February 19, 2021

Daily Market Commentary

Canadian Headlines

• Cineplex Inc., Canada’s largest chain of movie theaters, is seeing strong demand from yield-starved investors for its unrated bond sale to help it ride out the pandemic. The company is looking to raise C$250 million ($196.5 million) by issuing second-lien secured senior notes due 2026, which would provide an option for the borrower to call it earlier. The company’s arrangers are testing appetites for a yield below 8% after earlier discussions with investors for 8% to 8.25%, according to people familiar with the matter. Bookrunners have gathered around C$1 billion in preliminary indications of interest. The transaction comes as rival AMC Entertainment Holdings Inc., the largest theater chain in the world, signed terms on a new euro-denominated loan facility. It’s the latest evidence of lenders’ increasing conviction that a global economic recovery is near. The Toronto-based company is testing the market as government bond yields, the benchmark used to priced fixed-rate borrowings, are picking up and the longer durations are rising to levels last seen about a year ago as investors position themselves for a post-pandemic reopening. AMC’s subsidiary Odeon Cinemas entered into a new term loan facility, according to a regulatory filing Wednesday.

World Headlines

• European stocks rose, snapping their longest losing streak since October, as luxury-goods shares and chipmakers rallied on positive earnings updates. The Stoxx Europe 600 Index advanced 0.2% as of 10:27 a.m. in London, within 5% of a record high reached exactly a year ago. Hermes International and Moncler SpA climbed more than 5% each after better-than-forecast results. Peer LVMH rose to a record. BE Semiconductor Industries NV led chipmakers higher after keeping a favorable outlook, and as U.S. bellwether Applied Materials Inc. gave a bullish forecast. A year into the pandemic-fueled rout in European stocks, the Stoxx 600 is still recovering. After rallying to the highest level since last February on Monday, the benchmark dropped for three straight days as investors weighed recent gains against mixed earnings reports this week. Still, strategists on average expect more gains for the region’s equities this year, with many saying a pullback may be temporary.
• Futures on the S&P 500 and Nasdaq 100 gained and the dollar weakened. With the yield on the 10-year Treasury benchmark settling back around 1.3%, the focus is turning to corporate earnings reports. Rising yields dominated discussion this week and raised concern about the staying power of the New Year rally. The fear is that a rise in borrowing costs and price pressures could derail the economic recovery.
• Japanese shares fell, with the Topix capping its first weekly drop since January, as automakers and railways declined. Service-sector firms were also among the biggest contributors to the benchmark’s drop. Automakers fell as production was hampered in Mexico by the shortage of natural gas and in Japan by last weekend’s earthquake. The Nikkei 225 retreated but managed to stay above the 30,000 level it regained earlier this week for the first time since 1990. Semiconductor supply-chain stocks rose after U.S. peer Applied Materials forecast revenue that exceeded analyst estimates. Japan’s 10-year sovereign bond yield rose to the highest in more than two years Friday, intensifying speculation about the central bank’s next move at an upcoming review. U.S. stocks dropped Thursday and Treasury yields edged higher amid growing concern over rising borrowing costs. The yen extended gains to a third day.
• Oil fell for a second day as production slowly restarted in Texas and the White House said it would be willing to meet with Iran, potentially paving the way for more crude exports from the Persian Gulf nation. Futures in New York dropped toward $59 a barrel, falling the most in three months at one point on Friday. Companies are using restored power from grids or generators to resume output that was halted by the frigid weather, according to people familiar with the matter. The timeline for a full restoration of the estimated 40% or so of U.S. oil production that was shut in by the big freeze is unclear. Fuel margins rocketed again on Friday, however, with four of the biggest plantsin Texas facing delays of several weeks or more to resume operations. While that potentially limits demand for crude, it also raises the potential for prolonged fuel shortages that could spread across the U.S.
• Gold began the year with lofty expectations on the back of a record high and its biggest annual gain in a decade. Instead, the precious metal is off to its worst start in 30 years. Spot prices touched a seven-month low on Friday, deepening a slump and breaching through a support level that analysts say could portend further losses. Bullion pared some of Friday’s losses as the dollar moved lower, though is already down more than 6% this year. The metal, which surged last year on pandemic-induced haven buying, low interest rates and stimulus spending, is now 2021’s worst performer in the Bloomberg Commodity Index. It’s suddenly facing a host of unexpected stumbling blocks. Chief among those are the surprising resilience in the dollarand a rally in U.S. Treasury yields as economic indicators show recovery from the pandemic is well under way.
• Group of Seven nations are giving a major boost to Covax, the global initiative to fund vaccinations in lower-income countries, indicating momentum toward a coordinated effort to address the pandemic. The U.S. plans to contribute as much as $4 billion to the initiative while France will donate 5% of its secured supplies. The U.K. also will announce its commitment during a G-7 call Friday, and European Commission President Ursula von der Leyen will announce a doubling of European Union cash for the program. Meanwhile, the African Union has secured 300 million doses of Russia’s Sputnik V vaccine, starting in May. The trend of falling Covid-19 infections in Germany is coming to a halt, with the health minister warning that caution is required if the government decides to ease lockdown restrictions. Cathay Pacific Airways introduces a rotation system to cope with quarantine rules in Hong Kong.
• President Joe Biden will re-introduce himself and the U.S. to world leaders at a pair of international conferences on Friday, calling on industrialized democracies to partner in confronting the pandemic and climate change in a sharp departure from his predecessor’s foreign policy. In remarks to the Group of Seven and a speech to the Munich Security Conference, Biden will portray collective action as essential, too, in great-power confrontations with Russia and China, pivoting from former President Donald Trump’s “America First” approach to global affairs. Trump antagonized allies in order to secure more favorable trade deals and reduce the U.S. military footprint, ties Biden seeks to swiftly repair. The new president will also ask foreign leaders to match his efforts make large investments in economic stimulus, infrastructure and technology, warning that a greater risk lies in austerity, according to a senior administration official. Biden will argue that democracies must fight to preserve their institutions in the wake of both foreign interference in their elections and domestic upheaval, like the attack in January on the U.S. Capitol by Trump’s supporters.
• Renault SA braced investors for another challenging year as lingering coronavirus restrictions and supply-chain challenges threaten the French carmaker coming off a record annual deficit. The manufacturer reported a net loss of 8 billion euros ($9.7 billion) for 2020, worse than the 7.85 billion euro-deficit projected by analysts. Much of the damage was done during the first half, when lockdowns crippled auto shipments. A scarcity of semiconductors now poses risk to this year’s results. “2021 is set to be difficult given the unknowns regarding the health crisis as well as electronic components supply shortages,” Chief Executive Officer Luca de Meo said Friday in a statement. “The priority is profitability and cash generation.” Renault said business improved significantly during the final six months of last year, when it generated an operating margin of 3.5% and positive automotive operational free cash flow.
• For Vlad Tenev, the end couldn’t come soon enough. The House Financial Services Committee may have summoned the main actors in last month’s meme-stock frenzy for a hearing, but in reality their attention was centered on the Robinhood Markets chief executive officer and his brokerage’s starring role in the saga. Wearing a dark suit and tie, Tenev sat through more than five hours of testimony and questioning, with a majority of lawmakers focusing their attention on him. Representatives took turns accusing Robinhood of transforming the stock market into a casino and failing to protect retail investors, as well as probing the firm’s decision to restrict trading of stocks such as GameStop Corp. during the market mania. Representative Alexandria Ocasio-Cortez questioned the very business model behind the free-trading platform.
• Iran said the U.S. must first return to the 2015 nuclear deal and lift sanctions if it wants to start talks with the Islamic Republic, appearing to snub an effort by the Biden administration to begin direct discussions before officially rejoining the accord. The “key sequence” for nuclear talks between the Iran and U.S. is commitment, action then a meeting, Iranian Foreign Ministry spokesman Saeed Khatibzadeh said in a tweet on Friday. The reaction — and a similar comment from Iran’s foreign minister — highlighted the challenges in ending an impasse that has threatened to tip the Persian Gulf region into a new conflict in the years since former President Donald Trump exited the 2015 deal and reimposed sanctions.
• Uber Technologies Inc. lost a U.K. Supreme Court ruling over the rights of its drivers, in a landmark decision that threatens the company’s business model in the country. The judges unanimously ruled that Uber drivers are “workers” entitled to rights like minimum wage, holiday pay and rest breaks. Uber shares fell as much as 4% in pre-market trading in New York Friday. “The ruling strikes at the heart of Uber’s business model,” said Paul Jennings, a lawyer at Bates Wells, who represented the drivers. “As a business, it will need to reflect very carefully on the implications of the judgment.”
• Deere & Co., the largest maker of agricultural machinery, boosted its 2021 outlook as rising crop prices and an improving farm economy buoy demand for tractors and other equipment. Net income for fiscal 2021 is forecast at $4.6 billion to $5 billion, the Moline, Illinois-based producer said in a statement Friday. That compares with the $3.6 billion to $4 billion that Deere forecast in November, and the $4.06 billion average of analysts’ estimates compiled by Bloomberg. Expectations for Deere have risen amid a surge in crop prices and U.S. exports of farm goods. The manufacturer has set a high bar for stock performance going into 2021, with its shares jumping 55% last year, the most since 2007. Growers may also be feeling flush from rising U.S. Midwest farmland values. Federal Reserve Bank of Chicago economist David Oppedahl called the agricultural outlook “the rosiest in years” based on a survey of bankers.
• Deutsche Bank AG scaled back plans for its bonus pool after the European Central Bank objected to proposed payout levels, highlighting the challenges of rewarding top performers while heeding demands for restraint during the global pandemic. Germany’s largest lender had initially planned to pay out more than 2 billion euros ($2.4 billion) for staff performance in 2020, but that amount has been cut after several rounds of talks with the regulator in recent months, according to people familiar with the matter. The ECB has now dropped its reservations, the people said, asking not to be identified discussing the private information.
• Japan’s government cut its assessment of the economy for the first time in 10 months, as the country struggles through a renewed state of emergency to respond to a winter jump in coronavirus cases. In its monthly report for February, the Cabinet Office continued to describe overall conditions as improving from a severely low base, but said consumer spending was weakening again. Cutting the assessment is a potential signal that Prime Minister Yoshihide Sugamay be paving the way for more economic stimulus down the road, as he holds on to hopes conditions can improve enough to allow the Tokyo summer Olympics to be held.
• Tencent Holdings Ltd., the creator of the messaging platform WeChat, has raised $8.3 billion in the biggest offshore syndicated loan in Asia for a Chinese firm since 2016. Twelve banks joined the Tencent financing deal, which initially had a $6 billion size, according to people familiar with the matter. The loan will be used for general corporate purposes, the people said, asking not to be identified as they aren’t authorized to speak publicly. Representatives for Tencent didn’t immediately respond to requests for comment. IFR Asia earlier reported on the deal closing. Tencent is fast evolving beyond a social media and gaming behemoth over the past decade and has poured billions of dollars snapping up stakes in promising startups, widening its reach in areas from social media to grocery delivery. It received a 1.3 billion euro ($1.6 billion) loan last month to back its purchase of more shares in Universal Music Group International Ltd.
• Rents in Manhattan and Brooklyn had the steepest year-over-year drop on record in January, according to a new report from StreetEasy, with Manhattan rents slipping 15.5% and Brooklyn rents down 8.6%.  Home prices in January also showed major declines compared to a year prior, according to the report, falling a precipitous 6.2% in Manhattan and 5.4% in Brooklyn.  A recent surge in contract activity suggests at least some improvement on last month’s dismal results. Pending sales, meaning homes that have already gone into contract, are up 30.8% in Manhattan in comparison to January 2020. In Brooklyn, pending sales are up 17.3% for the same time frame. The contrast between rising sales volume and sinking prices is a simple question of supply and demand, says Nancy Wu, an economist at StreetEasy. Sales might have boomed compared to last January, but a year’s worth of inventory that sat fallow during the pandemic continues to dwarf demand.
• China may ban the export of rare-earths refining technology to countries or companies it deems as a threat on state security concerns, according to a person familiar with the matter. The Chinese government is currently conducting a review of its rare-earths policy. Officials view the technology needed to refine and purify the raw materials as a more powerful weapon in protecting state interests than the actual minerals, and is looking at banning sales of the technology to some countries or companies, according to the person, who asked not to be identified because the information isn’t public. While China has no plans to restrict shipments of rare earths to the U.S., it is keeping the plan in its back pocket should a trade war break out again, the person said. The Asian nation is also exploring a ban on rare earths as part of its sanctions on some individual companies, including Lockheed Martin Corp., which violated China’s core interest over arms sale to Taiwan, the person said.
• Apple Inc. is working on a magnetically attached battery pack for the newest iPhones, an accessory that would wirelessly charge the handset and provide the company with another potentially lucrative add-on product. Apple has been developing the attachment for at least a year and it has been scheduled to launch in the months following the release of the iPhone 12 line, according to people with knowledge of the product. The iPhone 12 models were introduced in October. The battery pack would attach to the back of an iPhone 12 using the MagSafe system, which all the new phones use for charging and pairing other accessories like cases and wallets. Some prototypes of the battery pack have a white rubber exterior, said one of the people, who asked not to be identified because the product isn’t yet public. The new accessory would differ from Apple battery add-ons for previous iPhones in that it only provides additional battery life and doesn’t serve as a full protective case.
• Billionaire Elon Musk defended Tesla Inc.’s $1.5 billion Bitcoin investment on Twitter, calling the cryptocurrency a “less dumb” version of cash. “When fiat currency has negative real interest, only a fool wouldn’t look elsewhere,” Musk said in a reference to the sub-zero returns on cash caused by negative-yielding debt. The comments pushed Bitcoin to a record on Friday, with prices climbing above $52,000. In a sense, Musk’s comments sum up one of the big issues facing markets this year. With so much cash being pumped into the financial system from governments fighting the pandemic, investors are increasingly worried about inflation and looking for alternative places to put their money.
• Allbirds Inc. has already beaten the odds in the startup world by raising a quarter of a billion dollars and turning earth-friendly wool sneakers into a legit product category. But the company behind Silicon Valley’s favorite footwear now faces another daunting challenge: impressing investors ahead of a potential initial public offering. That’s coming after its unicorn valuation took a hit last year. In September, Allbirds raised $100 million in a Series E round from large investment firms like Franklin Templeton and T. Rowe Price. According to researcher Pitchbook, the company’s valuation nudged down to an estimated $1.7 billion from $1.73 billion in January 2020. CB Insights, another data provider, shows the value plummeted to $1.14 billion, according to state filings it sourced. The company declined to provide any details on a possible IPO, valuation or performance.
• Huawei Technologies Co.’s Chief Financial Officer was denied access to records from HSBC Holdings Plc by a London judge, a blow to her bid to prove she didn’t trick lenders into processing transactions that violated U.S. sanctions targeting Iran. Meng Wanzhou, daughter of Huawei’s founder Ren Zhengfei, is fighting extradition to the U.S. from Canada. American authorities allege she misled banks into handling transactions that violated White House sanctions. Meng has said records would show lenders knew about the company’s connections to Iran-linked Skycom, which sparked the U.S. handover request. One of the documents underpinning Meng’s case is a Powerpoint presentation she gave to the bank in 2013 which she says made clear Skycom was a partner of the Shenzhen-based telecommunications giant and worked in Iran, according to previous court filings by her lawyer James Lewis.
• A single dose of the vaccine from Pfizer Inc. and BioNTech SE reduced Covid-19 infections by 85% in a study in Israel, bolstering the U.K.’s decision to speed immunizations by delaying a second shot. Among health-care workers who got the vaccine, symptomatic infections were reduced by that percentage in the 15 to 28 days after the first dose, compared with those who didn’t get a shot, according to the report in The Lancet medical journal. While most workers received a second dose on schedule — about three weeks after the first — the booster would only have just started to kick in by the end of the study, so it was essentially looking at the effects of one dose, researchers said Thursday. Israeli researchers analyzed the real-world effects of the Pfizer shot among staff at Sheba Medical Center, the country’s largest hospital. Although it wasn’t a standard clinical trial like those used to establish the efficacy of drugs and vaccines, it gives preliminary support to health officials who recommend postponing second shots to quickly get first doses to as many people as possible.
• A round of analysts initiations for Shoals Technologies Group, expected Monday, will end a quiet period for the banks that took the solar-powered components maker public in late January. Goldman Sachs, JPMorgan, Guggenheim, UBS, Morgan Stanley, Barclays, Credit Suisse, Cowen and Oppenheimer are among those expected to issue ratings. Shoals has climbed more than 50% since debuting at $25 on Jan. 26 in what was the year’s largest IPO at the time. It posted nearly half those gains in the first day of trading. Clean energy stocks had rallied to record highs in 2021, with Democrats committed to speeding the shift away from fossil fuels taking power in Washington. While some fuel cell and solar companies reversed course this week, Shoals has so far avoided the slump.
• Volkswagen AG’s potential listing of Porsche would be a strategic watershed moment and indicate the unprecedented upheaval of the auto industry may only just be beginning. The German industrial giant and other incumbents have navigated a global pandemic far better than initially feared, posting robust profits and ample amounts of cash flow. Even still, their valuations are stubbornly low compared to Tesla Inc. No automotive CEO has lamented this as openly and frequently as Herbert Diess, who routinely makes headlines by emphasizing the urgency with which VW must move to transform itself. Exploring a Porsche listing is a nod to that need and will be a litmus test of sorts for its future.

“Nothing endures but change.“ – Heraclitus

*All sources from Bloomberg unless otherwise specified