May 3, 2021

Daily Market Commentary

Canadian Headlines

• Canada’s top capital markets regulator is investigating officers and shareholders of Bridging Finance Inc., one of the country’s largest private lenders, on allegations they misappropriated investor funds. An Ontario court appointed PricewaterhouseCoopers to take control of Bridging at the request of the Ontario Securities Commission, pending the outcome of the investigation. The move was made public Saturday. Bridging, based in Toronto, was run by a husband-and-wife team, David Sharpeand Natasha Sharpe. The firm, which had about C$2 billion ($1.6 billion) in assets under management as of December, lends to small and mid-sized companies involved in everything from milling flour to delivering groceries.

World Headlines

• European equities rose on Monday, as investors weighed robust earnings reports and a brightening economic outlook against the risks of rising inflation and higher taxes. The U.K. market is closed for a public holiday. The Stoxx Europe 600 Index climbed 0.4% as of 10:35 a.m. CET, tracking gains in U.S. index futures and moving closer to historic highs reached last month. Consumer products and technology were among the biggest advancers, with Hermes International, L’Oreal SA and LVMH leading. Renewables dragged energy shares lower, after Citigroup Inc. said in a note that Siemens Gamesa Renewable Energy SA’s 2021 guidance was disappointing. Vestas Wind Systems A/S dropped by 3.4%.
• U.S. equity futures climbed with European stocks as investors assessed inflation risks amid improving economic activity. Trading was subdued on Monday with several markets including Japan, China and the U.K. closed for public holidays. S&P 500 futures added 0.5% and contracts on the small-cap Russell 2000 Index outperformed. As trading gets underway this week, inflation remains at the forefront of the investment debate. The latest U.S. data show fiscal stimulus helped drive the strongest monthly gains in personal incomes in records going back to 1946, and the Federal Reserve’s preferred gauge of prices rose by the most since 2018. Though last year’s pandemic shock has skewed some data, such readings fuel speculation that central banks may start to withdraw support by trimming asset purchases.
• Asian stocks declined for a second day as a resurgence in Covid-19 infections continued to weigh on sentiment. Equity markets in Japan, China, Thailand and Vietnam were shut for the holidays. The MSCI Asia Pacific Index slid 0.6%, heading to a one-month low. The region’s surging coronavirus pandemic cases remains a concern, with the daily death toll in India hitting a record 3,689 on Sunday. Meanwhile, Singapore had its first fatality due to complications from Covid-19 in nearly two months over the weekend. Taiwan semiconductor stocks and Chinese internet companies were the biggest drags on the market. South Korea’s benchmark erased gains and closed 0.7% lower as short selling resumed after a 13-month ban. Taiwan was the worst-hit market on Monday, with its benchmark falling almost 2%.
• Oil prices dipped as traders weighed weaker fuel demand in India against optimism over the global economic recovery from the coronavirus pandemic. Brent crude fell 0.6% to about $66.50 a barrel in Asian trading. Sales of gasoline in India were the lowest in April since August, while average daily diesel sales were the lowest since October, preliminary data from officials with direct knowledge of the matter show. Separately, the president of the Confederation of Indian Industry urged the government to curb economic activity to counter the growing health crisis. The country is the world’s third-biggest oil importer.
• Gold advanced after its first weekly decline in four as U.S. Treasury Secretary Janet Yellen said President Joe Biden’s economic plan won’t stoke inflationary pressures. Biden’s economic plan is unlikely to create inflation pressure in the U.S. because the boost to demand will be spread over a decade, Yellen, the former Federal Reserve chair, said Sunday on NBC’s “Meet the Press.” The precious metal, which is down 6.3% this year, has clawed back some gains over the past month as central banks, including the U.S. Fed last week, stuck to dovish monetary policies. While the Fed said signs of inflation were transitory, assuaging fears of an early rate hike, strong U.S. economic data continues to pressure havens.
• Warren Buffett said Greg Abel, Berkshire Hathaway Inc.’s vice chairman of non-insurance businesses, would be his likely successor if the billionaire were to step down. Buffett told CNBC that the board agrees Abel, 58, would take over if anything were to happen to the 90-year-old chief executive officer of Berkshire, and that age was a determining factor in the selection. Abel had been seen as the most likely candidate. Succession decisions had been a closely guarded secret at the conglomerate, even while the firm assured investors that it had a detailed plan in place. Ajit Jain, 69, was also often viewed as a potential pick given Buffett’s praise of the Berkshire vice chairman, who runs the insurance businesses.
• Prime Minister Narendra Modi has lost a crucial election as India’s Covid crisis deepens, with an official in his Bharatiya Janata Party conceding defeat in the populous state of West Bengal. Modi had been widely criticized for continuing to hold mass rallies in the state as infections rose. Talks starting this week between the U.S. and the World Trade Organization over expanding access to vaccines will focus on how to get them “widely distributed, more widely licensed, more widely shared,” according to White House Chief of Staff Ron Klain. U.S. cases dropped to 45,236, the fewest on a Saturday since late September. Daily deaths in India hit a record 3,689 on Sunday, while the number of cases slowed slightly after the country became the first to cross the mark of 400,000 cases in a day. U.K. Foreign Secretary Dominic Raab pledged to send 1,000 ventilators.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the 26th straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $341.7 million in the week ended April 30, compared with gains of $81.2 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $24.4 billion.
• President Joe Biden’s $4 trillion vision of remaking the federal government’s role in the U.S. economy is now in the hands of Congress, where both parties see a higher chance of at least some compromise than for the administration’s pandemic-relief bill. The president at this point is open to various possibilities to pass his proposals, including breaking them into multiple bills, according to a White House official speaking on condition of anonymity. While the “American Families Plan” that twins social spending with individual tax hikes is a non-starter for Republicans, parts of the infrastructure-focused “American Jobs Plan” have been embraced by the GOP. Biden’s planning to host top congressional leaders from each party at the White House on May 12, something he didn’t do for the $1.9 trillion Covid-19 relief package that passed with no Republican support. Whether a bipartisan deal can be done on a portion of his plans may hinge on whether the GOP abandons the comprehensive obstructionist model it used against President Barack Obama.
• Dell Technologies Inc. has agreed to selling its Boomi cloud business to private-equity firms Francisco Partners and TPG in a cash deal valued at $4 billion, as part of efforts by Chief Executive Officer Michael Dell to trim down the personal computer maker. The deal is expected to close by the end of this year, the companies said in a statement Sunday without providing additional details of the terms. Dow Jones had earlier reported the companies were near a deal. Boomi specializes in integrating different cloud platforms for companies and has more than 15,000 customers. Dell agreed to acquire the company for an undisclosed amount in 2010, a statement showed at the time.
• Moderna Inc. agreed to provide as many as 500 million doses of its Covid-19 shot to the program known as Covax in a boost for the global vaccination effort, but only a small fraction of the shipments are due to arrive this year. The U.S. drugmaker is joining developers including AstraZeneca Plc, Pfizer Inc. and Johnson & Johnson in supplying Covax, which has faced setbacks in its bid to help lower-income nations. The vaccine last week was cleared for emergency use by the World Health Organization, making it eligible for Covax. Covax has encountered funding challenges, delivery delays and other hurdles in a high-stakes campaign to narrow the vaccine-access gap. As India confronts a devastating resurgence of the illness, concerns are rising for many countries around the world that have been left behind their wealthier counterparts.
• German power is trading at the highest level since the financial crisis, spurred on by a furious rally in carbon prices and the nation’s pending exit from both nuclear and coal. European carbon prices are on a tear and have jumped 52% this year, which is more than most other commodities. The European Union is planning tighter climate targets that will encourage more renewable energy and make the remaining plants that’s run on coal and gas more expensive to operate. German next-year power gained 20% this year. Europe’s biggest economy plans to halt three of its six remaining reactors by the end of 2021 and the rest by the following year. Meanwhile, the coal-phase out plan is progressing with three more coal plants shutting this year and a tender in progress to halt another 2.5 gigawatt of fossil-fuel plants by 2022.
• Hong Kong’s economy finally turned the corner, posting its fastest growth since 2010 as the city makes a stronger recovery from the pandemic and social unrest before that. After declining for a record six quarters, gross domestic product surged 7.8% in the first quarter from a year earlier, advance data showed Monday, beating all estimates in a Bloomberg survey of economists. While that’s partly distorted by the low base a year ago when the economy was in lockdown, the quarter-on-quarter expansion, a better reflection of growth momentum, also outperformed, reaching 5.3%, well above an estimate of 0.7%.​
• Fidelity Investments halved its valuation estimate for Ant Group Co. following a Chinese regulatory crackdown on the fintech giant. The Boston-based money manager lowered the implied valuation for Ant to about $144 billion at the end of February, compared with a $295 billion value assigned to the firm in August, according to U.S. filings. Fidelity joins other global funds in cutting back estimates for Ant’s worth. The future of Jack Ma’s company — and its valuation — have been shrouded in uncertainty as regulators sort through details of a fintech industry overhaul that abruptly halted Ant’s $35 billion initial public offering in November. The company has since committed to drastically revamping its business and seen its chief executive officer Simon Hu exit.
• The European Commission proposed easing restrictions on business and leisure travel for those who have been fully inoculated against Covid-19, adding to signs of a gradual return to normalcy as vaccinations gather pace. The European Union’s executive arm recommended welcoming tourists from countries with relatively low infection rates as well as those who are fully vaccinated, according to a statement Monday. The proposals require approval from member states and a Commission official said he was hopeful they would be adopted by the end of this month.
• Credit Suisse Group AG’s business with Archegos Capital Management enabled the family office to undertake highly-leveraged stock bets with only minimal collateral posted, a strategy that exposed the lender to losses far exceeding its peers when the firm collapsed. Credit Suisse lent the family office of Bill Hwang funds allowing bets with leverage of up to ten times, and only asked for collateral worth 10% of the sums borrowed, according to a person familiar with the business. The leverage offered by the Swiss bank was in some cases double what other brokers gave Hwang, helping to push the loss to some $5.5 billion after the fund imploded in March. That compares with a $2.9 billion hit to Nomura Holdings Inc and lesser sums or no loss at all for banks including JPMorgan Chase & Co and Deutsche Bank AG that offered Hwang prime brokerage services.
• Bitcoin’s domination of total cryptocurrency market value is declining as its next-biggest rival Ether reaches the $3,000 milestone. The rise of Ether suggests there’s room for more than one winner among digital tokens as the sector evolves. Bitcoin now accounts for about 46% of total crypto market value of $2.3 trillion, down from roughly 70% at the start of the year, according to tracker CoinGecko. Ether is up to 15% and a group of others outside the top few has doubled its share to 36%. Bitcoin remains the biggest cryptocurrency but the momentum in other tokens is drawing increasing interest. Crypto proponents argue investors are getting more comfortable with a variety of tokens, while critics contend the sector may be in the grip of a stimulus-fueled mania.
• The semiconductor shortage has slashed vehicle production so much that rental-car companies can’t get the new cars they need, so they have resorted to buying used vehicles at auction. This is uncharted territory for the likes of Hertz Global Holdings Inc. and Enterprise Holdings Inc., which have made their profits by purchasing new vehicles cheaply in bulk, renting them out for as much as a year and selling them at auction. In the past, they have bought some used cars to shore up an occasional unforeseen burst in demand, but rarely for the mainstays of their fleets. “You would never go into auction to buy routine sedans and SUVs,” said Maryann Keller, an independent consultant who used to be on the board of Dollar Thrifty Automotive Group, which is now part of Hertz. “These are special circumstances. There is a shortage of cars.”
• Verizon Communications Inc. is nearing an agreement to sell its media division to Apollo Global Management Inc., according to people with knowledge of the matter, a move that would jettison once-dominant online brands like AOL and Yahoo!. A deal for Verizon Media could be announced as soon as Monday, said the people, who asked to not be identified because the matter isn’t public. Verizon will keep a stake in the business, they said. With the potential sale, Verizon would unload the remnants of an ambitious but distracting foray into online advertising. Last year, the telecom giant agreed to sell the HuffPost online news service to BuzzFeed Inc., and in 2019 it sold the blogging platform Tumblr.
• Mortgages ended April with one popular valuation metric at its tightest spread since September of 2012, back when the Federal Reserve announced what would come to be labeled “QE3.” That name was applied as it was the central bank’s third round of quantitative easing since the collapse of the Great Moderation in 2007. Markets are now on their fourth round of QE — the latest started in March 2020 — which has helped drive the Fannie Mae 30-year current coupon spread over a blend of the 5- and 10- year Treasury yields to 0.60% on Friday. The Fed statement from September 13, 2012 declared that in addition to $40 billion a month in mortgage-bond purchases, it also expected the federal funds rate to stay at “exceptionally low levels” at least through mid-2015. The bank would go on to purchase $1.4 trillion in agency mortgage bonds through October 2014.
• President Joe Biden’s promise to start narrowing income and wealth gaps underpins every part of his economic program, from almost $4 trillion in spending plans to the biggest tax increase in a generation. But even these measures may struggle to make headway against the highest levels of inequality in the developed world. The U.S. wealth divide widened further during the pandemic, as the top 1% of households added $4 trillion in net worth. Biden has outlined plans to create well-paid jobs with infrastructure investments, expand child care and bolster the social safety net. Higher taxes on corporations and wealthy households will cover part of the bill. The president has also promised to boost minimum wages, broaden union rights and fight racial injustice in the economy.
• The global semiconductor shortage roiling a wide range of industries likely won’t be resolved for a few more years, according to Intel Corp.’s new Chief Executive Officer Pat Gelsinger. The company is reworking some of its factories to increase production and address the chip shortage in the auto industry, he said in an interview with CBS News, based on snippets from its “60 Minutes” program. It may take at least several months for the strain on supply to even begin easing, he added. Demand for semiconductors was boosted in 2020 as consumers scooped up home gadgets during the pandemic. But meeting that increase has been hard, thanks to shuttered plants, among other factors. Companies worldwide say they expect supply-chain constraints due to logistics backlogs and the chip shortage to continue for much of 2021.
• Container shipping rates are heading higher again, driven to new heights by unrelenting consumer demand and company restocking from Europe to the U.S. that are exhausting the world economy’s capacity to move goods across oceans. After peaking in late 2020 and not budging much through the first quarter, the rate for a 40-foot container to Los Angeles from Shanghai hit $4,403 last week, the highest in Drewry World Container Index data going back to 2011. Cargo shippers on less-traveled transatlantic routes are feeling the sting, too: Rotterdam to New York surged to a record $3,500. With their fiscal and monetary floodgates wide open, countries with advanced vaccine programs are countering Covid-19 headwinds of unemployment, weak services industries and restricted travel. But the wave of stimulus buoying consumption has inundated the supply side — the manufacturers of goods that often rely on global distribution chains.
• Private equity firm Permira is considering a sale of Tricor Group in a deal that could value the business and investor services provider at about $2 billion, according to people familiar with the matter. Permira is in the early stages of evaluating a potential sale of Hong Kong-based Tricor, the people said, asking not to be identified because the matter is private. Other buyout firms and companies in the industry could be interested in the asset, the people said. A formal sale process could start later this year, one of the people said. Founded in 2000, Tricor provides business operations and corporate governance support including accounting, payroll and secretarial services for publicly-traded and closely-held companies, according to its website. It also offers investor and share registry services.

“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” — Charlie Munger

*All sources from Bloomberg unless otherwise specified