December 18th, 2019
Daily Market Commentary
- It’s not just the Quebecois who sometimes imagine themselves breaking away from Canada. Ever since Liberal Justin Trudeau was reelected as Canada’s prime minister in October, a small but vocal group in the oil-rich province of Alberta has worked to rally support for seceding from the country. The separatists complain that climate crusader Trudeau is working to cripple the oil industry, and that the province sends too much in taxes to Ottawa and gets too little in return. The so-called Wexit movement, named for Alberta’s location in western Canada and inspired by the U.K.’s separation from the European Union, was on display at a November rally in Calgary, where most of Canada’s energy companies are based. The event drew about 1,700 people, some wearing hats emblazoned with “Make Alberta Great Again” and “WEXIT” in all caps. Speakers, including the movement’s co-founder Peter Downing, spoke directly to Albertans’ frustrations, painting a picture of an independent Alberta flush with cash, freed of the burden of federal taxes, and driven by a booming oil industry no longer restrained by regulations imposed by eastern elites.
- The best performance in a decade for Canadian corporate bonds may be hard to beat in 2020, but there’s still yield to be found in parts of the market, according to some of the country’s biggest money managers. Corporate debt has returned 7.9% his year, according to Bloomberg Barclays Canada indexes. Hybrid bonds, including debt that can be converted into equity, and the first rung of the investment-grade ladder may present investors with the best risk-return opportunities next year, with energy companies favored in the category.
- After a decade of middling wage growth, Canadian workers are finally starting to see significantly bigger paychecks. The question is whether those gains are sustainable. Wages have risen upwards of 4% annually in recent months by some measures, the fastest pace since 2009. This would typically be a strong signal of health in the nation’s economy and foster confidence in future growth. But another indicator is prompting economists to worry the wage gains may soon reverse course. Productivity figures have barely budged and remain little changed from two years ago.
- Shares in Europe held steady after mixed trading in Asia, with investors still looking for further details on the U.S.-China trade deal. The Stoxx Europe 600 Index was up 0.1% as of 8:12 a.m. in London, led by the food and drinks sector. Denmark’s Bang & Olufsen A/S dropped as much as 25% after it issued a profit warning for the fourth time in a year. Within the autos sector, PSA Group and Fiat Chrysler Automobiles NV climbed after agreeing on a merger that will create the world’s fourth-biggest auto manufacturer.
- U.S. index futures are slightly higher after the S&P closed at a record on Tuesday, with European shares also up. Wednesday is a key day for the process in the impeachment of U.S. President Donald Trump, while FedEx will also be in focus after cutting its profit forecast.
- Earlier in Asia, equities were mixed, with shares falling in Tokyo but rising in Hong Kong and India. The yuan was steady after China’s central bank injected liquidity into the financial system. With global stocks around all-time highs and the U.S.-China trade accord announced Friday yet to be signed, traders are finding few reasons to bid prices higher. The outlook for America’s monetary policy remains steady — two Federal Reserve policy makers reiterated that interest rates are on hold — yet the miserable results from FedEx were a reminder of the headwinds to growth.
- Oil retreated from a three-month high after an industry report showed a large build in U.S. crude and gasoline stockpiles, reviving concerns over renewed oversupply. Futures in New York fell as much as 1%, yet held above $60 a barrel after rising 3.7% over the past four trading days as the U.S. and China struck a preliminary trade pact. The American Petroleum Institute reported crude inventories swelled by 4.7 million barrels last week and gasoline stockpiles by 5.6 million barrels, according to people familiar with the data. That would be the largest gasoline build since January if confirmed by official government figures due Wednesday.
- Gold edged higher, trading in a narrow range, while palladium extended declines after briefly breaching the $2,000-an-ounce level on Tuesday. Investors are looking for direction after the S&P 500 Index closed at a new record amid positive U.S. factory and housing data. Markets are awaiting further clues on the U.S.-China trade accord and the outlook for the global economy, while in the U.S., two Federal Reserve policy makers reiterated that interest rates are on hold unless there’s a material change in the economic outlook.
- Donald Trump’s legacy will be forever marked on Wednesday by his impeachment at the hands of House Democrats, who say it’s a necessary rebuke for the president’s pursuit of a political vendetta. On the eve of the vote, Trump defiantly rejected the move as a predetermined partisan assault. Trump is all but certain to become the third U.S. president in history to be impeached when lawmakers gather Wednesday in the well of the House, as their predecessors did when they voted to impeach Andrew Johnson and Bill Clinton.
- Shares in Saudi Aramco dropped for a second day in a row a week after its record initial public offering, pushing its market value just below $2 trillion, the level sought by Crown Prince Mohammed bin Salman. Shares fell as much as 2.5% to 36.80 riyals, before recovering a bit to trade at 37 riyals at 1:09 p.m. local time, giving the company a total value of $1.97 trillion. The stock was included in the MSCI Emerging Markets Index and the main local benchmark, the Tadawul All Share Index, on Wednesday.
- Blackstone Group Inc. agreed to buy U.K. warehouse owner Hansteen Holdings Plc, as the private equity giant races to expand its European portfolio of urban warehouses. Funds managed by Blackstone will pay 116.5 pence a share for Hansteen, a 10.3% premium to Tuesday’s closing price that values the company at about 500 million pounds ($656 million), according to a statement. Hansteen, a real estate investment trust, has about 256 properties, mainly the sort of warehouses in and around towns and cities that have become one of Blackstone’s biggest bets of recent years.
- FedEx Corp. plunged after cutting its profit forecast for the second straight quarter, as weak international demand hurt sales and the courier ramped up investment to handle soaring e-commerce deliveries. The results for the company’s fiscal second quarter were “breathtakingly bad,” with weakness in both the ground-delivery unit and air-cargo business, said Deutsche Bank AG analyst Amit Mehrotra. Adjusted earnings will be no more than $11.50 a share in the fiscal year ending in May, down from the previous expectation of as much as $13, FedEx said in a statement Tuesday.
- Traders have ramped up bets for the Bank of England to lower interest rates at the end of 2020 after Prime Minister Boris Johnson reignited fears of a no-deal Brexit. Money markets see an 80% probability of the central bank cutting by 25 basis points in December 2020, up from about 30% on Friday. While Johnson’s victory last week fueled immediate optimism for a smooth departure from the European Union, he has since announced plans to prevent Britain extending its transition period past the end of 2020, spooking financial markets.
- PSA Group and Fiat Chrysler Automobiles NV agreed to combine to create the world’s fourth-biggest carmaker, as the manufacturers prepare to shoulder the costly investments in new technologies transforming the industry. In the biggest automotive deal since Daimler acquired Chrysler two decades ago, the French and Italo-American carmakers will each own half of the enlarged business. The new company, with global sales of 8.7 million vehicles, will be run by PSA Chief Executive Officer Carlos Tavares, with Fiat Chairman John Elkann holding the same role.
- China’s government-bond investors will soon be looking for reassurance from the central bank that there’s plenty of cash in the financial system. The country will see a “liquidity hole” of 2.8 trillion yuan ($400 billion) in January, in large part because people across the nation will withdraw cash for the Lunar New Year holiday, according to Guotai Junan Securities Co. That means bond traders expect the central bank to unlock funds to avoid the liquidity-driven panic seen in October, when the benchmark 10-year yield spiked the most in six months.
- India’s controversial religion-based citizenship act will have to pass the scrutiny of the nation’s top court, even as Prime Minister Narendra Modi’s government pledged to push ahead and implement the law. A three-judge bench headed by Chief Justice of India S.A. Bobde issued a notice to the government seeking its response. The court agreed to examine the legality of the legislation following more than 50 petitions filed by activists, lawyers, student groups, Muslim bodies, and politicians from across the country. The court will next hear the case on Jan. 22 and may decide in January if the law should be stayed, Bobde said.
- Tohoku Electric Power Co. plans to invest about 300 billion yen ($2.7 billion) to build Japan’s largest offshore wind farm, the Nikkei reported without identifying its source. The power utility will invest in a project planned by Tokyo-based Green Power Investment and jointly set up large wind turbines with 480 megawatts of capacity off the coast of Aomori prefecture in northern Japan, according to the article. The project aims to start operation around 2029. Tohoku Electric said in a statement after the Nikkei report that it will invest in onshore and offshore wind power generation projects in Aomori and Iwate prefectures. An official with the utility said the amount of investment into Green Power hasn’t been fixed and issuing green bonds for the venture is one financing option under consideration.
- An appeals court upheld charges by Cyrus Mistry that he was improperly ousted as chairman of India’s $110 billion Tata Group, paving the way for his reinstatement and marking a loss for the conglomerate’s chairman emeritus Ratan Tata. Ratan Tata’s actions against Mistry were oppressive and the appointment of a new chairman was illegal, a two-judge panel of India’s National Company Law Appellate Tribunal said on Wednesday. The court also said holding company Tata Sons’ shift to a private company from a public one was unlawful and ordered a reversal.
- JSW Steel Ltd.’s $2.8 billion purchase of Bhushan Power & Steel Ltd. inched closer to completion after India’s top court halted a money-laundering case filed against the insolvent mill. A three-judge bench of the Supreme Court headed by Chief Justice S.A. Bobde stayed trial court proceedings in the case against Bhushan Power and said it will decide on the sale to JSW in February. A panel of lenders to Bhushan Power had approached the court seeking early completion of the transaction after the deal was halted by a lower court.
- One of China’s top liquefied natural gas buyers offered to sell a cargo on the cheap — and in the throes of winter — a fresh sign of the massive oversupply that has weighed on the market. PetroChina Co. offered the lowest price in Pakistan LNG’s tender seeking a cargo for Feb. 16-17 delivery. This follows a move by China National Offshore Oil Corp., the largest buyer, to swap multiple December and January cargoes for later supply to help manage brimming inventories. Chinese companies stocked up on LNG for the heating season, but warmer temperatures have curbed demand at the same time supply is ramping up at new projects. Prices in North Asia are more than 40% lower than they were a year ago, and none of China’s major buyers are currently seeking prompt deliveries for the winter, according to traders surveyed by Bloomberg.
- Fear of missing out is so rampant in stocks that investors are chasing the rally in large-caps to heights not seen in almost a century. One gauge of velocity, the S&P 500’s 14-week relative strength index, just exceeded 70, a threshold analysts consider an extreme reading of exuberance. At Friday’s close, the benchmark traded at 26.3 times five-year normalized earnings, according to data compiled by Leuthold Group. Since 1933, similar RSI breakouts have occurred 27 other times, though never in a market priced this richly.
- Volvo Group agreed to sell its UD Trucks unit to Isuzu Motors Ltd. for about $2.3 billion and announced plans to forge a strategic alliance with its Japanese rival, the latest sign of consolidation in the global automotive industry. UD Trucks, based in Saitama, Japan, used to be part of Nissan Motor Co. before it was sold to Volvo more than a decade ago. Isuzu, which sold 530,000 vehicles last year, will acquire all of the truck maker, the companies said in a statement Wednesday. The deal will boost Volvo Group’s operating income by about 2 billion kronor ($212 million) and increase the Swedish company’s cash position by 22 billion kronor.
- New York Life Insurance Co. has agreed to acquire a business from Cigna Corp. that sells non-medical insurance products to employers in a transaction worth north of $6 billion, the Financial Times reported Wednesday, citing people familiar with the matter. The acquisition would broaden New York Life’s offerings beyond its core life insurance and annuities franchises. It would also provide a large cash injection to Cigna, saddled with debt following its $67 billion takeover of pharmacy-benefit manager Express Scripts last year, according to the report.
- Fujifilm Holdings Corp. agreed to acquire Hitachi Ltd.’s diagnostics imaging unit for 179 billion yen ($1.6 billion) as it expands further in the lucrative health-care sector. The deal is expected to close by July 2020, Fujifilm said in a statement Wednesday. The companies had said earlier they were in talks for a deal.
*All sources from Bloomberg unless otherwise specified