August 31st, 2020
Daily Market Commentary
- Canadian equities fell Friday as a rally in materials shares failed to offset a drop in consumer staples. The S&P/TSX Composite Index fell 0.2%, as consumer staples led seven of eleven sectors lower. George Weston Ltd fell 2.6% to its lowest since June 11. Gold climbed, recovering from Thursday’s drop, as the dollar sank with investors weighing the impact of the Federal Reserve’s new approach to setting U.S. monetary policy. Stock-market bull Brian Belski is reinstating his year-end target for Canadian stocks and he expects the S&P/TSX Composite to rise 8.8% over the next four months. Gross domestic product plunged by an annualized 38.7% in the three months through June, adding to an 8.2% drop in the first quarter, Statistics Canada said Friday in Ottawa. But household disposable income surged on the back of state transfers, much of which has yet to be spent.
- A lockup associated with GFL Environmental Inc.’s initial public offering is set to expire ahead of Monday’s trading session with the shares in a recent slump. GFL sold 75 million subordinate voting shares in its initial offering in March, valuing the company at $5.9 billion. The Vaughan, Ontario-based trash hauler lowered its IPO price when investors balked at its debt load and questioned its growth prospects. The deal also took place in the early days of a market selloff sparked by the Covid-19 pandemic. The company has been on the defensive since becoming a target of New York-based Spruce Point Capital Management LLC, which questioned GFL’s accounting and an “aggressive and opaque business model” that includes frequent acquisitions.
- Obsidian Energy says it making a formal non-binding business combination proposal to Bonterra Energy. Obsidian Energy’s Board would be prepared to offer an exchange ratio of 2.0 common shares of Obsidian Energy per common share of Bonterra, representing total ownership by Bonterra shareholders in the pro forma entity of approximately 48%
- Whitecap Resources entered into an agreement in an all-stock transaction valued at about C$155m with NAL Resources Limited and a closely held subsidiary of Manulife Financial. Whitecap will issue 58.3m shares in exchange for all the issued and outstanding NAL shares.
- 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 0.5% at the close, with defensives leading losses. Cyclicals including banks, miners and insurers gained, tempering the broader gauge’s decline. The euro strengthened further, though some distance 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 newsflow around a coronavirus vaccine and a rapid test. After a 3.5% gain in August, the benchmark Stoxx 600 is trading between two key technical levels: the 50- and 200-day moving averages.
- U.S. stocks capped the week with fresh highs and the dollar weakened to a more than two-year low as the Federal Reserve’s new inflation approach rippled through global markets. The benchmark S&P 500 closed at an all-time high for a sixth consecutive trading session, while the Nasdaq Composite also reached unseen levels a day after Jerome Powell signaled that the Fed will stay accommodative for longer through more tolerance toward consumer-price increases. The Dow Jones Industrial Average turned positive for the year.
- Japanese stocks closed lower, reversing early gains after local media including NHK reported that Prime Minister Shinzo Abe will resign due to health reasons. The Topix index closed down 0.7%, erasing an advance of as much as 1.3%, with electronics makers the biggest drag. The yen gained 0.3% against the dollar, erasing earlier declines. The Nikkei 225 Stock Average fell 1.4% on the day, after swinging from a 0.7% gain to a 2.7% loss. The Nikkei Volatility Index surged 16% to 25.9. Abe told members of his ruling Liberal Democratic Party that he would step down, and his successor will be picked by an election within the party, lawmaker Hiroshige Seko said after a meeting on Thursday. Abe had been scheduled to give a news conference at 5 p.m. Friday in which he planned to discuss his health.
- Oil rose above $43 a barrel in New York to its highest closing level since early March amid a broader rally in equities and as China’s economic recovery continued. West Texas Intermediate futures snapped a two-day drop, rising 1.4% as of 2:34 p.m. in Dubai, while Brent crude for November settlement climbed around the same amount to $46.47. Data showed that China rebounded further in August as the world’s second-largest economy emerges from its coronavirus-induced slump. That helped push up global stocks for a second day, while U.S. Treasuries fell as investors moved out of havens.
- Gold declined after earlier advances as investors continued to weigh the latest shift in the Federal Reserve’s approach to setting U.S. monetary policy ahead of speeches this week by some key banking officials. Chair Jerome Powell signaled Thursday that the central bank will stay accommodative for longer, with more tolerance toward consumer-price increases. Vice Chair Richard Clarida kicks things off Monday with a speech on the Fed’s new monetary policy framework, followed by Governor Lael Brainard speaking on the same topic Tuesday and New York Fed President John Williams discussing the economy and Covid-19 Wednesday.
- India saw its Covid-19 fatalities surpass Mexico’s to give it the third-largest death toll globally, as the Asian nation fast becomes the new epicenter of the pandemic. Italian companies slashed investment and consumers cut back on spending during the coronavirus lockdown in the second quarter, sending the economy into a record contraction. U.S. cases approached the 6 million mark as outbreaks accelerated on college campuses. The U.S. death toll of 183,000 exceeds that of Europe’s, which is approaching 182,000, according to the European Centre for Disease Prevention and Control. The U.K. added the most infections since early June, and Paris expanded free testing after a jump in new cases.
- Warren Buffett’s Berkshire Hathaway Inc. bought stakes in five of Japan’s biggest trading companies, adding to the billionaire investor’s wager on the commodities sector and marking one of his largest-ever forays into Asia’s second-largest economy. Berkshire acquired the stakes of about 5% in Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co. and Sumitomo Corp. over the past twelve months, the U.S. conglomerate said in a statement. The investments were valued at more than $6 billion combined after shares of all five companies jumped at least 5% in Tokyo trading on Monday. Japan’s benchmark Topix index rose as much as 1.9% on the news.
- Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $68.3 million in the week ended Aug. 28, compared with losses of $108 million in the previous week, according to data compiled by Bloomberg. So far this year, outflows have totalled $15.8 billion.
- Veolia Environnement SA offered 2.9 billion euros ($3.5 billion) for a 29.9% stake in French rival Suez SA, reviving an eight-year-old attempt to create a world leader in waste and water services. Veolia offered to acquire the stake from energy giant Engie SA for 15.50 euros a share in cash, 27% more than where the target closed Friday, Veolia said in a statement Sunday. Suez said its board will meet “shortly” to consider the unsolicited bid. If the offer is successful, Veolia will make an offer for the rest, using the price paid to Engie as a reference point, and taking into account any subsequent significant events affecting Suez. Suez shares rose as much as 20% and traded up 18% at 14.46 euros as of 9:45 a.m. in Paris, suggesting some investors doubt Veolia’s bid will be successful. Veolia shares rose 3.7% to 19.81 euros and Engie shares were trading up 6% at 11.81 euros.
- Reliance Industries Ltd. is buying assets of debt-strapped rival Future Group for 247.1 billion rupees ($3.4 billion), almost doubling the footprint of India’s No. 1 retailer and largest company by market value. Future Retail Ltd. bonds gained and its shares soared 20% in Mumbai trading Monday. The deal includes Future’s retail, wholesale, logistics and warehousing units, Reliance Retail Ventures Ltd. said Aug. 29 in a statement. Dollar notes sold by Future Retail rose 20 cents to 93.5 cents on the dollar Monday, the biggest jump since the bond’s sale in January, according to Bloomberg-compiled prices. The unit averted a default on the securities this month.
- Nestle S.A.’s wholly-owned subsidiary, Société des Produits Nestlé S.A. will commence a cash tender offer to acquire all outstanding shares of Aimmune common stock that are not already owned by NHSc for $34.50 per share in cash, according to a statement. Deal represents enterprise value, including the shares of Aimmune held by NHSc, of approximately $2.6 billion
- Robinhood Markets has catapulted ahead of its online brokerage rivals with a smartphone app that has attracted an army of young investors. Yet with the company’s rise has come a litany of problems: trading outages, angry customers and regulatory probes. Over the first half of the year, U.S. consumer protection agencies received more than 400 complaints about Robinhood — roughly four times more than competitors like Charles Schwab Corp. and Fidelity Investments’ brokerage unit. The grievances, obtained via a public records request to the Federal Trade Commission, depict novice investors in over their heads, struggling to understand why they’ve lost money on stock options or had shares liquidated to pay off margin loans.
- Emerging-market carry trades may have been handed a fresh boost by Federal Reserve Chairman Jerome Powell. An index of returns from borrowing in the U.S. currency and investing in eight developing-nation currencies including the Mexican peso, Indian rupee and Indonesian rupiah rose 1.7% on Friday, the biggest jump in two years. Even after that increase, the index has returned only 0.2% this month, compared with a gain of 2.9% for a gauge of developing-nation stocks. “This latest rally is indeed Powell-driven,” said Edwin Gutierrez, who oversees $16 billion as head of emerging-market sovereign debt at Aberdeen Standard Investments Ltd. in London. “If anything, it was conspicuous previously how EM FX had lagged the broader EM asset rally, considering we’ve been in an environment of dollar weakness, the commodity complex has done well, EM imports have absolutely collapsed and remittances have held up better than expected.”
- Germany’s blame game over Wirecard AG’s collapse is focusing in on the question of why authorities failed to take a harder look at the payments company before it became the country’s biggest accounting scandal in living memory. Lawmakers will question a top adviser to Chancellor Angela Merkel on Monday in Berlin before grilling financial industry watchdogs the following day as the fraud that burned investors engulfs the country’s political establishment. If the hearings go badly, parliament may start a deeper investigation as the country prepares for the post-Merkel era with an election due next year. Wirecard’s crash from rising star to national disgrace has undermined the country’s reputation as a reliable place to do business and delivered a major blow to its fragile base of retail investors. While the government is taking action to prevent a repeat, authorities have struggled to dispel the impression that they were more focused on protecting Wirecard than investigating allegations of wrongdoing.
- H2O Asset Management froze several funds at the request of the French financial regulator, which cited uncertainties over the valuation of illiquid assets the firm is selling back to German financier Lars Windhorst at a steep discount. Bloomberg reported on Friday that H2O is selling the assets — for the most part, thinly traded bonds in companies tied to Windhorst such as La Perla Holding NV and oil explorer Trent Petroleum — at about half their nominal value, in a process scheduled to be completed by late September. The fund suspension will last four weeks. France’s Autorite des Marches Financiers said on Friday that it requested the freeze to protect the interests of fund investors in the process, the latest twist in a saga that began more than a year ago after revelations about H2O’s exposure to Windhorst. Concerns that the rarely traded securities were not suited for funds that allowed investors to make daily withdrawals triggered about 8 billion euros of outflows at the time.
- Royal Philips NV lowered its full-year profit outlook after the U.S. government prematurely ended a $650 million contract for ventilators signed in April to combat the Covid-19 crisis. The Dutch producer of medical equipment expects to deliver “modest comparable sales growth,” and an adjusted margin for earnings before interest, tax and amortization of around the same level as last year, it said in a statement Monday. The shares fell as much as 4.7%. Philips said it supplied 12,300 ventilators to the U.S. Strategic National Stockpile by the end of August. However, the Department of Health and Human Services terminated the order for the remaining 30,700 devices without giving a reason, said Chief Executive Officer Frans van Houten.
- India said its troops clashed with Chinese solders along their contested Himalayan border, the latest skirmish in a conflict that has simmered since May. The Chinese troops carried out “provocative military movements” late on Saturday night, India’s Defense Ministry said in a statement Monday. It accused the People’s Liberation Army of violating diplomatic and military agreements on the undemarcated area. Beijing was in close communication with New Delhi regarding issues on the ground, Chinese Foreign Ministry spokesman Zhao Lijian said at a daily briefing in Beijing on Monday. “Chinese border troops always strictly abide by the Line of Actual Control,” Zhao said. “They never cross the line.”
- Zhang Yiming’s plan to sell the U.S. operations of his short-video app TikTok to avoid a shutdown was thrown into jeopardy after China asserted authority over a deal already under scrutiny by the Trump administration. Beijing on Friday added uncertainty to already thorny negotiations over the sale of ByteDance Ltd.’s prized asset, claiming the ability to block a sale to foreign suitors Microsoft Corp. or Oracle Corp. with tighter restrictions on artificial intelligence exports. The commerce ministry added speech and text recognition and personalized recommendations to a list of products that require approval before they’re sold abroad.
- PayPal Holdings Inc. will introduce a feature allowing U.S. clients to pay off their purchases over time, joining companies such as Afterpay Ltd. and Klarna in a bid for younger consumers. Customers will have the option to split purchases of $30 to $600 into four installments over six weeks when they use PayPal during checkout, the company said Monday in a statement. No interest or origination fees will be charged, though a late fee may be applied if a payment isn’t received on time. Younger consumers have flocked to options that allow them to instantly buy products and pay them off over time during the pandemic. Klarna said last week it added 1 million customers in three months as volume swelled 44% to $22 billion in the first half.
- Facebook Inc. accused the European Commission of demanding the disclosure of irrelevant data that included details of correspondence with bereaved staff and of security risks to key employees’ families. The social network sued the European Commission in July, winning a temporary halt to officials’ demands to turn over internal documents that matched certain search terms. The alleged extent of regulator’s demands for information emerged in filings to the European Union’s General Court published in the EU’s Official Journal on Monday. The EU has two early stage probes into Facebook’s classified ads service and its data practices. Regulators can require companies to give documents mentioning certain keywords under threat of fines.
- There isn’t any urgency for the Federal Reserve to offer more clarity on how long it will hold interest rates near zero at the moment because investors already understand the central bank won’t be tightening for a while, Minneapolis Fed President Neel Kashkari said. “Market expectations are that rates will be low for a long period of time, and so I don’t feel like there’s a burning pressure that we need to change our forward guidance today to change market expectations,” Kashkari said during an interview on the Bloomberg Odd Lots podcast with Joe Weisenthaland Tracy Alloway, recorded on Aug. 26 and published Monday.
- Leaders of Japan’s ruling Liberal Democratic Party will meet Tuesday to formulate rules for a vote to replace Prime Minister Shinzo Abe, a process that will go a long way in determining who comes out on top. The party’s general council will meet around 10 a.m., though it’s unclear when it will announce the outcome. Some leaders have told local media the election will either be Sept. 14 or 15, with a new prime minister selected by parliament on Sept. 17. Abe’s abrupt decision last week to step down after nearly eight years due to a health problem left the party scrambling to find a new leader in about two weeks. Whoever wins will have no more than a year to try and revive Japan’s economy from a pandemic-induced contraction before calling a fresh general election against a recently unified opposition.
*All sources from Bloomberg unless otherwise specified