April 9th, 2020

Daily Market Commentary

Canadian Headlines

• Finance Minister Bill Morneau expects Canada to maintain a strong credit rating even as the country unleashes fiscal support of at least C$250 billion ($178 billion) to offset the effects of the coronavirus. The cost to ensure Canada’s AAA-rated debt is rising, according to credit default swaps, pointing to potential negative rating action. Five-year swaps covering Canada are at around 32 basis points, hovering just under the highest level since at least 2017, according to CMA data. Default swaps on Australia, whose top credit rating was put on negative watch by S&P Global Ratings on Tuesday, trade at around 34 basis points.
• U.S., Canada equity futures fluctuated on Thursday and Europe stocks clung to minimal gains as investors mulled estimates of when the coronavirus outbreak may ease enough for economies to reboot. Oil rose in the wake of Russia signaling readiness to cut output. Economic event include March employment data. Richelieu Hardware and Shaw Communications among companies reporting earnings.

World Headlines

• European equities nearly wiped out gains as investors assessed the week’s rally ahead of the Easter holiday, and as Italy and the U.K. were poised to extend lockdowns aimed at curbing the spread of the coronavirus. The Stoxx 600 Index was up 0.2% as of 10:43 a.m. in London, paring an earlier advance of as much as 1.9% and tracking the direction of U.S. futures. Telecom and media shares led decliners, offsetting gains in travel and leisure stocks. European stocks have rebounded from a March low, rising to a one-month high on Wednesday, as governments have rushed to put in place stimulus measures to prop up the economy. While the Stoxx 600 is headed for a weekly advance of about 6%, trading remains volatile as investors keep a close eye on the rate of fatalities and infections from the virus.
• U.S. equity futures fluctuated on Thursday while European stocks clung to modest gains on the last trading day before the Easter holiday. Oil rose in the wake of Russia signaling readiness to cut output. American index contracts struggled for momentum a day after the S&P 500 closed over 3% higher into bull-market territory.
• The Topix index fell for the first time in four days as investors sought to gauge how the coronavirus spread will impact earnings for Japan Inc. Railway operators and retailers were among industry groups that weighed most on the benchmark gauge. Global cases of the virus topped 1.5 million, less than a week after surpassing the 1 million mark. The number of confirmed infections in Japan stood at 4,257 as of Thursday morning, up from 2,384 one week ago, according to data collected by Johns Hopkins University and Bloomberg.
• Oil rose for a second day as the world’s top producers moved closer to a deal to curb output in an attempt to tackle the unparalleled impact of the coronavirus on demand. Futures in New York rose 5.9% as Russia said it’s ready to cut production by 1.6 million barrels a day. The OPEC+ meeting on Thursday will discuss curbing output by 10 million barrels a day, said Algeria’s energy minister, who holds OPEC’s rotating presidency. Decisions at the online gathering will form the basis of Friday’s discussions on further contributions from G-20 nations, with U.S. involvement seen as the key.
• Gold headed for a weekly advance as the haven asset continued to be in demand, with investors weighing the economic fallout from the coronavirus pandemic amid rising cases. Wall Street banks say the outbreak is set to rob the global economy of more than $5 trillion of growth over the next two years, greater than the annual output of Japan. Global cases topped 1.5 million, less than a week after surpassing the 1-million mark. Investors continue to pour into bullion-backed exchange-traded funds.
• Singapore’s partial lockdown to contain the spread of the coronavirus could cost the economy about S$10 billion ($7 billion) in lost output, Maybank Kim Eng Research Pte. estimates. That equates to about 2% of gross domestic product, according to Chua Hak Bin, a senior economist at Maybank in Singapore. Singapore has banned social gatherings and shut workplaces, except for essential services and key economic sectors, as part of “circuit-breaker” measures to contain virus infections. The restrictions took effect this week and will last through May 4.
• The Bank of Japan cut its assessment of all the country’s regional economies in response to the damage caused to production, consumption and corporate finances by the coronavirus, with new emergency restrictions set to add to the pain. The central bank’s move to lower its views on all nine regions was the first since the global financial crisis, an indication of the severity of the virus impact.
• Joe Biden’s most urgent task as the presumptive Democratic nominee will be to unify a divided party for a bruising general election fight against President Donald Trump while the coronavirus consumes voters’ attention and halts traditional campaigning. The more than 16-month nominating contest, in which a historically large field of Democrats presented a range of visions for the country, ended Wednesday with Senator Bernie Sanders quitting the race and leaving the progressive wing without a standard-bearer. Biden, who won the primary with a pitch centered on steady leadership and pragmatism, has to persuade Sanders’s impassioned supporters to not only accept him but actively work to help beat Trump’s well-financed operation.
• Prime Minister Boris Johnson spent a third night in the critical care unit where his condition was improving, as officials draw up plans to extend the lockdown in an bid to control the U.K.’s growing coronavirus crisis. Latest data shows Britain’s national picture has turned bleaker, with a record 938 people dying of the virus in the 24 hours to 5 p.m. Tuesday, bringing the U.K. toll to 7,097. With Foreign Secretary Dominic Raab temporarily in charge, the country is heading into the worst of the crisis without its elected leader and a major decision is looming on whether to extend or lift the lockdown.
• The world’s largest oil producers moved closer to an unprecedented deal to ratchet back production and rescue crude markets from a pandemic-driven collapse, after Russia signaled it’s ready to make cuts. Moscow, whose grudge against U.S. shale is arguably the biggest obstacle for a deal, said Wednesday it’s willing to reduce output by 1.6 million barrels a day, or roughly 15%. Oil prices surged in New York. At stake is the fate of entire oil-dependent economies, thousands of companies and millions of oil industry jobs as the OPEC+ coalition and Group of 20 oil ministers gather in two key video conferences this week. Crude futures have plunged to the lowest levels in almost two decades as the lockdowns around the world slash oil demand by as much as 70% in some places and Russia and Saudi Arabia battle for their share of a shrinking market.
• Ideas that a few months ago would have seemed anathema to President Recep Tayyip Erdogan are gaining traction as Turkey runs dangerously low on foreign-currency reserves and its economy succumbs to a recession amid the coronavirus pandemic. A pro-government newspaper has broached the possibility of borrowing from the International Monetary Fund, helping give legitimacy to what officials have long publicly regarded as a non-starter. This is the same IMF that Erdogan once branded “the world’s biggest loan shark.”
• Spain reported fewer coronavirus-related deaths and is poised to extend a nationwide lockdown. Italy is weighing similar steps and curbs will likely continue in Britain, where Prime Minister Boris Johnson’s condition is improving in intensive care. While fatalities are slowing in Europe, they are still accelerating in the U.S., which is on track to overtake Italy in the coming days. Global cases topped 1.5 million, less than a week after surpassing the 1 million mark, and South Korea’s Centers for Disease Control and Prevention said the virus may be “reactivating” in people who have recovered.
• The U.S. is on track for a grim milestone in the coming days — passing Italy as the world’s epicenter of Covid-19 mortality. Deaths from the virus were at about 14,800 in the U.S. as of Thursday morning and still accelerating, while Italy had more than 17,600 fatalities and the pace was beginning to slow, according to data compiled by Bloomberg. The U.S. has logged about 2,000 deaths each of the past two days, while in Italy, the number has hovered around 550 daily deaths.
• U.S. airlines’ desperate bid for $29 billion in government rescue cash is being frustrated by a lengthening process and demands that companies provide more detailed financial information, people familiar with the situation said. Carriers that filed April 3 for the grants intended to help meet payroll costs expected the checks to begin arriving days ago, said people familiar with the aid discussions who asked not to be identified because the talks are private. Instead, U.S. Treasury officials have asked for another round of data that appears to be more related to a separate loan process instead of the cash grants, further delaying the relief, the people said.
• Switzerland’s largest banks bowed to pressure to delay dividends even as UBS Group AG reported a surprise jump in first-quarter profit that suggests lenders so far are benefiting from volatility in the wake of the coronavirus pandemic. UBS and Credit Suisse Group AG will both split their payouts for 2019 into two installments at the request of financial markets regulator Finma, withholding part of the money until the second half when the impact of the pandemic will be clearer. The firms had been reluctant to follow peers that previously cut or delayed their dividends. Profit at UBS rose by roughly a third to about $1.5 billion in the first three months of the year, well ahead of analysts’ estimate. Business was strong across all units, and capital and leverage ratios are in line with targets even after accounting for an increase in credit risk, the bank said.
• Spain is poised to extend a nationwide lockdown and Italy is moving toward doing the same as Europe’s rising infection rate complicates plans to begin reversing stringent restrictions on public life. Spanish Prime Minister Pedro Sanchez will ask parliament on Thursday for an extension to a state of emergency through April 25. His Italian counterpart, Giuseppe Conte, is preparing to prolong the national lockdown from a current expiration date of April 13 for another two weeks, according to officials, who asked not to be identified discussing a confidential issue. The persistent increase in cases complicates efforts by European leaders to gradually ease the rules that have been put in place to slow the spread of the virus. The restrictions are having a devastating impact on economies across the region, and politicians are under pressure to relax them as quickly as possible.
• India is planning to provide nearly 500 billion rupees ($6.6 billion) in loans to state power utilities as a slump in electricity demand squeezes liquidity while dues to generators pile up, according to people with knowledge of the development. The loans, via state-run Power Finance Corp. Ltd. and its unit REC Ltd., will help the utilities, known as discoms, clear debts to both private and federal government-backed generators and will likely be disbursed this quarter, said the people, who asked not to be identified as the discussions are private. The two lenders want state governments to support the loans with guarantees and make budgetary allocations for timely repayments, the people said.
• U.S. consumers — armed with steady jobs, pristine repayment records and an appetite to spend — have driven the nation’s top banks to record profits in recent years. With the economy in a tailspin, that’s about to end. Fallout from the coronavirus is upending credit card and consumer-lending operations, meaning JPMorgan Chase & Co. and the nation’s other big banks will probably report first-quarter results next week that show an overall drop in loans and a jump in bad debt. Banks say they’ll let customers defer payments, and some have promised they won’t report problems to credit bureaus. That could stave off an immediate surge in delinquencies. But the four largest U.S. banks — JPMorgan, Bank of America Corp., Citigroup Inc., and Wells Fargo & Co. — probably still had to set aside about $6.4 billion to cover souring loans in the first quarter, a 21% increase from a year earlier, according to estimates compiled by Bloomberg.
• Saudi Arabia is again delaying the release of its key monthly oil-pricing statement to wait for OPEC+ and G-20 nations to meet and discuss plans to cut as much as 15 million barrels of daily crude production. State producer Saudi Aramco will release pricing on Saturday for crude to be shipped in May, according to a person with knowledge of the situation. Aramco had intended to decide on pricing Thursday, after already delaying the announcement initially planned for April 5, according to the person who asked not to be identified since the matter is private. Saudi Arabia and Russia will lead producers worldwide in discussing collective output cuts between 10 million to 15 million barrels a day to help stem an oil glut routing crude markets. The Organization of Petroleum Exporting Countries and partners meet Thursday via video conference and Group of 20 energy ministers are set to speak a day later.
• The mainstream adoption of Bitcoin is getting a boost from credit card giant Visa Inc., which joined startup Fold to offer a card that earns rewards denominated in the cryptocurrency instead of airline miles or cash. As much as 10% of cash purchases made with the co-branded credit card from San Francisco-based Fold and Visa will be credited to users in Bitcoin, Fold Chief Executive Officer Will Reeves said. He expects it can bring a wave of consumers to the world’s most-valuable digital asset. Visa’s approach to crypto has been evolving. Just two years ago it was in a public fight with the Coinbase Inc. exchange over issues related to purchases made using its cards. Then, in February, Coinbase and Visa announced the Coinbase Card, which allows users to spend Bitcoin using the Visa debit card.
• Medical device makers and scientists around the world are waiving their intellectual property rights to encourage companies to restore depleted stockpiles of emergency equipment and develop new tests and treatments for the Covid-19 pandemic. Some researchers and lawmakers are calling on President Donald Trump to follow the lead of Germany and Israel in restricting patent rights for work on coronavirus treatments. “When the lives of a significant population of a country are at stake, it is the inherent sovereign right of a government to override private property rights to protect the lives and health of its citizens,” said Fred Abbott, a Florida State University professor who’s advised the World Health Organization and United Nations on patents and drugs.
• Chinese firms are joining a global legion of debt-saddled companies hammered by credit downgrades as the coronavirus pandemic weakens their finances. S&P Global Ratings, Moody’s Investors Service and Fitch Ratings on aggregate issued over 50 downgrades on Chinese companies in the first quarter of this year. The number of downgrades, which included cuts to both credit ratings and outlooks, rose from about 30 in the same period last year. The onslaught of downgrades underscores the pain facing Chinese firms whose revenues have taken a serious hit after Beijing shut large swathes of the country to contain the outbreak. Dollar bond sales have also slowed to a trickle, posing a threat to the borrowers as a $85.4 billion debt wall looms large this year.
• As the bull market soared, investors in America’s 401(k) retirement plans increasingly entrusted their savings to a one-stop kind of investment. All they had to do was pick a fund that corresponded with their retirement date. Presto, they had an age-appropriate mix of stocks and bonds. These so-called target-date funds hold $1.4 trillion, equal to a quarter of the money in 401(k)s. The offerings generally place 20-year-olds mostly in stocks and then glide gradually into bonds as clients near their departure from the workforce. In theory, that strategy should protect older investors from the worst of bear markets—like the one sparked by the coronavirus pandemic. But those who’ve just reached retirement may be in for a nasty surprise. These supposedly sensible target-date funds can be quite aggressive. Under a time-honored rule of thumb—albeit one many think is out of date—the percentage you hold in bonds should equal your age. By that approach, a 65-year-old would have only 35% in stocks.
• Investments in U.S.-listed sector exchange traded funds swung to inflows last week following two weeks of outflows. Health care sector ETFs led the inflows. Financial sector ETFs had the biggest change from the previous week. Net inflows to ETFs that focus on industry sectors totaled $1.48b in the week ended April 8, including the effect of leveraged funds, compared with outflows of $2.49b the prior week.
• Nissan Motor Co. has requested loans totaling 500 billion yen ($4.6 billion) from lenders including Japan’s three megabanks as the carmaker suffers from plunging sales due to the coronavirus, according to bankers familiar with the matter. The automaker is seeking financing from Mizuho Financial Group Inc., Sumitomo Financial Group Inc., Mitsubishi UFJ Financial Group Inc. and the state-backed Development Bank of Japan, the bankers said, asking not to be identified. The talks are still at an early stage and details, including how much each bank will take on, have yet to be discussed, the people said. Nikkei earlier reported that Nissan was seeking a credit line from the banks. Carmakers are seeing a steep drop in sales and laying off workers as they halt production around the world, with their credit ratings being cut, because of the intensifying virus outbreak. Toyota Motor Corp. has asked for a 1 trillion yen credit line from two major Japanese banks to secure its funding.

*All sources from Bloomberg unless otherwise specified