April 6, 2021

Daily Market Commentary

Canadian Headlines

• Canadian equities gained Monday though lost some of their early spark. The S&P/TSX Composite Index gained 0.2%, with materials and utilities leading advancers. Energy and tech retreated. Oil plunged the most in nearly two weeks as growing delays in Europe’s reopening and looming Iranian supply damped hopes for a swift decline in global inventories. Bank of Nova Scotia, Canada’s third-largest lender, waded into the burgeoning debate over whether Justin Trudeau’s government should take immediate steps to cool the nation’s hot housing market, issuing a report that cautioned against rushing to implement new constraints.
• Enbridge Inc. wants to show the Joe Biden administration that the tunnel the Canadian company is building for its oil pipeline under Lake Michigan is exactly what the U.S. president’s plan for better infrastructure is all about. The tunnel project for the company’s Line 5, opposed by Michigan Governor and Biden ally Gretchen Whitmer, is the kind of upgrade that will make a crucial piece of infrastructure safer, Enbridge Chief Executive Officer Al Monaco said in an interview. The Calgary-based pipeline giant is engaging with the Biden administration to get that message across, he said. “Under the theme of ‘Build Back Better’ that the president has been talking about, it fits exactly,” Al Monaco said. “That’s what we are doing: We are modernizing an existing piece of infrastructure with a tunnel that reduces the risk to as close to zero as humanly possible, and we are doing it on our dime.”
• Toronto home values continued to swell in March, bringing annual average price gains to more than 20% and adding fuel to a raging debate about whether policy makers should try to cool the market. New listings were up 57% from March 2020, when the onset of the pandemic temporarily caused a freeze in real estate activity. But the new supply was not able to keep up with demand spurred by low borrowing costs and demand for bigger homes, especially in the suburbs, a report from the Toronto Regional Real Estate Board said Tuesday. Across the metropolitan area, the average price of all homes sold was C$1.1 million (about $878,000) during the month, up 21.6% from last March. Detached homes in the 905 area code, which surrounds the city’s core, sold for 31.4% more, an average of C$1.32 million.

World Headlines

• European stocks rose to a record high, more than a year after the pandemic spurred a market collapse, as investors looked past the region’s slow pace of vaccinations and focused on prospects for a global economic recovery. The Stoxx Europe 600 Index gained as much as 1% to 436.47 before trading slightly below that level as of 10:08 a.m. in London, surpassing a peak of 433.9 reached on Feb. 19 last year. Cyclicals such as miners, automakers and banks led the advance. Travel and leisure stocks rose, led higher by cruise operator Carnival Plc, with airlines getting a boost from a lower oil price, while U.K. pub stocks gained as the government downplayed the need for vaccine passports. With Europe’s markets reopening after the Easter break, shares are following Wall Street’s Monday rally as solid U.S. data adds to evidence the recovery is gaining momentum. Rising government bond yields have also boosted the appeal of economically sensitive sectors in 2021, while weighing on frothier parts such as technology. That’s helping the outperformance of Europe, which has a heavy weighting of cheap and cyclical shares.
• American stock futures slipped, suggesting the rally that drove the S&P 500 to an all-time high may pause as concern China is curtailing loan growth tempered optimism stoked by the U.S. economic rebound. ViacomCBS Inc. fell in premarket trading along with other stocks linked to the Archegos Capital Management implosion after Credit Suisse Group AG took a 4.4 billion franc ($4.7 billion) writedown and was said to have unloaded more than $2 billion in block trades. The dollar edged higher and Treasury yields were steady. U.S. data continued to highlight an economic pickup as more Americans are vaccinated against the coronavirus and fiscal relief takes hold. The global economy is poised for the fastest global growth in 60 years in 2021, according to Bloomberg Economics, but the recovery may be uneven as some countries struggle to curb the pandemic and lag behind in inoculations. Adding to investors’ concerns, the risk of bubbles prompted China’s central bank to ask lenders to curtail loan growth for the rest of this year.
• Asian stocks fell, poised to snap a three-day winning streak, with Japan leading losses in the region after the yen climbed against the dollar overnight. Shares of electronics makers and automakers were the biggest drags on Japan’s benchmark Topix, which slid the most in almost two weeks. Suzuki Motor slumped the most since June, falling for a second day after saying that it’s halting two domestic plants in continued fallout of the global chip shortage. China’s CSI 300 Index fell as trading resumed after Monday’s holiday. Equity benchmarks in the Philippines, Taiwan and Australia climbed, cushioning declines in the MSCI Asia Pacific Index, while markets in Hong Kong and Thailand were shut for holidays.
• Oil rebounded, mirroring a broader rally in commodities, ahead of talks on reviving the Iranian nuclear accord. West Texas Intermediate rose 2.3%, with most other commodities also climbing. Crude had plunged on Monday amid a resurgence in Covid infections in Europe and an imminent increase in OPEC+ supplies, which could swell further with an agreement with Iran. Multiparty negotiations take place in Vienna later on Tuesday, though the chances of a breakthrough are seen by analysts as slim. The oil market’s structure also retreated sharply on Monday, with the much-watched spread between the nearest December contracts falling by almost $1. The decline suggests weakening expectations for the health of the market.
• Gold held near the highest in more than a week as investors weighed swings in bond yields and data signaling a recovery from the pandemic. Bullion has clawed back last week’s drop to near the lowest since June, as Treasury yields edged down from a recent high, increasing the metal’s allure. Still, U.S. data continued to highlight an economic recovery as more people are vaccinated against the coronavirus, restrictions are rolled back and fiscal relief takes hold. Spot gold added 0.2% to $1,731.21 an ounce by 10:45 a.m. in London, after touching the highest since March 25. Silver and palladium advanced, while platinum declined. The Bloomberg Dollar Spot Index edged higher.
• Credit Suisse Group AG will take a 4.4 billion franc ($4.7 billion) writedown tied to the implosion of Archegos Capital Managementand replace more than half a dozen executives in response to the firm’s worst trading debacle in over a decade. The charge will result in a pretax loss of about 900 million francs for the first quarter, the bank said in a statement Tuesday, putting it on track for its second straight net loss. Credit Suisse scrapped bonuses for top executives, cut its dividend and suspended share buybacks to protect its capital. Investment bank head Brian Chin and Chief Risk Officer Lara Warner are leaving. Chief Executive Officer Thomas Gottstein vowed he will draw “serious lessons” from the Archegos loss and the collapse of Greensill Capital last month as they leave him with little room for further missteps. The firm is the worst-performing major bank stock in the world this year as a strong first two months for its investment bank business are being overshadowed by its exposure to the failed firms.
• Hundreds more JPMorgan Chase & Co. and Goldman Sachs Group Inc. bankers have returned to their London offices since the U.K. government eased its “stay at home” guidance on March 29. About 15% of JPMorgan’s staff in the city — about 1,800 people — came into the office last week, up from about 10% since Christmas, according to a person familiar with the matter. Goldman is expecting attendance to increase in the coming weeks to about 20% of its roughly 6,000 workers in the U.K. capital, another person said, asking not to be named discussing private information. The U.K. is inching out of its third Covid lockdown and banks of all types are looking to establish future working practices. Some financial firms are starting to entice employees back to deserted offices and an empty City of London, while other have moved to embrace remote work.
• Most European Union member states will have sufficient vaccine supplies to immunize the majority of people by the end of June, much earlier than the bloc’s official target, according to an internal memo seen by Bloomberg. The projections provide some hope that the EU’s vaccination campaign will improve after a lackluster start. The bloc’s regulator may indicate a potential link between vaccination with AstraZeneca Plc’s shot and rare cases of blood clots, an official told an Italian newspaper. A new study found that most toddlers infected with the virus carry a high viral load and may be silent spreaders despite a lack of symptoms.
• The tax plan President Joe Biden laid out last week will likely hit technology and pharmaceutical companies particularly hard, although the challenge for legislators will be to minimize loopholes that could diminish the impact, tax experts said. Much of the most valuable assets at pharmaceutical and tech companies is intellectual property, like patents and algorithms — intangibles that make it easier for them to structure global operations in a way to minimize tax costs. Sectors like retail or agriculture have lots of physical assets that can’t easily be moved to lower-tax countries. Both Republicans and Democrats have sought to bolster the U.S. tax take from companies’ overseas operations, and President Donald Trump’s 2017 overhaul did have measures to do that. Biden’s plan takes a tougher approach, with a 21% minimum tax on foreign profits and a 15% minimum levy on profits reported on financial statements. It limits companies from using credits for research and development costs and deductions for paying employees in stock.
• Air France-KLM will receive as much as 4 billion euros ($4.7 billion) and the French government could raise its stake to as high as 30% as part of a recapitalization plan for the indebted carrier slammed by the pandemic. Air France will get up to 1 billion euros in fresh capital as part of a shareholder subscription, and convert a previous 3 billion-euro French loan into hybrid instruments, according to a statement Tuesday from the European Commission. In exchange, Air France will have to give up 18 daily slots at Orly airport outside Paris. The French government could become the biggest shareholder in the airline as part of the plan, French Finance Minister Bruno Le Maire said on France Inter radio.
• Apollo Global Management Inc. is leading a group of investors aiming to buy a roughly $10 billion stake in Saudi Aramco’s oil pipelines, people familiar with the matter said. The buyout firm’s consortium will include U.S. and Chinese investors and has been shortlisted to make a final offer, the people said, asking not to be identified as the matter is private. Aramco, Saudi Arabia’s state energy company, has narrowed the pool of bidders and Canada’s Brookfield Asset Management Inc. and BlackRock Inc. are no longer involved, the people said.
• Stocks tied to the Archegos Capital Management crisis fell in premarket trading as Credit Suisse Group AG was said to have hit the market with block trades that totaled more than $2 billion, the latest bulk share sale as part of a fallout from the liquidation of Bill Hwang’s fund. ViacomCBS Inc. slipped 2.2% and Vipshop Holdings Ltd. dropped 2.1% as of 4:07 a.m. in New York, while Farfetch Ltd. declined 2.1% after the Swiss bank unloaded shares. Credit Suisse was down 0.3% as of 10:07 a.m. in Zurich after saying it will take a 4.4 billion-franc ($4.7 billion) writedown tied to the implosion of Archegos. Shares of companies involved in earlier block trades totaling more than $20 billion have had a rocky ride after Hwang and his private investment firm, Archegos, became the center of one of the biggest margin calls of all time. A basket of equally weighted shares linked to the fund has slumped about 35% since hitting a peak on March 22, according to data compiled by Bloomberg.
• Sarcos Robotics is planning to go public through a reverse merger with blank-check company Rotor Acquisition Corp. The Salt Lake City-based robot maker and the special purpose acquisition company, or SPAC, will have a combined valuation of $1.3 billion including debt, the company said in a statement on Tuesday, confirming an earlier Bloomberg News report. The deal includes a potential earnout of an additional $281 million based on the performance of the stock after the merger. To help fund the transaction, the companies have raised about $220 million in a private investment in public equity, or PIPE, from investors including BlackRock Inc., Millennium Management, Palantir Technologies Inc., Caterpillar Venture Capital Inc. and Schlumberger, as well as from their own executives.
• China’s Longi Green Energy Technology Co., the world’s biggest solar company, is entering the hydrogen market, industry publication Solarzoom reported. Xi’an Longi Hydrogen Technology Co. was registered March 31 in China, according to Solarzoom. Longi’s billionaire founder and president Li Zhenguo is serving as the company’s chairman, and the shareholders are Xi’an Longi Green Energy Venture Capital Management Co. and Shanghai Zhuqueying Private Equity Investment Fund Partnership. Longi didn’t respond to emailed requests for comment. The firm, which manufactures wafers, cells and panels, is the world’s largest solar company by market capitalization, at about $52 billion as of Friday’s close. Shares rose as much as 4.9% on Tuesday morning in Asia.
• The U.K. government told Britons to hold off on planning foreign holidays this summer, deflating the hopes of an airline industry desperate to get flying again before another high season slips by. While confirming that restaurants, pubs and shops in England will reopen next week, Prime Minister Boris Johnson said it’s not yet clear that non-essential international travel can resume safely as planned on May 17. The move extends the uncertainty facing an airline industry reeling from over a year of Covid-19 restrictions that have shaken balance sheets and forced carriers to raise cash to stay afloat.
• New-car registrations in the U.K. increased for the first time since July, mainly due to an easy year-ago comparison as dealerships remained closed amid lockdown measures. Sales in March rose 11% from last year but were still 37% below the average for the month over the past decade, according to the Society of Motor Manufacturers and Traders. Registrations were depressed in March 2020 by initial pandemic-related shutdowns. Dealerships are due to reopen on April 12 after being closed for months by the latest national lockdown. The U.K. would need to register about 8,300 cars a day to return to pre-pandemic sales levels by the end of the year, according to the SMMT.
• Royal Dutch Shell Plc has invested in sustainable-fuels technology company LanzaJet, adding to a string of deals positioning the oil giant for the energy transition. The Anglo-Dutch major didn’t disclose financial terms, but its expansion into clean energy has so far comprised small acquisitions, as well as organic growth. That contrasts with European peers Total SE and BP Plc, which have acquired billions of dollars’ worth of renewable assets.
• Hungary is seeking to become the first European Union nation to join the Moscow-based Eurasian Development Bank, according to Foreign Minister Peter Szijjarto. Membership in the bank, which groups Russia and five other former members of the Soviet Union including Kazakhstan, will help Hungary expand its investments in central Asia, Szijjarto told a briefing in Kazakhstan on Tuesday. He also said Hungary’s state-owned Eximbank will set up a $170 million credit facility to boost business ties with Kazakhstan. Joining Eurasian Development Bank would be the latest move by Hungarian Prime Minister Viktor Orban to deepen eastern ties. Hungary is also a member of another Russia-led lender, the International Investment Bank, and succeeded in moving its headquarters to Budapest from Moscow in 2019 in a step widely criticized by Hungary’s western allies.
• Iran and world powers began their most serious attempt yet to resurrect a troubled nuclear deal, with negotiators from the U.S. and Islamic Republic gathered at the same venue for the first time since Donald Trump sent the accord into freefall in 2018. The talks at Vienna’s Imperial and Grand hotels on Tuesday may extend through the end of the week if progress is made, according to two officials involved. Iranian and U.S. representatives aren’t expected to speak directly, reflecting the deep distrust they will have to overcome. Tensions over Iran’s accelerating nuclear program have threatened to spiral into open conflict since the Trump administration exited the 2015 agreement and reimposed punishing sanctions on an oil-dependent economy. They’ve also sparked attacks on Gulf shipping, and fueled the war in Yemen, including escalating strikes by Iran-backed rebels on Saudi Arabian oil facilities.
• Bangladesh conglomerate Summit Group is bidding for an estimated $2.3 billion of projects to import and store liquefied natural gas on the Indian subcontinent, amid a jump in storage demand from governments seeking to mitigate spikes in gas prices. Summit, Japan’s Jera Co. and Mitsubishi Corp. are jointly tendering to build Bangladesh’s first onshore import terminal at Matarbari, along with storage infrastructure, to handle 7.5 million tons of LNG per year, Summit Chairman Muhammed Aziz Khan said in an interview. The results of the tender are expected to be out later this year, he said. The company has also set its sights on a handful of projects for floating storage regasification units. It is bidding to construct a 7.5 million-tons-a-year FSRU at Payra, Bangladesh, that authorities are expected to award by 2022. It is participating in a tender called by the Ceylon Electricity Boardto build a 156,000 cubic-meter FSRU at Kerawalapitiya, Sri Lanka, and is working with Mitsubishi to jointly bid for a project in Pakistan.
• China’s central bank asked the nation’s major lenders to curtail loan growth for the rest of this year after a surge in the first two months stoked bubble risks, according to people familiar with the matter. At a meeting with the People’s Bank of China on March 22, banks were told to keep new advances in 2021 at roughly the same level as last year, said the people, asking not to be identified as the matter is private. Some foreign banks were also urged to rein in additional lending through so-called window guidance recently after ramping up their balance sheets in 2020, one of the people said. The comments give further detail to what the central bank stated publicly after the meeting, when it said it asked representatives of 24 major banks to keep loan growth stable and reasonable. In 2020, banks doled out a record 19.6 trillion yuan ($3 trillion) of credit, with about a fifth directed to inclusive financing such as small business loans. Lending the same amount this year would bring the outstanding balance to about 192 trillion yuan, an annual increase of about 11%, the slowest pace in more than 15 years.
• The next leg higher in long-term Treasury yields may come from what’s known as real rates, one of the bond market’s purest reads on the growth outlook. A burst of strong economic readings — a mammoth job creation figure Friday and now a report from the Institute for Supply Management showing record growth in service industries — is fueling bets that expectations for growth, not inflation, will dominate the narrative in Treasuries. That’s an important distinction because while higher real rates, which strip out inflation, suggest investors see the economic rebound from the pandemic gaining steam, a persistent rise may hurt other assets, including stocks. Relatively risky assets could start to suffer with the market signaling that it sees growth getting so strong that it expects the Federal Reserve to start discussing a tapering of its asset purchases as a step toward tightening policy.
• Investors bought equities in record amounts in the first quarter of 2021, as a combination of generous stimulus and bets on economic recovery drove $372 billion into global stock funds, according to Bank of America Corp. strategists. The first three months of the year saw the largest global equity inflows as a share of assets under management since 2006, the strategists said in an April 1 note, citing EPFR Global data. Cyclical stocks were among the biggest winners at the start of this year, with value equities attracting $35 billion and financial shares pulling in $24 billion, as fund managers snapped up laggard sectors in a bet on economic reopening. The flows data confirm the bullish market sentiment that has pushed equities around the world to record highs, with optimism over vaccination efforts outweighing the fear that higher bond yields can interfere with the rally. Stocks remain investors’ asset class of choice while bond yields offer limited returns, with fixed-income funds attracting just $131 billion this year, according to BofA.

“The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane.” – Marcus Aurelius

*All sources from Bloomberg unless otherwise specified