August 20th, 2020

Daily Market Commentary

Canadian Headlines

  1. Canadian equities fell alongside U.S. stocks after the Federal Reserve minutes signaled tempered optimism about growth in the second half of 2020. The S&P/TSX Composite Index dropped 0.3%, with seven of eleven sectors lower. Materials led the decline, while health care also lagged. Utilities were among gainers. Spot gold fell to a session low after minutes of the Federal Reserve’s last meeting showed U.S. central bankers appeared to back off from an earlier readiness to clarify guidance on the future path of interest rates. Meanwhile, the Canada Pension Plan Investment Board’s thought leadership lab sees permanent changes to consumer behavior as a result of the global pandemic.

World Headlines

  1. European stocks slid in a broad retreat after minutes from the Federal Reserve’s last meeting indicated expectations of a less robust U.S. economic recovery. The Stoxx Europe 600 Index dropped 1.3% to its lowest level since Aug. 10 as of 8:05 a.m. in London, with all 19 industry groups down. Cyclicals such as miners, carmakers and banks declined the most. Stocks are falling after Fed officials said in July minutes that the coronavirus crisis would weigh heavily on economic activity in the near term and posed considerable risks to the medium-term outlook. Simmering U.S.-China tensions and an American stimulus impasse are also weighing on European equities, which have stalled in recent weeks following a strong rebound from the selloff through March.
  2. Stocks fell across much of the world after the Federal Reserve signaled continued concern over the pandemic weighing on the world’s biggest economy. U.S. equity futures pared declines and Treasuries advanced before key data on U.S. unemployment. Chipmaker Nvidia Corp. dropped in pre-market trading after warning that growth will slow in its data-center business. S&P 500 contracts slipped, pointing to another weak session after Fed minutes of a July meeting said the virus posed “considerable risks” to the economic outlook over the medium term.
  3. Japanese stocks fell after Federal Reserve minutes spurred concern over the pace of recovery for the world’s largest economy. Electronic makers and telecommunication shares weighed the most on the Topix. Tokyo Electron, SoftBank Group Corp. and Fast Retailing Co. were the heaviest drags on the Nikkei 225 Stock Average. U.S. shares declined following the release of the Fed minutes, which noted the health crisis would “weigh heavily” on economic activity. Geopolitical tensions also sapped demand for equities to some extent, with President Donald Trump saying he would call on the United Nations Security Council to restore all nuclear-related sanctions on Iran. Meanwhile, the U.S. and China are planning to reschedule trade-deal talks postponed from last weekend, according to a person familiar with the matter.
  4. Oil declined from a five-month high in New York with the U.S. Federal Reserve and OPEC+ sounding caution on the demand recovery as many countries struggle to contain the coronavirus. Futures fell about 1% below $43 a barrel amid a broader slide in equities after minutes from the Fed said the pandemic would weigh heavily on economic activity, repeating its view that the recovery would depend on containment of the virus. OPEC+ also warned at a meeting Wednesday that the pace of the demand rebound was slower than expected and at risk from a prolonged second wave of the outbreak, while also urging laggards to adhere to their output pledges.
  5. Spot gold steadied after slumping on Wednesday, as investors weighed a resurgence in Covid-19 infections in Europe against the prospect for further talks on a China-U.S. trade deal. Beijing and Washington have agreed to have a call soon to discuss the progress of their trade deal, China’s commerce ministry said Thursday. That added pressure on havens like gold, following the complex fall-out from the minutes of the Federal Reserve’s last meeting. The Fed’s minutes left room for concerns over the path of the economic recovery, saying the ongoing public health crisis would “weigh heavily” on activity. They also signaled that central bankers backed off from an earlier readiness to clarify guidance on the future path of interest rates.
  6. Joe Biden will set the tone for a bruising general election battle against President Donald Trump as he accepts the Democratic nomination Thursday in a speech testing his ability to connect with voters in the virtual campaign format of the pandemic. The former vice president’s prime-time address will culminate four nights of withering attacks against Trump by Democrats who have called the president unfit for office and incapable of handling the coronavirus outbreak and a record surge in unemployment. In addition to laying a marker against his Republican opponent, Biden will also seek to uphold the centrist themes of this year’s convention while keeping party progressives in the fold.
  7. UBS Group AG is overhauling the legal structure at its key international wealth management unit in a move that will cut costs and free up billions of dollars for lending in higher-growth markets. The project — known as Rigi after a famous Swiss peak — will see the bank transfer large customer deposits out of its Swiss entity into the bank’s main UBS AG legal unit, people familiar with the matter said, asking not to be identified as the plans are private. The change will allow the bank to boost loans outside Switzerland, the people said. Rigi partially rolls back measures from the 2008 financial crisis, when Switzerland told UBS to create separate legal entities that would be insulated in the event of a surprise bankruptcy. Moving the deposits would help the bank toward its target of lending between $20 billion and $30 billion a year to wealthy clients outside its home market, the people said.
  8. Hedge funds are becoming even more bullish on the euro. Not only are they betting the currency’s rally will continue, they see it rising to a level last seen in early 2018. Interest to buy euro options that payout on another 5% advance over the next six-months is strong, according to two traders and a broker in London, all of whom are familiar with the transactions. The euro traded little changed at $1.1836 as of 10:44 a.m. in London. The chances of a Democratic Party win, and what that means to U.S. fiscal plans, are among the main drivers of the dollar’s weakness, the traders added, asking not to be identified because they aren’t authorized to speak publicly.
  9. President Donald Trump helped to clinch an unprecedented deal among the world’s largest crude producers, but the pact hasn’t stopped America’s oil industry from bleeding. The Covid-19 pandemic’s devastating effect on the oil market is rippling throughout the supply chain, from explorers to the companies that provide them with workers and equipment. London-based Valaris Plc, owner of the world’s largest offshore rig fleet, became the latest casualty on Wednesday. In North America alone, dozens of producers and oilfield servicers have gone bust in 2020, and Mizuho Securities USA predicted earlier this year that as many as 70% of U.S. shale producers may go bankrupt. Oil prices pulled out of a freefall after an agreement by OPEC and its allies, prodded by Trump, to rein in production. But after embarking on aggressive growth plans when crude was trading above $100 a barrel a few years ago, the U.S. industry is still grappling with crushing debt loads, and demand for oil and petroleum products remains well below normal as nations struggle to control the spread of the virus. Longer term, oil companies are facing investor calls to address climate change and transition away from fossil fuels.
  10. Estee Lauder Cos. plans to cut 1,500 to 2,000 jobs worldwide and boost its digital operations after coronavirus lockdowns hit demand for cosmetics. With consumers shifting to more online purchases, the company said in an earnings release Thursday that it plans to close 10% to 15% of its free-standing stores. Estee Lauder said it expects to take restructuring and other charges of between $400 million and $500 million. The company’s forecast for adjusted first-quarter earnings of 80 cents to 85 cents a share fell well short of analysts’ estimate of $1.22 a share. Estee Lauder said net sales in the current period will fall by 12% to 13%.
  11. United Parcel Service Inc. and FedEx Corp., riding high from record package deliveries amid the coronavirus pandemic, are moving on to their next challenge: showing investors they can boost profit in the approaching onslaught of the holidays. FedEx followed UPS and the U.S. Postal Service this week in setting aggressive peak-season fees, signaling increased pricing power with retailers ahead of what’s expected to be an unprecedented year-end surge of packages. The couriers will also compete with Inc. to hire hundreds of thousands of seasonal drivers as the e-commerce giant ramps up its distribution network. The holiday rush sets up a final exam of sorts for UPS and FedEx, which are finally winning over Wall Street after plowing billions of dollars into automated sorting centers, air freighters and routing software. With their seasonal price increases, they’re seeking to prove they can extract more profit from the flood of residential deliveries while keeping customers satisfied. That also means dodging the risk of a logjam, which is already stoking anxiety at big shippers.
  12. TikTok’s Chinese owner is proposing to settle consumer privacy litigation that has exposed it to hundreds of millions of dollars in damages as the video-streaming app prepares for a possible acquisition under threat of being shut down in the U.S. over national security concerns. Lawyers for ByteDance Ltd. and consumers have “reached a settlement in principle, subject to certain conditions,” to resolve claims that the app unlawfully records facial-scan images of children and sends confidential information about adult users to China, according to a filing in Chicago federal court. The attorneys said they plan to file a final settlement proposal within 90 days. But there’s a wrinkle: The deal could be scuttled because attorneys representing consumers in California are complaining that they were left out of the settlement talks.
  13. Big Oil is tapping Big Tech to keep drilling off the shores of Brazil even as the global pandemic traps workers at home. Confronted with the need to keep employees working remotely, Petroleo Brasileiro SA fast-tracked a move to a Microsoft Corp. cloud platform it had already been testing before lockdowns, Fernando Lemos, Microsoft’s chief technology officer in Brazil, said in an interview. That’s allowing staff to access from home data that was previously only available in the oil giant’s offices in Rio, and to monitor the use of safety equipment at deep-water vessels. With the help of Microsoft’s artificial intelligence technology to process its myriad of geological data, Petrobras also aims to eliminate dry holes during exploration and reach commercial production at offshore wells faster while reducing costs.
  14. China confirmed plans to talk with U.S. officials soon to review progress on their preliminary trade deal, a rare engagement between the world’s largest economies as relations deteriorate on other issues ranging from human rights in Hong Kong to technological dominance. The two nations will be in touch in the near term, Commerce Ministry spokesman Gao Feng said in Beijing Thursday when asked if the meeting will happen. Gao didn’t announce an exact date, or elaborate further. Both sides had been expected to talk this past weekend as part of a six-month review since the agreement, signed in January, took effect Feb. 15. Speaking in Arizona earlier this week, President Donald Trump said he canceled those plans because he’s unhappy with China over its role in the Covid-19 pandemic.
  15. Alibaba Group Holding Ltd.’s quarterly revenue grew a better than expected 34%, signaling that Chinese consumer sentiment is recovering at a rapid clip from its Covid-19 trough. China’s most valuable corporation reported sales of 153.8 billion yuan ($22.2 billion) and net income of 47.6 billion yuan in the June quarter, both surpassing projections. Ant Group, Alibaba’s 33%-owned financial affiliate, grew profit roughly six-fold to $1.3 billion in the March quarter, offering a glimpse into its books in the run-up to a mega initial public offering in Hong Kong and mainland China.
  16. Infections continued to flare in Europe, where Germany recorded more than 1,000 new cases for a third consecutive day and Spain reported its highest number of daily infections since April. French President Emmanuel Macron ruled out another nationwide lockdown, saying the country will rely on local strategies to curb a resurgence of the virus. CureVac and the European Commission are in talks for the supply of 225 million vaccine doses. South Korea is urging the participants of a recent anti-government rally to get tested even if they don’t show any symptoms. A total of 60 people who took part in the Aug. 15 protest in Seoul have so far tested positive. In the U.S., New York’s positive-test rate fell to the lowest since the pandemic began.
  17. Schaeffler AG is preparing to raise as much as 1.3 billion euros ($1.5 billion) as the automotive and industrial supplier grapples with the fallout of the coronavirus pandemic. The company will hold an extraordinary shareholders meeting on Sept. 15 to seek approval to issue as many as 200 million new shares, Schaeffler said Thursday in a statement. The company’s stock closed at 6.445 euros on Wednesday. Like most companies in the automotive industry, Schaeffler has faced a historic slump in orders and revenue as lockdowns to contain the disease halted production lines and sapped demand. First-half revenue fell by more than a fifth, though it managed to generate a profit, helped by a voluntary severance program it extended in May.
  18. RBL Bank Ltd. plans to raise 15.66 billion rupees ($209 million) by issuing shares to five investors, including Maple II BV, ICICI Prudential Life Insurance Co. and CDC Group Plc. The bank’s board approved the issuance of about 88.5 million preferential shares at 177 rupees a share, according to an exchange filing on Thursday. That’s about 4% lower than their closing price on Wednesday. Maple II BV, which is indirectly owned by funds affiliated to Baring Private Equity Asia, will subscribe to 56.4 million shares and hold 9.45% stake in the bank after the offering, according to the filing. Other investors include Gaja Capital Fund and its affiliate Gaja Trustee Co. Ltd.
  19. Kamala Harris, the California senator Joe Biden selected as his running mate, accepted the vice presidential nomination on Wednesday, introducing herself to the nation as a historic choice for a major party ticket and urging a change in direction for the country. “Donald Trump’s failure of leadership has cost lives and livelihoods,” Harris said in her acceptance speech, closing the third night of the Democrats’ virtual convention. “We are a nation that is grieving, grieving the loss of life, the loss of jobs, the loss of opportunities, the loss of normalcy and yes, the loss of certainty.”
  20. Californians are in their sixth month of sheltering in place because of a pandemic that’s killed more than 11,000 residents. Now a new crisis — hundreds of wildfires — is forcing people to prepare to flee their homes at a moment’s notice. Thousands of residents have had to evacuate as blazes rage in the northern part of the state. In Napa, Sonoma and Solano counties north of San Francisco, a conflagration known as the LNU Lightning Complex more than doubled in size Wednesday to 124,000 acres, threatening an estimated 25,000 structures. In a state known for its disasters, multiple crises are converging at once. After a summer of soaring coronavirus cases and scaled-back reopenings, Californians have been gripped by record-setting heat that strained its power grid and led to rolling blackouts for the first time since the 2000-2001 energy crisis. Then came wildfires, many of them caused by lightning strikes in the extreme weather.
  21. Occidental Petroleum Corp. agreed to sell land rights in Wyoming, Colorado and Utah to Orion Mine Finance for $1.3 billion, raising much-needed cash for the oil explorer as it seeks to reduce debt. The deal is expected to close in the fourth quarter and represents more than half of Occidental’s revised asset sales target for this year, the Houston-based company said in a statement on Wednesday. The assets include mineral rights to the world’s largest-known deposit of trona, the raw material for soda ash used to make glass and chemicals. Occidental originally had 13 bidders for the rights including Wyoming’s state government, and later narrowed the field down to Orion, a metals investment fund with $6.2 billion under management.
  22. When it comes to road conditions, drivers in some areas of the U.S. have it far rougher than others. Pandemic-punched budget holes may mean they won’t get smoothed out anytime soon.  Many cities have used lockdown-induced empty streets as an opportunity to make repairs without disrupting traffic. But more than 700 U.S. cities have said they may cut infrastructure spending because of budget shortfalls, and more states are pushing off construction projects. Funding sources for roads vary by state. For drivers, roads can be bumpy for their wallets, too. Potholes caused an estimated $15 billion in damage to American cars over the course of five years, according to a 2016 report by the American Automobile Association. The average bill for repairs caused by hitting a hole was about $300.
  23. President Donald Trump said he would call on the UN Security Council to restore all nuclear-related sanctions on Iran, an attempt to kill off the 2015 nuclear agreement and force Tehran back to the negotiating table. “Mark it down, Iran will never have a nuclear weapon,” Trump said at a White House news conference on Wednesday. “We paid a fortune for a failed concept, a failed policy that would have made it impossible to have peace in the Middle East.” The move sets the Trump administration on a collision course with other world powers who say the U.S. doesn’t have the authority to reimpose international sanctions and that they won’t go along. U.S. Secretary of State Michael Pompeo will formally propose the “snapback” of sanctions Thursday at the United Nations.
  24. Turkey left its policy interest rates unchanged on Thursday, risking greater volatility in the lira as the central bank looks for a backdoor way of containing the currency’s weakness. The Monetary Policy Committee held its key one-week repo rate at 8.25% for a third month, in line with the majority of forecasts in a Bloomberg survey. In the view of most analysts, however, pressure on the lira and the worsening inflation outlook warranted an outright rate hike. The MPC said it will continue with its “liquidity measures,” according to a statement. The Turkish lira depreciated after the decision, reversing earlier gains against the dollar.
  25. The European Union’s top markets regulator is asking for rule changes that could limit London’s role as a hub for asset management. It comes as the deadline for Brexit trade talks approaches, threatening to heighten tension at a fraught moment in the negotiations. The EU has previously warned that it’s not planning to grant easy cross-border access to markets in the short-term, and that banks and other financial firms must prepare to do more business from their offices in the bloc. EU-based funds routinely delegate portfolio management to teams in London, New York and other places outside the bloc. The European Securities and Markets Authority said this practice increases risk, and is recommending a rule change to limit it. The regulator is also seeking to reduce the use of so-called seconded staff from professional services firms or consultancy businesses based outside the region.
  26. Billionaire Jack Ma’s Ant Group generated about 9.2 billion yuan ($1.3 billion) of profit in the March quarter, offering investors a glimpse of its earnings power in the run up to its mega initial public offering. That’s an increase of about 560% compared with the same time last year. The company contributed 3 billion yuan in earnings for its backer Alibaba Group Holding Ltd., which owns 33% of Ant, according to the e-commerce platform’s first fiscal quarter earnings. Based on its equity share, that would roughly translate to 9.2 billion in profit for Ant. A representative for Ant declined to comment.

*All sources from Bloomberg unless otherwise specified