August 22nd, 2018
Daily Market Commentary
- Royal Bank of Canada has kept costs at bay, even with elevated spending on digital initiatives to woo more customers. Revenue growth in Canadian banking outpaced expenses in the fiscal third quarter, pushing operating leverage at the lender’s biggest division closer to its financial target for the year. Operating leverage — the difference between revenue and expense growth rates — was 5 percent for the period ended July 31, up from 0.7 percent in the second quarter, the Toronto-based bank said Wednesday in announcing earnings that beat analysts’ estimates. The gain helped lift profit from Canadian banking 11 percent to C$1.49 billion ($1.14 billion).
- The U.S. and Mexico moved closer toward a consensus on how to forge a new North American Free Trade Agreement even though key hurdles remain, according to several people familiar with the matter on both sides of the talks. Progress has been made during five weeks of discussions between the U.S. and Mexico on issues including rules for cars, but there’s no broader agreement on reshaping Nafta, two U.S. administration officials said Tuesday night.
- Canopy Growth Corp.’s chief executive officer expects one “Google-like company” to dominate the cannabis industry. His own firm may well be on its way. Canopy’s transformative deal with Constellation Brands Inc., the maker of Corona beer, has given it legitimacy, clout and a cash hoard that has widened the gap with its competitors. The deal has boosted Canopy’s stock 56 percent since Constellation’s C$5 billion ($3.8 billion) investment for a 38 percent stake was announced last week. That brings its market value to C$11 billion, in the same league as plane maker Bombardier Inc. and retailer Canadian Tire Corp. and about C$3.7 billion more than its nearest competitor Aurora Cannabis Inc.
- European shares slipped in early trade, reversing some of Tuesday’s gains, as investors assess the latest developments in U.S. politics with president Donald Trump suffering Tuesday perhaps the worst day of his presidency. The Stoxx Europe 600 Index fell as much as 0.2 percent, after raising for two consecutive days.
- U.S. equity futures edged lower while stocks in Europe and Asia were mixed as traders tried to gauge the fallout from the latest legal drama engulfing Donald Trump’s presidency. Treasuries held steady, while the euro advanced after data showed wages surged. Futures on the Dow and S&P 500 slipped, while they nudged higher on the Nasdaq.
- Asian shares advanced for a fourth day, led by a rebound in Japan, with technology stocks as the biggest contributors. The MSCI Asia Pacific Index rose 0.4 percent as of 4:31 p.m. in Hong Kong to 164.04, set for its longest advance since July 27.
- Oil rose from the highest in more than a week in New York after an industry group reported a steep drop in U.S. crude stockpiles. Futures for October added as much as 1.3 percent after settling Tuesday at the highest since Aug. 10. Inventories fell by 5.17 million barrels last week, the American Petroleum Institute was said to report. That’s more than double the decline forecast in a Bloomberg survey ahead of government data later on Wednesday. Prices were also boosted by a four-day slide in the dollar.
- Gold steady on continued dollar weakness and signs of improving physical demand. Copper prices have fallen relative to gold this year, and that may say a lot about the outlook for U.S. bond yields if history were any guide. Concerns about rising trade protectionism have weighed on demand for the red metal, with the copper-bullion ratio dropping and widening the divergence with Treasury yields.
- Hartford Financial Services Group Inc. agreed to purchase Navigators Group Inc. for about $2.1 billion in cash to expand its reach into specialty insurance coverage. Hartford will pay $70 per share for Navigators, the companies said Wednesday in a statement, or about 8.9 percent more than Navigators’ closing price Tuesday. The deal includes a 30-day “go-shop” provision for other suitors to propose a deal for Navigators, whose shares have surged 32 percent this year.
- Linde AG acknowledged that getting a merger with Praxair Inc. past U.S. antitrust authorities will require the industrial-gas giants to sell more assets than planned, potentially putting the $45 billion deal in jeopardy. The latest feedback from the Federal Trade Commission would require the pair to breach a self-imposed threshold for disposals, Munich-based Linde said Wednesday. The regulator has focused attention on a plant in La Porte, Texas, according to people with knowledge of the matter.
- Santos Ltd. agreed to buy fellow Australian oil and gas producer Quadrant Energy for at least $2.15 billion, boosting its domestic natural gas assets. The deal will raise Santos’ reserves by more than a quarter and annual production by nearly one-third, the Adelaide-based company said in a statement Wednesday. The two companies’ assets overlap in Western Australia, providing synergies estimated at $30 million to $50 million a year, it said in the statement.
- Lowe’s Cos. shares tumbled in premarket trading, despite upbeat second-quarter results, as the home-improvement company lowered its full-year outlook and moved to close a unit. The company expects this year’s revenue to rise 4.5 percent and earnings at $4.50 to $4.60 a share. It had previously projected a sales gain of about 5 percent and profit of as much as $5.50 a share. The shares fell as much as 4.8 percent in premarket action.
- Target Corp. kept pace with rival Walmart Inc. by posting its best sales in 13 years, positioning the shares to open at a historic high. Same-store sales rose 6.5 percent in the latest quarter, the company said Wednesday, beating analysts’ average prediction, according to Consensus Metrix. Web revenue growth also accelerated from the first quarter of the year. The shares rose in pre-market trading.
- Lockheed Martin Corp. continues to deliver its next-generation F-35 aircraft late because of production flaws, even as the Pentagon is poised to award the company a potential $11 billion contract that’s the biggest yet. The contractor for the costliest U.S. weapons system has been “late to contract requirements” in providing 209 of 308 of the planes to U.S. and international customers through June 30, the Defense Contract Management Agency said in a statement to Bloomberg News. While Lockheed and the Pentagon’s F-35 program office said they expect on-time delivery of all 91 F-35s due this year, the contract agency predicted seven won’t make that deadline.
- Tech-focused startups are knocking on the door of a $15 billion industry that’s dominated by just four companies: Title insurance. A California regulator announced Tuesday that, for the first time, it gave approval to a tech-focused startup title insurer to operate in the biggest U.S. state by population. States Title Inc. joins newcomers including OneTitle National Guaranty Co. and Spruce Holdings Inc. that have gained footholds in other U.S. regions to enter the complex and closely regulated world of title insurance.
- Continental AG shares slumped the most since 2009 after the car-parts maker reduced its revenue forecast, blaming rising spending on new technology for its carmaker customers combining with lower-than-expected sales in China and Europe. The world’s second-biggest automotive supplier expects revenue of 46 billion euros ($53 billion) for the year, excluding currency effects, which is 1 billion euros lower than a previous target, the Hanover, Germany-based company said Wednesday in a statement. The company also reduced its forecast for operating return on sales to more than 9 percent, down from a 10 percent target.
- Donald Trump suffered through perhaps the worst day of his presidency Tuesday as his personal lawyer implicated him in a crime at almost the same moment his former campaign chairman became a convicted felon. Trump’s former lawyer Michael Cohen pleaded guilty to illegal campaign finance charges over hush money paid to a porn actress and a former Playboy model, all but naming Trump as having ordered him to do it. Moments after the charges were read aloud in a Manhattan courtroom, the president’s former campaign chairman Paul Manafort was convicted on eight counts of tax and bank fraud charges, boosting Special Counsel Robert Mueller’s investigation.
- Poland’s latest move to battle some of the worst smog in Europe is actually counter-productive, according to environmental groups. The Energy Ministry this week proposed norms for the coal used to heat more than 40 percent of the nation’s households. But because the rules would take precedence over stricter local regulations in some of the most-affected areas, they may actually mean a step back in the the battle against smog, for which the government has pledged 103 billion zloty ($28 billion).
- Vodafone Group Plc and CK Hutchison Holdings Ltd. are considering combining their unprofitable mobile-phone business in Australia with broadband provider TPG Telecom Ltd. as intensifying competition forces rivals to consolidate. Vodafone Hutchison Australia Pty and TPG Telecom Ltd. are in “exploratory” discussions, they said in separate statements on Wednesday. TPG, which had a market value yesterday of A$5.84 billion ($4.3 billion), described it as a “merger of equals.”
- Telefonica SA is in talks with Amazon.com Inc. to add Prime Video streaming to its phone, TV and internet packages, part of an effort to keep customers hooked on the Spanish carrier’s services, according to a person familiar with the plans. By offering premium video-on-demand rolled into Telefonica’s services, the company aims to spare customers the hassle of subscribing to content separately. The move also helps ensure that users become more reliant on its packages, said the person, who asked not to be identified because the deliberations are private.
- U.K. pharmaceutical giant GlaxoSmithKline Plc has requested bids by mid-September for its $4.3 billion Indian consumer-health unit, which owns the popular malted milk brand Horlicks, people with knowledge of the matter said. Glaxo has sent out an information memorandum with preliminary details about the business to possible suitors, according to the people, who asked not to be identified because the information is private. The sale has attracted interest from potential bidders including Nestle SA, PepsiCo Inc. and Reckitt Benckiser Group Plc, they said.
- A backlash against the app stores of Apple Inc. and Google is gaining steam, with a growing number of companies saying the tech giants are collecting too high a tax for connecting consumers to developers’ wares. Netflix Inc. and video game makers Epic Games Inc. and Valve Corp. are among companies that have recently tried to usurp the app stores or complained about the cost of the tolls Apple and Google charge.
- Xiaomi Corp. delivered a 68 percent revenue jump and quarterly profit in its maiden earnings report, as the Chinese smartphone giant made strides overseas while fending off a challenge from local rivals such as Oppo. The results — its first since raising $5.4 billion in an initial public offering — could help Xiaomi get past an anti-climactic July trading debut. Net income came to 14.7 billion yuan ($2.1 billion) in the three months ended June, versus a 12 billion yuan loss a year earlier. Revenue climbed to 45.2 billion yuan, but its pace decelerated from the first quarter.
- Pacific Investment Management Co. sees a 70 percent chance the world economy enters a recession over the next five years as ultra-loose monetary policy from the U.S. to Europe comes to a halt. Marc Seidner, chief investment officer of non-traditional strategies at Pimco, warned investors should expect increased volatility as monetary easing turns into monetary tightening. With traditional assets expensive, they can find some shelter in private markets, Seidner, who has more than 30-year investment experience, said at a conference in Sydney.
- San Miguel Corp., the Philippines’ largest company by revenue, plans to offer as many as 1.02 billion shares of its food unit in a stock offering that would be valued at as much as $1.5 billion, based on Wednesday’s close. San Miguel Food and Beverage Inc. — which recently absorbed its parent’s beer and hard drinks ventures — aims to price the shares Oct. 19, followed by a public offer period from Oct. 23 to Oct. 29, according to a prospectus submitted to the securities regulator.
- Donald Trump may want to watch what he wishes for. If Federal Reserve boss Jerome Powell does what the president wants, American assets could lose their appeal as a global haven. Strategists warn that more than just the central bank’s credibility would be hurt if the Fed were to put on the brakes on monetary policy tightening. Trump would get his desire for a weaker dollar, but rising inflation expectations would dent the perceived safety of U.S. assets and eventually boost longer-term financing costs for the government and American consumers. On the other hand, global liquidity and growth could receive a lift, at least initially, and emerging markets that have been maligned by Trump could benefit.
*All sources from Bloomberg unless otherwise specified