December 21th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian equities fell Friday, with broad declines in real estate and mining stocks, and the benchmark index ended with its first weekly loss since October. The S&P/TSX Composite Index dropped 0.7% Friday, with financial, technology and energy shares also dragging it down. BlackBerry Ltd. plunged 16%; a disappointing earnings report brought an abrupt reversal to what had been epic rally. Precious metals stocks fell. A number of analysts predict the rally that drove some of the world’s largest miners to multiyear highs will extend into 2021 as the economy recovers from the steepest slump since the Great Depression.
• Prime Minister Justin Trudeau’s government suspended flights between Canada and the U.K. for 72 hours effective midnight Sunday. “Given the high number of cases of a variant Covid-19 virus observed in some areas in the United Kingdom, the decision has been made to suspend entry into Canada of all commercial and private passenger flights from the United Kingdom for 72 hours, effective midnight tonight,” the government said in a statement Sunday evening.
• International Longshore & Warehouse Union Local 502, a trade union, said it reached a “tentative agreement” with Westshore Terminals Investment Corp. and is ceasing all strike action, according to a Dec. 19 statement on its website. The strike could have potentially affected Teck Resources Ltd.’s shipments of metallurgical coal. Teck is the second-largest exporter of seaborne metcoal and shipped 80% of its steelmaking ingredient to Asia last year.

World Headlines

• European equities fell the most in nearly two months as the U.K. and the European Union failed to make progress on Brexit talks and several major countries moved to suspend travel from the U.K. amid concerns about a new strain of Covid-19, which could lead to more lockdowns. The Stoxx Europe 600 Index tumbled as much as 2.3%, the biggest intraday drop since Oct. 28, and was down 2% at 9:30 a.m. in London. Such cyclical sectors as banks, energy and travel paced the declines. The FTSE 100 Index dropped as much as 2.2%.
• Stocks and futures were a sea of red as a new strain of the coronavirus in the U.K. caused chaos ahead of the Christmas holiday, with regional neighbors suspending travel. In the U.S., equity futures pointed to sharp losses at the open even after Congressional leaders reached a deal on roughly $900 billion of outlays to support the economy amid escalating virus cases. The House of Representatives is expected to vote on it on Monday.
• Asian stocks dropped amid concerns over the latest coronavirus outbreaks and related lockdowns across the region, as well as a rampant new strain in the U.K. Thailand’s equity benchmark led losses, sinking as much as 5.1%, the most since March 23. The nation may expand a lockdown as health authorities search for over 10,000 people with ties to a record cluster of coronavirus cases found in a coastal province near Bangkok. Utilities was the worst-performing sector in Asia on Monday, followed by energy shares as oil fell toward $47 a barrel. All of that saw the MSCI Asia Pacific Index trading 0.5% lower even after the U.S. Congress reached a deal on a roughly $900 billion stimulus package to bolster the world’s largest economy.
• Oil plummeted the most in seven weeks, with investors fleeing the market as a mutation of Covid-19 discovered in the U.K. threatened more lockdowns across Europe. Brent futures slumped below $50 a barrel, at one stage falling almost 6%. More than 16 million Britons are now required to stay at home after a full lockdowncame into force in London and the southeast of England. Some European countries are limiting travel with the U.K. and France halted freight movements to England for 48 hours. That’s feeding concerns that a new wave of movement restrictions could come into effect across the region, curbing a recovery in global consumption. A stronger dollar also reduced the appeal of commodities such as oil that are priced in the currency.
• Copper dropped from a seven-year high as worries over a new strain of the coronavirus in the U.K. hurt market sentiment, with a stronger dollar also pushing gold lower. Italy, the Netherlands, Belgium and France closed their borders to Britain, while Prime Minister Boris Johnson canceled plans to allow U.K. families to see each other over the festive period in an effort to contain a new, faster-spreading strain of the virus. The moves sent stock markets lower, overshadowing recent news over vaccine rollouts and stimulus packages.
• The six biggest U.S. banks will be able to buy back as much as $11 billion of their own shares in the first quarter of next year after the Federal Reserve gave lenders the green light to resume purchases. The central bank’s show of confidence released late Friday followed a second round of 2020 stress tests, which indicated Wall Street navigated the Covid-19 turbulence and has adequate capital to weather an extended economic downturn caused by the virus. In June, the Fed put temporary caps on shareholder payouts by the biggest banks, prohibiting them from buying back their own stocks or increasing dividend payments. JPMorgan Chase & Co. and Morgan Stanley said in statements they plan to resume buybacks starting next quarter. Citigroup Inc. and Goldman Sachs Group Inc. said they also intend to resume purchases next year, while Bank of America Corp. Chief Executive Officer Brian Moynihan has said the firm plans to buy back stock “as soon as we’re allowed to.”
• Congressional leaders reached a deal on a roughly $900 billion spending package to bolster the U.S. economy amid the continued coronavirus pandemic giving lawmakers a short timetable to review and pass the second largest economic-rescue measure in the nation’s history. Senate Majority Leader Mitch McConnell, House Speaker Nancy Pelosi and Senate Democratic leader Chuck Schumer announced the accord Sunday. The legislative text was still being written, but the House was expected to vote on it Monday, followed by the Senate. The plan would provide direct payments of $600 to most Americans and $300-per-week in enhanced unemployment benefits through March, according to lawmakers and aides. Expiring programs for gig workers and the long-term unemployed also would continue.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the seventh straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $2.87 billion in the week ended Dec. 18, compared with gains of $2.18 billion in the previous week, according to data compiled by Bloomberg. This was the biggest weekly inflow since Jan. 17, 2020. So far this year, inflows have totalled $1.43 billion.
• Nike Inc. gained in premarket trading after second-quarter revenue and profit beat analysts’ expectations, bolstered by e-commerce and growth in China. The shares traded at $142.5 as of 10:30 a.m. London time, or 3.8% higher than Friday’s closing price in New York. They have gained 36% this year through the close. Sales rose 8.9% to $11.2 billion in the quarter ended Nov. 30, the sportswear company reported Friday. Analysts had projected $10.6 billion. Earnings grew to 78 cents a share, compared with a 62-cent estimate. The results provided fresh evidence that Nike is in recovery mode after Covid-19 upended its global operations. Though Nike also beat Wall Street estimates with its previous results in September, sales declined through much of 2020 and resumed their growth trajectory only in the latest period.
• Emerging markets may have their work cut out sustaining one of their strongest final quarters in more than a decade. Prospects for a U.S. stimulus windfall, a successful roll-out of Covid-19 vaccine programs, a commodity-price boom and even a possible Brexit trade deal were enough to keep the rally on course last week. Indexes of stocks, currencies and bonds registered their seventh successive weekly advance, taking the gain on the MSCI Inc. equity gauge since the end of September to more than 17%. But therein lies a warning. On the two occasions in the past five years when stocks have clocked up such a string of weekly gains, the rally has sputtered. What’s more, as of last week, the gauge was at 15 times the projected 12-month earnings of its members, hovering at the 98th percentile of its valuation range of the past decade. And its 15-day relative strength index has been close to or above overbought levels for more than two weeks.
• Britain’s biggest port stopped all traffic heading to Europe, triggering delays to food supplies after the discovery of a new variant of the virus prompted a wave of countries to ban travel from the U.K. The escalating crisis prompted Boris Johnson to convene a meeting of the government’s emergency committee on Monday in a bid to keep goods flowing. The concern is focused on links with France, which suspended inbound travel from the U.K., including freight, for 48 hours starting midnight Sunday. The disruption comes at a critical time for Johnson’s government, which is still negotiating the terms of post-Brexit trade with the European Union. It’s also battling a surge in coronavirus infections which forced ministers to put London and much of southeast England into lockdown over the weekend, heaping more misery on businesses in the critical pre-Christmas period.
• Royal Dutch Shell Plc agreed to sell a minority stake at a liquefied natural gas export project in Australia to Global Infrastructure Partners for $2.5 billion. The oil major will sell a 26.25% interest in the Queensland Curtis LNG Common Facilities in a deal that is expected to be completed in the first half of 2021, the company said a statement on Monday. The common facilities are currently completely owned by Shell and include LNG storage tanks, jetties and infrastructure that service the venture. The deal comes as the oil giant targets annual divestment of $4 billion in a bid to shore up its balance sheets. Reducing its net debt will help Shell meet its pledge to boost dividends, which it cut earlier in the year for the first time since the Second World War.
• Tesla Inc. shares fell 6.3% in premarket trading on Monday as the electric vehicle maker marks its trading debut on the S&P 500 Index. Futures contracts on the S&P 500 plunged 2.5%, following European stocks lower after several major countries moved to suspend travel from the U.K. amid concerns about a new strain of Covid-19. Tesla has catapulted 731% this year in anticipation of the historic inclusion, making it the biggest company ever to be added to the benchmark. The EV pioneer will also be joining the S&P 100, replacing oil and gas firm Occidental Petroleum Corp., which fell 12% premarket.
• Lockheed Martin Corp. agreed to acquire the defense industry supplier Aerojet Rocketdyne Holdings Inc. in a deal valued at $4.4 billion. As part of the transaction, Aerojet declared a $5 per share special dividend, to be paid on March 24, to holders of record as of March 10. The payment of that special dividend will adjust the $56 per share consideration to be paid by Lockheed Martin, according to a statement Sunday. The shares surged in pre-market New York trading on Monday. At $51, Lockheed will be buying Aerojet at a 21% premium from the closing price on Friday. Chief Executive Officer Jim Taiclet, who stepped into the top job this year, has said he was keen to expand the world’s largest defense contractor through acquisitions. With Aerojet, he’s picking up a key U.S. supplier of propulsion systems for missiles, rockets and other space and defense applications.
• The House and Senate are set to vote Monday on $900 billion in pandemic relief aimed at boosting the U.S. economy into the early spring, combined with $1.4 trillion to fund regular government operations for the rest of the fiscal year. The bill includes help for small businesses, the jobless and direct payments to most Americans. It also provides funding for vaccine distribution, food assistance, tax breaks and money for education and child care. The provisions aimed at the fallout from the coronavirus represent the second-largest economic rescue package in American history, behind the $1.8 trillion virus relief package that was signed into law just nine months ago. It surpasses the $787 billion stimulus passed in response to the financial crisis in 2009.
• President Donald Trump downplayed the severity of a massive cyber-attack on the U.S. government and suggested China may have been responsible — even as other U.S. officials are convinced Russia was the perpetrator. In doing so Saturday on Twitter, the president contradicted assessments from senior officials within his own administration who’ve blamed Moscow for the intrusion of at least half a dozen federal agencies — including comments Friday night from Secretary of State Michael Pompeo. Marco Rubio of Florida, acting chairman of the Senate Intelligence Committee, rejected Trump’s conclusion, calling the hack “the gravest cyber intrusion in our history,” and one conducted by “Russian intelligence.”
• Sweden is fighting a draft European climate measure that it says could harm its world-beating green bond market. The European Commission, which wants to steer investors to socially and environmentally sustainable assets, is proposing that only buildings certified as super-energy efficient by national authorities be included in its taxonomy. Being excluded would make financing more expensive. But national energy requirements differ and since Sweden imposes some of Europe’s toughest, the EU’s framework would ultimately dramatically shrink the pool of Swedish assets that could be funded with green bonds. The Swedish Bankers’ Association says the fallout could leave just 1% of the total eligible, compared with as much as 20% in other countries.
• Signature Aviation Plc said it will accept a $4.3 billion buyout from Blackstone Group Inc. if the U.S. private-equity firm makes a solid offer. The U.K. company, whose No.1 shareholder is Bill Gates, would accept the $5.17-a-share price made in an approach by Blackstone, according to a statement Monday. The offer represents the U.S. firm’s sixth proposal to buy Signature Aviation, the world’s leading operator of private jet bases. A lower bid from Global Infrastructure Partners was already rejected and both suitors were given 28 days to issue formal proposals or withdraw. The Blackstone offer represents a premium of 44% compared with the closing price on Dec. 16, before the Blackstone approach was announced.
• Seafarers stuck for months on vessels carrying Australian coal off China’s coast are trapped between authorities who won’t let them unload their cargoes and buyers who won’t let them leave. Worsening relations between Beijing and Canberra have stranded 74 vessels, about 8.1 million tons of coal, and an estimated 1,480 mariners off Chinese ports, according to an analysis of shipping data by Bloomberg. The original charterer of two of the vessels wants them to sail somewhere else to relieve the exhausted seafarers, but so far the traders who own the cargo won’t agree. “It’s the end receiver who has not given the green light” for the Jag Anandvessel to sail to another country where it could change crews, said Jan Dieleman, the president of Cargill Inc.’s ocean transportation business. The Minneapolis-based company is the original charterer of that ship and the Navios Coral vessel, which have both been moored off the port of Jingtang since June, waiting to discharge their loads of Australian coal.
• The Iran nuclear deal remains the “best instrument” to resolve the dispute over Tehran’s atomic program and its signatories are ready to welcome back the U.S. under a Joe Biden administration, according to German Foreign Minister Heiko Maas. President Donald Trump pulled the U.S. out of the 2015 accord and reinstated sanctions on Iran, and Maas said the deal has been in a “downward spiral” since, fueled by pressure from Washington and Iranian breaches of the terms. However, he said a “final window” remains to salvage it. After virtual talks Monday, Maas and his counterparts from France, Britain, China, Russia and Iran — as well as the European Union’s foreign affairs chief — issued a statement praising “the prospect of a U.S. return” and underlining “their readiness to take a positive view of this in a joint effort.”
• Private equity giant Thoma Bravo has agreed to buy out U.S. real estate software firm RealPage Inc. for about $10.2 billion including debt. Thoma Bravo is offering investors $88.75 in cash for each share of RealPage, the companies said in a statement on Monday. The bid is a 31% premium to RealPage’s closing share price on Dec. 18. RealPage, a maker of software for managing rental properties, has risen more than 26% this year — outpacing a 15% gain in the S&P 500 — after the pandemic spurred the adoption of online and digital services over in-person alternatives. The company in November hiked its earnings per share forecast for the year after reporting quarterly revenue ahead of expectations. It’s now valued at about 35 times estimated earnings, versus 26 for the benchmark index.
• Elon Musk inquired about converting “large transactions” of Tesla Inc.’s balance sheet into Bitcoin in a Twitter exchange with Michael Saylor, a prominent booster of the digital currency. In a series of tweets, Saylor, chief executive officer of Microstrategy Inc., encouraged the billionaire to shift U.S. dollars from the electric-car maker to Bitcoin and “do your shareholders a $100 billion favor.” “Other firms on the S&P 500 would follow your lead & in time it would grow to become a $1 trillion favor,” Saylor added in his tweet on Sunday.
• The pandemic aid package negotiated by Congressional leaders includes $15 billion to reinstate payroll reimbursements to airlines that expired two months ago, according to two people familiar with the legislation. The legislation is similar to provisions in an earlier pandemic aid package that expired on Oct. 1, which barred layoffs and came with other restrictions. The tentative agreement reached Sunday also includes $1 billion for airline contractor payrolls, $10 billion for state highways, $2 billion for airports and airport concessionaires, $2 billion for the private motor coach, school bus, and ferry industries, and $1 billion for Amtrak.
• OneTrust, a maker of privacy and security software, reached a $5.1 billion valuation after raising $300 million from venture firm TCV and existing backers Insight Partners and Coatue. “This round gives us flexibility for future acquisitions, recruiting and growth,” OneTrust co-Chairman Alan Dabbiere said in an interview. The Atlanta-based company may pursue smaller rivals, he said, referencing its 2019 purchase of privacy-laws specialist DataGuidance. “These are the kinds of creative acquisitions that have driven our growth and success.” Tim McAdam, a TCV general partner, described the startup as “category-defining,” noting that it caught the attention of his firm after reaching $150 million in annual recurring revenue faster than any other company in the business-to-business software space.
• Oracle Corp.’s surprise decision to shift its headquarters to Texas from California marks a strategic realignment for the Silicon Valley stalwart that’s likely to yield long-term financial benefits such as lower payroll costs and the potential to more easily recruit future employees. The world’s second-largest software maker said last week that it would no longer designate its longtime base in Redwood City as its main office, ending an era for a company that helped define the technology industry through the 1980s and 90s. The embrace of Texas seems designed to curtail costs over time, in contrast to the San Francisco Bay Area, which has grown increasingly expensive for corporate payrolls and individuals. Hired, a company that matches companies with tech employees, found in a 2020 analysis that the average tech worker in the Bay Area made $155,000 this year. Average tech salaries in Austin jumped 10% to $137,000.

*All sources from Bloomberg unless otherwise specified