February 28th, 2020
Daily Market Commentary
- Canada’s main stock exchanges said all systems are ready for the start of business on Friday after halting trading for hours due to a technical issue. The Toronto Stock Exchange said interruption was caused by a system capacity issue within the messaging technology component of TMX Group Ltd.’s trading engine. The bourse said it has undertaken necessary measures to mitigate the risk of recurrence and that the incident was not the result of a cyber-security attack. Exchanges operated by TMX stopped trading shortly before 2 p.m. Eastern time Thursday and did not re-open. The S&P/TSX Composite Index was down 1.9% at the time. Major U.S. benchmarks dropped more than 4% after falling sharply in the last hour of trading.
- Royal Bank of Canada has widened its lead in mortgages against rival lenders as the nation’s housing market shows signs of renewed vigor. The bank’s domestic mortgage book grew 8.6% in the fiscal first quarter, the biggest year-over-year jump in more than a decade. None of Canada’s other big banks has achieved such a fevered growth rate in almost two years, with Royal Bank grabbing a greater portion of the C$992.4 billion ($742.5 billion) mortgage market spread among the country’s five largest lenders. Among those companies, Royal Bank’s market share is now 27.4%.
- Fiat Chrysler Automobiles NV is cutting production at its Canadian minivan plant, eliminating about 1,500 jobs as it grapples with flattening demand for new vehicles. After almost a year of extensions, the Italian-American automaker said it is canceling the third shift at its assembly plant in Windsor, Ontario, beginning June 29. The company also is phasing out the Dodge Grand Caravan, output of which will cease at the end of May. The plant will continue to build the Chrysler Pacifica and Voyager minivans.
- European equities tumbled on Friday and were poised for their worst week since the 2008 financial crisis as investors fretted about the potential hit to the global economy from the spreading coronavirus. The Stoxx 600 Index extended losses to trade 4.6% lower by 9:36 a.m. London time before paring some losses. The travel and leisure sector slumped as much as 5.3%, with the gauge down 19% since the beginning of the year. Other sectors with exposure to China were among the worst performers, with the basic resources index down 5.5% and tech stocks dropping 5.1%.
- U.S. equity-index futures pointed to another bad day on Wall Street on Friday, slumping after European share gauges tracked a stock rout across Asia. Nasdaq 100 futures contracts expiring in March declined as much as 2.6% as of 8:45 a.m. in London. Contracts fell 1.6% for the S&P 500 Index and dropped 1.5% for the Dow Jones Industrial Average.
- Oil traded near $50 a barrel in London, after earlier slipping below that level, as the fast-spreading coronavirus roiled global markets, intensifying speculation that OPEC and its allies will strike a deal to support prices. Brent crude for May delivery, the most actively traded contract, lost as much as 4.2% while fears over the outbreak sent shares around the world slumping. The market’s price structure has weakened dramatically, tumbling into a contango, while profits from making products like diesel have also collapsed. The top official at the Organization of Petroleum Exporting Countries said the cartel and its allies are displaying a “renewed commitment” to reach an accord as the virus puts the world economy on course for its worst performance since 2009. Saudi Arabia has been pushing for deeper production cuts over the last few weeks, but Russia has so far taken a more cautious stance. One silver lining for markets is that prices are now at a level that may be uneconomic for U.S. shale producers.
- Gold falling as the market sells off is a bad sign. Investors tend to only let go of the metal in such conditions if they have high liquidity needs, for instance to meet margin calls. Bullion dropped more than 3% from Monday’s highs to trade at ~$1,626/oz, not as bad a route as in equities, but not what you’d expect from a haven either. Holders in exchange-traded funds were still mostly buyers, adding metal in three of the last four sessions, suggesting liquidations came in futures markets.
- Germany quarantined about 1,000 people and Switzerland banned large events, leading to the Geneva car show being canceled. Iran and South Korea revealed more coronavirus cases and Nigeria, Africa’s most populous country, confirmed the first infection south of the Sahara desert. Australia, the Netherlands and Britain all reported new cases. U.K. Prime Minister Boris Johnson is expected to chair an emergency meeting next week. Mexico had its first preliminary positive test. Equity markets tumbled in Asia and Europe and U.S. futures weakened, while yields on Treasuries maturing in two and five years slid to the lowest level since 2016. Brent crude dipped below $50 a barrel for the first time since December 2018.
- Traders in money markets are starting to bet the Federal Reserve may be forced into an emergency interest-rate cut if the coronavirus gets much worse. The wagers are driving down benchmark yields in U.S. Treasuries to record lows. Traders are now pricing more than a full 25-basis-point cut for the Fed in March, with another one expected in June. The last time the Fed cut out of its schedule was in 2008.
- Equity funds globally saw investors pull about $19 billion in the week through Wednesday as increasing angst over the impact of coronavirus fueled a rush into the bond market, Bank of America Corp. said. Exchange-traded stock funds led the outflows with $14.1 billion exiting, while equity mutual funds had $5.2 billion of redemptions in the week through Feb. 26, BofA strategists said, citing EPFR Global data. U.S. equity funds had their largest outflows in nine weeks at $17.7 billion, the most among major regional markets.
- The founder of Triton, a European private-equity firm that oversees about $15 billion in assets, is looking for partners to help it target acquisitions worth as much as 1 billion euros ($1.1 billion). Peder Prahl, who created Triton 23 years ago, says his goal is to invest in companies that are “a little bit larger” than those he’s chased in the past. Triton has made a business of buying problem companies and turning them around. Its model often involves teaming up with other investors, as it did last year when it bought packaging firm Ifco together with a unit of the Abu Dhabi Investment Authority. Prahl says his industry is likely to see a lot more of such so-called club deals.
- Borr Drilling Ltd. spent more than $3 billion building a fleet of offshore drilling rigs in a big bet on a market recovery. Now it’s having to sell some of them to shore up cash. Offshore drillers and other oil service companies have come under massive pressure as a recovery from the 2014-2017 market collapse has taken much longer than most expected, and rising investor focus on climate change has compounded their challenges.
- British Airways parent IAG SA said the spread of the coronavirus made it impossible to predict earnings this year, as demand weakens in Asia and Europe and companies cut back on businesses travel across the globe. The airline group, which also includes Spain’s Iberia and Aer Lingus of Ireland, said it will reduce capacity by 1% to 2% this year, as industry events are canceled and companies impose restrictions on travel. On Friday, the company reported profit that beat analysts’ estimates for 2019. IAG’s carriers have canceled flights to China through March, and have pared back services to other destinations as the virus spreads across the world. Last week, the International Air Transport Association forecast that the industry would see its first annual decline in global passenger demand in over a decade in 2020, primarily weighed down by the impact of the virus in China.
- Switzerland canceled large events and Germany quarantined about 1,000 people as Europe stepped up measures to contain the spread of the coronavirus. Public and private gatherings with more than 1,000 people won’t be allowed until March 15, the Swiss government said on Friday. The move hit the Geneva Motor Show, which was set to open to the public on March 5. The cancellation of one of Europe’s biggest auto exhibitions comes after the wireless industry earlier this month scrapped the Mobile World Congress in Barcelona and China postponed large-scale events scheduled through late March.
- An adviser to Prime Minister Shinzo Abe said Japan should compile another economic package with fresh spending of at least 5 trillion yen ($45 billion) to respond to a severe hit from the coronavirus outbreak. “We should take it very seriously that this is terrible timing, coming right after the sales tax hike,” Etsuro Honda, one of the key architects of Abenomics, said in an interview Thursday. “The impact could be devastating in the short term.”
- India is considering options including offering subsidized loans to cash-strapped wireless carriers that owe $13 billion in past dues, according to people with knowledge of the matter. The proposals include asking the companies to pay 20% of the principal upfront and the rest over a period of 16 years at an interest rate of 0.5% over the yield on the benchmark government bond, the officials said, asking not to be identified as the matter is private. A telecom ministry spokesman declined to comment.
- Asian oil refiners outside of China are reeling as the rapid spread of the coronavirus coincides with a warmer-than-normal winter. Crude processors are cutting operating rates as the outbreak weighs on demand for transport fuels, while the slowdown in consumer spending is hurting petrochemical producers that make plastics. This is all happening amid unusually mild temperatures, with parts of Japan experiencing the warmest January in data going back to 1946, depressing consumption of heating fuel.
- China is slowly starting to get back to work, as it battles the coronavirus outbreak that has killed more than 2,600 people and sickened tens of thousands. Government controls and the fear of going outside have curtailed spending, and many factories are still not working at full capacity due to a lack of staff, with workers still in their hometowns or spending two weeks in quarantine. However, activity seems to be picking up, with the economy likely running at 60% to 70% capacity this week, according to a Bloomberg Economics report, up from about 50% two weeks ago. The following data track how much of the world’s second-largest economy remains out of action.
- The damage from the coronavirus is temporary and global growth will bounce back later this year, strategists at Morgan Stanley and Credit Suisse Group AG said, providing a potential source of optimism for battered equity markets. “It’s probably too early to call a market bottom, but at the same time we believe that the virus will be a temporary event so even after we have reduced our global growth forecasts, we still believe that there’s going to be a recovery in 2020,” Philipp Lisibach, head of global equity strategy at international wealth management at Credit Suisse, said in a phone interview.
*All sources from Bloomberg unless otherwise specified