August 21st, 2020
Daily Market Commentary
- Canadian equities pared a drop earlier in Thursday’s session as information technology stocks advanced. The S&P/TSX Composite Index rose 0.2%, with six of 11 sectors higher. Lightspeed POS Inc. and Constellation Software Inc. were among technology gainers. Real estate also advanced. Spot gold closed with its third gain in four sessions as concerns over the path of the economic recovery and U.S.-China trade tensions bolstered demand for haven assets. Prime Minister Justin Trudeau’s government plans to extend Canada’s emergency income support for another four weeks, and beef up the country’s employment insurance plan in an effort to keep stimulus flowing into the economy.
- Canada’s biggest banks are expected to see profits plunge for a second straight quarter due to economic fallout from the Covid-19 pandemic — though there are signs of improvement. The nation’s six-largest lenders will post an average profit decline of about 30% in the fiscal third quarter from a year earlier when they kick off the reporting season next week, according to the average estimates of seven analysts. It’ll be one of the worst quarters in modern Canadian banking history, but it marks an improvement from the 50% profit drop in the second quarter when the virus first gripped the North American economy.
- European stocks rose as optimism about progress in developing a coronavirus vaccine news outweighed data showing a mixed picture for the euro-area economy. The Stoxx Europe 600 Index was up 0.4% as of 8:52 a.m. in London, dipping briefly into negative territory but bouncing back following the release of Purchasing Managers’ Index data for France and Germany, which showed a divergent performance for manufacturing and services in their economies. European stocks have been largely rangebound over the summer, following their rally off a March low. Since the end of June, the Stoxx 600 has gained just 1.8%. Ian Williams, a strategist at Peel Hunt, said that he doesn’t think investors are paying that much attention to forecasts at the moment and are instead assessing their portfolios stock by stock.
- U.S. futures fluctuated before turning lower as faith in the technology-led rally and a virus-vaccine breakthrough faltered amid concerns over mixed economic data. Semiconductor and healthcare shares led early gains in the U.S. premarket, from drugmakers Novartis AG and Pfizer Inc. to tech firms Prosus NV and Dassault Systemes. Equipment maker Deere & Co., a bellwether stock, jumped after increasing its profit guidance. The tech-heavy Nasdaq 100 swung between modest ups and downs after setting a fresh record high Thursday.
- Japanese stock rose after progress on a Pfizer Inc. vaccine and potential U.S.-China trade negotiations boosted investor sentiment. Both the Topix and Nikkei 225 Stock Average climbed as much as 1% in the morning after Pfizer announced its Covid-19 vaccine is on track to seeking regulatory review in October. The Topix’s Other Products Index, which includes companies such as Nintendo Co. and Bandai Namco Holdings Inc., led gains. Despite the advance, both equity gauges fell on the week as Japan’s currency climbed almost 1% against the dollar amid concerns about the U.S. economy. Initial jobless claims in regular state programs rose by 135,000 to more than 1.1 million in the week ended Aug. 15, U.S. data showed Thursday.
- Oil fell as the coronavirus pandemic continues to cloud the demand outlook. Europe’s economy unexpectedly lost momentum this month, causing concerns over energy consumption and showcasing the challenge to growth. The region is battling to control a new spike in virus cases while trying to avoid renewed lockdowns. Since prices touched a five-month high at the start of this month, U.S. crude futures have barely moved, trading in a $2.50 range. This week the Federal Reserve and OPEC+ cast doubt on the outlook for the global economy and oil demand respectively. Still, prices are set to eke out a gain for the week after data earlier showed American crude and gasoline stockpiles shrank.
- Gold slipped, heading for a back-to-back weekly decline, as the dollar firmed against other currencies amid growth worries in Europe. French manufacturing unexpectedly contracted in August after a two-month rebound, data Friday showed. German growth momentum slowed, with activity in services grinding to a halt, even though manufacturing continued to improve. Europe is grappling with a resurgence of coronavirus infections, adding to concerns over economic recovery. In the U.S., infections in southern states are slowing and death rates should start to fall next week, according to the head of the Centers for Disease Control and Prevention. Still, concerns over America’s economy linger, following Thursday’s data showing applications for unemployment benefits unexpectedly increased last week.
- The European Union and U.K. warned they may not be able to strike a deal on their post-Brexit relationship after a testy week of negotiations that saw little progress. The pound fell. “At this stage, an agreement between the U.K. and the EU seems unlikely,” the bloc’s chief negotiator Michel Barnier said after talks broke up on Friday. “Too often this week it felt as if we were going backwards more than forwards.” The two sides are stuck in several areas, notably fishing rights and the so-called level playing field rules aimed at ensuring fair competition. With agreement on both those subjects a precondition for a wider trade deal, businesses and consumers face the return of tariffs and quotas not seen for a generation if the talks fail.
- Deere & Co., the largest maker of agricultural machinery, increased its sales outlook for the year despite an “uncertain” market due to the coronavirus pandemic. The Moline, Illinois-based producer said net income for the fiscal year would be $2.25 billion, up from a May estimate of $1.6 billion to $2 billion. The company’s third-quarter net income of $2.57 a share exceeded the highest estimate among analysts. Shares rose 4.5% as of 6:43 a.m. in New York, before regular trading hours. “Although unsettled market conditions and related customer uncertainty are expected to have a moderating effect on key markets in the near term, we believe Deere is well-positioned to help make our customers more profitable and sustainable,” Chief Executive Officer John May said in a statement Friday.
- As the race for a Covid-19 vaccine gets closer to the finish line, investors are parsing details of trial designs like never before as they handicap which is most likely to succeed. Johnson & Johnson confirmed in an email Thursday that it plans to test its Covid-19 vaccine in as many as 60,000 people, twice the number of other big trials being conducted in the U.S. The company first posted the design for the trial on Aug. 10, and it is set to begin in late September. Meanwhile, Pfizer Inc. released favorable safety data from a Phase 1 trial of its vaccine. The New York-based company, which is developing its product with German partner BioNTech SE, hadn’t previously released safety data on the shot it will move into a final-stage trial.
- Saudi Arabia’s state oil company has suspended a deal to build a $10 billion refining and petrochemicals complex in China, according to people familiar with the matter, as the company slashes spending to cope with low oil prices. Saudi Arabian Oil Co., or Aramco, decided to stop investing in the facility in China’s Northeastern province of Liaoning after negotiations with its Chinese partners, said the people, who asked not to be identified as the matter is private. The uncertain market outlook was behind the decision, they said. Aramco didn’t immediately respond to a request for comment. China North Industries Group Corp., or Norinco, one of the partners, didn’t immediately respond to an email seeking comment. No one answered a call to Panjin Sincen, the third partner, outside office hours, or responded to an email.
- Europe is grappling with a resurgence of coronavirus infections, with little appetite among top officials to resort to stringent restrictions that helped control the spread earlier this year. Meanwhile, data released on Friday showed that the euro-area economic recovery had unexpectedly lost momentum. The U.K. economy continued its recovery from a record slump, but the news was clouded by a growing debt burden. In a further blow to the travel industry, the country’s transport secretary downplayed the benefits of testing at airports, citing the lengthy quarantine period that would still be required. Hong Kong will kick off a campaign to test its entire population for the coronavirus on Sept. 1, in the first such effort attempted outside of mainland China. Infections in southern U.S. states are slowing and deaths should start to fall next week, the head of the Centers for Disease Control and Prevention said.
- Joe Biden challenged Americans to embrace the “path of hope and light” as he accepted his party’s nomination Thursday, in an emotive and emphatic speech that cast November’s election as not merely the choice of a president but a fundamental referendum on the nation’s character. “May history be able to say that the end of this chapter of American darkness began here tonight,” Biden said in offering the closing argument of the Democrats’ virtual convention.
- Billionaire Jack Ma’s Ant Group plans to file for dual listings in Hong Kong and Shanghai in the next few weeks, targeting a valuation of about $225 billion, people familiar with the matter said, in an effort to pull off the world’s largest initial public offering. The share sales could raise about $30 billion in total if markets are favorable, said one of the people, requesting not to be named because the matter is private. The Hangzhou-based firm seeks to float its shares simultaneously on the Hong Kong stock exchange and the tech-focused Star board in Shanghai as soon as October, the people said. Ant, which made about $1.3 billion in profit in the March quarter, is Alibaba Group Holding Ltd. founder Ma’s prized asset. It’s morphed from a fintech platform to an online mall for everything from loans and travel services to food delivery, in a bid to win back shoppers lost to Tencent Holdings Ltd. With data from almost a billion users of its Alipay app at its back, Ant is pushing broadly into financial services, delivering technology such as robo investing and lending platforms as well as building out its advisory business.
- Investors pulled the most money out of U.S. equity funds in nearly four months in the week when the S&P 500 hit a record high, according to Bank of America Corp. U.S. stock funds saw a $7.8 billion outflow in the week through Aug. 19, the largest exit in 15 weeks, BofA said in a note, citing EPFR Global data. Instead, investors flocked to bond funds, which attracted $14.5 billion. Market players are facing a dilemma of whether to get out of equities at historic highs or stay invested and potentially reap unprecedented returns. The BofA and EPFR data confirm that some investors have been taking profit on U.S. stocks, which have surged thanks to unprecedented stimulus measures and a rally in technology giants. U.S. large caps and growth stocks dominated the equity outflows, according to BofA.
- In the week through Aug. 19, $14.5b went into bond funds, $1.2b into gold, $3.5b exited equity funds and $29.7b was pulled from cash, according to BofA note, citing EPFR Global data. Among equity regions, highlights include U.S. with largest outflow in 15 weeks at $7.8b, Japan with the biggest outflow in 26 weeks at $1.3b, Europe with $0.2b outflows, EM with first inflow in 6 weeks at $1.3b
- Nippon Paint Holdings Co., Japan’s biggest paint maker, struck a 1.29 trillion yen ($12.2 billion) deal to join with billionaire Goh Cheng Liang’s Wuthelam Holdings Pte, seeking to create a dominant paints and coatings company in Asia. The deal involves Wuthelam taking a majority stake by buying new shares in Nippon Paint, which will use the bulk of the money to buy out their joint ventures in China, India, Malaysia, Singapore, South Korea and Thailand. Nippon Paint will also take over Wuthelam’s wholly owned Indonesia business for about $2 billion. Nippon Paint has had ties for more than 50 years with Goh, Singapore’s richest person with a $16.3 billion net worth, according to the Bloomberg Billionaires Index. Although they operated the Nippon Paint South-East Asia Group, or Nipsea, together for years, he began efforts in 2013 to gain majority control of the Japanese paint company. The new arrangement should streamline their corporate structure and make it more flexible, according to Bloomberg Intelligence analyst Horace Chan.
- Hours before Lyft Inc. and Uber Technologies Inc. were planning to suspend services in their home state of California, a state court gave them a reprieve. On Thursday, a state appeals court ruled that the companies can keep operating as normal while challenging a judge’s order to comply with a state labor law. The law, in effect since January, mandates that the companies treat their workers in California as employees—a requirement that would upend the companies’ business models. The decision Thursday comes just in time for the ride-hailing companies, which said they would stop doing business in the state rather than hastily work to comply with state law. Earlier in the day, Lyft had said it was planning to suspend California service starting at midnight on Thursday, which was when a court ruling requiring the companies to comply with the law was set to take effect. Uber also threatened to stop service on Thursday night.
- Opposition activists in Russia say doctors are refusing to release prominent anti-corruption campaigner Alexei Navalny for medical treatment abroad and blamed the delay on President Vladimir Putin. The hospital in the Siberian city of Omsk has refused to discharge Navalny, saying his condition is too unstable to allow him to travel, despite his family’s requests, according to the Kremlin critic’s spokeswoman Kira Yarmysh. A plane from Germany arrived in Omsk Friday to transport him to Berlin.
- The euro-area economy unexpectedly lost momentum this month after a resurgence of coronavirus cases forced new restrictions, highlighting the challenge of rekindling growth while the pandemic remains untamed. The sharp slowdown — driven by services — shows that the escape from recession won’t be plain sailing, and undermines lingering hopes for a V-shaped recovery. While infections are approaching levels recorded during strict lockdowns earlier this year, governments are so far reluctant to re-impose those measures. In a report published Friday, IHS Markit said its composite measure of private-sector activity dropped to 51.6 in August from 54.9 in July. The manufacturing gauge remained virtually unchanged, but services plunged to 50.1, a level that practically signals stagnation.
- The U.K. economy continued its recovery from a record slump, though the good news was clouded by mounting job losses and a growing government debt burden. A broad measure of growth in economic activity jumped to the highest in almost seven years in August, while retail sales rose more than forecast to surpass their pre-virus levels in July, reports on Friday showed. That pickup from the virus slump is fueled by huge state support, which pushed government debt above 2 trillion pounds for the first time.
- Secretary of State Michael Pompeo formally notified the United Nations of the U.S. demand to reinstate global sanctions against Iran and slammed European allies who oppose the move, accusing them of a failure to lead and appeasing the Iranian regime. Pompeo traveled Thursday to New York to hand-deliver a letter to the president of the UN Security Council saying Iran isn’t complying with its obligations under the 2015 nuclear deal “despite extensive efforts and exhaustive diplomacy” by the U.S. and other member states. The move was also aimed at keeping in place a 13-year-old arms embargo that’s set to expire in October.
- U.K. government debt passed 2 trillion pounds ($2.6 trillion) for the first time, a milestone that will stoke the debate over how Chancellor of the Exchequer Rishi Sunak should finance his unprecedented support for the pandemic-ravaged economy. It means Britain now owes an amount equivalent to more than 100% of economic output, the heaviest burden since the early 1960s, the Office for National Statistics said on Friday. Sunak said the figures show that difficult decisions are needed to bring the nation’s public finances back to a sustainable footing, in a clear signal he’s not prepared to allow borrowing to accumulate unchecked for too long.
- Advent International is weighing a sale of Dutch health-care services company Mediq in a deal that could fetch more than 1 billion euros ($1.2 billion), according to people familiar with the matter. The private equity firm is working with advisers at Rothschild & Co. as it explores options for the business, the people said, asking not to be identified as discussions aren’t public. A sale process could begin this year and would likely draw interest from private equity buyers, the people said. Deliberations are at an early stage and no final decisions have been made, according to the people. Representatives for Advent and Rothschild declined to comment.
- Chevron Corp. plans to stagger shutdowns at its $54 billion Gorgon LNG plant in Western Australia through early-2021 after regulators demanded more inspections for damage to key components that liquefy the fuel. The U.S. energy major and state regulators said Friday that each of the project’s three LNG production units, known as trains, will be shut in a phased manner through January. “Chevron has presented the department with comprehensive safety and technical information that supports an accelerated but staged inspection schedule combined with a range of other controls,” the state’s Department of Mines, Industrial Regulation and Safety said in a statement.
- Several of Alibaba Group Holding Ltd.’s biggest investors have converted billions of dollars in U.S. shares for Hong Kong stock in part to avoid potential U.S. sanctions and de-listings of major Chinese technology companies. Temasek Group Holdings Pte., Baillie Gifford & Co., and Matthews Asia are among the major shareholders that have swapped stakes in the Chinese e-commerce giant to take advantage of new rules easing the switch following Alibaba’s listing in Hong Kong last year. Geopolitics is contributing to the shift, according to people familiar with the moves. “Lots of long-term fund managers, especially the ones whose fund managers are based in Asia, are switching or considering switching from ADRs into Hong Kong-listed shares,” said Nelson Yan, head of offshore capital markets investment at Creditease Wealth Management (Hong Kong) Ltd., referring to American Depositary Receipts. “Demand for these ADRs in the U.S. is now clouded by the politics.”
*All sources from Bloomberg unless otherwise specified