August 13th, 2020

Daily Market Commentary

Canadian Headlines

  1. Canadian equity markets advanced, following a rally in U.S. stocks, which briefly surpassed pre-pandemic levels. The S&P/TSX Composite rose 0.5% in Toronto. Energy was the best-performing sector as oil price closed above a key technical level, buoyed by U.S. energy data that suggest a much-awaited recovery in demand is underway as the summer driving season nears an end. Meanwhile, Ontario’s deficit will be nearly twice as large as projected in March as the government bolsters measures to cushion the economy from the coronavirus pandemic.
  2. The International Energy Agency cut forecasts for global oil demand as air travel suffers from the coronavirus crisis even more than previously expected. The IEA reduced estimates for almost every quarter through to the end of 2021, with the second half of this year taking the steepest downgrades. Air travel remained two-thirds lower than last year in July, normally a peak month because of holiday flying, it said in a monthly report. “The outlook for jet fuel demand has worsened in recent weeks as the coronavirus has spread more widely,” said the Paris-based agency, which advises most major economies on energy policy.
  3. The idea of producing cleaner-burning hydrogen to rid the world of fossil fuels is gaining traction in the unlikeliest of places: Alberta, home of the infamously dirty oil sands. Better known for energy companies that have been blacklisted by the Church of England for their emissions-intensive crude, the oil-rich Canadian province has attracted a growing group of researchers and entrepreneurs betting that the region’s vast resources can turn it into one of the world’s largest hydrogen suppliers. And they’re about to get some backing from federal and local governments. As nations seek to reduce greenhouse-gas emissions, hydrogen is emerging as a potential solution for hard-to-decarbonize sectors like industrial processes and freight. Oil-service heavyweights Schlumberger Ltd. and Baker Hughes Co. are already making forays into the space. Europe plans to increase its capacity to produce renewable hydrogen sixfold by 2024. Japan, China, Korea and Australia are looking to expand the fuel’s use.

World Headlines

  1. European stocks ended a four-day winning streak, as new U.S. tariffs aimed at goods from Germany and France raised fears of a worsening trade relationship, and as the market digested some earnings releases that came in below expectations. The Stoxx Europe 600 Index was down 0.3% as of 8:11 a.m. in London, with most sectors in negative territory. Cyclical industries including miners and oil & gas — both outperformers during August’s rally so far — fell the most. Earlier this week, equities in the region had regained some lost ground since slumping from a post-crisis high reached in mid-July. The latest rebound was led by cyclical stocks including banks, energy and automotive industries. Near the end of Wednesday’s session, the region’s gauge briefly crossed its 200-day moving average for the first time in a month, before falling below it again at Thursday’s open.
  2. S&P 500 Index futures edged lower with European stocks on Thursday as the global rally showed signs of faltering while stimulus talks in Washington remained deadlocked. The dollar fell before key unemployment data. Cisco Systems Inc. and Micron Technology Inc. led decliners in Wall Street’s premarket trading, as shares faltered in the wake of the S&P closing Wednesday within 0.2% of its all-time high.
  3. Japan’s Nikkei 225 Stock Average rallied to its highest since February, with technology companies providing the biggest market boost, mirroring gains in their U.S. peers. The blue-chip gauge climbed above the 23,000 mark for the first time since early June, finishing at its highest level since Feb. 21. The Nikkei is now 1.7% away from erasing its loss for the year. The broader Topix index extended its three-day gain to 5%, its best such performance since May.
  4. Oil was steady near $43 a barrel after the International Energy Agency cut forecasts for global oil demand. Futures in New York edged higher though the agency reduced its estimates for almost every quarter through to the end of next year, citing the muted outlook for air travel. Russia’s energy minister said the market is stabilizing and that OPEC+ plans no sharp moves. Prices have been trading near a five-month high in recent sessions as U.S. crude inventories declined for a third week. While gasoline demand in America is recovering, the picture for oil products has been far more mixed in other corners of the globe as the pandemic continues to spread. The IEA’s report followed those from OPEC and the U.S. Energy Information Administration earlier in the week, both of which included revised views on U.S. oil production.
  5. Gold headed for back-to-back gains as investors weighed the outlook for the metal’s record-setting rally after this week’s dramatic price swings. Rising U.S. bond yields helped spark a sharp selloff in gold Tuesday and early Wednesday, followed by a rebound later in the day. Both gold and silver have resumed their uptrend after the correction and remain among the best-performing commodities this year, aided by negative real yields and vast stimulus to combat the fallout from the coronavirus pandemic.
  6. Fannie Mae and Freddie Mac are planning to charge an additional fee on most mortgage refinance loans that could raise costs for borrowers trying to take advantage of historically low rates in an uncertain economy. The mortgage giants, which have been under government control since 2008, announced the plan late Wednesday, saying the new 0.5% fee is meant to mitigate their risk in light of the Covid-19 pandemic. It would apply to most refinances involving the companies. The companies and their regulator, the Federal Housing Finance Agency, have tread carefully during the pandemic, as some parts of the mortgage market temporarily seized up in March before slowly recovering. FHFA Director Mark Calabria, an appointee of President Donald Trump, has been pushing to end U.S. control of the companies, a task that has been impeded by the pandemic and ensuing economic downturn.
  7. Facebook Inc. launched a voting information hub to give users election information, including links to register to vote or volunteer at a local polling station. The hub, which Chief Executive Officer Mark Zuckerberg first announced in May, will be promoted atop U.S. users’ Facebook and Instagram feeds later this fall. The company expects it will reach 160 million Americans before November’s presidential election, according to Emily Dalton Smith, Facebook’s director of social impact. Facebook will compile information for the site from state officials and groups like the Bipartisan Policy Center and the Federal Voting Assistance Program.
  8. Cisco Systems Inc. gave a lackluster sales forecast for the current period, a sign that businesses are spending less in the pandemic-driven recession. Chief Executive Officer Chuck Robbins pledged to reduce expenses by $1 billion through a reorganization that will include job cuts and early retirement for some workers. The plan will cost about $900 million, which will include severance and other “termination benefits,” the company said in a regulatory filing. Chief Financial Officer Kelly Kramer is also leaving. Revenue will fall 9% to 11% from a year earlier in the fiscal first quarter, which ends in late October, the San Jose, California-based company said Wednesday in a statement. Analysts on average had projected a decline of about 7%. Adjusted profit will be 69 cents to 71 cents a share, lower than Wall Street expectations of 76 cents, according to data compiled by Bloomberg.
  9. Two patients in China who recovered months ago tested positive for Covid-19, raising concern about the the virus’s ability to linger and reappear in people who it previously infected. Germany recorded the highest number of new cases in more than three months. The Philippines will join the final phase of clinical trials for Russia’s coronavirus vaccine. President Rodrigo Duterte is willing to be inoculated after the vaccine’s likely approval from the Philippines’ Food and Drug Administration by April. The recession gripping Sweden may be much softer than first predicted, with economists pointing to the absence of a full lockdown as a key reason. India’s virus death toll has surpassed that of the U.K., pushing it to the No. 4 spot globally.
  10. Nancy Pelosi and Donald Trump are putting down opposing wagers on where the economy is headed and who voters will blame if it goes south. The two sides are at least $1 trillion apart on another package of relief the U.S. economy needs to overcome the ravages of a pandemic that continues to force companies, schools and other organizations to roll back plans to reopen for business. Pelosi, the House speaker, on Wednesday rebuffed an overture from Treasury Secretary Steven Mnuchin to resume negotiations, saying the White House refused to budge on the size of the relief plan. Mnuchin said it was Pelosi who refused to compromise.
  11. Unprecedented government stimulus has allowed more companies to borrow at lower rates than ever before. Yet amid the credit boom, smaller firms that power America’s economic engine are often being shut out, hamstringing the recovery just as it begins. The Federal Reserve’s pledge to use its near limitless balance sheet to buy corporate bonds has aided stricken airlines, oil drillers and hotels. It’s also helped companies from Alphabet Inc. and Inc. to Visa Inc. and Chevron Corp. access some of the cheapest financing ever seen. All told, firms have sold about $1.9 trillion of investment-grade debt, junk bonds and leveraged loans this year, according to data compiled by Bloomberg.
  12. KE Holdings Inc., a Chinese online property platform backed by SoftBank Group Corp. and Tencent Holdings Ltd., raised $2.1 billion in a U.S. initial public offering priced above the marketed range. KE, also known as Beike Zhaofang sold 106 million American depositary shares for $20 each, according to a statement. The company had marketed the shares for $17 to $19 apiece. KE is valued in the IPO at $22.5 billion based on the outstanding shares listed in its filings, marking a success for SoftBank which invested $1.3 billion at a $10 billion valuation. The company was last valued at about $14 billion in 2019, according to CBInsights data.
  13. Apple Inc. is readying a series of bundles that will let customers subscribe to several of the company’s digital services at a lower monthly price, according to people with knowledge of the effort. The bundles, dubbed “Apple One” inside the Cupertino, California-based technology giant, are planned to launch as early as October alongside the next iPhone line, the people said. The bundles are designed to encourage customers to subscribe to more Apple services, which will generate more recurring revenue.
  14. The U.S. left largely intact its list of European products worth $7.5 billion targeted with tariffs because of illegal Airbus SE subsidies, opting not to follow through on a threat to substantially increase the economic pain on its transatlantic trade partners. In a statement in Washington on Wednesday, the U.S. Trade Representative’s office said it was making “modest” changes to the list of products subject to tariffs, while leaving the overall amount of goods unchanged. The U.S. didn’t carry out a threat to increase the tariff rate to 100% from the current 15% and 25% levels, nor did it expand the list of products to include $3.1 billion of new goods.
  15. Turkey’s central bank offered the nation’s lenders funding through a more expensive channel in the latest effort to reverse declines in the lira without raising its key interest rate. Policy makers on Thursday conducted a 20 billion-lira ($2.7 billion) one-month repo auction through what they call the conventional method. The average simple rate for lenders that received funding was 10.96%, 271 basis points higher than the central bank’s benchmark. Unlike another method in which the central bank sets the yield, the price is determined through lenders’ bids. Since the regulator ceased to provide liquidity at its cheapest rate of 8.25% by suspending one-week repo auctions last week, Turkish banks in need of liras took part in the auction and drove up the cost of money.
  16. U.K. Prime Minister Boris Johnson’s government faces a coronavirus dilemma, and how it responds could set the tone of the economy for years to come. If it withdraws its massive support for jobs and wages too soon, it’ll tip Britain into an unemployment crisis just as other risks, such as Brexit, threaten to clobber growth. If it extends the aid — as opposition politicians are urging it to do — that could dissuade Britons from quitting jobs that may never return anyway, and hinder a necessary restructuring. Both options are costly on the face of it. Chancellor of the Exchequer Rishi Sunak’s furlough programs have cost the Treasury almost 35 billion pounds ($46 billion) so far. Mass unemployment or unproductive workplaces could be far more expensive in the longer run though — with political repercussions for Johnson’s Conservatives.
  17. Russia now receives more euros than dollars for its exports to China, in the latest sign President Vladimir Putin is plowing ahead with his pledge to reduce dependence on the U.S. currency. Just over 50% of the goods China bought from its northern neighbor in the first quarter were priced in euros, according to Bank of Russia data published this month. The share of the currency in payment for exports to the European Union increased to 43% from 38% at the end of last year, the data show.
  18. Iranian special forces boarded a tanker in international waters for about five hours on Wednesday before releasing it, according to an U.S. official familiar with the matter. Two Iranian ships were in the vicinity when the personnel roped down from a helicopter onto the Wila, a Liberian-flagged chemicals and oil-products tanker, around 5.30 p.m. Dubai time, said the official, who asked not to be named because they’re not authorized to speak publicly. The Wila was in the Gulf of Oman and around 20 miles from the United Arab Emirates, said the official. It passed through the Strait of Hormuz, a critical choke-point that borders Iran and accounts for about one-third of the world’s seaborne oil flows, on July 16, according to ship-tracking data compiled by Bloomberg.
  19. Carlyle Group Inc. plans to invest about 1 trillion yen ($9.4 billion) in Japanese companies over the next three to five years, betting that corporate carve-out deals will increase in response to the coronavirus pandemic. The investment will be funded from the 258 billion yen raised recently for its fourth Japan buyout fund, and by drawing on its existing U.S. and Asian funds, bank loans and additional investments by limited partners, a spokesperson for the U.S. private equity firm said. It’s the latest sign of Carlyle’s strengthening focus on the world’s third-largest economy. The company has been expanding its Japan team partly on expectations that economic challenges brought on by the illness’s spread may create investment opportunities, prompting Japanese firms to trim non-essential assets to focus on their core business.
  20. Stephen Colbert, Jimmy Fallon and Jimmy Kimmel may skewer President Donald Trump on their late night shows, but that doesn’t stop his campaign from advertising on them. Trump commercials have appeared more than three times as often as his Democratic rival on all three talk shows since Joe Biden’s campaign began his first general election ad buys on June 19, according to data from Advertising Analytics. Trump spent an estimated $1.3 million to Biden’s $700,000 on the comedy shows. “The Late Show with Stephen Colbert” was favored by both candidates, with Trump running 2,480 spots to Biden’s 581. Trump’s late night commercials might be an effort to provide viewers with an alternative view of the president than they get from the hosts’ monologues, which frequently ridicule him, according to a Republican ad buyer, who asked not to be named because he’s dealing with the same issues for his clients.
  21. Investments in U.S.-listed sector exchange traded funds swung to inflows last week. Industrials sector ETFs led the inflows. Technology sector ETFs had the biggest change from the previous week. Net inflows to ETFs that focus on industry sectors totaled $3.05b in the week ended Aug. 12, including the effect of leveraged funds, compared with outflows of $197m the prior week
  22. Uber Technologies Inc. Chief Executive Officer Dara Khosrowshahi’s warning that the company may have to temporarily shut down in California is textbook strategy for the ride-hailing giant: When adverse court rulings hit, appeal to the public for support and seek to delay regulatory action. Legal experts say buying time is the name of the game after California won a court order this week requiring Uber and rival Lyft Inc. to convert their drivers from contractors to employees — an existential threat to their business model and that of the broader gig industry. Uber’s short-term objective is to keep the sweeping enforcement order from taking effect until Californians vote in November on a ballot measure that would exempt app-based transportation and delivery companies from the law known as Assembly Bill 5. Uber, Lyft, Postmates, Instacart and DoorDash have poured nearly $111 million into a campaign that’s among the state’s most expensive ever and has raised 128 times as much money as the opposition.

*All sources from Bloomberg unless otherwise specified