April 20th, 2020
Daily Market Commentary
- The Covid-19 pandemic has prompted Canadian convenience-store giant Alimentation Couche-Tard Inc. to walk away from its A$8.8 billion ($5.6 billion) proposal for fuel retailer Caltex Australia Ltd. Couche-Tard decided against a revised offer after completing its due diligence, ending its six-month pursuit of the Australian company. A deal for Caltex Australia would have marked the largest acquisition in the country this year as well as the third-biggest in the past 12 months, according to data compiled by Bloomberg. The Canadian company said it continues to see Caltex Australia as a “strong strategic fit” and plans to re-engage “once there is sufficient clarity as to the global outlook.” Matthew Halliday, Caltex Australia’s interim chief executive officer, said in an interview that the company has a “reasonably strong” balance sheet and continues to explore an initial public offering or trade sale for its property assets.
- The Covid-19 health crisis quickly turned into an economic crisis that roiled stock markets worldwide. Now, a profit crisis is coming for Canadian stocks. After a wild earnings week in the U.S. where about 10% of companies listed on the S&P 500 Index reported results, Canada’s earnings season is about to get started with 10% of its benchmark due to report the week of April 20, according to BMO Capital Markets. Bellwethers like Canadian Pacific Railway Ltd., Rogers Communications Inc. and Teck Resources Ltd. are set to provide a glimpse into their first quarter, which was barely half over when the coronavirus pandemic began. Some companies on the Canada’s benchmark S&P/TSX Composite index have already temporarily suspended or cut dividends to shore up cash, providing some inkling of what to expect when financials are released.
- CAE recalled all 1,500 Canada-based employees that were temporarily laid-off, according to a statement. Cites contract with government of Canada for 10,000 ventilators
- European equities erased earlier gains and fell, led by cyclical sectors, as concerns about the damage from the pandemic to corporate earnings and the falling oil price weighed on risk appetite. The Stoxx Europe 600 Index retreated as much as 0.5%, led by miners and oil shares. Iron ore producer Vale SA cut its iron ore output forecast for the year citing the impact of the coronavirus pandemic. Crude oil slid to the lowest in more than two decades as inventories soared because of the supply-demand mismatch. European stocks had advanced over the past two weeks, flirting with bull market levels, on optimism that the number of new infections in major pandemic centers is easing and as governments and central banks announced stimulus packages. Now all eyes are turning to the corporate earnings season, which may shed light on the extent of damage that the outbreak and lockdowns have caused.
- U.S. equity futures fell alongside European and Asian stocks on Monday as investors grappled with everything from the spread of the coronavirus to oil’s collapse and the next raft of corporate earnings. The dollar gained. Contracts on the S&P 500 extended their decline through the European morning as the price of West Texas oil cratered. A big part of that slump is because the May futures contract expires on Tuesday, but crude has been under immense pressure as demand disappears and a glut develops.
- Shares retreated across much of Asia, though the benchmark in Shanghai rose. The euro, pound and yen all weakened. European bonds mostly dropped. Meanwhile, governments and policy makers are continuing attempts to limit the economic damage of the outbreak. U.S. lawmakers are moving closer to a deal to top up funds for small businesses, China pledged more stimulus as banks lowered borrowing costs and European officials are discussing creating a bad bank for the region, according to the Financial Times.
- Oil plunged below $15 a barrel in New York, a fresh 21-year low, as inventories soar because of the supply-demand mismatch that’s been created by the coronavirus. The most immediate West Texas Intermediate contract fell as much as 22% to $14.19 a barrel. While a major part of the slump is because the May futures contract expires on Tuesday, the collapse nonetheless reflects a fast-growing glut of oil, and rapidly expanding stockpiles in Cushing, Oklahoma, the American pricing hub.
- Gold held declines as signs that the spread of the coronavirus was being contained curbed demand for the haven asset. New York Governor Andrew Cuomo said the state may be past the high point of virus deaths, as cases and fatalities slowed, and fewer daily deaths have been reported in Italy, Spain and the U.K. Democratic leaders and the White House are close to an agreement to top up a loan program aimed at helping small businesses stay afloat, and to provide funds for hospitals.
- China Development Bank Financial Leasing Co. canceled an order for 29 Boeing Co. 737 Max planes, worth at least $2.9 billion based on list prices, joining a growing list of customers scaling back plans for buying the grounded jet. The move cuts the company’s outstanding Max order to 70, it said in a statement to the Hong Kong stock exchange Monday. The 737 Max 10s still on order will be converted to smaller Max 8 aircraft, while the delivery of 20 jets will be deferred to between 2024 and 2026, the company said. Boeing is working with regulators to clear a flying ban on the Max, which has been grounded worldwide since March 2019 following two fatal crashes. Earlier this month, leasing firm Avolon Holdings Ltd. canceled an $8 billion deal for 75 jets, and General Electric Co.’s aircraft-leasing division followed that last week when it canceled an order worth at least $6.9 billion for 69 undelivered jets.
- As U.S. financial markets have rebounded feverishly this past month from the worst of the coronavirus-induced sell-off, one asset has been conspicuously absent from the rally: the collateralized loan obligation. Prices in key parts of the almost $700 billion market — which through large doses of Wall Street alchemy provides financing to companies with less-than-stellar credit scores — have remained deeply depressed, typically fetching less than 70 cents on the dollar. Back in February, before the Covid-19 pandemic throttled the economy, they hovered near par. Part of the reason for this is the simple fact that CLOs, as the securities are known, have been largely left out of the stimulus programs hastily crafted by U.S. officials to shore up markets. But there’s a bigger and more ominous force at work that has investors bracing for the kind of pain they’ve never experienced in the decades that the market has existed.
- Daily infections in Singapore topped 1,000, while rival financial hub Hong Kong had no new cases for the first time since March. Cases rose the least this month in Germany and the government eased some curbs, even as Chancellor Angela Merkel sounded a note of caution. Democrats and the Trump administration are nearing agreement on an aid deal as large as $500 billion and China vowed more stimulus. In Britain, Boris Johnson’s government issued a defense of his handling of the crisis and is resisting pressure to ease the lockdown too soon.
- Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week. This was the ninth straight week of outflows. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $1.76 billion in the week ended April 17, compared with losses of $134 million in the previous week, according to data compiled by Bloomberg. So far this year, outflows have totalled $10.3 billion.
- Sanford C. Bernstein strategists have joined a growing chorus of analysts who warn that equities may be set for fresh losses following the recent rebound. “We think we will face an extended period of higher volatility and also think it highly likely that we see a pull-back in the near term as the difficulties of exiting lockdown (or the risk of a re-imposition of lockdown) become apparent,” Bernstein strategists led by Inigo Fraser-Jenkins wrote in a note published Monday. Although global and U.S. stocks have rallied more than 20% from March lows on the optimism of economic stimulus and the easing of new coronavirus infections, the prospect of the deepest recession and highest unemployment in years make Bernstein strategists doubt that the correction in the S&P 500 is over. Elevated valuations also give them cause for concern.
- Buyout firms are halting sale processes for European technology companies worth nearly $20 billion, as the market turmoil starts to crimp dealmaking in an industry that’s been a bright spot amid the coronavirus pandemic. Billionaire Robert F. Smith’s Vista Equity Partners is putting the sale of a stake in payments giant Finastra on hold after soliciting interest from potential buyers, people with knowledge of the matter said. The U.S. investment firm was seeking to sell as much as 50% of London-based Finastra in a deal valuing the business at more than $10 billion including debt, Bloomberg News reported in October. Investors in Visma Group have also halted a minority stake sale in the Norwegian cloud software developer, according to the people, who asked not to be identified because the information is private. Visma’s backers, including European buyout firm Hg, were seeking to value the company at about 7 billion euros ($7.6 billion) including debt, people with knowledge of the matter said in August.
- DuPont Inc. secured $3 billion in financing to help it ride out the coronavirus that’s decimating demand in some end-markets like the automotive industry. The maker of materials used in car interiors and headlamps secured a new revolving credit facility worth $1 billion and arranged $2 billion in financing to meet debt maturing in November. DuPont said its results held up in the first quarter, but there’s a need to brace for further turbulence ahead. “As this pandemic expands globally, the uncertainty around demand in select end-markets continues,” Chief Executive Officer Ed Breen said in a statement. “We will remain agile, continuing to take swift, prudent actions as conditions continue to evolve.”
- The world’s biggest sovereign wealth fund faces serious questions over the conduct of its outgoing chief executive and the selection process of his successor amid a scandal involving a luxury jet and a private performance by Sting. CEO Yngve Slyngstad has had to explain why he accepted a flight paid for by Nicolai Tangen, the hedge-fund manager who was eventually tapped to succeed him. The development has now prompted Norwegian authorities to look into convening an emergency meeting to examine more closely the circumstances under which Tangen was selected. The watchdog of Norway’s central bank, which oversees the $1 trillion fund, will try to find out whether the events “represent a breach of regulations applying to Norges Bank’s activities,” the head of the Supervisory Council, Julie Brodtkorb, said in a text message on Monday.
- Poland’s central bank pushed back its next scheduled interest-rate meeting, buying time to assess the economic damage wrought by the coronavirus as initial lockdown measures are gradually eased. The bank’s Monetary Policy Council will convene on May 28 instead of three weeks earlier, as originally planned — the first date change in five years — according to a statement Monday on its website. A separate mid-May meeting has been canceled, its press office said. While analysts across the board see a recession as inevitable, Poland hasn’t updated its official economic forecasts for 2020 to account for the fallout from Covid-19. The central bank has cut borrowing costs twice since since mid March, lowering the benchmark to 0.5% from 1.5% before the crisis. The government has also followed most of Europe in rolling out unprecedented stimulus.
- Indonesian President Joko Widodo called for an urgent expansion of testing and aggressive containment measures to prevent the spread of coronavirus that’s killed almost 600 people in the world’s fourth-most populous nation. Large scale testing nationwide should be followed by aggressively tracking and isolating those exposed to the deadly disease, Jokowi, as the president is known, told a cabinet meeting in Jakarta Monday. The president also asked officials to widely disseminate data related to the pandemic to dispel any “impression of a cover up” by the government. Indonesia’s capital Jakarta and its satellite cities have emerged as the epicenter of the pandemic in the country with infections more than quadrupling to 6,760 since the start of the month. The outbreak has killed 590 people in Indonesia, the most in Asia after China, according to Johns Hopkins University data.
- A top Wuhan laboratory official has denied any role in spreading the new coronavirus, in the most high profile response from a facility at the center of months of speculation about how the previously unknown animal disease made the leap to humans. Yuan Zhiming, director of the Wuhan National Biosafety Laboratory, hit back at those promoting theories that the virus had escaped from the facility and caused the outbreak in the central Chinese city. “There is absolutely no way that the virus originated from our institute,” Yuan said in an interview Saturday with the state-run China Global Television Network. Yuan rejected theories that the yet-to-be identified “Patient Zero” for Covid-19 had contact with the institute, saying none of its employees, retirees or student researchers were known to be infected. He said U.S. Senator Tom Cotton, an Arkansas Republican, and Washington Post journalists were among those “deliberately leading people” to mistrust the facility and its “P4” top-level-security pathogen lab.
- Declines in Japanese exports steepened sharply in March as the spreading pandemic tightened its grip on major trading partners and stifled demand for the country’s cars, auto parts and ships. Shipments fell 11.7% from a year earlier, the biggest drop in more than three years, Ministry of Finance data showed Monday. Economists had forecast a 9.4% drop. Exports to the U.S. fell the most since 2011, with auto shipments plunging by nearly a quarter amid lockdowns across America. The slowdown in global trade is likely to worsen in coming months, hitting the Japanese economy hard. Battered by trade wars last year and now by the coronavirus, Japanese exports have fallen for 16 months, the longest streak of declines since the 1980s.
- Shake Shack, the U.S.-based burger chain, will return its entire $10 million loan from the U.S. government, the company’s leaders said in a statement, amid widespread criticism over who got access to the funds aimed at saving small businesses before they were depleted. More than a dozen publicly traded companies with revenue topping $100 million received funds before the program ran out of money, according to a Bloomberg review of regulatory filings. Lawmakers in Congress are said to be near an agreement to top up the loan program, while also providing new funds for hospitals and coronavirus testing. “Shake Shack was fortunate last Friday to be able to access the additional capital we needed to ensure our long term stability through an equity transaction in the public markets,” said Chief Executive Officer Randy Garutti and Danny Meyer, the founder and chairman of Shake Shack and CEO of Union Square Hospitality Group.
- U.S. airlines face a bleak future of depressed traffic and volatile revenue well into 2021, as the global economy transitions from the acute damage of a public health catastrophe into a potentially long recession. Already a bumpy ride for the “Big Three” carriers, the journey promises to get worse this fall when billions of dollars in government assistance comes to an end. Several carriers, including Delta Air Lines Inc. and United Airlines Holdings Inc., have begun openly contemplating how they will shrink operations, while American Airlines Group Inc. is moving to shed more of its older planes. Airlines are barred from slashing jobs through Sept. 30 under the terms of a $50 billion government bailout, but they’re already warning employees that cuts are almost inevitable. The planned contraction reflects a widespread belief that 2020 revenues could shrink to levels not seen in years. Recovery will probably be a long-term affair, said Cowen & Co., which predicted that ticket sales may not rebound to pre-pandemic levels until 2025.
*All sources from Bloomberg unless otherwise specified