August 19, 2021

Daily Market Commentary

Canadian Headlines

• Canadian shares fell on Wednesday as the nation’s inflation picked up speed last month to the highest level in almost 20 years and U.S. Federal Reserve officials agreed they could start reducing the pace of their bond-buying purchases. The S&P/TSX Composite index extended its decline into fifth day, falling 0.3% in Toronto, posting longest losing streak since Feb. 2020. Materials and energy stocks were the worst performers as prices for most metals and oil were down. Health care and tech stocks were the best performers on Wednesday. Meanwhile, Manulife Financial said it will expand operations in China as the Canadian insurer seeks to capture increasing demand from the world’s second-largest economy as it prepares for virus restrictions to ease.
• Prime Minister Justin Trudeau said he doesn’t believe monetary policy will be a top priority for his government after the Sept. 20 election, prompting criticism from his Conservative rivals. At a campaign stop in Vancouver, Trudeau was asked whether he would support altering the Bank of Canada’s inflation-fighting mandate to allow it to tolerate somewhat higher prices, as the U.S. Federal Reserve has done. The central bank tries to keep inflation close to 2%, and its target comes up for review every five years.  The next renewal is due later this year, but Trudeau indicated it was not a major preoccupation for him. The comments came on the same day Statistics Canada said inflation hit 3.7% in July, one of its highest readings over the past two decades and the fourth straight month outside the central bank’s 1% to 3% control range.

World Headlines

• European stocks slumped after the Federal Reserve signaled a tapering of stimulus starting this year and worries about China’s crackdown sparked a selloff in luxury shares. The Stoxx Europe 600 index dropped as much as 2.3%, the most in a month. Miners slid 4% for the worst sector performance. Luxury shares LVMH, Richemont and Kering SA tumbled after Chinese state media said President Xi Jinping offered an outline for “common prosperity” that puts some of the country’s wealthiest citizens on notice. That hurt France’s CAC 40 Index, which fell as much as 3.1%. Investors are turning more risk averse after sending the Stoxx 600 to 10 straight records earlier this month, with minutes from the Fed’s last meeting showing that most officials agreed they could start slowing the pace of bond purchases later this year. That’s adding to worries about the spread of Covid-19 variants, China’s regulatory crackdown and turmoil in Afghanistan.
• Global markets tumbled across the board, as investors fled to the safety of U.S. Treasuries and the dollar, amid concern the Federal Reserve may start tapering stimulus this year even as the delta virus variant undermines global growth. U.S. stock-index futures fell, with contracts on the S&P 500 Index losing as much as 1.1%, and European stocks slid the most in a month. A selloff in commodities deepened, as iron ore plunged more than 10% and oil headed for the longest slump since the early days of the pandemic. The 10-year Treasury yield shed four basis points and the greenback headed for a nine-month high. Investors are bracing for the withdrawal of unprecedented liquidity as the developed world looks to mass vaccinations to keep the recovery on track. However, the persistent spread of coronavirus and slowing China growth raise questions about whether the global economy can absorb the shock of reduced support.
• Asian stocks slumped, led by tech and commodity names, after minutes of the Federal Reserve’s latest meeting signaled that it could start paring stimulus from later this year. The MSCI Asia Pacific Index slid as much as 1.8%, with Alibaba, Taiwan Semiconductor and BHP Group among the biggest drags. Copper and iron ore prices slipped while oil dropped to the lowest level since May. Equity benchmarks in Taiwan, Hong Kong and Indonesia were the biggest losers in Asia as the dollar rose to its strongest level in nearly five months. Asia’s stock benchmark has lost more than 3% this week, widening its underperformance versus global peers in 2021, as the spread of the delta variant casts a pall on the outlook for growth. A deepening selloff in Chinese tech shares amid Beijing’s regulatory onslaught is making matters worse for Asia.
• Oil tumbled again, dropping to the lowest level since May as the U.S. Federal Reserve signaled it was set to start tapering asset purchases within months, hurting commodities and lifting the dollar. West Texas Intermediate futures fell 3.7%, declining for a sixth straight day and sinking in tandem with equities and other commodities like copper and iron ore. The Fed delivered a fresh blow to crude, which had already been weakening as the delta virus variant hits demand in Asia. A surprise jump in U.S. gasoline stockpiles underscored the risks. Oil’s impressive rally in the first half of the year has lost momentum in July and August amid the threat to demand posed by spread of delta, including in key importer China. Gains in the dollar in recent weeks have also acted as a brake on prices, making commodities priced in the U.S. currency more expensive. At the same time, OPEC+ has pushed ahead with gradually restoring supplies.
• Gold steadied as investors weighed the prospect of a tightening of U.S. stimulus within months that sent financial markets tumbling. Bullion pared earlier losses on Thursday, even as the dollar climbed to the highest since November on the back of minutes of the Federal Reserve’s July meeting. Those minutes showed that most policy makers agreed that tapering could start later this year, given the progress made toward inflation and employment goals. Gold’s recovery from a four-month low set at the start of last week has stalled below $1,800 an ounce as investors continue to weigh the outlook for stimulus and concerns over the spread of the delta coronavirus variant. Traders will be closely watching the Fed’s conference at Jackson Hole, Wyoming next week, with some expecting an announcement on the timeline of stimulus reduction.
• Iron ore plunged and copper sank to a four-month low as worries over Chinese steel production, global growth risks and the prospect of reduced U.S. stimulus roiled metals markets. This week’s drop for iron ore accelerated, with futures sliding as much as 12% to the lowest since December in Singapore on expectations that Chinese steel output and consumption will weaken over the rest of the year, partly as authorities curb pollution. Prices are more than 40% below a record high reached just three months ago. Metals markets have also been pressured by worries that the Federal Reserve may soon start curbing massive stimulus that helped drive prices higher over the past year, as well as risks from the fast-spreading delta coronavirus variant. Weaker data in the U.S. and China recently added to unease that the global economic recovery is stalling.
• The Federal Housing Finance Agency is proposing a greater degree of low-income lending support from Fannie Mae and Freddie Mac over the next three years. The Financial Safety and Soundness Act requires the FHFA to establish annual housing goals for the GSEs, which includes setting percentage targets for their purchases of single-family mortgage loans according to borrower characteristics or locale.  The new FHFA proposal announced on Wednesday looks to increase those percentages for 2022 to 2024. For example, whereas the 2018 to 2021 period required 24% of their purchases of single-family mortgages to be sourced from low-income borrowers, the proposal looks to raise that goal to 28%. There are annual goals set for GSE purchases of both purchase- and refinance-sourced mortgages from low-income borrowers. Seasoned loans purchased by the GSEs that meet the goal criteria qualify toward their targets.
• Goldman Sachs Group Inc. agreed to buy the asset-management arm of Dutch insurer NN Group NV as the bank grabs a toehold in the fast-growing sustainable-investing industry and boosts its European ties. The U.S. lender will pay about 1.6 billion euros ($1.9 billion) for NN Investment Partners, according to a statement Thursday. The unit has around $355 billion of assets under supervision, with about three-quarters of its investments backed by environmental, social and governance criteria. NN’s sustainability effort “mirrors our own level of ambition to put responsible investing and stewardship at the heart of our business,” Goldman Sachs Chief Executive Officer David Solomon said in the statement. “This acquisition allows us to accelerate our growth strategy and broaden our asset-management platform.”
• Italy is considering a rights offer of as much as 3 billion euros ($3.5 billion) for bailed out lender Banca Monte dei Paschi di Siena SpA, to strengthen the bank’s finances and make it more attractive for a takeover by UniCredit SpA. The Finance Ministry’s favored solution to meet UniCredit’s demand of a “capital neutral deal” is the sale of shares with pre-emptive rights that help protect the stakes of current investors, according to people with knowledge of the matter. The discount applied to the offer wouldn’t be highly dilutive for investors, the people said. Various amounts are still in discussion and the final size of the rights offer would depend on the outcome of UniCredit’s review of Monte Paschi’s books, on which assets are sold and on the ratio of shares swapped between UniCredit and Monte Paschi, they said, asking not to be named as the process is not public.
• Tencent Holdings Ltd. warned investors to brace for more regulatory curbs on China’s tech sector, telegraphing that Beijing plans to expand restrictions over its internet giants. China’s largest company reported its slowest pace of quarterly revenue growth since early 2019, underscoring the impact of crackdowns including on the edtech sector — a major source of ad revenue. The company’s core mobile gaming business cooled as it cut playing time for minors, part of Xi Jinping’s campaign to address social ills and redistribute wealth. The months-long crackdown has ignited a trillion-dollar selloff in Chinese equities and up-ended industries from education and online commerce to car-sharing. Tencent’s sales rose 20% to 138.3 billion yuan ($21.3 billion) for the three months ended June, in line with the 138.2 billion yuan average forecast, after gaming growth decelerated.
• Macy’s Inc. reinstated its dividend and raised its sales guidance, giving the retailer a boost as consumers come back to the apparel market. Same-store sales, a key retail metric, rose 61% for the company’s owned stores, Macy’s said Thursday in a statement. That’s above the 43% gain expected by analysts, according to data compiled by Bloomberg. The company sees sales as high as almost $24 billion this year, an increase from its previous outlook.
• Lloyds Banking Group Plc could buy 50,000 U.K. homes in the next decade as it looks to become a major player in the country’s rental market. An internal job advertisement seen by the Financial Times for the bank’s newly launched Citra Living unit details ambitions for Lloyds to purchase 10,000 houses by the end of 2025 and 50,000 by 2030. The new business aims to provide a fresh source of revenue for the U.K.’s largest mortgage lender as low interest rates hit margins. Citra Living hopes to take advantage of demand for rental properties as traditional private landlords leave the market due to changes in regulation and tax, while the number of people renting is set to increase.
• Singapore will pilot quarantine-free travel lanes for vaccinated passengers next month from Germany and Brunei and open up to visitors from Hong Kong and Macau in its first big move yet to lift border restrictions that have been in place since early in the pandemic. In what are the highly anticipated first steps of the city’s reopening, travelers from Germany and Brunei can enter Singapore from Sept. 8 without the need to have a purpose for visiting and controlled itinerary or sponsor requirements, officials said during a press briefing in the city-state Thursday. While Singapore is easing restrictions on inbound travel from Hong Kong, the two financial hubs won’t go ahead with plans for an air travel bubble, the governments said. Their strategies for containing Covid have diverged — Hong Kong is still pursuing a Covid-zero eradication path, while Singapore seeks to reopen with a backstop of one of the world’s best vaccination rates.
• Deutsche Bank AG is in talks with a number of Turkish clients to ramp up funding it says will be tied to environmental, social and governance metrics, as part of a wider plan to tap into an increasingly lucrative corner of finance. Claire Coustar, Deutsche’s global head of ESG for fixed income and currencies and vice chair of its Turkey unit, says she expects “a lot of positive stories” to come out of Turkey on the ESG front. She also notes that adding the label “will be very important going forward for bringing international investors into the country.” Chief Executive Officer Christian Sewing has made clear he intends Deutsche Bank to gain a solid foothold in the rapidly expanding market for ESG. That’s as Wall Street giants like JPMorgan Chase & Co. announce plans to make ESG ubiquitous across their products, after recently attaching the label to derivatives. Some of the world’s biggest banks, including Deutsche, have also started experimenting with ESG hedges and repo agreements, including in emerging markets such as Turkey.
• The British government ordered a probe into the proposed purchase of defense-technology specialist Ultra Electronics Holdings Plc by U.S. buyout firm Advent International Corp., citing national security concerns. Business Secretary Kwasi Kwarteng issued a Public Interest Intervention Notice regarding the 2.57 billion-pound ($3.6 billion) agreed takeover by Advent’s Cobham Ltd. arm, according to a statement Wednesday. The Competition and Markets Authority has until Jan. 18 to prepare a report. Ultra said Monday it had approved an all-cash acquisition by Advent, sparking an outcry among some politicians and unions, who say the U.K. firm’s role in producing sonars and electronics for Britain’s nuclear submarines make it a vital asset. Similar concerns surround bids for aerospace supplier Meggitt Plc by two other American groups, Parker-Hannifin Corp. and TransDigm Group Inc.
• Toyota Motor Corp. slumped as much as 4.7% as the worsening chip shortage saw the world’s No. 1 automaker suspend output for several days at almost all its plants in Japan next month, forcing a 40% cut in production plans. Adjustments will be made to the production operations of plants for completed vehicles in Japan due to parts shortages resulting from the spread of Covid in Southeast Asia, Toyota said in a statement Thursday. A total of 360,000 fewer cars will now be made next month. The cuts were reported earlier by Nikkei. Some 27 lines in 14 plants in Japan will be impacted, affecting production of models from the RAV4 to Corolla, Prius, Camry and Lexus RX, Toyota said. That represents a hit to every one of the plants Toyota has across the country bar one.
• Asia’s physical crude market softened this week as muted buying from China coincided with a surprise move by India to sell oil from its strategic reserves to state-run refiners. Spot differentials of Murban and Das crude from Abu Dhabi, as well as Russian Sokol and ESPO have tumbled, with traders pointing to weaker Chinese demand following a Covid-19 resurgence and a crackdown on the nation’s independent refiners. Adding to the bearish sentiment was India’s decision to sell oil from its strategic reserves, the traders said, reducing the need for spot barrels. China’s mega-refiner Rongsheng Petrochemical Co. still hasn’t released its buy tender this month. It was most active this year in May, when it purchased about 12 million barrels of crude from Persian Gulf producers.
• Since its groundbreaking nearly two decades ago, the megamall built in New Jersey’s Meadowlands has done little except hemorrhage cash. Now, less than two years after its much-delayed opening, the complex known as American Dream is threatening to dash the lofty ambitions of yet another developer. The Ghermezian family, which runs some of the biggest and most successful malls in North America, can’t keep up with the bills on the shopping and entertainment megaplex, which helped drive its original developer to the brink of bankruptcy and later was seized by lenders from the team that came next. Revenue from the stores has been so scarce amid the surging pandemic that the Ghermezians have hired legal and financial advisers to help them ease the crushing $3 billion debt load, and perhaps retain some role in running the project, according to people with knowledge of the matter.
• Amazon.com Inc. plans to open several large physical retail locations in the U.S. that will operate akin to department stores, a step to help the tech company extend its reach in sales of clothing, household items, electronics and other areas, people familiar with the matter said. The plan to launch large stores will mark a new expansion for the online-shopping pioneer into bricks-and-mortar retail, an area Amazon has long disrupted. Some of the first Amazon department stores are expected to be located in Ohio and California, the people said. The new retail spaces will be around 30,000 square feet, smaller than most department stores, which typically occupy about 100,000 square feet, and will offer items from top consumer brands. The Amazon stores will dwarf many of the company’s other physical retail spaces and will have a footprint similar to scaled-down formats that Bloomingdale’s Inc., Nordstrom Inc. and other department-store chains have begun opening, the people said.
• Covid-19 vaccines are less effective against the delta variant, according to results in the U.K. from one of the largest real-world studies into the efficacy of the shots. Pfizer Inc. and BioNTech SE’s messenger RNA vaccine lost effectiveness in the first 90 days after full vaccination, though that shot and the one made by AstraZeneca Plc still staved off a majority of Covid infections. When vaccinated people did get infected with delta, they were shown to have similar levels of virus in their bodies as those who hadn’t had shots. This suggests that vaccinating large portions of a population might not protect those who don’t get inoculated, casting doubt on the idea of achieving herd immunity. These latest results are likely to fuel calls to give booster shots to the fully vaccinated even as countries around the world still lack enough supply for first immunizations. The U.S. plans to start offering booster shots on Sept. 20 to all vaccinated U.S. adults. U.K. authorities are still deciding how broadly boosters should be given. In Israel, which started giving third doses of Pfizer-BioNTech this month, initial results show they have been 86% effective for people over the age of 60.
• The rout in Chinese technology giants deepened on Thursday after the industry was hit with a fresh round of proposed regulations. The Hang Seng Tech Index closed 2.9% lower after earlier falling to lowest since its inception in July 2020 with Alibaba Group Holding Ltd. slumping 5.5% to a record low in Hong Kong. Video streaming giant Kuaishou Technology slid 7.1% to close at new all-time low for a fifth consecutive session. The drops came after China said it is studying proposals to further ensure the rights of drivers who work for online companies and to step up oversight of the live streaming industry. Sentiment also soured after Tencent warned the industry to prepare for more regulations including potential substantial changes to how companies use data for advertising.
• Fidelity International staff are trying out new ways of flexible working and may get a bump in pay as the asset manager grapples with a pandemic that’s upended working habits and fueled inflationary pressures. The firm has given some teams options for five or six different working patterns and asked them to test the arrangements for a few months before reporting back, according to Chief Executive Officer Anne Richards. Fidelity is also considering raising employees pay given inflation, she said. Last year’s abrupt shift to remote working has sparked a debate across the financial industry about what firms should require of staff in terms of working practices. Nigel Wilson, the CEO of Legal & General Group Plc, said earlier this month that the City of London was struggling far more than the U.K.’s other office districts in luring workers back to their offices.
• More evidence arrived this week showing how the world’s biggest economy is dealing with supply-chain constraints, with U.S. housing starts and earnings from Home Depot flashing glints of normalization. While government data showed U.S. residential starts fell 7% last month to a three-month low 1.53 million annualized rate, the number of single-family houses under construction but not yet completed in July increased to 689,000 — the most since 2007. This suggests builders are making some headway despite land, labor and materials shortages, Bloomberg News’s Reade Pickert writes. Home Depot, which has benefited from homeowners taking on do-it-yourself projects amid pandemic lockdowns, has grappled with the shortages and transport pressures by leveraging the scale of its supply chain to prioritize sourcing key items in high-demand categories, Chief Executive Officer Craig Menear said.is simple.

“Money is a terrible master but an excellent servant.” – P.T. Barnum

*All sources from Bloomberg unless otherwise specified