August 19th, 2020
Daily Market Commentary
- Justin Trudeau, seeking to rejuvenate his government’s mandate amid an ethics scandal and double digit unemployment, named a new finance minister, suspended all parliamentary business, and promised to return next month with an “ambitious” new spending plan to help drive the recovery. The Canadian leader prorogued the legislature, a formal act that ends the current parliamentary session, in order to outline a new agenda, which he plans to introduce on Sept. 23. It was the culmination of a dramatic few days in Ottawa. Earlier Tuesday, Trudeau appointed Chrystia Freeland as the country’s new finance minister after the previous finance chief, Bill Morneau, resigned amid policy differences.
- Canadian investment firm Onex Corp. promoted Bobby Le Blanc to president, positioning him as a potential successor to founder Gerry Schwartz. Le Blanc, who has been a senior managing director at Onex, will oversee all of its business units and become the sole head of Onex Partners, the Toronto-based firm’s flagship private equity group. He will report to Schwartz, Onex’s chairman and chief executive officer. “Having joined the firm more than 20 years ago, Bobby represents the best of Onex,” said Schwartz, 78, who is one of Canada’s pioneering private equity investors. “I am confident he will continue to be a positive force in our future success and Onex, our shareholders and our partners will continue to benefit from his proven leadership.”
- European equities erased earlier losses to post gains as renewed concerns about U.S.-China trade tensions failed to damp investor optimism after a Wall Street record. The Stoxx Europe 600 Index rose 0.3% as of 10:50 a.m. in London in a broad rally, with all but three sectors in the green. Telecoms, construction and food and beverage shares led the gains, while oil & gas and travel stocks were the main laggards. President Donald Trump calling off last weekend’s talks with China had initially weighed on markets, raising questions about the future of the countries’ trade deal. European equities have been trading in a range over the past month amid concerns about trade tensions and a rising number of new Covid-19 cases, which have led to some additional travel restrictions. At the same time, after U.S. stocks surged to a record high on Tuesday, investors may be looking at European equities as an alternative developed market that hasn’t rallied as much.
- U.S. equity index futures track higher as optimism in the market’s rally continues after Tuesday’s record close for the S&P 500. A surge in technology shares and stimulus injections have supported global equities and spurred the rally after an initial market rout following the outbreak of the Covid-19 pandemic. Although analysts have voiced caution about elevated valuations and the trajectory of the rally, optimism among investors continues despite occasional setbacks.
- Japanese stocks ended the day higher after gains in U.S. equities propelled the S&P 500 to a record and the yen looked set to halt a three-day winning run. Shares linked to information and communication, and railways provided the biggest support to the Topix index. The gauge had opened lower in the morning, when the yen climbed to an almost three-week high against the greenback, and data showed Japanese exports slumped 19.2% in July from a year earlier amid continued steep falls for cars and auto parts.
- Oil eased from a five-month high in New York after a report signaled surging U.S. gasoline stockpiles, suggesting faltering demand. The American Petroleum Institute reported motor fuel inventories gained by about 5 million barrels last week, according to people familiar, offsetting a decline in crude stockpiles. OPEC and its allies will meet later Wednesday to discuss their deal, amid signs physical oil prices are weakening as the group this month started unwinding some of its record output cutbacks. Crude has been largely steady despite the higher supply from OPEC+. Saudi Arabia is keeping up the pressure on the group’s laggards to adhere to their production targets and compensate for past shortcomings, to prevent too much oil from hitting the markets.
- Gold fell below $2,000 an ounce after two days of gains, as investors awaited the release of Federal Reserve minutes later Wednesday. While bullion was supported by a weaker dollar and renewed tensions between Washington and Beijing, some risk-on sentiment crept back into markets this week with U.S. stocks posting a record close. European equities turned higher with U.S. futures as investors signaled continued optimism in the post-pandemic rally. Meanwhile, House Speaker Nancy Pelosi suggested that Democrats might be willing to make more cuts to their stimulus proposal to seal a deal with Republicans and speed Covid-19 relief, then come back after the November elections with additional items.
- President Donald Trump is trying to paint nominee Joe Bidenas a puppet of progressives — but the Democratic Party that crowned Biden its nominee on Tuesday largely shunted aside its left-leaning stars. The second night of the Democratic convention unfolded Tuesday as a testament to Biden’s brand of centrism, rather than Trump’s warnings of a radical agenda. It included testimonials from the party’s old guard, like former President Bill Clinton and former Secretary of State John Kerry, along with a joint keynote address by 17 political newcomers, largely hailing from the centrist wing of the party. In contrast, Representative Alexandria Ocasio-Cortez, the young star of the progressive movement, spoke for only about 90 seconds in nominating Senator Bernie Sanders, who’d offered a full-throated endorsement of Biden a night earlier. The meager profile afforded to Ocasio-Cortez has riled progressives who noted that several Republicans spoke longer than she did at Biden’s convention — but Trump may be among those wishing she’d been given a bigger stage.
- Greece and Ireland moved to tighten rules after a jump in coronavirus cases. The U.K. is looking at testing people for Covid-19 at airports and Finland reinstated border controls. Global virus infections topped 22 million, with the U.S., Brazil and India accounting for more than half the total. The death toll in Iran surpassed 20,000 while the UAE reported a surge in cases. Hong Kong recorded the lowest number of new coronavirus infections since its latest outbreak started last month. South Korea is targeting an uncooperative religious sect that may be spreading the disease. In the U.S., President Donald Trump said he called off last weekend’s planned trade talks with China, saying Beijing’s handling of the virus was “unthinkable.”
- Johnson & Johnson agreed to buy Momenta Pharmaceuticals Inc. for about $6.5 billion to expand in treatments for autoimmune diseases. The deal involves an all-cash tender offer of $52.50 per Momenta share, J&J said Wednesday in a statement. The offer is 70% more than the target’s closing price on Tuesday. The Cambridge, Massachusetts-based company’s shares had gained about 56% this year. Momenta traded 68% higher at $52 in pre-market trading in the U.S. The transaction will help its Janssen Pharmaceutical unit broaden its leadership in immune-mediated diseases, J&J said, and includes full global rights to Momenta’s experimental drug nipocalimab. Momenta received positive news on the drug in June when it hit its main goal in a phase 2 trial as a treatment for myasthenia gravis, an autoimmune neuromuscular disorder.
- The $20 trillion U.S. Treasury market is giving the Federal Reserve a thumbs-up for its efforts to revive inflation after the coronavirus pandemic threatened to inflict a damaging bout of deflation on the U.S. economy. The best measure of that is inflation-adjusted interest rates on 10-year Treasury bonds, which have plunged well below zero as nominal yields held fairly steady. Other signs of success include rising expectations for future prices among U.S. households. Those are all signals that investors reckon some degree of inflation may be on the way, in part because Fed Chair Jerome Powell and colleagues slashed interest rates to almost zero and bought hundreds of billions of dollars of government bonds. Some even think price pressures could ultimately spiral out of hand, as ultra-easy monetary policy combines with fiscal stimulus after lawmakers authorized $3 trillion in spending and debate still more.
- Kamala Harris’s prime-time speech at the Democratic convention on Wednesday night will be the first glimpse of how Joe Biden’s campaign plans to deploy a history-making vice presidential nominee as they work to define her role for a campaign that has largely been grounded by the coronavirus. The Biden campaign has a clear idea of the people they want Harris to win over in November: Black voters, younger voters and women. But as they strictly abide by health guidelines forced by coronavirus, they are severely limiting the candidates’ travel to in-person events and sharing few details about how Harris will engage with voters.
- The world’s biggest exchange-traded fund tracking oil is facing U.S. regulatory action after it took a series of extreme steps to survive the historic crude selloff earlier this year. The United States Oil Fund ETF, known as USO, received a Wells Notice from the Securities and Exchange Commission, according to a filing on Wednesday. The fund was being probed over whether its risks were adequately disclosed after it dramatically reshuffled the mix of futures it tracked amid the turmoil. The notice states that the SEC has made a preliminary decision to recommend an enforcement action against the fund, its Chief Executive Officer John Loveand United States Commodity Funds, the company which manages USO.
- Target Corp. reported second-quarter sales that trounced analysts’ expectations, brushing off concerns that demand would ebb after consumers spent their relief checks. Comparable sales rose 24% in the three months through Aug. 1, Target said Wednesday — the fastest pace in the retailer’s 58-year history, and almost three times higher than the average estimate of 8.6% compiled by Consensus Metrix. Adjusted earnings per share also touched an all-time high.
- Lowe’s Cos. reported a strong summer sales pace that beat estimates as housebound Americans in every region did more home improvement while cutting back on other discretionary spending. Same-store sales in the U.S. rose 35.1%, beating the estimate for a 20.5% gain from Consensus Metrix. Lowe’s adjusted earnings per share for the second quarter ended July 31 of $3.75 also beat the average analyst estimate.
- President Donald Trump’s Postal Service chief tried to neutralize complaints by suspending his operational changes, but he failed to silence accusations that he is hampering the agency’s ability to handle voting by mail. Postmaster General Louis DeJoy’s retreat followed mounting pressure from Democrats, including an Aug. 5 exchange with top lawmakers that Senate Minority Leader Chuck Schumer described as “heated.” Congress scheduled two hearings with DeJoy in the coming days and the House plans to vote on a postal funding measure on Saturday. At heart are concerns that Trump, running behind Democrat Joe Biden in polls, is mounting a politically driven campaign to hobble the Postal Service. The president has repeatedly claimed — without evidence — that widespread mail-in voting leads to fraud; diminished capacity to deliver ballots could complicate vote-counting. Trump has also said the agency in effect subsidizes deliveries for Amazon.com Inc., a longtime target of the president’s ire.
- KBR Inc. has agreed to acquire national security and space contractor Centauri LLC for about $800 million, as the one time construction firm seeks to boost its presence in the fast expanding space market. KBR will buy the company from private equity firm Arlington Capital Partners and plans to fund the purchase with around $300 million in cash and $500 million of debt, according to a statement on Wednesday, confirming an earlier Bloomberg News report. The parties expect to close the transaction in the fourth quarter. A deal for Centauri represents a milestone on KBR’s cosmic journey, which has seen the former Halliburton Co. subsidiary transition away from the energy sector and into highly specialized government and technology services. And while space is at least part of the allure of any deal with Centauri, KBR is also acquiring extensive operations in cyber-security and sensitive military services.
- Germany’s longest-maturity bonds saw demand rise to an all-time high as investors seeking alternatives to dollar assets bought the nation’s highest-yield notes. Bids for the nation’s 30-year notes outstripped supply by 2.9 times, the highest since at least 1997, according to data compiled by Bloomberg. Similar-maturity bonds rose in the secondary market. A gauge of the dollar this week declined to the lowest level in more than two years amid tensions over U.S. fiscal policy, presidential elections in November and the nation’s response to the spread of the coronavirus across the country. The flight from dollar assets has benefited the euro — which climbed to the highest since 2018 — and other European assets.
- U.K. inflation accelerated to the fastest in four months in July, an unexpected jump that’s unlikely to last or persuade the Bank of England to ease off the stimulus pedal. Consumer prices climbed 1% in July from a year earlier — almost double economists’ expectations. The reading was boosted by fuel, the absence of the usual summer clothing sales, and private health firms passing on the higher cost of virus-related protective equipment. Economists said the rise will be short-lived, with some predicting inflation will turn negative next month due to lower energy prices as well as government measures to support businesses. Bond markets are also showing few signs of concerns — yields fell on Wednesday and remain close to record lows.
- Thailand is considering an extension of its state of emergency through Sept. 30 to prevent a second wave of coronavirus cases and guard its streak of almost three months without a local infection amid mounting anti-government protests. The one-month extension, when approved by the Cabinet, would be the fifth since the initial order in March. The emergency allows the government to enforce mandatory quarantines and streamline disease-control plans without multiple approvals from various agencies, according to Natthapol Nakpanich, deputy army chief and deputy leader of the national Covid-19 task force. Thailand hasn’t detected any new cases from community transmission for the past 86 days, one of the world’s longest streaks. But officials are wary after the virus recently reemerged in places including Vietnam and New Zealand. Also, a student-led protest movement sweeping Thailand could make it difficult to control spreading if an outbreak occurs.
- The United Arab Emirates connected the Arab world’s first nuclear power plant to the country’s grid and began providing electricity, crossing the final threshold to membership in the exclusive club of atomic nations. Built and run by a joint venture with Korea Electric Power Corp., the Barakah plant will increase production gradually until reaching full capacity within months, its developer, Emirates Nuclear Energy Corp., said Wednesday. Barakah is the first of four civilian reactors that the government plans to fire up by 2023. The plant is a milestone for the Middle East and the UAE, a seven-member federation that includes commercial hub Dubai and oil-rich Abu Dhabi. The reactors, located along a sparsely populated strip of desert on Abu Dhabi’s Persian Gulf coast, are estimated to cost $25 billion. The government expects them to produce as much as 5.6 gigawatts once they’re fully commissioned — or about a fifth of the country’s current installed generating capacity.
- Californians just saved themselves from what would’ve been the biggest coordinated blackout of all time. Now on to the next crisis: Dry lightning and extreme heat that together ignited 155 fires within 24 hours and are setting off more. On Tuesday — just as California was preparing to plunge as many as 6 million people into darkness to save the power system from one of the worst heat waves in generations — blazes torched tens of thousands of acres, forcing people to flee their homes and prompting California Governor Gavin Newsom to declare a state of emergency only days into the peak of the wildfire season. Add them all to 2020’s global tally of extremes — including fires, excruciating heat and tropical storms. They’re offering a glimpse into the future of a climate-changed world.
- Saudi Arabia kept up the pressure on OPEC+ nations that have been exceeding their oil-output targets, hours before a meeting to discuss their agreement. King Salman bin Abdulaziz called Nigerian President Muhammadu Buhari to emphasize the importance of complying with production quotas and compensating for past shortcomings, state-run Saudi Press Agency said on Wednesday. Nigeria, Iraq and several other nations have consistently fallen short of their pledges to cut production as the Organization of Petroleum Exporting Countriesand its allies seek to offset the sharp drop in oil demand triggered by the coronavirus pandemic.
- The pile of the murkiest trades at global banks, long the bane of regulators, got much bigger during Covid-19. Lenders including Barclays Plc, Citigroup Inc., BNP Paribas SA and Societe Generale SA reported a surge of more than 20% in their most opaque assets during the chaotic first half of 2020, Bloomberg calculations show. The banks are now sitting on hard-to-value trades that they say are worth about $250 billion, including categories that gained notoriety during the financial crisis, such as complex debt securities. There’s no single, clear-cut explanation for the jump in these so-called Level 3 assets. For some, the surge was a natural consequence of pandemic turmoil: safer assets became difficult to price as markets froze, and risk managers had to shunt them into a different category, according to analysts and people familiar with the situation. Others are likely to have added to their riskiest bets after seeing the potential for a windfall in the chaos, said Jerome Legras, managing partner at Axiom Alternative Investments.
- Investments in U.S.-listed fixed income exchange traded funds declined 90% last week. Broad bond-market ETFs led the inflows. Corporate bond ETFs had the biggest change from the previous week. Net inflows to ETFs totaled $555.2m in the week ended Aug. 18 for the 21st straight week of gains, including the effect of leveraged funds; that compares with $5.29b the prior week
*All sources from Bloomberg unless otherwise specified