August 10, 2021

Daily Market Commentary

Canadian Headlines

• Canadian equities fell Monday as investors digest the resurgence of Covid through the fast-spreading delta virus variant, while commodities dipped. The S&P/TSX Composite Index fell 0.2%, with energy and materials leading the drop. Health care and tech jumped. Oil slid to a three-week low with new waves of Covid-19 exacerbating demand concerns as investors weighed concerns about a pullback in stimulus. On the deal front, Blackstone Real Estate Investment Trust Inc. is acquiring WPT Industrial Real Estate Investment Trust in a cash deal valued at $3.1 billion, including debt. Meanwhile, Brookfield Asset Management Reinsurance Partners Ltd. agreed to buy American National Group Inc. for about $5.1 billion in cash.
• Canadian Pacific Railway submitted a superior proposal to acquire Kansas City Southern in a stock and cash transaction representing an enterprise value of approximately $31 billion. The proposed transaction values KCS at $300 per share, representing a 34% premium, based on the CP closing price on August 9, 2021 and KCS unaffected closing price on March 19, 2021. Following the closing into a voting trust, common shareholders of KCS will receive 2.884 CP common shares and $90 in cash for each share of KCS common stock held
• Canada condemned a Chinese court’s decision to uphold the death sentence of a Canadian national convicted of drug trafficking, a decision that came as a Huawei Technologies Co. executive’s extradition battle enters its final stages in Vancouver. Robert Lloyd Schellenberg’s bid to challenge his January 2019 death sentence was denied, the Liaoning Provincial High People’s Court in Shenyang said in a statement Tuesday. Schellenberg had been sentenced to 15 years in prison after his initial conviction, but the penalty increased after an earlier appeal that coincided with Huawei Chief Financial Officer Meng Wanzhou’s arrest in Canada.

World Headlines

• European stocks were poised for another record, edging higher as earnings optimism offset concerns about stimulus tapering. The Stoxx Europe 600 Index was up 0.2% at 9:45 a.m. London time, with the travel and leisure and technology sectors leading gains. The former was boosted by Flutter Entertainment Plc, which jumped after its revenue beat estimates. The benchmark has closed at a record for six straight sessions, the longest streak since June. With European equities notching a series of fresh highs in August, investors are paying close attention to policymakers’ discussions on tapering stimulus. The backdrop of a strong earnings season has helped calm nerves about rising coronavirus cases, higher inflation, a Chinese crackdown and a worrying environmental report.
• Contracts on the S&P 500 Index were little changed, while those on the Nasdaq 100 gained. AMC Entertainment Holdings Inc. shares rose as much as 13% in pre-market trading after the theater chain’s second-quarter results beat estimates. Remarks from Atlanta Fed President Raphael Bostic on Monday added to the mix of commentary and economic indicators traders are parsing for clues on the Fed’s next move. With stocks at or near records on the back of extraordinary stimulus measures, Bostic said that another strong month or two of employment gains should prompt the central bank to taper its asset purchases, and that the Fed should move faster than in past episodes.
• Asian equities held on to mild gains on Tuesday, bolstered by a rebound in Chinese technology stocks following a recent selloff. The MSCI Asia Pacific index rose as much as 0.5% after earlier falling by 0.2%. Tencent Holdings, Meituan and Alibaba Group were among the biggest contributors to the benchmark’s advance. By industry, consumer discretionary and communications services firms climbed, while decliners were led by chipmakers and materials companies. Kuaishou Technology, a video-sharing platform operator, climbed as much as 9.5% in Hong Kong on Tuesday before paring the gain to 3%. It still snapped a five-day slide as some brokers started to turn optimistic on the stock’s outlook. The Hang Seng China Enterprises Index, which includes Kuaishou, was the biggest gainer among Asia’s key equity gauges.
• Oil rebounded from a three-week low on expectations that the global economic recovery will withstand the latest virus onslaught, even as it takes a toll on fuel demand. Futures climbed toward $68 a barrel in New York, recovering in concert with other commodities, after tumbling almost 4% over the past two sessions. The Delta variant has led to rising infections and curbs on movement, most notably in China, where crude refining is set to be scaled back and air travel has slumped. Still, global demand is expected to hold up and tighten the market through the end of the year.
• Gold steadied near a four-month low after a volatile start to the week fueled by growing expectations for the Federal Reserve to start reining in massive stimulus. Better-than-expected U.S. jobs data last week triggered a slump that initially deepened Monday, before the metal pared losses. A growing number of Fed officials are talking about the possibility of reducing the bank’s massive bond-buying program, eroding one of gold’s key supports. The latest comments come from Fed Bank of Atlanta President Raphael Bostic, who said the central bank should move to taper after one or two more months of strong job gains.
• Singapore said 70% of its population has been fully vaccinated as it starts to ease social distancing restrictions. In the U.S., new coronavirus cases surged to the highest weekly level since early February, fueled by the delta variant; deaths rose by 49%. China’s latest outbreak continues to expand, with more than 100 symptomatic cases reported on Tuesday as the nation’s Covid-zero strategy risks leaving it isolated for years.
• President Joe Biden’s big plans for the U.S. economy are on the verge of passing their first major legislative tests in the Senate, leaving their future to intra-party struggles between Democratic progressives and moderates. A broad group of Democratic and Republican senators is prepared to place a bipartisan stamp of approval on a cornerstone of the Biden agenda — a $550 billion infrastructure program — in a vote scheduled to begin late Tuesday morning. The remainder of Biden’s economic agenda is encompassed in a $3.5 trillion budget resolution the Senate is scheduled to consider next. It allows Democrats to bypass Republicans to expand child care, health coverage and education benefits and address climate change, paid for by raising taxes on the wealthy and corporations.
• API Holdings Pvt., owner of India’s largest online pharmacy PharmEasy, is considering a Mumbai initial public offering that could raise as much as $1 billion, according to people familiar with the matter. The company, backed by TPG and Temasek Holdings Pte, is working with advisers on a potential offering that could take place by March 2022, the people said. The firm plans to file a draft prospectus before the end of October, said one of the people, who asked not to be identified as the information is private. PharmEasy has so far delivered more than 15 million orders from medicine to diagnostic kits to health care products, serving over 5 million families, according to its website. The company in June bought a majority stake in Thyrocare Technologies Ltd. for 45.5 billion rupees ($611 million).
• The European Union decided not to reinstate restrictions on non-essential travel from the U.S. despite new Covid-19 cases there exceeding the bloc’s threshold. The next review of the list of countries being granted unrestricted access into the EU will be in two weeks, according to a spokesperson for the Slovenian presidency, who confirmed Monday’s decision.  New Covid cases in the U.S. rose to about 270 per 100,000 inhabitants over the previous 14 days, according to data compiled by the European Center for Disease Prevention and Control. The EU limit is 75 new cases.
• Apple Inc.’s next iPhone lineup will get at least three major new camera and video-recording features, which the company is betting will be key enticements to upgrade from earlier models. The new handsets will include a video version of the phone’s Portrait mode feature, the ability to record video in a higher-quality format called ProRes, and a new filters-like system that improves the look and colors of photos, according to people familiar with the matter. The camera features are seen as some of the biggest selling points for the iPhone 12’s successor, which is expected to go on sale in the next several weeks. Beyond the camera enhancements, the new iPhones will get relatively modest upgrades. Last year, Apple revamped the iPhone design, added 5G wireless networking and updated the camera hardware. For this year, the company will retain the same 5.4-inch and 6.1-inch regular sizes and 6.1-inch and 6.7-inch Pro screen dimensions, as well as their designs.
• Florida officials announced the largest pandemic-era municipal-bond sale backed by port revenue, hoping to tap into investor demand for local-government debt tied to recovering sectors of the U.S. economy. Miami-Dade County said Monday it is selling around $1.4 billion of bonds due 2050 and backed by revenue from the Port of Miami, or PortMiami — the county’s largest municipal bond sale ever. That is also the largest sale tied to a port since last March, beating a $1.1 billion bond issued by the Port Authority of New York and New Jersey during July 2020. Miami is home to the largest port in Florida. It processed more than $45 billion worth of cargo during the fiscal year ending September 2020 and in normal times is home to over a fifth of the world’s cruise traffic.
• French automotive suppliers Faurecia SE and Cie Plastic Omnium SA are competing in the final bidding for a majority stake in German rival Hella GmbH, people with knowledge of the matter said. Hella’s founding Hueck family has asked for binding offers by Aug. 11 and could make a decision on a winner in the following days, according to the people, who asked not to be identified because the information is private. Any deal could value Hella at around 8 billion euros ($9.4 billion), equivalent to more than 70 euros a share, the people said. That could make it the second-largest takeover in Germany this year, behind Vonovia SE’s pursuit of real estate rival Deutsche Wohnen SE, according to data compiled by Bloomberg. It would also be one of the biggest ever acquisitions of a German company by a French suitor. Shares of Hella fell 0.6% at 10:40 a.m. Tuesday in Frankfurt, erasing some of Monday’s 11% gain and giving the company a market value of 7.4 billion euros.
• Billionaire Mukesh Ambani’s Reliance Industries Ltd. is weighing a bid for Deutsche Telekom AG’s Netherlands subsidiary, according to people familiar with the matter. The Indian conglomerate is working with an adviser to evaluate an offer for T-Mobile Netherlands BV, the people said, asking not to be identified discussing confidential information. Deutsche Telekom is seeking about 5 billion euros ($5.9 billion) in any sale, the people said. Deliberations are ongoing, no final decision has been made and there’s no certainty Reliance will decide to proceed with a formal offer, according to the people. Deutsche Telekom declined to comment. A representative for Reliance could not immediately comment.
• The world’s largest oil companies are bidding up prices for renewable energy projects, squeezing profits from wind and solar farms just as they’re needed most to avoid climate catastrophe. Companies from BP Plc to TotalEnergies SE are paying top dollar for clean energy assets as they transition away from fossil fuels, boosting competition and compressing margins for developers. Wind giants Orsted A/S and Vestas Wind Systems A/S reported lower returns in the first quarter, while turbine maker Siemens Gamesa Renewable Energy SA lost money as materials rallied. Shrinking profits are a worrying sign for an industry that needs to invest at least $92 trillion by 2050 to cut emissions fast enough to prevent the worst effects of climate change. They also come at a time governments are tackling record gas and electricity prices, a headache for world leaders trying to iron out an ambitious climate deal when they meet in Scotland in November.
• Krafton Inc., creator of hit video game PUBG: Battlegrounds, plummeted in its Tuesday debut after pulling off a $3.8 billion initial public offering that was South Korea’s biggest in over a decade. Its shares fell as much as 20% before closing 8.8% down, becoming the first stock on the KOSPI mainboard to drop on debut this year. The Tencent Holdings Ltd.-backed firm, which cut its offering by more than 1 trillion won ($870 million) after regulators questioned its valuation, is grappling with concerns about its dependence on PUBG for almost all revenue and tightening scrutiny over China’s gaming arena.
• China’s biggest oil refiner is scaling back operations as Beijing’s aggressive response to the delta virus variant saps demand for road and aviation fuel, according to an analyst. State-owned China Petroleum & Chemical Corp., commonly known as Sinopec, is cutting run rates at some plants by 5% to 10% compared with previously planned levels this month, Jean Zou, an analyst at Shanghai-based commodities researcher ICIS-China, said in an interview. The analytics firm tracks refinery operations, maintenance plans and processing margins across China.
• China Evergrande Group said it’s in talks with investors on selling assets including part of the interests in China Evergrande New Energy Vehicle Group Ltd. and Evergrande Property Services Group Ltd. The discussions involve “several independent third party investors,” the company said in a statement to the Hong Kong exchange. No concrete plan or formal agreement has been determined or entered into, it said. Evergrande has been offloading assets and listing units in an attempt to stave off a cash crunch. Evergrande’s equity and bond holders have been rattled in recent weeks by a slew of reports about wary banks and unpaid dues to suppliers. Last week, a Caixin report saying that creditor lawsuits against Evergrande would be consolidated triggered another slump in the developer’s bonds.
• Fanatics Inc. raised a new round of funding valuing the online sports-merchandise retailer at $18 billion, people familiar with the matter said, roughly tripling its valuation from a year ago as it works to expand into new business lines, including sports betting. The company raised $325 million in a funding round that closed Monday with new investors including rapper Shawn “Jay-Z” Carter and the entertainment company he founded called Roc Nation LLC and existing investors Major League Baseball, SoftBank Group Corp.’s Vision Fund, and private-equity giant Silver Lake, the people said. Fanatics has been working to grow its business beyond its core of selling sports apparel and memorabilia online and some bricks-and-mortar locations. It launched a nonfungible token company called Candy Digital earlier this year.
• Top Covid-19 vaccine makers Moderna Inc. and BioNTech SEare extending this year’s stock rally ahead of new guidance on the need for boosters. The two companies have each surged more than 480% the past year to record highs. Pfizer Inc., BioNTech’s partner on the shot, which has a fulsome list of other marketed drugs driving its valuation, has broken through a 21-year high as investors pile into vaccine-tied stocks. “It becomes a self-fulfilling prophecy, because if you don’t own it, you are obviously underperforming,” Michael Yee, an analyst at Jefferies said about Moderna in a video note. “Everyone has to buy it.” Moderna’s shares jumped 2.6% to $496.88 as of 6:10 a.m. in New York, putting them on pace to hit $200 billion in market value.
• Mortgage bond investors have been dealing with a deluge of net supply this year, with $526 billion already issued in just the first seven months alone. Relief may come soon, however, as Fannie Mae’s Home Purchase Sentiment Index report states that would-be home buyers are “increasingly sensitive to the lack of affordability” amid surging prices and sparse inventory, with 66% saying it’s a bad time to buy. Home sales are a prime determinant of mortgage bond net supply. Traditionally, Americans in their early 30s are of prime home buying age. Today, those between the ages of 22 and 40 make up 37% of all housing demand, according to the National Association of Realtors. The labor force participation rate for those age 25 to 34, after collapsing to just 79.3% during the lockdowns, has rebounded back to its trailing five-year average of 82.1%, so they seem poised to continue to drive housing demand.
• Tesla Inc. shipments of China-made cars to the local market fell sharply last month following a run of negative publicity that culminated in the recall of almost every vehicle the California-based company has sold in the nation. Elon Musk’s electric-vehicle pioneer reported domestic China shipments of just 8,621 units in July, a 69% plunge from June when Tesla’s Shanghai factory shipped 28,138 cars to the local market. Exports however soared to 24,347 versus 5,017, with most of those vehicles destined for Europe. That meant overall Tesla China shipments in July decreased just 0.6% to 32,968.
• Any further selloff in Treasuries could get an added boost from mortgage-related hedging flows, which may ramp up should benchmark yields climb past 1.43%. That’s the view of Morgan Stanley strategists who calculated mortgage servicers would need to sell twice as much duration to hedge positions at that level than they would have to buy if yields dropped to 0.93%. That would translate into $4.7 billion in selling pressure of 10-year Treasury equivalents per basis point move if yields climb to the higher level.
• U.S. consumer prices probably jumped again in July, with little sign that households — buoyed by pandemic savings — are balking at paying more for goods and services. Economists expect data due out on Wednesday to show a 0.5% increase in the consumer price index. While that would be a slowdown from the previous month, it would leave the headline rate of annual inflation at 5.3% — close to the 13-year high reached in June. How long inflation will stick around has become a key question about the U.S. recovery, central to discussion of the Biden administration’s spending plans and the Federal Reserve’s timetable for tightening monetary policy.
• The multibillion-dollar fund that California established two years ago to keep its utilities from ever going bankrupt again because of a catastrophic wildfire may face its first big test. The second-largest blaze in California history — known as the Dixie Fire — is still raging across Northern California 26 days after a PG&E Corp. fuse blew, potentially igniting the conflagration. It has so far ripped through about 490,000 acres, destroyed hundreds of structures and all but leveled the small town of Greenville, northeast of Sacramento. By at least one estimate from Guggenheim Securities, damages from the Dixie Fire may have already surpassed $1 billion — the threshold at which PG&E could tap the state-backed insurance fund to cover the costs of any liabilities it’s saddled with.

“Always deliver more than expected.”– Larry Page

*All sources from Bloomberg unless otherwise specified