August 17th, 2020

Daily Market Commentary

Canadian Headlines

  1. After spending hundreds of billions to prevent a major depression, Justin Trudeau will make critical decisions in coming weeks on the next steps to support Canada’s economic recovery. That will include whether to keep or drop the only finance minister he has ever had. The strains between Trudeau and Bill Morneau, the two most powerful men in the government, burst into public view last week. Bloomberg News reported Aug. 10 that the prime minister has been taking advice on an economic recovery plan from Mark Carney, the ambitious former Bank of Canada and Bank of England governor. The following afternoon, Trudeau was forced to issue an extraordinary statement expressing “full confidence” in Morneau, to quiet the drumbeat of speculation about the minister’s future.
  2. TMX Group names John McKenzie, who had served in an interim role since January, as chief executive officer. Frank DiLiso to serve as interim CFO until a permanent successor is appointed.
  3. A plague of tiny mountain pine beetles, no bigger than a grain of rice, has already destroyed 15 years of log supplies in British Columbia, enough trees to build 9 million single-family homes, and are chewing through forests in Alberta and the Pacific Northwest. Now, an outbreak of spruce beetles is threatening to devour even more trees in North America just as similar pests are decimating supplies in parts of Europe, creating a glut of dead and dying logs. The bugs are thriving as climate change warms winters that would normally keep them at bay, destroying a swath of the world’s timber supplies. That may eventually spur shortages for the global housing market. Right now, lumber prices are soaring to record highs thanks to a  surge in pent-up repair, renovation and housing demand sparked by the coronavirus pandemic.

World Headlines

  1. European stocks opened broadly neutral as market participants weighed recent setbacks in the region’s management of the pandemic while commodity prices boosted miners. The Stoxx Europe 600 Index was little changed as of 8:27 a.m. in London, with mining and technology rising the most, while travel and leisure shares continued Friday’s declines as travel restrictions returned. Equities in the region had pared most of last week’s gains after the U.K. re-introduced quarantine measures for several European countries, signaling a setback in the region’s return to normality. This has kept Europe’s main gauge within a range it hasn’t left since early June, in contrast to the U.S., where stocks have resumed their climb above pre-pandemic levels during mid-year earnings season.
  2. U.S. equity futures and European stocks advanced, following a rally that began in China after the country’s central bank pumped cash into the financial system, signaling that it wants to ease monetary policy. Covid-19 vaccine contender CureVac continued Friday’s rally, surging more than 50% in U.S. pre-market trading. Overall trading in markets was subdued on Monday as traders weighed the prospect of tighter quarantine measures against continued government support. Declines among airline shares and travel agencies kept a lid on gains in Europe as Spain and Italy told nightclubs to close and France’s public health agency warned that virus indicators are trending upward.
  3. Japanese stocks fell after U.S. retail sales data on Friday pointed to a slowing rebound and U.S.-China tensions showed little sign of letting up. Electronic makers and pharmaceutical companies weighed on the benchmark Topix index the most. The value of U.S. retail purchases increased in July, albeit weaker than expected. Meanwhile, the U.S. and China are postponingtalks for reviewing a phase-one trade deal, according to people familiar with the matter.
  4. Oil fell below $42 a barrel in New York at the start of a week that will see OPEC+ gather to assess its supply deal as countries struggle to contain the virus that’s hurt economies and fuel demand globally. The Joint Ministerial Monitoring Committee — the panel which reviews the deal between the Organization of Petroleum Exporting Countries and its allies– is poised for a planned meeting on Wednesday, with the group starting to return some crude supply to the market this month following deep reductions. OPEC+ will meet as pockets of the market have started to weaken in recent weeks. Futures for the Middle East’s Dubai benchmark are trading lower now than for future months, known as contango, which indicates oversupply. For the global Brent benchmark, that structure was the weakest since May.
  5. Gold steadied as investors weighed the uptick in real yields last week and the postponement of a planned review of the U.S.-China phase-one trade agreement. Vice Premier Liu He had been supposed to hold a video conference call with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin over the past weekend, but it’s been rescheduled indefinitely, according to people familiar with the matter. Bullion ended last week with the first weekly drop in more than two months after hitting an all-time high on Aug. 7. The precious metal has surged this year on rising haven demand and as investors bet central banks and governments will maintain support for economies hit by the coronavirus pandemic.
  6. A pitched battle over the U.S. Postal Service and its ability to reliably deliver presidential election ballots during a pandemic has broken out on the eve of the parties’ high-profile conventions. Democrats accuse President Donald Trump of sabotaging the agency to cripple vote-by-mail efforts, and Speaker Nancy Pelosi suspended the House’s summer recess to take up related legislation. Meanwhile, Trump, who’s trailing challenger Joe Biden in polls, has claimed — without evidence — that widespread remote voting routinely leads to massive fraud, putting Republicans in a tough spot, given the popularity of the Postal Service.
  7. Germany is looking at maintaining subsidies to protect jobs for longer as a spike in cases in recent weeks raises the specter of renewed restrictions on economic activity. Elsewhere in Europe, Italy and Spain told nightclubs to close and France’s public health agency warned that all of the country’s Covid-19 indicators are trending upward. Singapore announced an additional $5.8 billion in fiscal stimulus to cushion the economic fallout from the pandemic. New Zealand delayed its national election by four weeks because of concerns over its coronavirus outbreak. Hong Kong extended its social distancing measures for a week. U.S. fatalities exceeded 1,000 for the fifth consecutive day, though cases slowed. Australia had its deadliest day, and India’s fatalities topped 50,000. A cluster of infections from giant churches in South Korea is reviving concern the country could again become a hotspot.
  8. Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the sixth straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $143.8 million in the week ended Aug. 14, compared with gains of $592,894 in the previous week, according to data compiled by Bloomberg. So far this year, outflows have totalled $15.8 billion.
  9. Sanofi agreed to acquire U.S. biotech company Principia Biopharma Inc in a $3.4 billion deal as the French drugmaker pivots toward innovative therapies to spur growth under new Chief Executive Officer Paul Hudson. The all-cash deal will see Sanofi taking full control of the company, which focuses on treatments for multiple sclerosis and a range of autoimmune disorders, according to a statement Monday. Bloomberg reported last month that Sanofi is studying potential acquisitions of U.S. biotechnology firms, including Principia. Sanofi will pay $100 per share, according to the statement, representing a 10% premium over the Friday closing price of Principia’s shares, which have jumped nearly 66% this year. The aggregate equity value of the deal is approximately $3.7 billion, according to the statement.
  10. Goldman Sachs Group Inc. is the latest firm to boost its year-end price target for the S&P 500, as a relentless rally off the March lows leaves strategist predictions in the dust. David Kostin raised his forecast for the benchmark U.S. gauge to 3,600 from 3,000, joining the likes of Yardeni Research founder Ed Yardeni and RBC Capital Markets’ Lori Calvasina who’ve upped their forecasts in recent weeks. The rally has caught many investors by surprise, with the S&P 500 now sitting at 3,372.85 — 51% off its March lows — and threatening to eclipse its February closing record. Kostin cited Goldman’s above-consensus U.S. growth expectations keyed off positive news on the vaccine front.
  11. BGI Group, the world’s biggest DNA-sequencing company, is considering an initial public offering of its equipment unit on Shanghai’s Star board as early as this year, people with knowledge of the matter said. The Shenzhen-based firm could seek to raise about $1 billion by selling shares in its subsidiary MGI Tech Co., the people said, asking not to be identified because the matter is private. BGI is working with advisers for the potential listing on China’s tech-focused exchange, the people said. Deliberations are at an early stage, and the size and timing of the IPO could still change, the people said. A representative for MGI declined to comment on IPO-related matters. A representative for BGI referred a request for comment to MGI.
  12. Geely Automobile Holdings Ltd., the Chinese automaker controlled by Volvo Cars owner Li Shufu, reported a 43% drop in first-half profit after the coronavirus outbreak shuttered factories and decimated demand. Net income in the six months through June was 2.3 billion yuan ($331 million), the carmaker said in a statement Monday. Revenue plunged 23% after auto deliveries sank. The company cut its annual sales target to 1.32 million vehicles from 1.41 million. The pandemic kept consumers away from showrooms and forced carmakers to suspend production, exacerbating an industry slump that lasted for more than two years. With the outbreak receding in China, sales have started to revive in recent months and automakers are betting on the world’s largest market to help them return to growth.
  13. One of the most extreme heat waves in generations is smothering California this week and pushing the region’s power grid to the brink of collapse. In the past 72 hours, the state has declared two grid emergencies and instituted the first rolling blackouts since the 2001 energy crisis to protect a system strained by people blasting air conditioners and power plants tripping offline. The region’s electricity system operator has warned of more rotating outages through Wednesday with temperatures forecast to reach as high as 112 degrees Fahrenheit (44 degrees Celsius) in some parts of the state.
  14. Chances for a deal in Congress on a new, comprehensive stimulus package before September diminish with each passing day, leaving the U.S. economy limping and many businesses and millions of consumers coming up short. Democrats and Republicans are focused on their party presidential nominating conventions this week and next. House Speaker Nancy Pelosi headed to California after rebuffing an overture from President Donald Trump’s Treasury secretary, Steven Mnuchin, to restart talks on a virus relief package without concessions. Both chambers of Congress left Washington and had been scheduled to be gone until mid-September. But a financial crunch and political controversy involving the U.S. Postal Service prompted Pelosi to announce Sunday that the House would return later this week to vote on legislation that would prohibit the Postal Service from cutting service.
  15. The U.K. government is facing an exam crisis after its handling of school leavers’ test results during the Covid-19 pandemic sparked public outrage. That in turn prompted a backlash against Boris Johnson’s government, with many complaining young people from economically disadvantaged places were harder hit by the changes. More criticism may come this week, when thousands of 16-year-olds get the results of exams known as GCSEs on Thursday.
  16. The U.K. housing market saw a surge in activity last month after a government tax break pushed sales to the highest in more than a decade, according to Rightmove. The property website said the number of agreed sales jumped in July, with the value hitting 37 billion pounds ($48 billion). That’s the most since Rightmove began tracking the data over 10 years ago. Prices rose at their fastest annual rate since the aftermath of the 2016 Brexit referendum.
  17. Momentum from peace moves between Israel and the United Arab Emirates spread to the technology and aviation fronts, while the UAE talked tough to a worried Iran. Israel’s technology minister on Monday predicted imminent collaboration with the Gulf Arab nation in cyber security and space research. Dubai-based Emirates airline said it was looking into starting flights to Israel if demand allows, and Israir Airlines Ltd. has started applying for a landing permit in the UAE. Israeli Prime Minister Benjamin Netanyahu said he’s trying to arrange permission for flights to cross over Saudi Arabia so they can travel direct.
  18. Singapore Deputy Prime Minister Heng Swee Keat announced additional support measures of S$8 billion ($5.8 billion) to cushion the blow from the coronavirus pandemic, extending wage subsidies and aiming to shore up the hard-hit aviation and hospitality sectors. The new set of measures, announced almost three months after the last package, adds to Singapore’s total pledged pandemic aid of almost S$100 billion, Heng, who is also finance minister, said in a taped speech aired Monday. The measures will be financed in part by unused expenditures from earlier budgets, and won’t require additional funds.
  19. India’s move to ban the import of certain weapon systems will do little to boost local manufacturing and is sowing uncertainty at a time when the South Asian nation is trying to ramp up defenses on its restive borders with China and Pakistan, according to analysts. Prime Minister Narendra Modi’s administration earlier this month announced curbs on $47 billion worth of imports that include communication satellites, conventional submarines and light machine guns. But defense experts said they didn’t address critical issues such as the certification of systems and locally-made components, and won’t prevent the military from making emergency purchases of equipment from foreign vendors. Modi has struggled to transform the world’s second biggest arms importer into a defense manufacturing powerhouse since a 2014 proposal to produce indigenous equipment and systems worth $100 billion by 2020. The target has since been slashed in half and the deadline extended to 2027, while the need for more advanced weaponry grows more urgent following the most deadly border clash with China in four decades.

*All sources from Bloomberg unless otherwise specified