April 23rd, 2020

Daily Market Commentary

Canadian Headlines

• Canada’s energy industry is facing one of its toughest tests ever as companies scramble for credit against a turbulent backdrop of record-low crude prices. Oil companies have already been renewing borrowing facilities in a bid to stay afloat, but renegotiations will begin in earnest in the weeks ahead as “borrowing-base redeterminations” get underway. That’s the twice-yearly ritual when companies meet with their bankers to renegotiate credit based on the size of their reserves, oil and gas prices, and other factors. More than half the big Canadian banks’ energy loans are to companies with junk credit ratings.
• Canadian oil sands producers no longer have an incentive to send their crude toward the Gulf Coast as a glut grows in the U.S. due to the coronavirus pandemic. Western Canadian Select for May delivery in Alberta was 50 cents more expensive on Tuesday than it was at the U.S. oil storage hub of Cushing, Oklahoma, according to NE2 Group prices. In normal times, the further one gets away from Northern Alberta the higher the price. So oil companies gain from shipping the crude to U.S. refineries. But these aren’t normal times. With Americans sheltering at home, demand for gasoline and jet fuel is cratering. Last week, U.S. inventories gained 15 million barrels to the highest level since May 2017.

World Headlines

• European stocks inched higher after swinging from gains to losses, with investors parsing a further recovery in oil prices and mixed earnings reports, while output data missed expectations. The Stoxx Europe 600 Index added 0.2% as of 11:15 a.m. in London, with energy shares leading gains. The benchmark earlier fell as much as 0.5% after disappointing PMI reports across the region. Earnings were also in the spotlight. Unilever slid 2% after withdrawing its 2020 guidance and reporting flat quarterly sales. Credit Suisse Group AG reversed an earlier advance after the collapse of Luckin Coffee Inc. in China was said to add to the bank’s Asian loan provisions. Volvo AB slid 5.6% after reporting a decline in sales and warning of challenges ahead.
• U.S. futures fluctuated with European stocks on Thursday as investors weighed the latest signs of the coronavirus’s impact on the global economy. Crude oil surged above $15 a barrel in New York. Contracts on the S&P 500 and Nasdaq 100 indexes swung between losses and gains as traders awaited further clues on the health of the American labor market in jobless data due Thursday.
• Japanese shares rose, ending a three-day losing streak as concerns over the global economy eased somewhat and oil prices staged a rebound. Auto makers provided the biggest boost to the Topix index, as all but one industry group advanced. U.S. stocks advanced after Treasury Secretary Steven Mnuchin said he anticipates most of the U.S. economy will restart by the end of August after shutdowns due to the coronavirus.
• Oil extended its recovery from Monday’s plunge below zero, but trading remains volatile with the market under intense pressure from a swelling global glut. Futures in New York rose as much as 17% to top $16 a barrel. Already inundated with bearish signals, the market shrugged off data from Wednesday showing U.S. crude stockpiles at a three-year high and petroleum demand at a record low. An order by President Donald Trump authorizing the Navy to destroy any Iranian gunboats harassing American ships also lent some support. Prices remain down 75% this year, and more production shut-ins are likely as the value of real oil crashes globally. ICE Futures Europe Ltd. confirmed Tuesday that it had taken steps to prepare for negative Brent pricing, while the Chicago Mercantile Exchange took similar measures earlier in the week. Meanwhile, oil traders are rewriting their risk models to accommodate potentially limitless declines.
• Gold headed for a back-to-back gain above $1,700 an ounce as investors weighed the prospects of another wave of stimulus in virus-hit economies. Bullion-backed exchange-traded funds boosted their holdings, with this month’s net inflows of almost $8 billion closing in on a record, according to Bloomberg data. Investors are pouring money into the traditional safe haven as the pandemic triggers recessions and government and central banks try to combat the impact.
• The largest U.S. banks, flooded with requests for loans from blue-chip companies in recent weeks, are starting to use their newfound leverage over corporate America to insert safer, more favorable terms into billions of dollars of deals. Anti cash-hoarding stipulations, interest-rate floors and mandatory prepayment clauses — provisions more commonly found in junk-rated transactions or bridge loans — are creeping into investment-grade financings as demand outstrips how much Wall Street is willing to lend. Banks are even starting to increase the rates some companies such as General Motors Co. have to pay, a rarity in a market where borrowing costs have largely been on a one-way track lower since the last financial crisis. The changes underscore the shifting power dynamics in a business where, under normal circumstances, banks would often seek to undercut each other to provide cheap lines of credit — part of an effort to secure relationships with clients who they hope stick around for more expensive needs. Now, as the surge of borrowers tapping existing revolvers threatens to dent profitability and bankers seek to conserve liquidity for those that need it most, they’re starting to push companies to make concessions.
• Spain reported the greatest number of new coronavirus cases and fatalities in almost a week, while Singapore had more than 1,000 new infections for a fourth straight day. The U.K. will survey 20,000 households to track the spread of the virus, five weeks after abandoning community testing. Earlier, U.S. President Donald Trump said he disagreed with the Georgia governor’s decision to begin relaxing curbs this week, a marked shift in tone from his calls for states to reopen their economies. U.S. lawmakers plan to convene on Thursday to pass a $484 billion interim rescue plan. Nationwide lockdowns have pushed Europe’s economy into a record slump and data due later will probably show U.S. jobless claims remain near record highs. More companies withdrew guidance for the year, while Credit Suisse took a $1 billion hit and profits slumped at Chinese insurer Ping An.
• The U.K.’s antitrust authority approved Takeaway.com NV’s $8 billion acquisition of Just Eat Plc, less than a week after giving its blessing to another food-delivery deal amid the coronavirus pandemic. Takeaway.com’s departure from the U.K. market in 2016 and the strong likelihood it wouldn’t return meant the deal didn’t produce antitrust concerns, the Competition and Markets Authority said Thursday. Amazon.com Inc.’s purchase of a $575 million stake in Deliveroo was given a green light last week as the CMA acknowledged it needed a cash injection from the U.S. company to avoid going bust. Restaurants across London have been forced to shut during the coronavirus lockdown, leading to a significant declinein revenue for Deliveroo.
• Exxon Mobil Corp. has agreed to sell its 10% stake in a Norwegian natural gas liquids pipeline and processing plant to a company controlled by Danish pension funds. The U.S. supermajor sold all its oil and gas fields in the Nordic country over the past three years as it focuses efforts on higher-growth projects from Guyana to Brazil and shale oil at home. The company’s only significant remaining asset in Norway is now the Slagentangen refinery. Exxon agreed to sell its stake in Vestprosess DA to North Sea Infrastructure AS, which is majority owned by pension fund manager AIP Management P/S, in an all-cash transaction, the buyer said in a statement. It didn’t provide the price.
• An investment firm backed by a member of Abu Dhabi’s royal family agreed to buy a stake worth just over $1 billion in LuLu Group International, which runs one of the Middle East’s largest hypermarket chains, according to people familiar with the matter. The company led by Sheikh Tahnoon Bin Zayed Al Nahyan acquired an almost 20% holding in the Abu Dhabi-based supermarket group founded by Indian entrepreneur Yusuff Ali, the people said, asking not to be identified as the matter is private. It wasn’t immediately clear which company Sheikh Tahnoon is using for the investment or if he was buying the stake in his personal capacity, the people said.
• Welcome to legislating in the pandemic era: U.S. House members in masks, disinfectant, silent committees and hundreds of billions in deficit spending. The House plans to convene at 10 a.m. Thursday to give final passage to a $484 billion interim rescue plan to bolster a staggered American economy. It will be the first time lawmakers have gathered in such a large group since March 27, when the last stimulus plan was approved, and they will be casting a roll-call vote under extraordinary circumstances to match the times. Unlike the Senate, which was able to pass the latest emergency package in a quick voice vote with only a handful of senators present, the possibility of an objection from either party means at least half of the 429 current House members must venture to Washington despite the risks from the coronavirus pandemic.
• The number of people out of work in the U.K. is set to surge fivefold and the longer the lockdown persists, the more difficult it will be to get people back to their jobs, according to two leading labor-market economists. The U.K.’s effective unemployment rate — including those who have been furloughed — will rise to around 20%, according to a paper published by the National Institute of Economic and Social Research. The current rate is 3.9%.
• Big Oil’s first-quarter earnings are likely to hold clues about a market that’s having the most tumultuous year in recent memory. Royal Dutch Shell Plc has indicated that the pain of oil’s slump wasn’t huge in the first three months of the year. But the coronavirus pandemic has been decimating energy demand since March, crude is at levels never before seen in history, and economies around the world are heading toward recessions, making the remainder of the year bleak. First-quarter earnings are usually sedate affairs, and this year the focus will be on the outlook more than ever. Dividends are also in the spotlight, particularly after Equinor ASA became the first major to cut its payout on Thursday. Management of oil fields, and demand signals from the companies’ global network of fuel stations and refineries will provide insight for the months ahead.
• Activity in Japan’s economy took a hammering in April as the impact of the coronavirus pandemic and restrictions under a state of emergency hit demand at home and abroad. A gauge of Japan’s service sector activity slid to a record low of 22.8, according to preliminary purchasing managers data. The au Jibun Bank Japan purchasing managers index for manufacturing fell to 43.7 in April, indicating the strongest contraction in the factory sector since April 2009. PMI readings below 50 signal activity is shrinking.
• Even as market watchers await Warren Buffett’s splashy move to seize on fallout from the current crisis, his Berkshire Hathaway Inc. hasn’t been spared by the pandemic. Coronavirus-related shutdowns across the U.S. have hit Berkshire units from See’s Candies and a shoemaker to industrial behemoth Precision Castparts. That could leave a few scars on the conglomerate that gives the billionaire investor his ammo and has been pumping out more than $20 billion in annual profit in recent years.
• Apple Inc. is planning to start selling Mac computers with its own main processors by next year, relying on designs that helped popularize the iPhone and iPad, according to people familiar with the matter. The Cupertino, California-based technology giant is working on three of its own Mac processors, known as systems-on-a-chip, based on the A14 processor in the next iPhone. The first of these will be much faster than the processors in the iPhone and iPad, the people said. Apple is preparing to release at least one Mac with its own chip next year, according to the people. But the initiative to develop multiple chips, codenamed Kalamata, suggests the company will transition more of its Mac lineup away from current supplier Intel Corp.
• Credit Suisse Group AG signaled the worst may not be over after the bank set aside $1 billion to cover the impact of the coronavirus, the biggest such hit in more than a decade. Chief Executive Officer Thomas Gottstein said key profit targets and capital levels will be under pressure and the bank may need to put more cash to the side to cover bad loans or account for a drop in asset values. At the same time, it signaled that trying to predict the full impact on its business is still more art than science. Switzerland’s second-largest lender is giving the first window into how European lenders fared after the coronavirus pumeled economies and businesses at the end of the first quarter. Widespread lockdowns hit corporate clients and whipsawed markets last month, forcing goverments around the world to step in to try and cushion the economic damage.
• Being a retailer for essential goods during the coronavirus pandemic is boosting sales for Target Corp. The discount chain is on pace for same-store sales growth of 7% in the fiscal first quarter that ends this month, Target said in a statement. If that holds, it would mark its best performance since 2000, according to data collected by Bloomberg. The key has been an explosion in shoppers turning to Target’s website, with e-commerce revenue more than doubling. That includes a 275% increase so far this month as most of America fell under stay-at-home orders.
• Saudi Aramco, the world’s largest oil producer, has hired advisers to review a potential multi-billion dollar stake sale in its pipeline business, people with knowledge of the matter said. The energy giant is working with JPMorgan Chase & Co. as it makes early preparations for the potential deal, according to the people, who a sked not to to be identified because the information is private. Mitsubishi UFJ Financial Group Inc. also has a role on the transaction, the people said. Aramco hasn’t yet started a formal sale process, the people said. It may wait until market turmoil caused by plunging oil prices and the impact of measures to halt the spread of the coronavirus eases before it begins soliciting interest in the asset, they said.

*All sources from Bloomberg unless otherwise specified