August 24, 2021

Daily Market Commentary

Canadian Headlines

• Canadian stocks surged Monday, staging their biggest rally since July 21 after last week’s volatility. The S&P/TSX Composite Index rose 0.7%. Healthcare led as Trillium Therapeutics surged the most on record, following Pfizer’s purchase of the cancer drugmaker. Materials and energy also gained along with higher commodity prices. Gold rose to the highest in more than two weeks as the dollar weakened amid speculation that the Federal Reserve may delay scaling back its asset-purchase program. Canadian banks are slated to report earnings this week as seven of the eight largest firms release quarterly results starting Tuesday.
• Bank of Nova Scotia continued to see strength in its Canadian banking business and a rebound in its Latin America-focused international unit in the fiscal third quarter. Profit in the international unit totaled C$564 million ($446 million) in the three months through July, compared with a loss a year earlier. Overall profit topped analysts’ estimates. Meanwhile, the lender’s home market of Canada is benefiting from the wider spread of vaccinations, the nascent reopening of the economy and a thriving housing market. Net interest income in the Canadian personal and commercial banking unit more than doubled to C$1.08 billion, helped by an increase in mortgages and business and government loans.
• Bank of Montreal saw loan growth strengthen in its home market in the fiscal third quarter, signaling that the worst of the pandemic may be in the rear-view mirror. Profit in Bank of Montreal’s Canadian personal and commercial banking unit more than doubled to C$815 million ($645 million) in the three months through July, helped by gains in mortgages and personal loans. Overall profit topped analysts’ estimates. With domestic loan growth strengthening, Bank of Montreal is starting to release the stockpile of capital it built up to protect against a wave of pandemic-induced defaults that never materialized. The lender had C$70 million in recoveries, compared with C$1.05 billion in set-asides a year earlier.
• BHP Group and Mitsubishi Corp. will deploy electric pickup trucks and fast-charging infrastructure at one of their metallurgical coal mines in Queensland as part of a push to reduce operational emissions. BHP Mitsubishi Alliance, Australia’s top coal producer, will initially use two of Canadian firm Miller Technology Inc.’s Relay trucks to transport workers at the Broadmeadow mine. The vehicles — which can be charged in about 20 minutes for a 10-hour shift — will be backed by Tritium Pty Ltd.’s fast-charging infrastructure adapted for use in the mining environment.

World Headlines

• European stocks pared earlier gains to trade little changed on Tuesday as investors weighed economic recovery optimism against concerns over the Covid-19 Delta variant and a potential reduction in monetary stimulus. The Stoxx Europe 600 index was up 0.1% by 9:58 a.m., paring earlier advance of as much as 0.4%. Travel and leisure and automakers outperformed, while basic resources rose as iron ore surged. Financials, utilities and staple goods underperformed. Still, European equities are on track for their best month since March and are close to regaining a record high. Purchasing managers’ index data Monday showed continued growth of the manufacturing and services sectors — albeit missing some lofty forecasts — while statistics Tuesday showed the German economy grew faster than initially reported in the second quarter.
• U.S. index futures pared an advance and a rally in European stocks ran out of steam as investors awaited insights on the Federal Reserve’s policy path amid lingering concerns about the threat of Covid-19 to the global economy. Treasuries dipped and the dollar was steady. Contracts on the Nasdaq 100 and S&P 500 held modest gains after a rebound in Chinese technology stocks carried through to U.S.-listed Chinese companies in pre-market trading, with Alibaba Group Holding Ltd. and JD.com Inc. up more than 5% and 8% respectively. While markets started the week with a strong global rally, gains in Europe and the U.S. seem to be fizzling on concern over the spread of the delta virus variant and tighter monetary policy. Economic data this week painted a mixed picture, with manufacturing purchasing managers’ indexes in Europe and the U.S. showing showing continued growth, though slowing from last month’s levels.
• Asian stocks were poised for their biggest two-day gain since early February, as Chinese technology stocks extended their rebound and investor attention turned toward reopening possibilities. The MSCI Asia Pacific Index gained as much as 1.4%, extending Monday’s 1.6% advance. Alibaba and Tencent were the biggest contributors to the regional benchmark’s gain, amid continued bargain hunting following the recent tech selloff.  Hong Kong’s Hang Seng Index rose more than 2%, leading gains in the Asia Pacific. Key equity gauges in China, South Korea, Japan, Malaysia and the Philippines rose by at least 1%.
• Oil prices gained for a second session, building on the biggest one-day gain in five months, amid glimmers of optimism among bulls that the delta coronavirus variant’s hit to demand may be passing. Brent futures topped $70 a barrel, after falling below that level last week, when the market underwent its longest sell-off in years on concern about demand caused by the virus. Both the global benchmark and West Texas Intermediate surged by more than 5% on Monday. China has rapidly brought local virus cases down to zero and traffic is showing signs of recovery, although the variant continues to impact other regions. Separately, a fire on a Mexican oil platform wiped out more than 400,000 barrels a day of the nation’s output, curbing supply.
• Gold held near the highest level in more than two weeks amid speculation the Federal Reserve won’t signal a taper timeline, while a boost to the U.S. vaccination drive eased concerns over the delta virus strain. Investors are awaiting the annual Jackson Hole symposium later this week for more insight into the Fed’s policy outlook. Chair Jerome Powell is expected to remain vague about the timing of the central bank’s tapering of asset purchases in his speech, but a surprise announcement can’t be entirely ruled out, according to Bloomberg Economics.
• Iron ore surged on expectations a recovery in economic growth, including additional support from the Chinese government, will boost demand for steel. Futures in Singapore rebounded as much as 10% as a potential boost to the U.S. vaccination drive lifted sentiment across assets from stocks to base metals. Separately, China’s central bank chief vowed to stabilize the supply of credit and boost the amount of money supporting smaller businesses and the real economy after both credit and economic growth slowed in July. In China, “people are hoping for some further stimulus targeting the infrastructure sector, as real estate and manufacturing are looking bleak,” saidErik Hedborg, principal analyst at CRU Group. “In the rest of the world, we are seeing steel production stabilizing at levels below pre-pandemic levels.”
• German Chancellor Angela Merkel said measures currently in place to curb the virus remain sufficient, even as infection numbers tied to the spread of the delta variant are on the rise, but she urged continued vigilance. The number of U.K. workers going to the office is increasing. Covid-19 test maker Qiagen NV is pushing to find out its employees’ vaccine status, saying that European privacy rules forbidding disclosure are a serious issue for the industry as demand for diagnostics increases. France said a third vaccine dose for the elderly may begin in early September. The acting head and the chief financial officer of South Africa’s Department of Health have been arrested on charges of fraud, according to the Police Service. Traffic on China’s typically busy city streets has shown signs of a recovery after the country quashed a resurgence in cases. A study said India may face an unprecedented 600,000 new infections a day if the nation fails to boost the pace of shots. Vaccine requirements were set by a wide range of U.S. groups — from Chevron Corp. to New York City schools to the Pentagon — after regulators gave full approval to the Pfizer Inc.-BioNTech SE jab.
• House Speaker Nancy Pelosi and a group of centrist Democrats will resume talks Tuesday on how to advance President Joe Biden’s legislative agenda, after hours of negotiations failed to break a stalemate. Lawmakers will be continuing talks that went late into the night on Monday. Pelosi said the House would convene at noon and vote later. The impasse between House Democratic leaders and a group of moderate lawmakers over the process to address Biden’s economic priorities threatens to derail the president’s agenda if lawmakers cannot find an agreement in the coming days. Pelosi is proposing to hold off on passing a $550 billion infrastructure bill until a larger economic package worth as much as $3.5 trillion in social program spending is ready for consideration in the House, a process that could stretch well into the fall. Pelosi has pledged to bring up the infrastructure bill for a vote by Oct. 1. But there is no mechanism to enforce that promise and part of the discussions involve how to make that commitment.
• Samsung Group has unveiled a 240 trillion won ($205 billion) expansion that will entail hiring 40,000 people over three years, a sprawling investment blueprint intended to build the South Korean conglomerate’s lead in next-generation technologies. Samsung Electronics Co. and affiliates like Samsung Biologics aim to lead research and spending in areas from telecommunications and robotics to corporate acquisitions. The country’s largest conglomerate is setting aside 180 trillion won for its home country alone and now aims to hire another 10,000 people over the period, on top of 30,000 new jobs already planned, the group said in a statement. Samsung Electronics’ shares finished Tuesday 3.1% higher. The envisioned spending includes expenditures outlined previously, such as Samsung Electronics’ long-term goal of investing $151 billion through 2030 to delve deeper into advanced chipmaking. But the announcement comes days after Samsung scion Jay Y. Leewalked out of jail. The conglomerate’s de facto leader, who was serving a sentence on graft charges, won release on parole just months ahead of South Korea’s presidential election.
• Banco Santander SA’s U.S. unit agreed to buy up the shares it doesn’t already own in the Spanish bank’s American auto-loan division, as part of a drive to invest in higher-growth businesses. Santander Holdings USA Inc. will buy all outstanding shares in Santander Consumer USA Holdings Inc. for $41.50 per share in cash, the bank said in regulatory filings Tuesday.  The offer values the outstanding 20% of SC that SHUSA doesn’t already own at about $2.5 billion. It represents a 14% premium to Santander Consumer’s closing price on July 1, the day before Santander Holdings announced its initial $39-per-share offer.
• Capital Group, the $2.6 trillion mutual fund giant, plans to launch a slate of fully transparent ETFs in the first quarter, one of the last of the major asset managers to relent by offering the low-cost product to clients. The Los Angeles-based firm will release six exchange-traded funds covering strategies ranging from value to growth, Capital Group said Tuesday. The firm prepared its entry into the $6.6 trillion ETF business earlier this year by recruiting Holly Framsted, a former BlackRock Inc. managing director, to lead the effort. After years of sticking with mutual funds, it shows that investor appetite for the product is becoming too hard to ignore. With Ark Investment Management’s Cathie Wood proving that transparent, active management can succeed in the ETF industry, mutual fund managers such as Dimensional Fund Advisors and Federated Investors are also debuting new products to capitalize on the torrent of cash flowing into ETFs.
• India plans to raise 6 trillion rupees ($81 billion) by leasing out state-owned infrastructure assets over the next four years to fund new capital expenditure without pressuring government finances. The proposal involves handing assets including roads, railways, airports, sports stadiums, power transmission lines and gas pipelines to private operators, according to a National Monetization Pipeline document unveiled by Finance Minister Nirmala Sitharaman in New Delhi on Monday. The plan is in line with Prime Minister Narendra Modi’s strategic divestment policy, under which the government will retain presence in only a few identified areas with the rest tapping the private sector. The program will free up the government’s budget money for infrastructure creation, while giving investors access to sectors such as railways that were until now a state monopoly.
• Spark Infrastructure Group agreed to a takeover offer from a consortium including KKR & Co. valuing the Australian energy company at about A$5.2 billion ($3.7 billion). The private equity firm and its partners offered A$2.95 per share in a scheme-of-arrangement deal for the Sydney-based company, according to an exchange filing Monday. The deal, which was unanimously recommended by Spark’s board of directors, confirmed a Bloomberg News report Sunday that the parties were nearing an agreement. The consortium also includes Canadian investors Ontario Teachers’ Pension Plan and the Public Sector Pension Investment Board, according to the filing. Meetings for Spark shareholders to vote on the deal are expected to be held by the end of the year.
• U.S. agencies are rushing to complete security vetting of thousands of Afghanistan citizens who are in line to be relocated to the U.S., as some lawmakers raise alarms about the risk that terrorists and criminals could slip through. The massive, rushed and chaotic evacuation effort from the airport in Kabul means that thousands of people are being put on planes before their background vetting is complete. It includes many who already had applied for “special immigrant visas” after working with U.S. soldiers and diplomats as well as others who didn’t.  U.S. agencies are doing security screening while flights are in the air and when refugees arrive at temporary locations before being transferred to the U.S., including Qatar, Kuwait, Bahrain, Italy, Spain and Germany.
• Blackstone Inc. is in advanced talks to acquire Singaporean precision components business Interplex for about $1 billion, according to people familiar with the matter. The U.S. buyout firm is hammering out the details of a transaction with owner Baring Private Equity Asia, the people said, asking not to be identified because the matter is private. Blackstone has emerged as a leading bidder after beating out rival private equity firms, the people said. An announcement could come in the next few weeks, the people said. Talks could still be delayed or fall apart and other bidders remain interested in the asset, they said. Representatives for Baring and Blackstone declined to comment.
• U.S. President Joe Biden will face a plea from his closest allies to extend the Afghanistan evacuation deadline, though the U.K. warned they are unlikely to change his mind as conditions on the ground become more perilous. The airlift will dominate a virtual Group of Seven summit Tuesday starting 2:30 p.m. in London and convened by British Prime Minister Boris Johnson just a week before the Aug. 31 date set by Biden to complete the withdrawal of U.S. troops. The American exit ultimately accelerated the rapid Taliban takeover and collapse of the Afghan government. The stakes were raised further after the Taliban spokesman warned of “consequences” if the U.S. postpones its withdrawal. An end of August deadline effectively means the civilian evacuation will have to end earlier because of the need for time to get the military out. Removing foreigners and Afghans, whose ties to outside powers leave them vulnerable to Taliban reprisals, will be much harder once U.S. forces leave.
• Russia, one of the world’s biggest oil and gas producers, has a plan to bring more electric vehicles to its roads over the next three years and to build a market for battery-powered cars. According to the strategy, approved by the government on Monday, the production of EVs should reach 10% of all cars produced by end of 2030. The cost will be about 591 billion rubles ($8 billion), according to government’s press office. In the first stage of the strategy, from 2021 through 2024, the nation aims to have at least 25,000 EVs and more than 9,000 charging stations on its roads. To encourage EV adoption, the government will offer buyers incentives, including loans and easy leasing terms for the battery powered cars.
• MSCI Inc., the world’s biggest index provider, shook off concerns about the “investability” of Chinese stocks following Beijing’s recent regulatory crackdown, citing previous instances where markets rebounded in the aftermath. Regulatory compliance has weighed on China “every three, four, five years and obviously the markets have sold off at the time. But very quickly afterwards, the markets have recovered and gone through to new heights,” MSCI Inc. Chairman and Chief Executive Officer Henry Fernandez told Bloomberg Television’s Haidi Lun and Shery Ahn in an interview.
• Best Buy Co. rose in early trading Tuesday after it raised its full-year sales outlook on continued strong demand for its gadgets and services. The key metric of U.S. same-store sales rose 21% in the second quarter, the retailer reported in a statement. That’s above the 18.4% average estimate from analysts compiled by Bloomberg. It now sees companywide same-store sales growing in a range of 9% to 11% this year, much higher than the previous range the electronics retailer offered earlier this year. The company had previously said that it would be difficult to know how consumer behavior would evolve in the back half of the year as people spent more time on activities and traveling.
• Citigroup Inc. is facing a lawsuit for pulling support from a European credit fund as the Covid-19 pandemic roiled the markets, then giving its own traders a potential profit at the fund’s expense. The New York-based bank was sued by Ver Capital Partners in London for forcing the fund to default on a 224 million-euro ($263 million) loan in March 2020 and selling linked assets to its trading desk. This liquidation process created a conflict of interest at the bank, while ignoring the chance of better offers from other possible buyers and leaving the fund further out of pocket, Ver said in a legal filing. Citigroup undervalued the assets it sold to the traders, acting “with the intention of generating a profit for itself” at the expense of “the best price reasonably obtainable,” Ver’s lawyers said in the filing made available last week.
• Vice President Kamala Harris warned that China poses a threat to countries in Asia, while reassuring nations in the region the U.S. won’t force countries to choose between the world’s biggest economies. In a speech in Singapore on Tuesday, Harris spoke about the U.S. vision for a region built on rules, human rights, freedom of the seas and unimpeded commerce. She also offered for the U.S. to host the 2023 summit of the 21-member Asia-Pacific Economic Cooperation forum, signifying the administration’s commitment to multilateral engagement. In her most pointed comments at Beijing, Harris accused China of coercion and intimidation over its vast territorial claims in the South China Sea. “Beijing’s actions continue to undermine the rules-based order and threaten the sovereignty of nations,” she said.
• Federal Reserve Chair Jerome Powell has built a reputation as a skilled advocate for the U.S. central bank, thanks to strong personal ties forged with Congress that will help if he’s nominated for a second term. Powell has worked Congress during his three years at the helm like no Fed chair since Alan Greenspan. But where Greenspan was a regular of the cocktail party circuit, Powell has taken a more workmanlike approach. Since he took the helm of the Fed in February 2018, through June of this year, he’s held at least 350 meetings, dinners or phone calls with members of Congress, according to his monthly calendars. That’s almost nine per month, and many of those included more than one lawmaker.
• Chinese technology stocks rallied for a second day as bargain hunters returned, emboldened by Tencent Holdings Ltd.’s share buyback and strong results from JD.com, which drew Cathie Wood back into the market. The Hang Seng Tech Index advanced more than 7%, adding to a 2% gain on Monday, after a five-week rout that took the gauge to the lowest level since its inception last year. Heavyweights Tencent and Alibaba Group Holding Ltd. climbed 8.8% and 9.5%, respectively. While there’s no indication that the nation’s regulatory crackdown will ease, the absence of significant new initiatives in recent days opened the door to investors who see longer-term value in China stocks. Some are also taking a cue from technical charts that show the index plunged into oversold territory last week.

“Opportunities don’t happen, you create them.”- Chris Grosser

*All sources from Bloomberg unless otherwise specified