April 9, 2021

Daily Market Commentary

Canadian Headlines

• Almost as soon as it was announced, the Canadian government’s first attempt to rein in the country’s pandemic housing boom was dismissed as not enough. Canada’s banking regulator signaled its intent Thursday to take a small step by tightening qualification rules for uninsured mortgages, worried that low interest rates will put new home buyers too far into debt. The move will effectively reduce by about 4% the size of mortgages households will be eligible to take. With buyers straining ever more to get in amid the frenzy, expectations are building that move will be only the first step in Prime Minister Justin Trudeau’s efforts to keep a long-feared housing bubble from forming, and popping, on his watch. To do so, his government must bring the one part of the economy that’s at a boil down to a simmer, without triggering a sharp correction that could disrupt the nation’s recovery from Covid-19.
• Operations at the Porgera gold mine are set to resume later this year after Barrick Gold Corp. and Papua New Guinea reached an agreement that will see the miner take a minority stake in the operation. The mine will be held in a new joint venture, owned 49% by Barrick Niugini Ltd. — co-owned by Barrick and China’s Zijin Mining Group Co. — and 51% by Papua New Guinea stakeholders, according to a statement on Friday. Barrick will operate the mine, which has been on care and maintenance since April last year after the government didn’t renew its special mining lease. Barrick, the world’s second-largest gold producer, said in October it would grant the state a bigger stake in Porgera as part of an in-principle agreement that would allow the mine to re-open. That marked a thaw after a months-long standoff that escalated to legal challenges and tested Prime Minister James Marape’s pledge to obtain a greater share of Papua New Guinea’s resources wealth.

World Headlines

• European equities were steady near a record high as investors weighed recent gains and awaited the quarterly earnings season. The Stoxx Europe 600 Index was up 0.1% as of 10 a.m. in London, on track for a sixth week of gains, its longest winning streak since November 2019. Consumer shares led gains, while banks and miners dropped. The tech subindex edged up 0.2%, approaching the 700 level for the first time since the dotcom days of 2001. European equities have rallied strongly in 2021, in a rare instance of outperforming the U.S., as investors have boosted the cheap and cyclical shares that dominate the region’s stock market on bets of a vaccine-fueled recovery. The Stoxx 600 this week surged above its previous record set before the pandemic, and is 9% higher this year.
• U.S. equity-index futures struggled for direction on Friday as investors weighed prospects for economic growth against lingering inflation concerns. Treasury yields rose and the dollar gained. S&P 500 futures fluctuated, while contracts on the Nasdaq 100 edged lower as factory-price data from China spurred new concerns over global inflation despite Federal Reserve Chair Jerome Powell’s promise of a U.S. recovery without surging prices. American producer-price data later Friday may provide further clues on the outlook. Fed officials have stressed that the U.S. economy continues to need aggressive policy support as it recovers from the pandemic. Powell said Thursday that policy makers would react if inflation expectations started “moving persistently and materially” above tolerable levels. Despite the strength of some indicators, the recovery remains incomplete, as reflected in the latest unexpectedly high U.S. jobless claims. The next catalyst for stocks is likely the upcoming earnings season.
• Asian stocks fell as benchmark gauges in China led declines, with investors spooked by the fastest Chinese producer price inflation since July 2018. The Chinext index of Chinese small caps and the CSI 300 index each retreated more than 1%. SF Holding was the biggest decliner on the CSI 300 after reporting downbeat earnings. China Great Wall Technology and Shenzhen Inovance Technology also slumped. Tokyo’s Mothers index for startups outperformed, climbing more than 1%. Japanese equities advanced, with technology stocks providing the biggest boost after the Federal Reserve played down inflationary risks.
• Oil switched between gains and losses after Saudi Arabia said it was confident that OPEC+ was right in agreeing to raise output and India posted its strongest oil consumption in 15 months. While West Texas Intermediate fluctuated, prices remain within the $5 range they’ve been holding since mid-March. India’s oil products consumption in March was the strongest since late 2019. The country’s monthly jump in gasoline demand was the biggest since 2013. The uptick in India comes even as the country posted a record number of Covid-19 cases, with traders continuing to await a recovery in consumption elsewhere. While the roll-out of vaccines is showing signs of boosting demand in places like the U.S. and U.K., cases continue to spread rapidly in other parts of the world. Japan is set to reimpose lockdowns in Tokyo, Kyoto and Okinawa.
• Gold eased, trimming the first weekly gain in three that’s been driven by a retreat in bond yields amid dovish commentary from the Federal Reserve. Bullion is still up 1% this week, with Fed Chair Jerome Powell on Thursday saying the economic recovery is incomplete and playing down the risk that inflation could get out of control. That followed minutes from the Fed’s March meeting which showed officials were united on the need to see more progress on the recovery before scaling back their massive bond-buying program. The dovish rhetoric helped send gold prices to a five-week high on Thursday. The metal was pressured in the first quarter on optimism over a global recovery amid the rollout of vaccines, a rally in Treasury yields and a stronger dollar.
• The latest Mortgage Bankers Association credit availability release showed what at first glance was a surprise — the index which tracks the lower-credit borrowers held up best during the pandemic. Since the end of February 2020, when Covid-19 began taking its toll on the country, the government index that measures credit availability for buyers usually pooled into Ginnie Mae mortgage bonds declined just 15%, far better than the overall index decline of 31%.
• China’s target to vaccinate 560 million people — 40% of its population — by the end of June is hampered by a supply shortage, forcing health authorities to extend the intervals between doses, and leaving some people unable to book second shots. Germany has doubled the pace of Covid-19 vaccinations after a sluggish start, as it battles a third wave of the virus. The U.K. unveiled new testing procedures for travelers, as well as a “traffic-light” system for rating countries as it prepares to open up international travel. France pulled the AstraZeneca vaccine as a second shot for those under 55 who have already had their first dose with the product. Japan is set to reimpose curbs in Tokyo, Kyoto and Okinawa aimed at slowing the spread of the virus, three weeks after ending a state of emergency in the capital. Thailand tightened restrictions to stem a new wave of infections. South Korea is in the early stage of a fourth wave and may raise social distancing levels.
• Prince Philip, Duke of Edinburgh, husband and confidant of the U.K.’s Queen Elizabeth II since 1947, has died. He was 99. The prince “passed away peacefully this morning at Windsor Castle,” according to an emailed statement Friday from the Queen’s officials. Philip’s death comes at a moment of profound change for the royal family, amid Prince Harry’s departure from royal duties and the controversy over Prince Andrew’s friendship with convicted sex offender Jeffrey Epstein. At the same time, Britain is trying to heal the wounds resulting from its departure from the European Union and is riven by deep political and social divisions.
• The U.S. added seven Chinese supercomputing firms to a list of entities banned from receiving exports from American companies, citing activities contrary to the national-security or foreign-policy interests of the U.S. The companies were added so-called entity list, which prohibits American firms from doing business with them without first obtaining a U.S. government license, the Commerce Department said in a statement on Thursday. The new entities are involved either with building supercomputers used by China’s military actors, its military modernization efforts or weapons of mass destruction. The entities are Tianjin Phytium Information Technology Co., Shanghai High-Performance Integrated Circuit Design Center, Sunway Microelectronics, the National Supercomputing Center Jinan, the National Supercomputing Center Shenzhen, the National Supercomputing Center Wuxi, and the National Supercomputing Center Zhengzhou, Commerce said. Shares in Phytium suppliers including China Great Wall Technology Group Co. and Taiwan’s Alchip Technologies Ltd. fell as much as 10% Friday.
• Didi Chuxing is raising $1.5 billion of debt financing from banks as the Chinese ride-hailing giant seeks to expand its firepower ahead of a potential U.S. initial public offering, according to people familiar with the matter. Didi, backed by SoftBank Group Corp., has signed a revolving loan facility with JPMorgan Chase & Co., Morgan Stanley, Goldman Sachs Group Inc., HSBC Holdings Plc, Barclays Plc and Citigroup Inc., the people said. A debt deal would serve as a stepping stone as Didi continues to evaluate a potential listing that could value the firm at about $100 billion, the people said, asking not to be identified because the matter is private.
• President Joe Biden plans to request $715 billion for his first Pentagon budget, a decrease from Trump-era spending trends, according to three people familiar with the plans. The White House plans to release an outline Friday of Biden’s spending priorities, including defense. The plan had been widely expected last week, but its release was delayed in part because of disagreements over defense spending. The three people asked not to be named because the budget isn’t yet public. The $715 billion Pentagon “topline” is likely to be presented as a compromise to Democrats pressing for cuts in defense spending, as some of the money would be slated for the Pentagon’s environmental initiatives, two of the people said.
• Revlon Inc. lenders that received more than half a billion dollars in accidental payments from Citigroup Inc. are asking a judge to free up the money he’s already ruled is theirs to keep. The bank sued 10 asset managers for the Revlon lenders last summer to force them to return $504 million it had mistakenly wired them, an epic back office blunder that led to a closely watched trial. U.S. District Judge Jesse Furmanfroze the funds while the dispute played out. Then, in a surprise decision in February, Furman ruled for the money managers, finding they shouldn’t have been expected to know the wire transfers were an error. Citibank appealed his ruling.
• Boeing Co. grounded some 737 Max aircraft to repair a new electrical issue that emerged just months after the jets were cleared to return to the skies. The Chicago-based manufacturer identified the potential problem on some of its 737 Max planes and alerted 16 customers that they shouldn’t operate the jets until it is addressed. The company said it’s working with the Federal Aviation Administration on what it described as a “production issue” that affects a specific group of planes. Boeing declined to say how many planes were affected. About 20 operators have brought the aircraft back into service after a nearly two-year grounding was lifted starting late last year, indicating the latest glitch will hit most of them. A company spokeswoman said it’s premature to estimate how long it will take for the problem to be fixed.
• The U.S. stockpile of the controversial AstraZeneca Plccoronavirus vaccine has grown to more than 20 million doses, according to people familiar with the matter, even as the shot looks increasingly unlikely to factor into President Joe Biden’s domestic vaccination campaign. AstraZeneca has yet to request Food and Drug Administration authorization for the two-dose vaccine, and the company faces safety questions abroad and scrutiny from U.S. regulators who’ve already rebuked it for missteps during clinical trials and partial data releases. Three other vaccines already authorized in the U.S. are going into Americans’ arms at a rate of about 3 million doses per day, with hundreds of millions of additional doses set to be delivered by August.
• Italian Prime Minister Mario Draghi is bringing forward plans for as much as 40 billion euros ($48 billion) in new borrowing as the cost of keeping the economy afloat drains the state’s coffers and street protests heap pressure on the government, according to two people familiar with the matter. The government will need between 35 billion and 40 billion euros to cover all of the country’s needs, from maintaining furloughs to sustaining help for businesses and families, the people said, asking not to be identified as discussions are confidential. A spokesperson for Draghi declined to comment. Italian bonds fell after the report, with the yields on 10-year debt climbing as much as five basis points to 0.71%, the highest level since March 30. The spread over similar-dated German securities, a key gauge of risk for the nation, also rose.
• The European Union’s drug regulator said it has started a safety review to assess cases of blood clots in people who received Johnson & Johnson’s Covid-19 vaccine. Four serious cases of unusual clots accompanied by low blood platelets, one of which was fatal, have emerged after vaccination with the J&J shot, the European Medicines Agency said Friday. One happened during a clinical trial — at the time, J&J said it had found no evidence the vaccine was at fault — and three others occurred in the U.S., where the shot is being widely used. Though J&J’s shot is approved in the EU, its rollout in the bloc isn’t expected to start until later this month. Still, the EU is relying on the one-shot vaccine to boost its immunization drive amid restrictions in some countries on use of the AstraZeneca Plc shot. Separately, the regulator said it doesn’t yet have enough evidence to approve the Russian Sputnik V vaccine.
• Enough vaccines have now been administered to fully vaccinate about 5% of the global population — but the distribution has been lopsided. Most vaccines are going to the wealthiest countries.  As of Thursday, 40% of the Covid-19 vaccines administered globally have gone to people in 27 wealthy nations that represent 11% of the global population. Countries making up the least-wealthy 11% have gotten just 1.6% of Covid-19 vaccines administered so far, according to an analysis of data collected by the Bloomberg Vaccine Tracker.
• A surprise U.S. drive to overhaul international corporate taxation promises a new era for governments to capture a bigger tax take from some of the most successful global businesses — if only the rest of the world can agree. Welcoming noises in Europe to Treasury Secretary Janet Yellen’s proposals suggest a good start in shifting what’s been a years-long impasse among more than 135 countries over harmonizing corporate taxes. At stake is shoring up cash-strapped finance ministries bankrolling massive Covid-19 crisis spending. Representatives leading the negotiations, led by the Organization for Economic Cooperation and Development, said this week they can see an agreement by mid-summer.
• The guardians of the global economy this week implored governments to act to avoid a two-speed rebound where vaccinated, rich nations recover more strongly from the pandemic than poorer countries languishing under the burden of disease and debt. The International Monetary Fund said that it sees the U.S., as well as China, as the locomotive for global economic growth. The world’s largest economy, fueled by trillions of dollars in stimulus spending, is expected next year to surpass its pre-pandemic projected level of output. But many emerging and developing economies, struggling with slow growth and mountains of debt, will take much longer. The central theme of the IMF’s virtual spring meetings with the World Bank was “giving everyone a fair shot” — a slogan that underlined both concerns about inequality and the importance of speeding up the distribution of vaccines globally.
• Amazon.com Inc. took a commanding lead in a historic election to determine whether workers at its warehouse in Bessemer, Alabama, will become the first in the U.S. to join a retail union. When federal officials halted the count at about 7 p.m. eastern, Amazon was ahead with 1,100 nos to 463 yeses for the Retail, Wholesale and Department Store Union. The count will resume Friday, with about half of the 3,215 ballots cast not yet counted. “Our system is broken, Amazon took full advantage of that, and we will be calling on the labor board to hold Amazon accountable for its illegal and egregious behavior during the campaign,” said Stuart Appelbaum, RWDSU president. “But make no mistake about it; this still represents an important moment for working people and their voices will be heard.”
• Russia brushed off German Chancellor Angela Merkel’s call to pull back troops massed near the border with Ukraine, warning that growing violence there could set off a broader military conflict. “The escalation of tensions in the southeast of Ukraine justifies the measures Russia is taking,” Kremlin spokesman Dmitry Peskov said on a conference call Friday, referring to the military buildup. “The trend in the behavior of the Ukrainian side creates the risk of a resumption of full-scale military action,” he said. Ceasefire violations in the conflict zone in eastern Ukraine have grown in recent weeks and Russia has moved thousands of troops into the area near the border. Moscow accuses Ukraine of preparing for a new offensive against the Russian-backed separatist regions there. Kyiv denies that and has blamed Moscow for the latest surge in tensions.
• Apollo is set wrap up a $4.1 billion bond-and-loan offering that will finance its buyout of craft-store chain Michaels after adding buyer protections. Meanwhile, CreditSights expects loan growth to remain soft in first half of 2021 and continues to believe that demand will be the ultimate driver in supporting balances as U.S. banks prepare to report earnings starting next week. Investors won a series of protections in the debt sale, including the inclusion of a provision that would forestall a company from stripping collateral away from lenders — a so-called J. Crew blocker. Both the $1.95 billion leveraged loan portion and the $2.15 billion high-yield note offering are oversubscribed

“The only true wisdom is in knowing you know nothing.”― Socrates

*All sources from Bloomberg unless otherwise specified