August 13th, 2019

Daily Market Commentary

• Canadian Headlines
  • Canadian stocks fell with U.S. equities as political unrest in Hong Kong and Argentina fueled a rally in global bonds, continuing to raise the specter of a looming recession. The S&P/TSX Composite Index fell 0.6% to 16,237.77 on Monday, with all 11 sectors declining, led by consumer discretionary and financial stocks. Meanwhile, Monday saw two high profile deals. Canadian billionaire Jim Pattison, offered to take lumber producer Canfor Corp. private for about C$982 million ($742 million). And Air Canada boosted its takeover offer for Transat A.T. by 38%, or C$200 million ($151 million), securing support from the tour operator’s largest shareholder in the process.
  • Brookfield Business Partners agreed to buy Genworth Financial’s majority interest in Genworth MI Canada, the largest private sector residential mortgage insurer in Canada, for C$48.86 per share. Genworth subsidiaries Genworth Financial International Holdings and Genworth Mortgage Insurance will sell all of the 51.94 million shares they collectively own in Genworth Canada, representing about a 56.9% stake, resulting in a deal valuation of about C$2.54 billion
  • Guyana Goldfields Inc., a miner that has lost more than half its value in the past year, is exploring options including a potential sale of the business, according to people familiar with the matter. The Toronto-based company is working with advisers at Royal Bank of Canada and Maxit Capital, an independent financial adviser to mining companies, the people said, asking not to be identified as the matter is private. The deliberations are in early stages and may not result in a sale of the business, the people said.

   

• World Headlines
  • European equities declined at the open as banking and retail shares led the retreat amid unresolved trade tensions and growth concerns. The Stoxx Europe 600 Index was down 0.3%. LVMH fell 1.2% as the fallout from protests in Hong Kong deepened. Henkel dropped 4.6% after cutting its 2019 guidance. HSBC was down 0.6%. Investors are watching for dovish signals from global central banks as U.S.-China trade tensions show no sign of abating and global economic growth slows. Political unrest in Hong Kong and Argentina is also not helping to improve trader sentiment. This earnings season, most European companies managed to beat lower expectations and EPS growth was in line with consensus at -2%, according to Barclays Plc, however, the number of profit warnings increased.
  • U.S. equity futures declined on Tuesday and Asian shares slumped as turmoil in Hong Kong and Argentina spooked investors already on edge over the trade war. The dollar edged higher as gold and silver rallied. The latest sell-off in risk assets is adding to already skittish sentiment across markets during the low-volume month of August. With the U.S. and China offering no respite to their trade war and a slew of data pointing to slowing global growth, traders will look to this week’s euro-zone GDP figures and industrial production reports from both China and America for further clues to the outlook.
  • In Asia, a regional benchmark headed for its biggest drop in a week. Hong Kong stocks were the worst hit as anti-government protesters again targeted the airport and the city’s leader warned it risked sliding into an “abyss.” Japan’s Topix gauge erased this year’s gain as it reopened following a long weekend.
  • Oil steadied near $55 a barrel in New York as persistent concerns over slowing demand jostled with expectations that U.S. crude stockpiles will continue to tighten. Futures were little changed after rising 7.5% in the past three days. American inventories probably dropped by about 2.3 million barrels last week, according to the median estimate in a Bloomberg survey before Energy Information Administration data due Wednesday. Gasoline demand climbs during the U.S. summer months as motorists take to the road for vacations.
  • Gold rose on Tuesday to trade at highest level since 2013 and silver touched its highest in more than a year as investors sought havens amid an increasingly fraught backdrop of geopolitical tensions and fears for economic growth. The rate on 30-year Treasury bonds approached an all-time low and a key part of the U.S. yield curve moved toward inversion, underscoring a general risk-off bias. Political unrest in Hong Kong and Argentina is adding to an already fragile mood across markets that’s prompted growing investor flows into gold.
  • Recession fears are spreading among investors at a time when valuations across major assets are looking dangerously stretched following years of monetary stimulus, the latest Bank of America Corp. survey shows. About a third of asset managers polled believe a global recession is likely in the next 12 months, the highest probability since 2011 — when Europe was engulfed by a sovereign-debt crisis. Trade war concerns rose, topping the list of the biggest tail risks, followed by the fear of monetary policy impotence, according to Bank of America’s report.
  • U.S. President Donald Trump’s plan to import cheap Canadian drugs overlooks a crucial fact: it can’t happen without the cooperation of major drugmakers, the very industry he’s trying to undercut. Even as alarm grows in Canada over the prospect of Americans draining their supply of medicines, there’s little reason to believe the U.S. proposal would worsen the country’s drug shortages. But the fear plays into the hands of the powerful drug companies seeking to protect their U.S. profit margins. “Instead of attacking the Trump administration for this proposal, it’s easier to make sure that this proposal does not come into existence in Canada,” said Marc-André Gagnon at Carleton University in Ottawa, who focuses on the political economy of the pharmaceutical sector. “But what we do have is a fear-mongering campaign as if it will be a catastrophe for Canadian supply.”
  • China’s 10-year sovereign bond yield fell to 3% for the first time since 2016, joining a global rally of government debt as the nation’s economy slowed and its trade dispute with the U.S. worsened. The yield on the country’s most-active notes due in a decade fell 1 basis point to briefly trade at 3% in Shanghai. Escalations in the trade war since April have put a damper on sentiment in equities, helping spur a rally in Chinese sovereign bonds. The yield on the country’s 10-year debt, which hadn’t touched 3% since November 2016, is down about 40 basis points since its April peak.
  • U.K. wages rose at their fastest pace in 11 years in the three months through June and employment climbed to a record high. Basic earnings growth is now close to 4%, far above inflation and good news for consumers. The figures were bolstered by increases for National Health Service staff and a higher minimum wage introduced in April. The headline figures point to ongoing strength in the labor market, with employment growth far outstripping economists’ forecasts. However, there were some signs of the Brexit jitters weighing on the wider economy, with vacancies falling to their lowest level since early 2018. Productivity also slumped from a year earlier, its fourth straight decline.
  • Amazon.com Inc. is in late-stage talks to acquire as much as 10% of India’s Future Retail Ltd., people familiar with the negotiations said, as the U.S. company moves to bolster its brick-and-mortar presence in one of the world’s fastest-growing retail markets. India’s No. 2 retailer by turnover, Future is seeking a valuation of about 20 billion rupees ($281 million) from Amazon for the stake, according to the people, who asked not to be identified as the discussions are private. The sale is likely to be routed through a holding company, they said, and will give Amazon the option to buy more shares from Kishore Biyani, Future Retail’s founder and chairman.
  • Wall Street watchdogs are poised to take a major step toward overhauling Volcker Rule limits on banks’ ability to trade with their own funds, according to four people familiar with the effort, moving to ease post-crisis safeguards reviled by the industry. Regulators responsible for the Dodd-Frank Act rule could complete work as soon as next week on revisions that include loosening restrictions on banks investing their own money in private equity and hedge funds, according to the people, who requested anonymity because the process isn’t public. The group of five agencies led by the Federal Reserve has focused on a new definition of proprietary trading — which is specifically banned by Dodd-Frank. They’ve chosen to implement the changes without re-proposing the rule and seeking comment, according to three of the people, a step that could open the process to legal challenges.
  • Bond volatility is staging a comeback, driving investors toward the safety of longer-dated Treasuries. A key gauge of price swings in the U.S. Treasury market is at the highest level since 2016 following the barrage of headlines over the trade war with China, which are difficult to anticipate and trade on, according to Toronto-Dominion bank. Many in the market have simply resorted to buying up the world’s largest debt market.
  • Iran expects an oil tanker seized by the U.K. in the Strait of Gibraltar in July will be released soon, the semi-official Fars News agency reported Tuesday, a move that could help to ease concerns about the safety of shipping routes in the Middle East. “Official and unofficial documents have been exchanged to resolve the matter and we hope the problem will be dealt with in the very near future,” Fars cited Jalil Eslami, deputy for maritime affairs at Iran’s Ports and Maritime Organization, as saying. The future of a U.K.-flagged tanker that Iran seized later in the Persian Gulf depends on “the necessary judicial processes,” Eslami added. Iran’s Grace 1 tanker was seized by the Royal Navy on suspicion it was sending crude oil to Syria in violation of European Union sanctions. Tehran denied breaking sanctions and two weeks later impounded the U.K.-flagged Stena Impero near the Strait of Hormuz, the world’s most important chokepoint for oil.
  • Passenger vehicle sales in India dropped the most in nearly two decades, with the decline extending for a ninth straight month amid a broader slowdown in Asia’s third-largest economy. Car sales fell 36% from a year earlier to 122,956 units in July, data released by the Society of Indian Automobile Manufacturers showed. Passenger vehicle sales slumped 31%, while truck and bus sales fell 26%. Weak sales are forcing manufacturers to cut production or shut factories temporarily, leading to at least 15,000 job losses in the industry so far, Vishnu Mathur, the director general of Siam, said in New Delhi Tuesday. The trend mirrors waning consumer confidence in an economy, whose growth has slowed to a five-year low, and where unemployment has risen to a 45-year high.
  • CBS Corp. and Viacom Inc. are keeping investors waiting. The media giants were expected to announce a merger as soon as Monday, the culmination of years of on-again, off-again discussions. But the negotiations have dragged on, setting the stage for another day of anticipation. The two sides have been working out the terms for an all-stock merger of companies worth a combined $30 billion. They’ve discussed 0.595 to 0.6 of a share of CBS for each of Viacom’s, though that range could change, according to people familiar with the situation. At this level, a deal would value Viacom at around its current level — in other words, Viacom investors wouldn’t get the kind of premium they might have liked.
  • A unit of state investment company Temasek Holdings Pte has invested in Secretlab, a Singapore-based maker of chairs for players of electronic games, to help drive growth. Heliconia Capital Management Pte.’s purchase of a minority stake values the five-year-old company at between S$200 million ($144 million) and S$300 million ($216 million), according to a person with knowledge of the matter.
  • South Korea’s Mirae Asset Financial Group is emerging as the leading bidder for a portfolio of 15 U.S. luxury hotels being sold by troubled Chinese insurer Anbang Insurance Group Co., people with knowledge of the matter said. An affiliate of Mirae is working to arrange financing and reach an agreement on terms of a purchase, according to the people, who asked not to be identified because the information is private. An acquisition by the South Korean asset manager could value the 15 properties at more than $5.5 billion, one of the people said.
  • Over the past week, signs have appeared that China has stepped up preparations to mobilize mainland forces to quell the weeks-long uprising in Hong Kong. The question now is whether President Xi Jinping will actually do it. State-run media posted videos this week of the People’s Armed Police, a paramilitary force specializing in riot control, assembling across the border in Shenzhen. A Chinese official with the agency overseeing the city used “terrorism” to describe the protests, invoking a term used to justify sending in forces to repress minority Muslims in the far west region of Xinjiang.
• *All sources from Bloomberg unless otherwise specified