February 26th, 2020

Daily Market Commentary

Canadian Headlines

• As the collapse in global equities deepens, gold shares have helped Canada’s stock market stay in the green for the year. But that hangs in the balance as the precious metal’s red-hot rally took a step back today and the S&P/TSX Composite tumbled around 2.2% — its biggest drop since October 2018. Escalating virus concerns pushed all but eight stocks in the index lower on the session. Where it goes from here is anyone’s guess, as black swan events have a way of gripping markets with fear.
• Canadian Imperial Bank of Commerce shuffled its top management ranks, cut jobs and took a restructuring charge as Chief Executive Officer Victor Dodig doubles down on controlling costs. Canada’s fifth-largest lender by assets recorded a C$339 million ($255 million) charge in its fiscal first quarter to cover severance from staff reductions, as the pace of expense growth accelerated for its sixth straight quarter. CIBC also named new managers including the head of its largest division, Canadian personal and business banking, where the main product line — mortgages — lagged behind rivals in the past year. The moves are part of Dodig’s efforts to reshape the Toronto-based bank while improving efficiencies. CIBC follows Bank of Montreal and Toronto-Dominion Bank in taking restructuring charges in recent quarters, as tighter margins, rising provisions and a more challenging operating environment damp revenue growth and spur Canadian lenders to cut costs to increase earnings.
• Justin Trudeau’s ambition was to forge a grand bargain to develop Canada’s resources. In trying to please everyone, he has pleased no one. The Canadian prime minister pledged that increased support for the environment and indigenous rights would help win the social license for major projects. It hasn’t worked out that way. The country’s long-running argument over its vast oil riches is boiling over, and Trudeau finds himself besieged on all sides. Resource proponents are up in arms over a decision Sunday by Teck Resources Ltd. to abandon a C$20 billion ($15.1 billion) oil development in Alberta because of policy uncertainty. The government is also being accused of being too slow to respond to protesters who blocked rail lines for more than two weeks in support of indigenous people opposed to a new natural gas pipeline.

World Headlines

• European shares on Wednesday wiped out what was left of the sharp gains made since late October, extending the rout into a fifth day as the coronavirus spread in the region and companies from Diageo Plc to Danone warned the outbreak will hit sales. The Stoxx Europe 600 Index tumbled as much as 2.9%, extending its weekly drop to 8.2% — the biggest slump since the heat of the euro-area’s sovereign-debt crisis in August 2011 — before trimming losses. The benchmark was down 0.9% as of 11:56 a.m. in London.
• U.S. equity-index futures fluctuated while stocks in Europe and Asia dropped on Wednesday as investors fretted over fresh evidence of the widening coronavirus outbreak. Gold advanced and Treasuries were steady. Futures on the three main American equity gauges swung between losses and gains, a day after the S&P 500 Index fell 3% to cap its worst two-day slide since 2015.
• South Korean and Australian stocks led declines in Asia, with the won falling back toward its weakest since 2016 as the country emerged as a hot spot for the contagion. Ten-year Treasury yields hovered close to their record-low close set Tuesday, while the dollar edged higher. Risk assets are showing few signs of rebounding as coronavirus cases steadily climb outside the epicenter in China. South Korea said its national total rose to more than 1,000, while American health officials Tuesday warned that they expect the epidemic to spread in the U.S. Traders may be looking out for further signs of policy accommodation after American central bankers said they are closely monitoring the spreading virus, though it’s “still too soon” to say whether it will change the outlook.
• Oil extended declines to the lowest in a year on fears the fast-spreading coronavirus will take a major toll on the global economy. Futures in New York fell 1.4% after plummeting more than 7% over the previous three sessions. Top U.S. health officials on Tuesday warned of a domestic outbreak of the infection, triggering another sell-off on Wall Street and in commodities. South Korean cases topped 1,200 from just 51 a week ago, there have been 11 deaths in Italy and the toll is mounting in Iran.
• Gold rebounded on renewed concerns over the coronavirus after the U.S. Centers for Disease Control and Prevention warned Americans to prepare for a potential outbreak at home and the total number of cases in South Korea topped the 1,000 mark. The move out of riskier assets saw Asian stocks drop after the S&P 500 Index capped a fourth day of losses overnight, while 10-year U.S. Treasury yields held near Tuesday’s record low. Traders are also monitoring for any signs of policy accommodation to cushion the impact of the virus on global growth.
• Investors withdrew a net $1.57 billion from the iShares iBoxx High Yield Corporate Bond ETF in the latest session, reducing the fund’s assets by 9.4 percent to $15.2 billion, the lowest level since June 17, according to data compiled by Bloomberg. It was the biggest ever one-day decrease and the fifth straight day of outflows, bringing the total amount withdrawn to $3.18 billion. The fund’s assets fell by 17 percent during that span. The fund has suffered net outflows of $1.02 billion in the past year.
• Italy reported more coronavirus cases from the Lombardy region, Iran confirmed 44 additional infections, while 700 people are still confined in a hotel in Tenerife, the Canary Islands. Greece reported its first case. Europe’s debt risk jumped to a six-month high, stocks tumbled and oil slumpedto the lowest in a year. South Korea’s won fell toward its weakest against the dollar since 2016 as the nation emerged as a hot spot, and China’s yuan rosefor a second day.
• Private equity giant KKR & Co., which made a non-binding bid this month for a minority stake in parts of Telecom Italia SpA’s landline network, has valued the assets at the high end of initial estimates, giving a boost to the company’s effort to cut debt. The approach set an enterprise value of 7.5 billion euros ($8.2 billion) for the telecommunications company’s “secondary network” of copper and fiber lines that run from street cabinets to premises, said the people, who asked not to be identified because the details aren’t public. The previous range estimated for the assets was 7 billion euros to 7.5 billion euros, the people said.
• Blackstone Group Inc. agreed to buy the iQ Student Accommodation business from Goldman Sachs Group Inc. and the Wellcome Trust in the largest-ever private real estate deal in the U.K. Funds managed by Blackstone will pay 4.66 billion pounds ($6 billion) for the business, which owns and manages properties with more than 28,000 beds in the U.K., according to an emailed statement from Goldman Sachs. The deal is subject to regulatory approval.
• The Pentagon’s five-year nuclear weapons plan calls for requesting at least $167 billion through 2025 — building from the $29 billion sought for next year to $38 billion, according to previously undisclosed figures. The commitment includes research, development, procurement, sustainment and operations. It reflects a major boost to an effort started under President Barack Obama to replace aging nuclear systems, such as Minuteman III missiles and command and control systems. It doesn’t include funding for the Energy Department’s National Nuclear Security Administration, which is requesting $19.8 billion for fiscal 2021, including $15.6 billion for nuclear weapons activities.
• Democrats running for president ripped into two of their own in the last debate before Super Tuesday, saying that nominating either front-runner Bernie Sanders or the best-funded candidate Michael Bloomberg would all but guarantee Donald Trump’s re-election. It’s a grim prescription for a party that still can’t believe it lost to Trump last time, but one that seemed all too real to the Democrats on stage. Yet none of the other five contenders in Charleston, South Carolina, had the kind of breakout moment that suggested they were prepared to grab the nomination, or emerge from the pack to dislodge Sanders as the front-runner.
• Marathon Petroleum Corp.’s refinery near Los Angeles was rocked by two explosions and a blaze late Tuesday night. A blast hit a cooling tower at the plant in Carson, California, starting a fire, according to the Los Angeles County Fire Department. The blaze has been confined and supply has been disconnected, while residual fuel supply is burning off, the department said in an update on Twitter. It recommended that local residents stay indoors as hazardous-materials censors monitor the surrounding area.
• When Boris Johnson’s top Brexit negotiator went to Brussels to deliver a stinging speech full of threats and allegations last week, his target was the officials who run the European Union. The problem is, they couldn’t believe he really meant it. In the first set of Brexit negotiations, Johnson’s predecessor Theresa May claimed that “no deal is better than a bad deal” — but few on her own side believed her, and Brussels held firm, convinced that the U.K. would buckle in the end. This time may be different. Johnson now has a commanding majority in Parliament and the power to follow through with his threats to walk away if he doesn’t like the terms on offer. The risk is that the EU may not have appreciated that change.
• UiPath, a software maker valued last year at $7 billion, is getting closer to an initial public offering after helping some of the biggest companies in the U.S. automate routine processes. Armed with last year’s $568 million funding round that gave the New York-based company its multi-billion dollar valuation, co-founder and Chief Executive Officer Daniel Dines sees more growth on the cards. The bourse entry may take place as soon as early next year, depending on market conditions and strategic decisions.
• Escalating violence in India’s capital New Delhi has left at least 20 people dead after right-wing Hindu groups attacked mostly-Muslim protesters demonstrating against the country’s new religion-based citizenship law, the worst violence in the city in nearly three decades. Delhi’s chief minister Arvind Kejriwal called on Prime Minister Narendra Modi to send in the army to calm the “alarming” situation, the Press Trust of India reported Wednesday. The city state’s police is not under the control of Kejriwal’s government and takes orders from the federal government.
• Indonesia is ready to seek parliamentary approval for a bill to accelerate the construction of a new capital that’s drawn interest from investors across the world, according to President Joko Widodo. The National Development Planning Agency may submit the bill to the parliament this week, Jokowi, as the president is known, told a cabinet meeting in Jakarta on Wednesday. The bill, once passed by lawmakers, will serve as the legal basis for the new capital, he said.
• Lowe’s Cos. fourth-quarter sales narrowly missed estimates despite a buoyant U.S. housing market. Revenue of $16 billion fell short of the $16.2 billion average of analysts’ estimates. Excluding some items, earnings per share of 94 cents beat the average projection of 91 cents. The shares were little changed in pre-market trading.
• Walt Disney Co. Chief Executive Officer Bob Chapek is taking the helm at a perilous time for the company in China. The deadly coronavirus outbreak has forced Disney to temporarily shut its Shanghai and Hong Kong theme parks, while cinemas across the mainland remain closed, raising the likelihood of postponing planned film debuts in the country. Infections are spreading worldwide, while the disease has killed more than 2,700 people. Chapek, 60, who led Disney’s theme parks and consumer products businesses, is taking over immediately, the company said Tuesday, after Bob Iger abruptly stepped down as CEO. Even as coronavirus cases spike outside China, the biggest impact for Disney so far has been in the Asian nation, one of the entertainment giant’s fastest growing markets.
• Chesapeake Energy Corp. rose in pre-market trading after the embattled U.S. shale oil and gas producer said it plans to slash capital spending and raise as much as $500 million from asset sales to fund debt that matures this year. Capital expenditures in 2020 will total $1.3 billion to $1.6 billion, about 30% lower compared with last year, the company said Wednesday in its fourth-quarter earnings statement. It also plans to trim general and administrative costs by 10%.
• Tesla Inc. and Panasonic Corp. plan to end their partnership in producing solar cells for rooftops at a facility in Buffalo, New York. Panasonic is ending its participation in the venture as part of a global overhaul of its solar business, but will continue to produce car batteries with Tesla at a jointly owned plant in Nevada, the Japanese conglomerate said in a statement. It will halt production at the New York site by May, then withdraw before the end of September, it added. The decision comes after the two companies have struggled to ramp up production at the newer facility, known as Gigafactory New York, according to people familiar with the matter. Panasonic’s withdrawal is part of the firm’s broader recent move to curtail money-losing businesses, one of the people said, asking not to be named because the decision isn’t public.
• Blackstone Group Inc. has proceeded with the acquisition of Coffee Day Enterprises Ltd.’s technology park as it is set to pay the first tranche of 1.5 billion rupees ($21 million) as soon as Wednesday, people familiar with the matter said. The fund will pay another 20 billion rupees in the next two weeks for Global Village Tech Park, said the people, who asked not to be identified as the information is private. The remainder, which is 5.5 billion rupees, will be paid within a year, the people said. The deal values the technology park at 27 billion rupees. The embattled Coffee Day, which runs India’s largest coffee chain, has been trying to sell assets to repay its debt after the unexpected death of its founder V. G. Siddhartha last year. Though the company announced on Aug. 14 that it has entered into a non-binding agreement to sell the technology park in Bangalore to Blackstone, the deal got delayed after its creditor Yes Bank Ltd. didn’t issue the so called no-objection certificate for the transaction, Bloomberg News reported in December.

*All sources from Bloomberg unless otherwise specified