December 2nd, 2019

Daily Market Commentary

Canadian Headlines

• Brookfield Asset Management Inc., the Canadian money manager, is holding more cash and sees distressed debt as “highly attractive” as it girds for the next recession, said Chief Executive Officer Bruce Flatt. “We have more dry powder in funds, more cash on our balance sheet,” Flatt said in an interview with BNN Bloomberg Friday in Toronto. The investment firm is “getting ready for the point where we can capitalize on situations if the markets turn. If they don’t, we’ll be fine, we’ll just keep investing.” Earlier this month, Brookfield said its assets swelled to more than half a trillion dollars at the end of the third quarter and it had over $65 billion in capital available to continue its spending spree. Holdings ballooned to almost $511 billion after the Toronto-based alternative asset manager closed its purchase of a 61.2% stake in Oaktree Capital Group at the end of the quarter.
• Zijin Mining Group Co. has agreed to take over Continental Gold Inc. (CNL.T), a Toronto-based company that has been developing a gold project in Colombia. Zijin has agreed to acquire Continental for $5.50 Canadian dollars a share in cash, resulting in what the companies said Monday was an equity deal value of about C$1.4 billion. Shares of Continental closed Friday at $4.87 and are up 116% so far this year.
• Canada’s struggling oil-sands industry has a plan to cut costs while exporting more of their crude: Make it even heavier. Companies including Cenovus Energy Inc., Gibson Energy Inc., Imperial Oil Ltd.and MEG Energy Corp. are looking to remove condensate and other light oils from the oil-sands bitumen they produce, so they can get more of it onto rail cars. Doing so would dramatically reduce the cost of shipping crude by rail to the U.S. Gulf Coast, which otherwise can cost twice as much as shipping by pipeline. Removing the light oils, called diluent, would make rail shipments nearly as cost-effective as pipeline exports, said Dinara Millington, vice president of research at the Canadian Energy Research Institute.
• BRP Inc., the Canadian maker of Sea-Doos, three-wheelers and other gasoline-fueled outdoor toys, is eyeing a new type of customer: the climate-conscious urban dweller. The power-sports vehicle manufacturer unveiled six electric prototypes at a September event for dealers in Las Vegas, giving them a taste of the future as it explores ways to enter a segment that’s still in its infancy. Among them were two models of two-wheelers that could catapult BRP into the urban mobility market. While the two-wheeler field of mopeds and scooters is competitive, BRP Chief Executive Officer Jose Boisjoli finds inspiration in Tesla Inc., which he says “taught a lesson in business to a lot of people.”

World Headlines

• European equities started the week on a good note as mining and oil sectors advanced on positive data from China, which offered extra fuel to the stock rally. The Stoxx Europe 600 Index gained 0.3%. BP Plc added 0.7% and Rio Tinto Plc climbed 1.9%. The so-called official China manufacturing purchasing-managers’ index exceeded all estimates in a Bloomberg survey, fueling traders with confidence that global growth isn’t faltering. European equities have staged a powerful recovery this year, rising for three months straight this fall on optimism that the U.S.-China talks are making progress. Investors are looking to 2020 to gauge whether the rally can continue.
• U.S. equity futures pared a gain and Europe stocks briefly turned lower as a move on tariffs by America reminded investors of lingering trade risks and overshadowed solid factory data. Government bonds slid. Contracts on the main U.S. gauges were solidly up with most shares after a strong China manufacturing purchasing-manager index reading, but pared after President Donald Trump said he was restoring tariffs on steel and aluminum shipped from Brazil and Argentina effective immediately. Trump also renewed his assault on the Federal Reserve, saying the authority should “lower rates and loosen” monetary policy.
• Earlier, Japanese stocks led gains in Asia, while Hong Kong shares managed to climb even after clashes between protesters and police resumed over the weekend. Oil rallied following its more than 5% sell-off on Friday, while gold retreated. The latest tariff development is threatening to overshadow promising data out of China and Europe along with a record $7.4 billion in U.S. online sales for Black Friday. Investors will look for new reasons to be bullish in American factory and employment numbers due this week.
• Oil rebounded from the biggest weekly loss since October as Iraq defied expectations by saying OPEC+ will consider deeper output cuts at its meeting this week, and China’s economy showed signs of improvement. Futures surged as much as 2.7% in New York after plunging 5.1% on Friday. Last week, there were indications OPEC+ wouldn’t make steeper supply reductions. However, Iraq’s Oil Minister Thamir Ghadhban told reporters on Sunday there could be an additional cut of about 400,000 barrels a day. A gauge of China’s manufacturing sector jumped unexpectedly in November, suggesting a recovery in activity.
• Gold dropped after better-than-expected manufacturing data from China and the euro-zone fueled a risk-on mood among investors. A gauge of China’s manufacturing jumped unexpectedly in November, signaling a recovery in activity amid state support. In the euro-zone, factory activity rose to a three-month high. Investors will be looking for clues later Monday on the strength of the U.S. economy, with ISM manufacturing and construction spending data due. Holdings in gold exchange-traded funds dropped by 905,711 ounces in November, according to the latest data compiled by Bloomberg. The decline, the biggest since April, was driven mainly by outflows in the first half of the month.
• Euro-zone factory activity rose to a three-month high last month, though job losses continued as the sector remained stuck in a slump. The Purchasing Managers’ Index for the 19-nation euro region rose slightly to 46.9 in November as confidence improved and a drop in new orders slowed.
• President Donald Trump is reinstating tariffs on steel and aluminum from Argentina and Brazil, nations he criticized for cheapening their currencies to the detriment of U.S. farmers, and again called on the Federal Reserve to loosen monetary policy. Linking his trade agenda with his Fed criticism in an early morning tweet, he said the two South American countries “have been presiding over a massive devaluation of their currencies. which is not good for our farmers. Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S. from those countries.”
• For years, OPEC ignored the rise of the U.S. shale industry and came to regret its mistake. Now, the group is making another bold gamble on America’s oil revolution: that its golden age is over. When the Organization of Petroleum Exporting Countries meets this week, ministers will discuss whether to extend their current output target, rather than reduce it, according to people familiar with the internal debate. The reason? They believe relentless U.S. oil production growth will slow rapidly next year. OPEC isn’t alone. Across the industry, oil traders and executives believe U.S. production will grow less in 2020 than this year, and at a significantly slower rate than in 2018. On paper, the cartel has the oil market under control.
• China avoided measures related to trade in its first actions retaliating against the U.S. over a law supporting Hong Kong’s protesters, instead vowing to sanction some rights organizations and halt warship visits to the city. Chinese Foreign Ministry spokeswoman Hua Chunying told a news briefing Monday that U.S. groups targeted for sanctions included the National Endowment for Democracy, Human Rights Watch and Freedom House. Hua said that China would also suspend further Hong Kong port visits by U.S. Navy ships over the legislation, which Trump signed into law Wednesday.
• Joe Biden is working to breathe new life into his campaign in Iowa, a state where he’s struggled to keep up with his competitor’s organizations and popularity despite leading the crowded 2020 field of Democrats in most national polls. Biden kicked off an eight-day bus tour this weekend that focuses on rural areas. He’s traveling with Tom Vilsack, a former Iowa governor and agriculture secretary under President Barack Obama, and Vilsack’s wife, Christie. Aides and allies see Biden’s trip as an opportunity to shift to a new phase of Iowa campaigning — not as intense as it will be during the final rush before the Feb. 3 caucus, but more focused, particularly in rural areas that get little attention from most candidates. Biden’s team believes he can attract at least 15% of the support of caucus-goers in each of the state’s 1,679 precincts, the threshold for earning delegates toward the Democratic nomination.
• New York lawmakers are planning to introduce a bill that would go beyond making Uber Technologies Inc. and Lyft Inc. drivers employees by also allowing them to unionize, a move that could clash with federal labor and antitrust laws. “There’s no scenario I can imagine that’s not going to include collective bargaining,” said Sen. Diane Savino (D), adding that she and Assemblyman Marcos Crespo (D) plan to introduce the legislation after lawmakers return to Albany in January.
• RocketSpace Inc., a San Francisco-based WeWork rival, is pulling out of its U.K. shared office business and will shut down the subsidiary by April in another blow to London’s co-working scene. Chief Executive Officer Duncan Logan told U.K. employees last month that they’d be out of a job after Dec. 20, according to a person familiar with the plans, who asked not to be identified because the information is private. The company will instead refocus on funding services for startups, according to emails seen by Bloomberg News. The 1,500-seat office in the North London borough of Islington has already removed marketing materials from its website and no longer lets visitors request tours. RocketSpace has said it plans to close RocketSpace U.K. Ltd. and RocketSpace Angel Ltd. by April, according to regulatory filings. The latter had debts of about 9 million pounds ($11.6 million) due this year, which the company has sufficient money to repay, according to the November filing.
• Global bonds started the week with a sharp lurch lower after economic data in China beat expectations and a change in Germany’s political leadership opened the possibility for more fiscal spending. U.S. Treasuries led declines, with 10-year yields touching a two-week high, after better-than-expected manufacturing data from both China the euro-area. German bonds followed from the European market open, as a left-wing triumph at the weekend in the Social Democrats’ leadership — in a pact with Chancellor Angela Merkel’s Christian Democrats — may increase pressure to end the nation’s balanced budget policy.
• The world’s biggest natural gas exporter and one of the globe’s top consumers of the fuel cemented their energy cooperation on Monday with the launch of Russia’s giant Power of Siberia pipeline to northern China. Gas started flowing toward China through the link, which has become a symbol of President Vladimir Putin’s pivot to the fast-growing economies of Asia as relations deteriorate with the West. The pipeline, which runs from Russia’s enormous reserves in eastern Siberia and will eventually be 3,000 kilometers (1,900 miles) long, will help satisfy China’s vast and expanding energy needs.
• Frasers Logistics & Industrial Trust has agreed to buy Frasers Commercial Trust in a S$1.5 billion ($1.1 billion) deal, giving it greater ammunition to make acquisitions amid a spate of consolidation among Singapore’s real estate investment trusts. Combined, the group will have about S$5.7 billion of assets, propelling it into the city-state’s top 10 REITs, according to a statement Monday. With about 100 properties across Singapore, Australia and Europe, including warehouses, offices and business parks, the merged firm’s market value will almost double to about S$4.2 billion.
• Shares of India’s largest mobile phone service providers surged after they announced an increase in the cost of subscriptions to their plans, signaling a cut-throat price war in the nation may finally be easing. Bharti Airtel Ltd., the third-largest wireless carrier, said it will increase prices of its most expensive plan by as much as 41%, while Reliance Jio Infocomm Ltd., the biggest telecom company by subscribers in India, will boost tariffs by as much as 40% from Dec. 6. Vodafone Idea Ltd. also announced a new pricing plan for prepaid customers on Sunday, which would be effective Dec. 3.
• China’s central bank governor sounded a cautious tone on the health of the global economy, while signaling that the nation’s monetary policy makers will continue to refrain from large-scale easing steps. Policy should be prepared for a “mid- and long-distance race” and stick to a conventional approach as long as possible, according to the article by Governor Yi Gang published Sunday on the WeChat account of Qiushi, the Communist Party’s flagship magazine.
• China is pursuing a three-year pilot program, led by five of its biggest utilities, to integrate and cut some coal-fired power capacity to help the debt-saddled industry, state media reported. The pilot, which runs through 2021, will seek to consolidate coal-power assets within five northwestern regions and reduce their capacity by up to one-third, according to a Shanghai Securities News, citing sources it didn’t identify.
• Hong Kong’s retail sales suffered a record contraction in October, as the city counts the cost of almost six months of political unrest. Retail sales by value contracted by 24.3% in the month from a year earlier, the fourth month of double-digit declines. By volume, sales contracted by 26.2%, also a record, according to a government release. Earlier Monday, Financial Secretary Paul Chan told lawmakers he expected the first budget deficit since the early 2000s for the fiscal year, and said that the ongoing turmoil has hurt economic growth by some 2 percentage points this year.
• Agnelli family scion John Elkann is in talks to buy one of Italy’s most famous publishers, GEDI Gruppo Editoriale SpA, the owner of daily newspapers including la Repubblica and La Stampa. Elkann is looking to acquire a controlling stake from the De Benedettifamily, whose holding company CIR was due to meet Monday to discuss the possible deal. Shares in CIR rose 2.8% by 9:08 a.m. in Milan. GEDI shares were suspended from trading.

*All sources from Bloomberg unless otherwise specified