April 21st, 2020

Daily Market Commentary

Canadian Headlines

• In a historic Monday for crude prices, energy-exposed equities didn’t quite crater as some may have envisioned. The price on the futures contract for West Texas crude that is due to expire Tuesday fell into negative territory — minus $37.63 a barrel. Yet the S&P 500 Energy Index fell just 3.3%, the most since last Thursday, and even posted a brief gain earlier in the session. Leading decliners Occidental Petroleum Corp. and Pioneer Natural Resources Co. posted drops in the single digits. In Canada, Toronto’s energy gauge fell 0.6%.
• From the outside, the roughly diamond-shaped Nexen tower is one of the more recognizable features of Calgary’s skyline. On the inside, it’s a barren landscape. All 37 floors are empty. Office landlords in major cities around the world are facing a hit from the coronavirus. In Canada’s energy capital, they’re suffering from a triple dose of misery: the pandemic, an oil crash and a severe hangover from a building spree. More than 20% of office space is vacant, and one firm projects more than 33% of downtown will be open by early 2021, creating a cycle of falling rents, declining values and “a huge crater” in local government finances.
• For the first time ever, Canada’s benchmark oil price was higher than the headline number in the U.S. after futures in New York cratered to negative territory, but oil-sands companies have more reason to fear than celebrate. All too familiar with price pain, producers in northern Alberta have a less liquid market and an apples-and-oranges comparison to thank for the apparent price advantage more than anything else. The signal the crash in New York sends is far more ominous for Canada than it seems at first glance. Canadian crude has to travel much longer distances than light oil from shale fields to get to the same place, the U.S. Gulf Coast, giving it a competitive disadvantage that no bad day in New York can erase. So, if prices stay this low in the U.S., things are bound to get worse in Canada.

World Headlines

• European stocks retreated, joining global declines across risk assets, on worries over the health of North Korea’s leader and after oil prices collapsed. Results from firms including Danone SA and Associated British Foods Plc also attracted attention as earnings season gets into full stride. The Stoxx 600 Index was down 1.9% at 11:30 a.m. CET, wiping out all of Monday’s gains. The Stoxx oil & gas sector index tumbled as much as 4.6% after oil plunged below zero for the first time in history amid quickly filling U.S. storage tanks and as the U.S. benchmark’s May contract entered its final trading session.
• U.S. stock index futures dropped after conflicting reports about North Korea’s Kim Jong Un’s health condition, after he underwent a medical procedure, and concerns over the energy market. Contracts on the S&P 500 slid as much as 1.2%, before paring their loss to 0.6% as of 9:02 a.m. in London. Futures dropped 0.3% on the Nasdaq 100 Index and 1% on the Dow Jones Industrial Average.
• Japanese shares fell after oil prices plunged and media reported that North Korea’s leader was in critical condition. The benchmark Topix index and the blue-chip Nikkei 225 Stock Average both declined for a second day. Electronics makers weighed most heavily on the Topix. Declines in Fast Retailing Co. and SoftBank Group Corp. contributed most to Nikkei 225’s drop.
• The day started like any other gloomy Monday in the oil market’s worst crisis in a generation. It ended with prices falling below zero, thrusting markets into a parallel universe where traders were willing to pay $40 a barrel just to get somebody to take crude off their hands. The move was so violent and shocking that many traders struggled to explain it. They grasped wildly at possible causes all day long — had some big firm got caught wrong-footed? Or were inexperienced retail investors flummoxed by a market quirk? — but had no tangible evidence of anything to point to.
• President Donald Trump’s decision to halt funding to the World Health Organization has sown confusion within his administration, as staff argue over what the decision means and whether some programs that the agency oversees should be protected from the cut. In the days since Trump suspended funding to the WHO for a review period of “60 to 90 days,” some administration officials have argued that, no matter what, the organization should get far less than the $400 million to $500 million it receives each year from the U.S. They see the review as a way to redirect money permanently to other organizations focused on health-care issue Others insist the halt is aimed — as the president said when he announced the cuts last week — at seeking reforms from the WHO and cleaning up what the administration sees as the pro-China bias it showed during the early stages of the coronavirus pandemic. They believe the agency has a crucial role to play fighting the virus and also in programs that receive the bulk of the U.S. funding, such as eradicating polio, fighting HIV and combating measles.
• CVC Credit Partners has raised $657 million for its second U.S.-focused direct lending fund. The CVC Credit Partners U.S. Direct Lending Fund II, which surpassed a $500 million target, will invest in U.S. middle-market businesses, according to a statement Tuesday. Investors include pension funds, insurance companies and asset managers in North America, Europe, Asia and Australia, CVC said in the statement. Through its direct lending strategy, CVC provides senior secured loans to companies with $10 million to $40 million in earnings before interest, tax, depreciation and amortization. The firm has deployed over $1 billion in commitments as part of its U.S. direct lending business.
• Beyond Meat Inc. jumped as much as 18% in early trading following its announcement it will enter the Chinese market through a partnership with Starbucks Corp. The new imitation-meat menu items, which will be available at most Starbucks locations in mainland China starting April 22, include pasta, lasagna and a tortilla wrap. The world’s second-largest economy represents an important potential market for Beyond Meat, since it consumes more than a quarter of the world’s meat by volume. The Starbucks agreement adds to Beyond Meat’s growing list of big-name collaborators, including Dunkin’ Brands Group Inc. and Subway in Canada. Starbucks and Beyond Meat already had a partnership in Canada as well. The meat-alternative company has ramped up its production to meet a sharp increase in demand for the products.
• Bank of America Corp. raised its 18-month gold-price target to $3,000 an ounce — more than 50% above the existing price record — in a report titled “The Fed can’t print gold.” Analysts including Michael Widmer increased the target from $2,000 previously, as policy makers across the globe unleash vast amounts of fiscal and monetary stimulus to help shore up economies hurt by the coronavirus. “As economic output contracts sharply, fiscal outlays surge, and central bank balance sheets double, fiat currencies could come under pressure,” the report said. “Investors will aim for gold.”
• Investors expressed confidence that Germany’s economy will start growing again in the third quarter after a sharp coronavirus shock. While an assessment of current conditions in Europe’s largest economy plummeted in April to the lowest in more than a decade, reflecting the damage done by a month-long lockdown to contain the spread of the disease, expectations for the next six months climbed to the highest level since mid-2015.
• President Donald Trump said he’ll sign an executive order temporarily suspending immigration into the U.S. as the country tries to contain the spread of the coronavirus. Trump made the announcement by tweet late Monday night, and did not offer specifics, such as the time frame or the scope of who would be affected. The White House did not immediately respond to a request for comment. He tweeted that he made the decision, “in light of the attack from the Invisible Enemy, as well as the need to protect the jobs of our GREAT American Citizens.”
• Central-bank balance sheets are expanding to record levels amid their latest buying spree, raising questions about how big they can get and whether those assets can ever be sold back to markets. Policy makers didn’t have much luck paring down much smaller portfolios in the decade since the financial crisis. And now they have to bankroll a coronavirus economy that’s putting government budgets under unprecedented strain and threatening to drive companies everywhere out of business.
• International Business Machines Corp. shares fell in pre-market trading after the company reported a drop in first-quarter revenue and pulled its full-year earnings outlook, citing uncertainty related to the pandemic. Analysts were not excited by the results, with Bloomberg Intelligence writing that IBM’s goal of generating revenue growth this year “may be delayed as the coronavirus upends IT budgets.” While Morgan Stanley praised IBM’s new chief executive officer, writing that he is “clearly more focused on revenue growth,” BMO Capital Markets said it is waiting “until we see evidence that IBM can organically grow the top line” before it turns more positive.
• An investor group backed by Global Infrastructure Partners and Brookfield Asset Management Inc. is seeking a loan of about $8 billion to finance the potential purchase of a stake in Abu Dhabi National Oil Co.’s natural gas pipelines, according to people with knowledge of the matter. The consortium — which also includes Italian infrastructure operator Snam SpA, Ontario Teachers Pension Plan, Singapore sovereign fund GIC Pte and South Korea’s NH Investment & Securities Co. — has reached out to banks to gauge their interest in participating, according to the people, who asked not to be identified because the information is private.
• The most ambitious bid to rescue the global oil industry ever seen has been swept aside by a brutal wave of demand destruction. Less than two weeks ago, the world’s biggest oil producers — in a deal facilitated by U.S. President Donald Trump — agreed to slash output in the hope of defending energy markets against the ravages of the coronavirus outbreak. Yet Monday’s historic slump, in which crude prices fell below zero in the U.S., made the OPEC cartel and its partners painfully aware of the limits of their powers. Some nations in the group are desperately searching for any additional steps they might take to stem the rout, but they have few options.
• Gold fell as investors weighed the impact of the crash in oil prices along with signs that the coronavirus outbreak in some parts of the world is slowing. While Monday saw a bid for the haven asset as oil futures plunged below zero for the first time, bullion traded lower Tuesday as crude rebounded. Markets have been rattled by the collapse, with Asian stocks following their U.S. counterparts lower. The dollar climbed after news that the U.S. is monitoring information surrounding the health of North Korea’s dictator.
• The foundations for the European Union were laid six decades ago in Rome and some officials in the Eternal City are starting to think they might just be seeing the beginning of its breakup. After Boris Johnson and the Brexiteers laid to rest the carefully cultivated myth of the EU’s irreversibility, europhiles argued that Britain was a special case, an island nation that could never fully commit to the continent. It’s different when Italy turns against you. The bloc’s third-largest economy has flirted with euroskepticsm before as it railed against budget rules or struggled to cope with successive waves of refugees heading north from Africa. But when Covid-19 struck Lombardy, Italians still expected Europe would come to their aid with no questions asked.
• Japanese lenders must brace for rising bad-loan costs and investment losses even as the financial system shows resilience to the coronavirus-fueled economic slump, according to the central bank. If the downturn is prolonged, more companies at home at abroad could face solvency problems, raising credit costs, the Bank of Japan said Tuesday in its semiannual Financial System Report. Losses on banks’ securities investment “could deteriorate” due to financial-market moves, and foreign-currency funding may become destabilized, it said. The central bank left unchanged its assessment that Japan’s financial system has been “maintaining stability on the whole.” Banks have “considerable resilience” in terms of capital and liquidity, and the government and central bank have implemented “swift and powerful” policy measures, it added.
• Singapore will extend its partial lockdown for a further four weeks until June 1 to “decisively” bring down coronavirus cases within the community, and will provide an additional S$3.8 billion ($2.7 billion) to support businesses that are reeling from the fallout. Authorities will scale up testing “substantially” to quickly detect any cases that pop up amid concerns over rising unlinked cases. Singapore will close more workplaces, with only the most essential services remaining open, Prime Minister Lee Hsien Loong said in a live broadcast to the nation Tuesday. He said the extended measures will ensure the city-state has made “definite progress and consolidated” its position. “Many will be disappointed by the extension of the circuit breaker, especially our business and workers, who are hurting greatly,” Lee said, adding the city-state must press on to bring down daily infections more sharply, to single digit, or even zero.
• Indonesia is hiring tankers to store refined fuels at sea as it seeks to take advantage of plunging prices of oil products such as gasoline and diesel. State-owned PT Pertamina has provisionally chartered at least three long-range tankers to store clean fuels, said people with knowledge of the matter. The move comes as Indonesia, one of Asia’s biggest refined fuel importers, weighs the merits of processing its own crude or buying fuels from abroad, which is becoming more cost-effective amid a glut.
• Mystery surrounded Kim Jong Un’s health after U.S. and South Korean officials gave differing accounts of the North Korean leader’s condition following his unusual absence from recent holiday celebrations. Kim was in critical condition after undergoing cardiovascular surgery last week and the Trump administration wasn’t sure of his current health, said U.S.officials, who asked not to be identified. One of the officials said the White House was told that Kim took a turn for the worse after the procedure, while CNN earlier cited a U.S. official with direct knowledge saying the 36-year-old leader may be in “grave danger.” The White House declined to comment. Meanwhile, South Korean President Moon Jae-in’s office said that Kim was conducting “normal activities” in a rural part of the country assisted by close aides and no special movements were detected. Moon spokesman Kang Min-seok said earlier there was nothing to confirm on the speculation over Kim’s health.
• Biotechnology offerings are one of the few bright spots in an otherwise dreary market for initial public offerings and could hold steady for the rest of the year, even as the pandemic keeps listings in other sectors shut. Biotech companies usually go public at the clinical trial stage without products or revenue. They tend to find long-term investors who are betting on whether these companies will ever have a successful product. Their businesses can survive volatility or a downturn in the economy.

*All sources from Bloomberg unless otherwise specified