February 16, 2021

Daily Market Commentary

Canadian Headlines

  • Air Canada and Transat AT Inc. are “continuing their discussions regarding potential deal amendments” after the Feb. 15 deadline on the proposed takeover of Transat passed without regulatory approval from the European Commission. Air Canada has refused to agree to an extension of the Feb. 15 date. “In such case, even if the Arrangement Agreement is amended, Air Canada and Transat would retain the ability to terminate the agreement at any time.”
  • After a meteoric rise in 2020 that made it Canada’s most valuable company, Shopify Inc. has a lot to live up to. The question is whether last year’s 178% rally has inflated investors’ expectations beyond reason. Analysts are forecasting record fourth-quarter adjusted earnings of $150.6 million and the company’s first-ever annual adjusted profit when it reports on Wednesday, boosted by soaring demand for online shopping. Longer-term, there’s a consensus the Ottawa-based firm is poised to benefit from a massive investment by businesses on a transition to e-commerce. What’s less clear is the trajectory of growth in the medium term, especially once Covid-19 vaccinations let hordes of shoppers break their cabin fever and head back to the mall.

World Headlines

  • European shares edged higher, rising for a fourth day on optimism that lockdowns may be eased as Covid-19 cases wane and vaccine rollouts progress. The Stoxx 600 Index gained 0.1% at 9:32 a.m. in London, with cyclicals and value sectors such as miners, energy and travel outperforming. Defensives such as consumer staples and health care shares lagged behind. Europe’s stocks have renewed their push higher after the recovery rally paused at the end of January. The U.K. government is set to publish reopening plansnext week, while German Chancellor Angela Merkel is under growing pressureto ease restrictions. The Stoxx 600 trades at the highest in almost a year.
  • Global stocks are in the midst of the longest run of gains in 17 years as optimism over the economic recovery sweeps across markets. The reflation trade is powering assets tied to economic growth and price pressure, including commodities and cyclical stocks. At the same time, investors are riding a wave of speculative euphoria from penny stocks to Bitcoin amid abundant policy support. The dollar slipped against most of its major peers as haven bids waned. The pound gained for a third day, closing in on $1.40, amid signs that trade between the U.K. and European Union is normalizing.
  • Asian stocks rose to a fresh record, led by gains in Hong Kong, which resumed trading after Lunar New Year holidays. SoftBank Group climbed to an all-time high and was the biggest contributor to gains in the MSCI Asia Pacific Index. Financials were the biggest boost among industry groups as U.S. Treasury yields rose. Energy was the region’s top-performing sector on elevated oil prices owing to disruptions at refineries in Texas amid a cold snap. All major national benchmarks were in the green. Japanese stocks extended a rally that saw the Nikkei 225 breach the 30,000 level for the first time since 1990 on Monday.
  • Oil held gains in New York after rising above $60 a barrel for the first time in a year as a deepening energy crisis in the U.S. disrupted crude production and forced the shutdown of some of the nation’s biggest refineries. As much as 1.7 million barrels a day of oil output has halted and deliveries via pipeline suspended as freezing weather cripples Texas’s power system and blackouts spread to other states in the central U.S. Energy Aspects Ltd. said 3 million barrels a day of processing capacity could be off-line. The combination of frigid temperatures and refinery closures has spurred ascramble for fuels and is likely to lead to higher U.S. prices for all kinds of products from gasoline to propane.
  • Gold held a decline as demand for the haven asset eased, with investors weighing signs of a vaccine-aided global recovery and higher Treasury yields. Platinum rallied to the highest in more than six years. The U.S. recorded the lowest daily number of new coronavirus infections since Oct. 25, before a holiday season surge sent case numbers soaring. Traders are betting on a recovery, sending global equities to a record, while the yield on 10-year Treasuries is at the highest in almost a year, eroding bullion’s appeal.
  • Treasury Secretary Janet Yellen is giving Federal Reserve Chairman Jerome Powell a bit of a headache when it comes to managing the money markets. Already low short-term interest rates are set to sink further, potentially below zero, after the Treasury announced plans earlier this month to reduce the stockpile of cash it amassed at the Fed over the last year to fight the pandemic and the deep recession it caused. The move, which aims to return its cash position at the central bank to more normal levels, will flood the financial system with liquidity and complicate Powell’s effort to keep a tight grip over money market rates.
  • Bitcoin blew through another milestone, surging past $50,000 for the first time as the blistering rally in the largest cryptocurrency continues to captivate investors worldwide. The world’s largest cryptocurrency reached about $50,191 as of 7:32 a.m. in New York and is now up about 73% so far this year. Ether, a rival crypto, hit a record on Friday and is up about 140% year-to-date. After ending last year with a fourth-quarter surge of 170% to around $29,000, Bitcoin token jumped to $40,000 seven days later. It took just nearly six weeks to breach the latest threshold, buoyed by endorsements from the likes of Paul Tudor Jones, Stan Druckenmiller and Elon Musk. Bitcoin traded for a few cents for several years after its debut more than a decade ago. Tesla Inc.’s announcement that it added $1.5 billion in Bitcoin to its balance sheet was the most visible recent catalyst, sending the price up 16% on Feb. 8, the biggest one-day gain since the Covid-19 inspired financial markets volatility in March. Optimism grew after Mastercard Inc. and Bank of New York Mellon Corp. moved to make it easier for customers to use cryptocurrencies, while Bloomberg reported Saturday that Morgan Stanley may add Bitcoin to its list of possible bets.
  • With Donald Trump’s impeachment trial behind them, Democrats are quickly pivoting back to President Joe Biden’s priorities, particularly his $1.9 trillion stimulus plan and confirming the rest of his cabinet. Lawmakers face a short turnaround to approve another round of stimulus payments, jobless compensation and funding for schools and vaccines before key benefits from the last round of pandemic aid expire on March 14. In less than four weeks, Democrats must pass a bill out of the House and get all 50 Senate Democrats to back the legislation. That will likely require amending some provisions, such as the $15 federal minimum wage requirement, that at least two Democratic Senators — Kyrsten Sinema of Arizona and Joe Manchin of West Virginia — say they won’t support. Any changes made in the Senate would mean that the bill would have to go back to the House for another vote.
  • The energy crisis crippling power grids across the U.S. showed no sign of abating on Tuesday morning as blackouts left almost 5 million customers without electricity during unprecedented cold weather. To prevent the collapse of their networks, suppliers from North Dakota to Texas are having to institute rolling power cuts to limit demand. The severe shortages are likely to continue throughout Tuesday and the deep freeze is forecast to remain until Wednesday at least. Officials have reported two people dead, likely from cold, according to the AP news agency. Medical centers are rushing to administer vaccines before they go bad. Flights are grounded. More than a million barrels a day of oil and 10 billion cubic feet of gas production are shut and massive refineries have halted gasoline and diesel output.
  • Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the 15th 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 $884.5 million in the week ended Feb. 12, compared with gains of $1.29 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $9.44 billion.
  • Bank of America Corp. clients with $614 billion combined are in the throes of an unprecedented frenzy of risk-taking, as more Wall Street banks sound the alarm on greed across markets. After a week which recorded the strongest-ever inflow into stocks, a record net 25% of investors surveyed by the investment bank this month are taking higher-than-normal risks. Cash levels slumped to the lowest since 2013, while optimism on cyclical risk assets rose to the highest since 2011. All this is being fueled by unprecedented optimism on the growth outlook, with 84% of fund managers expecting global corporate profits to improve over the next 12 months. For the first time in a year, investors say companies should focus on spending rather than improving their balance sheets.
  • Czech billionaire Petr Kellner’s PPF Group NV has picked banks to help it explore a potential listing of its Cetin unit, which operates the country’s biggest telecommunications network, people familiar with the matter said. PPF is working with BNP Paribas SA, Morgan Stanley and Societe Generale SA to study options for Cetin including an initial public offering, according to the people. A deal could value the business at about 4 billion euros ($4.8 billion), the people said, asking not to be identified because the information is private. Kellner is the Czech Republic’s richest person with an estimated net worth of about $15.9 billion, according to the Bloomberg Billionaires Index. Cetin, which was founded in 2015, manages more than 44,000 kilometers (27,340 miles) of fiber-optic cable and runs a cellular network covering 99.7% of the Czech population, according to its website.
  • Bristol-Myers Squibb Co. and Sanofi were ordered to pay the state of Hawaii more than $834 million for illegally marketing their blockbuster blood-thinning drug Plavix in a manner that put some users’ lives at risk. Judge Dean Ochiai in Honolulu concluded Monday the drugmakers misleadingly marketed Plavix and failed to properly warn consumers in the state about its health risks. The companies produce the medicine as part of a joint venture. The $834 million was awarded as a civil penalty for Bristol-Myers Squibb and Sanofi’s violation of Hawaii’s consumer-protection laws through their improper Plavix marketing campaigns. Hawaii Attorney General Clare Connors’ lawyers showed the companies didn’t properly disclose the blood thinner was ineffective for as many as 30% of users in the state, the judge said.
  • Germany wants to make a deal with the U.S. in order to complete the controversial Nord Stream 2 gas project that has caused friction between the two countries. The 1,230-kilometer (764-mile) gas pipeline that’ll bring the fuel from Russia to Germany has been a persistent source of trans-Atlantic friction. Its construction was halted for a year after the U.S. imposed sanctions. Chancellor Angela Merkel’s coalition is working on a proposal that’ll attempt to soften Russia’s influence over the European energy market, addressing some of the U.S.’s concerns on the project, according to people familiar with the matter. Berlin’s strategy to convince the U.S. to scrap sanctions over the project include a regulatory mechanism that would limit Russia’s ability to manipulate the energy market. Germany also plans to offer its support to U.S. liquefied natural gas imports with the construction of LNG terminals, according to the people, who asked not to be identified because the matter is private.
  • Czech billionaire Petr Kellner’s PPF Group NV has picked banks to help it explore a potential listing of its Cetin unit, which operates the country’s biggest telecommunications network, people familiar with the matter said. PPF is working with BNP Paribas SA, Morgan Stanley and Societe Generale SA to study options for Cetin including an initial public offering, according to the people. A deal could value the business at about 4 billion euros ($4.8 billion), the people said, asking not to be identified because the information is private. Kellner is the Czech Republic’s richest person with an estimated net worth of about $15.9 billion, according to the Bloomberg Billionaires Index. Cetin, which was founded in 2015, manages more than 44,000 kilometers (27,340 miles) of fiber-optic cable and runs a cellular network covering 99.7% of the Czech population, according to its website.
  • The U.K. could need tax increases of about 60 billion pounds ($84 billion) if Chancellor of the Exchequer Rishi Sunak wants to balance the books, according to the Institute for Fiscal Studies. The warning sets the tone for the Treasury’s budget on March 3, when Sunak is due to outline how he intends to address the ruinous legacy of a pandemic that has driven government borrowing to its highest in peacetime and forced him to deliver 13 emergency statements since he took office a year ago. “It is possible that growth will be fast enough that big fiscal deficits will largely dissipate of their own accord,” said Paul Johnson, director of the IFS. “But that is not a central expectation. More likely, we are on track for ongoing unsustainable deficits. A reckoning in the form of big future tax rises is highly likely, but not as yet inevitable.”
  • BHP Group boosted its outlook for the global economy as the Covid-19 vaccine rollout gathers pace, backing its optimism by rewarding investors with a record $5.1 billion first-half dividend. The world’s biggest miner reported a 16% increase in first-half profit, and said it will pay a record interim dividend of $1.01, up from 65 cents last year. “The deployment of vaccines in key economies, albeit with some uncertainty as to timing and efficacy, removes a material amount of downside risk to the short term demand and price outlook for our portfolio commodities,” the company said Tuesday.
  • Covid-19 cases and hospitalizations are dropping dramatically across the U.S., suggesting that measures to interrupt transmission are working, at least for now. More than 27.6 million Americans have tested positive, likely giving them some degree of immunity. A rising number — 11.8% of the population — has now received at least one dose of a vaccine. And data gathered from mobile phones suggest people are being more cautious day-to-day. If cases keep falling, it could buy time for the vaccination effort to take hold in the warm summer months ahead, potentially underpinning a long-sought economic recovery. Health experts, though, anticipate challenges. Inoculations need to outpace highly contagious variants from the U.K. and South Africa that are now in the U.S. And the upcoming holidays — Spring Break, Easter and Mother’s Day included — hold the threat of group gatherings that can swiftly boost the virus’s spread.
  • CVS Health Corp. CVS Health Corp. forecast a strong year ahead after administering more than 3 million vaccines in about 40,000 long-term facilities in the fourth quarter, a key part of the U.S. campaign to beat the pandemic. The pharmacy giant said in a statement Tuesday it would have adjusted earnings of between $7.39 and $7.55 per share for 2021 as a result of both its efforts against the coronavirus and rising retail sales. The average estimate of analysts surveyed by Bloomberg was $7.50. CVS started immunizing nursing home workers and residents in mid-December through a partnership with the federal government. It’s now administering shots at its pharmacies in more than a dozen states. The company also said it also administered 15 million coronavirus tests last year.

“The ancient Greek definition of happiness was the full use of your powers along lines of excellence.” – John F. Kennedy’s favourite quote

*All sources from Bloomberg unless otherwise specified