August 28th, 2020

Daily Market Commentary

Canadian Headlines

  1. Canadian equity markets failed to hold on to the earlier morning gains after tech and materials stocks declined. The S&P/TSX Composite index fell 0.4% in Toronto, reversing an early gain of as much as 0.3%. A dip in Shopify and gold stocks weighed on technology and materials stocks on Thursday. Gold swung sharply as traders parsed comments from Federal Reserve Chair Jerome Powell, who announced a more relaxed stance on inflation while saying that the central bank wouldn’t hesitate to act if consumer prices rose much above its goal. Meanwhile, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce fiscal third-quarter results topped analysts’ estimates as soaring capital markets earnings softened the economic impact of the coronavirus pandemic.
  2. Commodities are set to close out August with a fifth monthly advance, aided by crude, copper and corn, as markets tighten just as the dollar sags. Even as the coronavirus pandemic remains a major headwind, a further modest gain would lift the raw materials complex to its highest since 2018. Next week, there’s a rich bounty of information that’ll influence moves across energy, metals and, especially, crops. Oil has pushed higher aided by OPEC+ supply cuts, and the coming days bring key tanker-tracking data plus Bloomberg’s monthly production survey. Gold investors can track plentiful Federal Reserve commentary on the central bank’s new policy approach, and there’s figures on iron ore flows from top suppliers Brazil and Australia.

World Headlines

  1. European equities fell on Friday as investors sought fresh catalysts at the end of a month that’s set to be the best since April. The Stoxx Europe 600 Index was down 0.3% at 9:14 a.m. in London, with tech stocks among the laggards after hitting their highest level since May 2001 earlier this week. Banks headed for a two-week high, tempering the broader gauge’s decline. The euro strengthened further, though some way away from the $1.30 level that fund managers and strategists see as a pain threshold for equities, in a Bloomberg survey. European stocks are up this week, led by a comeback for travel stocks. Investors have taken comfort in signs of progress in trade talks between the U.S. and China, and positive news flow around a coronavirus vaccine and a rapid test. After a 3.8% gain in August, the benchmark Stoxx 600 is trading between two key technical levels: the 50- and 200-day moving averages.
  2. S. equity-index futures gained and the dollar sank after Jerome Powell signaled the Federal Reserve will stay accommodative for longer as it shifts to a more tolerant approach on inflation. Contracts on the S&P 500 rose, signaling the gauge may head toward another record high. Powell’s shift gave traders a green light to sell long bonds, which are more sensitive to inflation, with the U.S. yield curve steepening to the widest in two months. It also provided another tailwind for stocks globally, which are heading for a fifth week of gains as investors monitor progress on vaccine developments for the pandemic.
  3. Japanese stocks slumped while the yen advanced after Prime Minister Shinzo Abe told officials he plans to resign, raising questions over the future of his signature stimulus policy. Volatility surged, with the benchmark Topix index sliding as much as 1.6%, wiping out a gain of 1.3% earlier. The currency, which has been kept in check by so-called Abenomics, rose as much as 0.4% against the dollar to 106.11. Abe came to power for the second time in 2012, touting new plans to revive the economy through unprecedented monetary easing and regulatory reform that was eventually labeled “Abenomics.” Few market participants had expected he would step down after his right hand man, Chief Cabinet Secretary Yoshihide Suga, said Abe should be able to serve out the remainder of his term as a party leader.
  4. Oil stayed in its recent tight range after Hurricane Laura swept the U.S. energy heartland without appearing to inflict major damage on key infrastructure. Futures in New York were steady near $43 a barrel on Friday, with average trading volumes in August plunging to multiyear lows. Laura, one of the most powerful hurricanes to ever hit Louisiana, knocked out power to hundreds of thousands of people and caused widespread damage, but ports and crude facilities — including the largest U.S. refinery — in southeast Texas likely avoided the worst of it. Traders are now returning their focus to the recovery in oil demand that has appeared to stall this month. Crude prices are moving in a narrow range of about $4 in August and a gauge of market volatility remains near its lowest level since January.
  5. Gold climbed, recovering from Thursday’s drop, as the dollar weakened and investors weighed the impact of the Federal Reserve’s new approach to setting U.S. monetary policy. Comments from Fed Chair Jerome Powell sent bullion on a roller-coaster ride on Thursday after he announced a more relaxed approach on inflation, with the central bank seeking inflation that averages 2% over time. He also noted that the Fed wouldn’t hesitate to act if consumer prices rose considerably above its goals.
  6. Economic confidence in the euro area continued to improve in August, with companies from manufacturing to services benefiting from higher demand following the end of pandemic lockdowns. A European Commission sentiment index rose for a fourth month, exceeding all but three estimates in a Bloomberg survey, and registered sustained gains in industry, retail trade and particularly services. Companies’ employment expectations rose, but job cuts in recent months across the continent meant consumers remain worried about the labor market. Even with the latest gains, optimism hasn’t fully recovered. The headline gauge has made up just about 60% of the combined losses of March and April, and evidence is building that the region’s recovery will be uneven and long.
  7. Hurricane Laura, one of the most powerful storms ever to hit Louisiana, left a path of chemical fires, wrecked buildings, flooded roads and what could be more than $15 billion in insured losses, with reports of at least six people dead. Still, the storm mostly spared the region’s oil refineries and other energy infrastructure, muting its impact on global markets. Laura weakened to a tropical depression about 10 p.m. local time Thursday, less than 24 hours after coming ashore near Cameron, Louisiana, with record-tying maximum winds of 150 miles (241 kilometers) per hour. The hurricane killed at least six people in Louisiana, mostly when trees fell on their homes, according to the New York Times. And in Lake Charles, residents were ordered inside while smoke from a damaged plant billowed into the air.
  8. Masayoshi Son’s SoftBank Group Corp. said it will sell about 1.33 trillion yen ($12.5 billion) of the stock it holds in its Japanese wireless operation, adding to massive asset sales that have helped his conglomerate get back on track after missteps with startup investments. The Tokyo-based parent said it will sell 927 million shares in SoftBank Corp. through a global secondary offering, about a third of its stake. The carrier’s stock, which closed at 1,431.5 yen on Friday, will be sold at a discount of 3% to 5%. Separately, the wireless unit said it will buy back up to 1.68% of its shares for about 100 billion yen. Son, founder and chief executive officer, has turned around his company’s fortunes since March by selling off assets and repurchasing his own stock. SoftBank Group had previously announced plans to sell about 4.5 trillion yen in assets and had said it was almost done with that program. Son has used the proceeds to pay down debt and embark on 2.5 trillion yen in buybacks.
  9. Yum China Holdings Inc. has received the green light from the Hong Kong stock exchange for its proposed second listing, people familiar with the matter said, adding to the list of billion-dollar share sales in the Asian financial hub. China’s largest restaurant company, which runs outlets in the country of U.S. brands including KFC, Pizza Hut and Taco Bell, is considering gauging investor demand for the share sale as soon as next week, one of the people said, asking not to be identified because the information is private. Yum China could raise about $2 billion, Bloomberg News has reported.
  10. For one night on the South Lawn of the White House, President Donald Trump painted a vision of the campaign he wished he were waging — where the pandemic was an afterthought, his first term was an unqualified success and his Democratic opponent Joe Biden was little more than a “Trojan horse for socialism.” “Joe Biden is not the savior of America’s soul. He is the destroyer of America’s jobs, and if given the chance, he will be the destroyer of America’s greatness,” Trump said Thursday night in attempting to define his opponent, a former two-term vice president with a history of moderate stances who is viewed more favorably by voters than Trump himself.
  11. Traders across major asset classes are sending the same message: Prepare for what could be the most-contentious U.S. presidential elections in decades. One measure of hedging in the stock market is higher than at any point in the past three presidential elections. In the interest-rates market, implied volatility is well above levels reached in 2016 or 2012. And three-month implied volatility in the dollar-yen pair — a classic haven trade — has risen above the two-month tenor by the most in two decades, signaling demand for protection from turbulence near Election Day. Trades protecting against election-induced volatility have been around all year, with “unprecedented” levels of hedging seen as early as January. Yet the potential for drama has only grown since then as the coronavirus leaves the U.S. mired in a recession and President Donald Trump rages against mail-in voting, raising concerns about a prolonged dispute over vote tallies. That uncertainty is complicating more conventional topics, such as how the results will affect tax policy and the trade war with China.
  12. Capital One Financial Corp. is cutting borrowing limits on credit cards, reining in its exposure as the U.S. reduces support for millions of unemployed Americans. The adjustments, which the company said it makes from time to time, set off a swift outcry on social media. Some customers have complained in recent days their limits have been slashed by a third to two-thirds, eroding their ability to borrow in an emergency during a pandemic or potentially hurting their credit scores.
  13. Belarusian authorities stepped up pressure on the opposition with mass arrests during a protest after Russian President Vladimir Putin offered more support to his embattled ally Alexander Lukashenko. More than 280 people were detained Thursday evening in the capital Minsk, according to the Viasna human rights center. The Interior Ministry said Friday that 114 people are being held awaiting court hearings, while 50 reporters were brought in for document checks. Police in riot gear targeted peaceful demonstrators, according to video posted by Radio Liberty from the event. The more aggressive tactics came after Putin said Russia had prepared a reserve force of police officers to assist Lukashenko if necessary.
  14. Banca Monte Dei Paschi di Siena SpA must boost its capital through a bond sale to gain European Central Bank approval for its plan to spin off 8 billion euros ($9 billion) of soured loans. The bailed-out Italian bank will have to raise at least 250 million euros through the sale of Tier 2 bonds, with further funds coming from the sale of Additional Tier 1 securities, Monte Paschi said in a statement. The steps are needed to restore the bank’s compliance with capital requirements, the bank said. Italy’s Finance Ministry, which owns about 68% of Paschi, can buy as much as 70% of the new securities, while at least 30% must be subscribed by private investors. The bank didn’t disclose the total amount of bonds it has to issue.
  15. Norwegian Air Shuttle ASA said it will need more funds to avert insolvency and announced plans to scale back the discount long-haul operations that it pioneered in order to survive. The beleaguered carrier, which reported a pre-tax loss of 4.8 billion kroner ($541 million) for the first half, said it will require additional working capital in the first quarter of 2021 to meet its obligations and will consider another private placement of shares as well as selling assets. That’s after the carrier already received a government-backed loan and converted debt into equity. The pandemic has ripped through the global travel industry, forcing airlines to halt operations, lay off employees and seek financial help from governments and investors. Norwegian, which was already struggling pre-Covid 19, was forced to ground virtually its entire fleet as well as furlough or outright eliminated 8,000 employees, representing 80% of its workforce.
  16. Chancellor Angela Merkel warned the coronavirus crisis represents a challenge to Germany’s financial health because there’s no certainty how long the pandemic will last. Beating the disease depends on the development and dissemination of a vaccine, and “we don’t know whether that will be three months or 12 months or 15 months,” Merkel said during her annual summer address. “To that extend it is indeed a not known challenge to our financial capacity.” The country will get around 22 billion euros ($26 billion) from the European Union’s recovery fund. Merkel said most of those funds will be spent on existing programs, noting that one requirement is to address shortfalls identified by the European Commission, such as infrastructure investments.
  17. Goldman Sachs Group Inc. has made the $2.5 billion payment it pledged to the Malaysian government to settle allegations of misconduct related to 1MDB, and the funds will be used to repay outstanding debt of the disgraced state fund, according to a person familiar with the matter. Malaysia plans to use the funds to help repay 1MDB’s outstanding debt, including $3.5 billion of bonds due in 2022 and 2023, which are now held under the finance ministry, according to the person, who asked not to be named as the information is private. The finance ministry confirmed that it has received the money in its escrow account on Thursday, according to a spokesman.
  18. Coca-Cola Co. plans to offer voluntary separation to at least 4,000 employees to reduce its workforce amid changes in the soft-drink business. The company will initially offer enhanced benefits to workers in North America who agree to leave, according to a statement Friday. A similar program will follow in other countries, the soda maker said, and there will also be an unspecified number of layoffs. The move comes amid continuing challenges for companies selling sugary drinks as consumers cut back on calories. Bottled water also faces new hurdles amid growing environmental concerns.
  19. Companies usually don’t even consider selling bonds toward the end of August, when many investors and bankers are out on vacation. This year’s different. Blue-chip corporations have sold around $16 billion of notes this week in the U.S., more than triple the normal volume for the last week of August. TreeHouse Foods Inc. issued $500 million of high-yield securities on Tuesday, representing the first junk bond deal to hit the market in the last full week of August in at least four years, according to data compiled by Bloomberg. On Wednesday, dealers started selling an asset-backed security supported by student loans, an almost unheard-of move for the final week of this month.
  20. Scientists and drugmakers are beginning efforts to overcome Americans’ safety and other concerns about Covid-19 vaccines, while U.S. health authorities ready a campaign to encourage widespread uptake. As vaccine candidates advance closer to U.S. authorization, health and industry officials want to make sure as many people as possible get vaccinated to reach the level, known as herd immunity, that would protect even people who aren’t immunized. Yet large percentages of Americans, including those at high risk of contracting the virus, are reluctant, skeptical or opposed to taking a vaccine, according to surveys and researchers. Among the reasons: concerns about safety because of the quick development pace and government overreach.
  21. Boeing Co. found two “distinct manufacturing issues” in the fuselage of 787 Dreamliner jets and has told airlines operating eight affected planes to remove them from service so they can be repaired. The issues were found in the joint of fuselage sections toward the rear of the aircraft, and as a result, the jets don’t meet Boeing’s design standards, the company said in a statement Friday. Boeing said it has notified the Federal Aviation Administration and is conducting a review into the cause of the problem. “We determined that eight airplanes in the delivered fleet are affected by both issues and therefore must be inspected and repaired prior to continued operation,” Boeing said. “We immediately contacted the airlines that operate the eight affected airplanes to notify them of the situation, and the airplanes have been temporarily removed from service until they can be repaired.”
  22. Dell still has its sights set on returning to an investment-grade rating after generating strong free cash flow in the period that ended July 31. Microsoft’s cash pile alone could make it the frontrunner for buying TikTok from a credit perspective, while Hertz is reportedly seeking up to $1.5 billion of debtor-in-possession financing. Dell’s management reiterated its target to reduce core debt by $5.5 billion in FY21 and its commitment to obtaining IG corporate ratings
  23. Credit Suisse Group AG is dealing with the fallout of a fraud at its international wealth management business two years after it was criticized by a regulator in a similar case that rattled the bank and raised questions about controls. The Swiss lender dismissed a Zurich-based banker who forged documentation on an over-the-counter contract for an African wealth management client, according to people familiar with the matter. The deception, uncovered earlier this year, led to a loss of about 10 million francs ($11 million) for the bank and additional clients were also affected, the people said, asking not to be identified as the matter is private. The case echoes a much bigger fraud when Patrice Lescaudron, a former star private banker, was sentenced to prison after he forged documents to cover mounting client losses. Lescaudron’s activity went undetected by Credit Suisse and his clients for years until a massive wrong-way bet on a Californian drugmaker in 2015 exposed his behavior. Switzerland’s financial regulator later identified deficiencies in the bank’s anti-money laundering controls and shortcomings in its oversight.

*All sources from Bloomberg unless otherwise specified