December 17th, 2018
Daily Market Commentary
- Canada was looking for a way out of a $13 billion deal to export armored vehicles to Saudi Arabia, Prime Minister Justin Trudeausaid in a televised interview Sunday. “We are engaged with the export permits to try and see if there is a way of no longer exporting these vehicles to Saudi Arabia,” Trudeau told CTV on Sunday, without elaborating. Amid growing international outrage over the murder of Saudi journalist Jamal Khashoggi, the government has been reviewing the planned sale of the armored vehicles made by London, Ontario-based General Dynamics Land Systems, a unit of U.S.-based General Dynamics Corp.
- Byju’s, an Indian education startup, more than doubled its valuation to $3.6 billion after a funding round led by Naspers Ventures and the Canada Pension Plan Investment Board. The company raised $540 million, which will be used to fuel an expansion into English-speaking countries, Bangalore-based Byju’s said in a statement on Monday. The new valuation puts it among the top five on CB Insights’ ranking of India startups. Byju’s has attracted millions of users in India, where there is often a lack of good teachers, helping to teach students from kindergarten to year 12 subjects including math, science and English. Its existing backers include the Chan-Zuckerberg Initiative, founded by Facebook Inc. co-founder Mark Zuckerbergand his wife Priscilla Chan, as well as Tencent Holdings Ltd. and Sequoia Capital.
- European shares fell at the open, adding to Friday’s losses, as investors enter into pre-Christmas mood. The Stoxx 600 Europe Index dropped 0.3 percent, led by falls in retail stocks on contagion from Asos Plc, which plummeted 35 percent after the British retailer cut its sales growth outlook. Italian stocks fell after an official confirmed the government has reached an agreement on trimming its budget deficit. With two weeks to finish the year, investors are looking forward to leave behind what is set to be the worst year for European shares since 2011, with the Stoxx 600 Europe Index down 11 percent. This week’s Federal Reserve meeting is the last big event on the agenda before the end of 2018.
- U.S. equity futures edged lower and stocks fell in Europe after a mixed session in Asia as markets looked to the Federal Reserve for hints on how a volatile year may end. Benchmark Treasury yields steadied just below 2.9 percent. With the Federal Reserve seen raising interest rates for a fourth time this year, Chairman Jerome Powell’s remarks will be closely studied for suggestions on their future path. Global growth forecasts for next year are being trimmed as a trade war between the biggest economies bites and markets reel from a volatile 2018. Meanwhile political uncertainty still grips investors. There are yet more personnel changes within the Trump administration and confusion remains over Britain’s future relationship with the European Union.
- Japanese stocks gained as investors assessed the latest signs on the outlook for the global economy. Railways and utilities boosted the Topix index, while energy-related groups fell oil held losses near $51 a barrel. The benchmark gauge was trading at about 12 times estimated 12-month forward earnings, compared with about 15.5 times in late January. Weak Chinese economic data rattled global stock markets Friday, with the S&P 500 Index sliding to its lowest level since April. The U.S. manufacturing purchasing managers’ index slowed in December to its lowest reading in 13 months, while retail sales topped forecasts with 0.2 percent growth.
- Oil was boosted to near $52 a barrel by a weak U.S. dollar while investors weighed if OPEC and its allies can successfully re-balance the market. Futures in New York gained as much as 1.1 percent. The number of oil rigs in the U.S. fell to the lowest in eight weeks and the dollar slipped on Monday, boosting crude. Investors continue to grapple with concern that rising American supply will quash any price rallies. Hedge funds slashed bullish bets on U.S. oil to the lowest in more than two years, showing they aren’t buying into the OPEC+ coalition’s production cuts just yet.
- Gold held above the lowest in more than a week as investors count down to the Federal Reserve’s final meeting of 2018, with policy makers expected to raise borrowing costs and map out priorities for next year. While higher rates tend to curb bullion’s appeal, many investors are betting on a slower pace of tightening next year. Money managers have turned net bullish for the first time in five months and holdings in exchange-traded funds are at the highest since July.
- U.K. Prime Minister Theresa May is pushing back against Cabinet colleagues who are trying to take control over the direction of Brexit after her deal ran into a wall of opposition. Some of May’s ministers are calling for Parliament to get the chance to vote on what happens next, with a series of indicative ballots on the options available, including potentially a second referendum. May’s office hit back on Monday, insisting she has “no plans” to let members of Parliament give their views on the alternatives to her exit deal as talks are still ongoing with the EU to find a compromise. That doesn’t rule out moving to give Parliament a say over the way ahead in future, if May’s deal is finally rejected.
- China’s bond futures slid on concern that front-loaded issuance from local authorities next year will increase supply pressure. The most active contracts on 10-year sovereign debt fell as much as 0.36 percent to the lowest intraday level since Nov. 13, while the yield on similar-maturity China Development Bank bonds surged 6 basis points. Beijing plans to provide local governments with quotas for issuing debt from January, according to people familiar with the matter. Those allocations usually come after the March national legislative meetings.
- Google will invest more than $1 billion as part of the search giant’s plans to expand its New York City presence, the Alphabet Inc. unit said in a blog post Monday. The company said it had reached lease agreements at 315 and 345 Hudson Street and signed a letter of intent at 550 Washington Street to make up the new 1.7 million square-foot campus, called Google Hudson Square. Google aims to move into the new Hudson buildings by 2020 and the Washington Street location by 2022, Chief Financial Officer Ruth Porat said in the blog post. The move could allow the company to more than double the current 7,000 people it employs in the city over the next decade.
- Taisho Pharmaceutical Holdings Co. is nearing a deal to buy Bristol-Myers Squibb Co.’s French over-the-counter unit, people familiar with the matter said, as the Japanese drugmaker seeks to boost its overseas presence. An agreement for the consumer-health business could be announced as soon as this week, the people said, asking not to be identified because the matter is private. A deal could value the OTC operations, known as UPSA, at about $1.6 billion, said the people. U.S. pharma giant Bristol-Myers has sought to sell the unit amid a push to streamline its business globally to focus on other growth areas, the people said. Any deal would add to the $428.7 billion of announced acquisitions of health-care companies this year, 27 percent more than the same period in 2017, according to data compiled by Bloomberg.
- Boeing Co. and Embraer SA approved the terms of a strategic partnership that’s been in the works for about a year, and still needs a sign off from the Brazilian government. The deal on commercial aircraft is aimed at expanding the U.S. company’s manufacturing base abroad and its reach into small jetliners, while also offering a much needed boost to the Brazilian planemaker. Embraer shares jumped at open in Sao Paulo.
- General Electric Co. is set to close out one of its worst years since the financial crisis, and 2019 may be another precarious one. The challenges are many and over the next few months, new Chief Executive Larry Culp will have to revamp GE’s power business, sort out liquidity problems arising from cash flow shortages and soaring financial liabilities, and resolve regulatory investigations. Those are tall orders even in a bullish or stable market, and tougher still in the midst of a possible economic slowdown, volatile oil prices and questions surrounding U.S.-China trade.
- Hitachi Ltd.’s planned takeover of ABB Ltd.’s power grid division for about $6.4 billion will be the Japanese conglomerate’s biggest-ever deal as it shifts focus from nuclear plants to the higher-growth market for electricity networks. Hitachi will acquire 80.1 percent of a business with a total enterprise value including net debt of $11 billion, it said in a statement Monday. ABB will keep the remaining stake and plans to return as much as $7.8 billion to investors through a buyback or other measures.
- Standard Chartered Plc reached an agreement to separate its private-equity unit, ending more than two years of effort by Chief Executive Officer Bill Winters to get out of the business. Intermediate Capital Group Plc said Monday that its funds are buying a majority of the bank’s private-equity assets in a transaction valued at about 790 million pounds ($997 million). The former Standard Chartered private-equity team, led by Nainesh Jaisingh, will run the portfolio in their new firm, Affirma Capital, after a management buyout.
- Investors added money to exchange-traded funds that buy emerging market stocks and bonds in the ninth straight week of inflows, the longest stretch of gains this year. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $494.9 million in the week ended Dec. 14, compared with gains of $1.62 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totaled $24.7 billion.
- U.K. Chancellor of the Exchequer Philip Hammond faces a 12 billion-pound ($15 billion) hole in the public finances after a change to the way student loans are accounted for was announced on Monday. The Office for National Statistics said a review has concluded that the assets should be divided into a portion that will be repaid and one that will have to be written off by the government. Currently, the loans are classified as government lending. Under the new system, the proportion of the debt that is not expected to be repaid will be treated as government spending, and contribute toward the budget deficit. The ONS aims to incorporate the decision into the government accounts next Autumn.
- SSE Plc and Innogy SE terminated plans to create the U.K.’s second-biggest utility, the latest sign of pressure on the industry from increasing regulation. SSE’s board decided it wasn’t in the best interest of the company to proceed with the deal to combine its retail business with Innogy’s Npower unit after it emerged last month that more cash would be needed in order to obtain an investment grade rating for the combined company. Shares of Innogy and SSE both fell after the announcement.
- India has offered the Maldives $1.4 billion through a credit line and budgetary support as the tiny island nation’s new government pivots from a pro-China foreign policy to one focused on its close neighbor India. The loan agreement came after talks between newly-elected Maldives President Ibrahim Mohamed Solih and Indian Prime Minister Narendra Modi. The two leaders discussed regional stability and defense cooperation as Solih visited the Indian capital on his first trip overseas as president.
- Nissan Motor Co.’s directors failed to name a successor for Carlos Ghosn amid a widening rift with partner Renault SA on governance issues that prompted Japanese prosecutors to jail the iconic executive and also indict the carmaker. The board instead chose to appoint a new committee to improve corporate governance, Chief Executive Officer Hiroto Saikawa told reporters Monday after a meeting of the directors. The committee will give its recommendations by March 2019, almost four months after the Nov. 19 jailing of Ghosn and his hasty ouster as Nissan’s chairman three days later. The board may wait until the committee’s comments before naming a chairman, Saikawa said.
- Malaysia turned up the heat on Goldman Sachs Group Inc., filing the first criminal charges against the U.S. bank in relation to the 1MDB scandal. Authorities alleged that Goldman misled investors when the bank knew that proceeds from 1MDB bond sales it arranged would be misappropriated. The government is seeking fines well in excess of both the $2.7 billion of allegedly misused funds and the $600 million in fees received by Goldman on the deals. Goldman has blamed rogue employees for any wrongdoing in relation to 1MDB, a state-owned investment fund.
- U.S. student loan debt outstanding reached a record $1.465 trillion last month and one particular set of borrowers is having a hard time paying back their loans, according to a Bloomberg analysis of student loan securitization data. This debt is raising fiscal risks. “Over 90% of student loans are guaranteed by the U.S. Department of Education, meaning that if a recession causes a rise in youth unemployment and triggers mass defaults, this contingent liability could prove burdensome for the U.S. government budget,” said Paul Della Guardia, economist at the Institute of International Finance in emailed comments. For one group of young adults that took out loans in 2012, student loan debt is a particularly stark reminder of college. Loans disbursed in 2012 have defaulted at a faster rate than any other loan cohort since the financial crisis.
*All sources from Bloomberg unless otherwise specified