scrambles to rescue the devastated tourism industry. Osaka’s governor will ask the Japanese government to declare a state of emergency in the prefecture as infections surge. A Hong Kong-Singapore travel bubble could start in May, according to media reports. Singapore is considering Covid-19 breathalysers.
• Johnson & Johnson posted stronger-than-expected first-quarter sales, as the drugmaker awaits a ruling from U.S. health regulators on whether use of its coronavirus vaccine can resume. For the full year, J&J said that it expects adjusted earnings per share of $9.42 to $9.57, narrowing guidance of $9.40 to $9.60 given in January, compared with the average Wall Street estimate of $9.50. First-quarter revenue was $22.32 billion, outpacing the average analyst estimate of $21.98 billion. The U.S. paused use of J&J’s Covid-19 vaccine last week after reports that six women had developed serious but rare blood clots in the brain after receiving the shot. On Friday, a panel of medical experts reviewing data on the adverse events could vote on whether the hold should end. As of April 15, 7.7 million people in the U.S. had received the shot.
• The competition between Wang Xing’s Meituan and fellow tech billionaire Jack Ma’s Alibaba Group Holding Ltd. is turning into one of the great rivalries in Chinese business. While Alibaba is the dominant force in e-commerce with a global reputation, Wang, a generation younger, has built Meituan into a fearsome rival, the world’s largest delivery empire with ambitions to encroach on Alibaba’s home turf. There’s also years of bad blood between the two companies after an early alliance broke down. Now Wang, 42, has raised a record $10 billion to develop promising technologies like autonomous delivery vehicles and drone delivery to reduce labor costs and expand the footprint of Meituan’s food and e-commerce network. These investments, analysts say, will be key to supporting what Wang has previously called its “top priority”: community e-commerce, an arena where tech giants from the likes of Alibaba to JD.com Inc. and Pinduoduo Inc.are all seeking a foothold.
• Netflix Inc.’s first-quarter results will demonstrate whether it can manage expectations and still come out ahead with investors as Wall Street projects a steep drop in its most closely watched metric. The streaming giant is expected to report after markets close Tuesday that new signups slowed by 60% to 6.29 million from a year ago, according to the average of 16 analyst estimates. That follows a surge in growth in early 2020 as the Covid-19 pandemic limited travel and out-of-home entertainment. The slowdown could stretch into the current period, with analysts forecasting 4.44 million new customers for the second quarter. The first-quarter estimate from analysts tops the company’s own three-month-old outlook for 6 million new users. And as long as Netflix reassures investors that consumers will keep flocking to its service, it will have the backing of several Wall Street analysts.
• The Dutch government has raised concerns with Hungarian officials after a decision in Budapest to block the sale of Aegon NV’s local unit to Vienna Insurance Group AG, according to several people familiar with the matter. The issue was communicated through diplomatic channels, the people said, asking not to be identified to discuss confidential proceedings. Both Dutch and Hungarian authorities declined to comment, as did Aegon. Vienna Insurance said it was still in talks with Hungary’s Finance Ministry but declined to elaborate. Hungary this month refused to approve the key part of an 830 million-euro ($1 billion) sale of Aegon’s central and eastern European operations to Vienna Insurance. While governments across Europe routinely block deals to prevent market monopolies, save jobs or for national-security reasons, the Orban administration’s intervention raised concern because it didn’t seem to match those categories.
• Tobacco stocks plunged after a report said the U.S. government may only allow cigarettes with nicotine levels so low they’d no longer be addictive. The U.S. Food and Drug Administration could also move to ban menthol cigarettes as the Biden administration considers imposing requirements to lower nicotine content, the Wall Street Journal reported, citing people familiar with the matter. Marlboro producer Altria Group Inc. lost almost $6 billion in market value Monday, while British American Tobacco Plc dropped as much as 7.3% in London early Tuesday. Analysts estimate the maker of Lucky Strike cigarettes gets a quarter to a third of its earnings from menthol brands such as Newport.
• U.K. Prime Minster Boris Johnson is preparing to announce deeper carbon cuts this week as he aims to spur global momentum in the fight against climate change, three people familiar with the matter said. The government will adopt a target of cutting carbon emissions by 78% from 1990 levels by 2035, in line with the recommendations of the Committee on Climate Change, according to the people, who declined to be named talking about plans that aren’t yet public. The Financial Times reported the proposal first. Johnson is aiming to show leadership on the matter as the U.K. prepares to host a round of United Nations climate talks in Glasgow in November. The move is significant because it builds on the U.K.’s already ambitious target announced just last year to cut emissions by 68% in the four decades through 2030 — the deepest cuts in greenhouse gas emissions in the Group of 20 nations. That goal remains in place.
• The U.K. and the Pentagon reached agreement on a $2 billion sale of 14 Chinook helicopters built by Boeing Co., as well as engines, machine guns, radar and missile-jamming equipment for the choppers, according to officials and documents. The agreement was confirmed in a previously undisclosed March 25 letter from the U.K.’s embassy in Washington that paves the way for signed contracts. But the letter also indicates that the U.K. wants to delay delivery of the helicopters by as much as three years, in part due to impacts from the Covid-19 pandemic. The letter serves as “acknowledgment that the UKG wishes to extend its Chinook Vertical Heavy Lift capability by proceeding with the acquisition of quantity fourteen (14) new build Chinook H-47(ER) helicopters,” according to the text, referring to the U.K. government. “However, as a direct result of the worldwide impact of Covid-19, the UKG has had to reconsider the expenditure profile of this project.”
• Tesla Inc. looks to be coming under increasing pressure in China with two government entities firing off missives about the company’s behavior and treatment of its customers in a single day. The trouble started early on Tuesday when China’s state-run Xinhua news agency released a piece that said the quality of Tesla’s electric vehicles must meet market expectations in order to win consumers’ trust. The Palo Alto, California-based company should address consumer hesitation over purchasing its cars after issues ranging from malfunctioning brakes to blazes during the vehicles’ charging emerged, the article said. A few hours later, the Commission for Political and Legal Affairs of the Communist Party of China Central Committee weighed in, posting a commentary on its WeChat account that said the automaker should respect Chinese consumers and comply with local laws and regulations. Making an effort to find the cause of problems and improve features is something any responsible business should do, and Tesla hasn’t done that, the Communist Party body that oversees China’s police, prosecutors and courts said.
• China Mobile Ltd. posted a 2.3% rise in quarterly profit buoyed by its expanding 5G network, giving the country’s largest wireless carrier some breather as it tries to boost its flagging user base. Net income rose to 24.1 billion yuan ($321.8 million) for the quarter ended March, compared with 23.5 billion yuan in the same period last year. Operating revenue climbed 9.4% to 198.4 billion yuan, according to a company statement Tuesday. It lost 2.32 million wireless users in the first quarter, worsening its year-long contraction in subscribers in China’s saturated telecommunications market. The state-owned wireless operator, which is considering a listing in mainland China after being expelled by the New York Stock Exchange, has also been tightening costs as it scales back budgets reserved for older generations of networks to offset increasing expenditure demand for 5G infrastructure. It bounced back from its steepest earnings slump in years when it announced full-year results last month.
• Hedge fund giant Marshall Wace is ringing alarm bells about the booming SPAC market after building up long and short bets on blank-check companies that total more than $1 billion. The life cycle of SPACs, or special purpose acquisition companies, is riddled with “perverse incentives” for investors, sponsors and the companies using the shortcut route to come to market, Paul Marshall, co-founder of the investment firm, told his investors in a newsletter. SPACs have delivered “awful returns” and most recent issuances will be no different, he said. The billionaire wasn’t holding back. The SPAC structure could even have been designed to encourage “the bezzle,” he said, referencing a term coined by economist John Kenneth Galbraith to describe the period in which an embezzler has stolen money but the victim doesn’t yet realize it.
• For a cryptocurrency created as a joke, Dogecoin now finds itself in some serious company. After a 400% rally in the past week, the total value of all circulating Dogecoins in the world is about $50 billion, according to data provider CoinMarketCap.com. That makes it bigger than the market cap of Ford Motor Co. and Kraft Heinz Co. — and nearly equal to Twitter Inc., the platform where Elon Musk and Mark Cuban have promoted the Shiba Inu-themed meme coin.
• It was supposed to be a temporary buffer — more than $1 trillion of debt taken on by U.S. companies last year to ride out the economic devastation caused by Covid-19. But with the economy rebounding and interest rates still near all-time lows, it’s becoming increasingly tempting for corporations including Home Depot Inc.and Verizon Communications Inc. to spend those cash cushions on acquisitions and dividend hikes. In many cases, they’re now borrowing more. The risk is that unfettered access to cheap debt — even for less creditworthy companies — will ease the pressure on executives to pay down their liabilities. That could extend a decade-long trend of swelling corporate debt levels, increasing the chances of a greater reckoning once interest rates rise or the next time capital markets seize up.
• Lumber prices have soared to records. Demand for wood is skyrocketing. The shares of wood suppliers are surging. And yet, trees themselves are dirt cheap in places like Louisiana, where timber supplies are plentiful. And yet, trees themselves are dirt cheap in places like Louisiana, where timber supplies are plentiful. The so-called stumpage fee, or what lumber companies pay to land owners for trees, for Louisiana pine sawtimber on March 31 was $22.75 per short ton, according to the latest data from price provider TimberMart-South. That’s the lowest since 2011. An abundance of harvest-ready trees has kept stumpage fees extremely low across the U.S. South, home to half of the country’s production. Meanwhile, lumber futures are up 85% in 2021 because of soaring demand. Sawmills profit from the premium lumber commands over the stumpage fee — think of it like the lumber crack spread.
• Procter & Gamble Co. is raising the prices of some consumer products as the household-goods behemoth grapples with higher commodity costs. With manufacturing expenses climbing for products like diapers, the owner of the Pampers and Always brands has started implementing price hikes in the baby care, feminine care and adult incontinence categories. The increases, to take effect by September, could be in the mid- to high-single digit percentages, the company said Tuesday as it reported third-quarter earnings. P&G will make the adjustments “where it’s necessary” to offset certain costs, Chief Operating Officer Jon Moeller said in an interview. The company also plans to focus on product innovation “so that we actually improve consumer value as we implement that pricing.”
• The global semiconductor shortage that’s crippling the auto industry could drag on for as long as a year, according to Mike Jackson, chief executive officer of AutoNation Inc., the largest auto-dealer chain in the U.S. AutoNation expect automakers’ shipments in the second quarter to be double what they were a year ago, but that’s barely enough to keep dealer lots full, Jackson, 72, said in an interview. Low interest rates, stimulus checks, and a desire for private transportation during the pandemic are fueling demand for vehicles, while assembly plants are sitting idle because of a lack of chips. AutoNation has been increasing used-car sales to make up for the lack of new supply.

“The individual investor should act consistently as an investor and not as a speculator.”― Ben Graham

*All sources from Bloomberg unless otherwise specified