February 25, 2021

Daily Market Commentary

Canadian Headlines

• Toronto-Dominion Bank earnings beat analysts’ estimates as a rebound in the Canadian economy helped drive profit up in the company’s domestic banking business. The bank said profit from its Canadian retail division rose 14% to C$2.04 billion ($1.63 billion) in the three months through January. The gain was driven by higher transaction and fee-based revenue in the wealth business, higher insurance revenue and lower provisions for loan losses. Relative to peers, Toronto-Dominion set aside larger amounts of money to absorb potential loan losses earlier in the pandemic. With the economy stabilizing and government programs helping, the bank is now setting aside less. Total provisions in the quarter were C$313 million, down 66% from the fourth quarter.
• Canadian Imperial Bank of Commerce posted fiscal first-quarter profit that topped analysts’ estimates as its domestic retail-banking unit continued to rebound. Canada’s fifth-largest lender by assets said profit in its Canadian personal and business banking unit rose 13% to C$652 million ($522 million) in the three months through January. The gain was driven by lower provisions for loan losses. CIBC’s earnings got a lift from a decline in set-asides for potentially souring loans. The bank reported C$147 million in provisions for credit losses last quarter, compared with C$291 million in the fourth quarter.
• Exxon Mobil Corp. erased almost every drop of oil-sands crude from its books in a sweeping revision of worldwide reserves to depths never before seen in the company’s modern history. Exxon counted the equivalent of 15.2 billion barrels of reserves as of Dec. 31, down from 22.44 billion a year earlier, according to a regulatory filingon Wednesday. The company’s reserves of the dense, heavy crude extracted from Western Canada’s sandy bogs dropped by 98%. In practical terms, the revision clipped Exxon’s future growth prospects until oil prices rise, costs slide or technological advances make it profitable to drill those fields. Exxon has enough reserves to sustain current production levels for 11 years, down from 15.5 years a year ago, based on Bloomberg calculations.

World Headlines

• European shares erased earlier gains, moving lower along with U.S. index futures, as declines in defensive and growth shares outweighed gains in value shares. The Stoxx 600 Europe Index was 0.2% lower as of 11:53 a.m. in London, after having advanced as much as 0.5%. U.S. index futures declined, with contracts on the tech-heavy Nasdaq 100 dropping more than 1%. Energy, banks, and mining shares were up 1% or more, while chemical, health-care, food and beverage shares dropped at least 1%. Europe’s equity benchmark is still up more than 4% this month, poised for its best February since 2015. Economically sensitive and cheap stocks are gaining traction, helped by rising bond yields and reflation bets, while pandemic winners have come under pressure. The relative outperformance of value shares over growth peers kicked off with the breakthroughs in inoculations and the U.S. election in November, a trend that many see continuing in 2021.
• Across markets, investors are betting on a sunnier outlook for the global economy and the risk that inflation is just around the corner. In stocks, futures on the tech-heavy Nasdaq 100 Index slumped as the Russell 2000 Index of small-caps rallied. Companies popular with the day-trader crowd are surging once again. GameStop Corp. jumped 80% and AMC Entertainment Inc. rallied 16% in early U.S. trading. Commodities also extended gains, with investors piling into metals that can ride faster growth trends. Copper moved closer to a record high set a decade ago and aluminum touched a two-year high. In remarks this week, Federal Reserve Chairman Jerome Powell offered reassurance that policy would continue to be supportive and look beyond a temporary pick-up in inflation, especially from a low base.
• Asian stocks rebounded from their biggest drop in almost three months, bolstered by a rally in technology names. Samsung Electronics, SK Hynix and Taiwan Semiconductor Manufacturing boosted the MSCI Asia Pacific Index after U.S. President Joe Biden said he plans to address shortfalls in chip output that have idled production at some auto plants. SK Hynix hit a 20-year high. Tencent and SoftBank were the other big contributors to the Asian benchmark’s rise. South Korea’s equity benchmark surged 3.5% to lead gains in Asia. Key gauges in Singapore, Malaysia and Taiwan rallied at least 1.5% each. Markets in the Philippines were shut for a local holiday.
• Oil extended gains from its highest close in more than a year on a slump in U.S. oil inventories and a broader lift to the reflation trade taking place across global markets. Futures in New York rose near $63 a barrel. Inventories of U.S. oil have fallen by 40 million barrels over the last three weeks, with cold weather demand for heating fuels offsetting a rise in gasoline and crude stockpiles. The futures curve is continuing to indicate tightness. The market is in a backwardation of almost $6 a barrel for the next 12 months, a structure that indicates scarce supplies. There have even been tentative mentions of crude hitting $100 a barrel again in the longer term.
• Gold headed for a second straight monthly decline as surging bond yields continued to weigh on the non-interest bearing asset, while Federal Reserve Chairman Jerome Powell continued to play down prospects for inflation in the future. The swapping of havens for risk assets continued on Thursday, causing 10-year Treasury yields to climb close to the highest in a year and gold to decline. Exchange-traded funds for the metal registered an eighth consecutive day of outflows, a sign investment demand for bullion is flagging. Meanwhile, in testimony to Congress Powell played down concerns about persistently higher inflation in the future. Bullion is down almost 6% in 2021, after last year posting its best annual gain in a decade, as investors position for a return to normality later this year. Goldman Sachs Group Inc. cut its gold-price forecast, pointing to a rotation into riskier assets as a reason for the metal’s under-performance.
• The shot made by Pfizer Inc. and BioNTech SE was overwhelmingly effective against the virus in a study, confirming earlier reports and prompting experts to say that immunizations can end the pandemic. The two companies will also examine how people respond to a potential third dose of the vaccine. Hungary reported the biggest jump in cases in two months, making it one of the outliers as infections slow in many parts of the globe. Finland, also seeing a resurgence, is preparing to tighten its lockdown measures. Meanwhile in Asia, vaccination programs are rolling out this week from Hong Kong to South Korea, with Thailand joining the fray in March. A new variant of the coronavirus, containing a mutation that may help it get past the immune system, is spreading in New York, according a report in the New York Times, citing two studies that haven’t yet been peer reviewed or published in a scientific journal.
• Joe Biden’s White House is targeting key states in an appeal for public support for his $1.9 trillion pandemic-relief bill, an effort aimed at both solidifying crucial votes and test-running what’s set to be an even tougher sales job on his next stimulus package. Biden and his lieutenants are pitching the giant bill to mayors, governors, state treasurers and tribal leaders, along with workers and the business community. The administration is focusing on roughly 13 key states — including Ohio, Pennsylvania, West Virginia, Arizona and Georgia. The White House has already put senior administration officials on-air with more than 70 local news stations. Biden himself has visited Wisconsin and Michigan — states he flipped from Donald Trump to win the presidency — to directly make the case, and he’s headed Friday to Texas, which proved much more competitive last November than in previous elections.
• GameStop Corp. continued its resurgence in U.S. premarket trading, rising as much as 83% after more than doubling on Wednesday in a move that spread to a host of other meme stocks at the center of last month’s day trader-driven frenzy. The stock rose as high as $167.50 and traded at $146 at 5:43 a.m. in New York. Among other favorites of traders populating Reddit forums, AMC Entertainment Inc. rose 16% premarket after gaining 59% during the first three days of the week, while Koss Corp. surged 62%. Nokia Oyj, also a favorite of the meme crowd, climbed 7.2% in Europe. GameStop’s surge in Wednesday’s cash session was spurred by a final-hour rally that brought its biggest advance since Jan. 29, the day Robinhood Markets restricted trading in it and 49 other stocks at the height of the frenzy. An equally weighted Bloomberg basket of those rose more than 5%, the most since late January.
• Employee wellness startup BetterUp Inc. has raised $125 million at a $1.73 billion valuation. The investment was led by Iconiq Growth, with participation from existing investors Lightspeed Venture Partners, Threshold Ventures and Plus Capital. New investors Salesforce Ventures, Sapphire Ventures and Mubadala Capital joined the round. The business works with clients such as NASA and Snap Inc. to help employees with a network of performance coaches, mentors and mental health counseling. BetterUp also has offerings to help companies improve their diversity and inclusion efforts.
• Two of the hottest equity market trends are headed for a clash as some ESG investors are having second thoughts about blank-check firms that have flooded the market. Early signs show that money managers wedded to environmental, social and governance themes are reluctant to buy into special-purpose acquisition companies before a target has been identified. That could potentially cut SPACs out of an investment class that’s on course to exceed $53 trillion by 2025, according to Bloomberg Intelligence. Sanford C. Bernstein analysts are among those questioning whether blank-check listings are a good fit for investors seeking to direct capital toward businesses and activities that support a greener and fairer society. Amundi SA, Europe’s largest asset manager, says it’s reluctant to hand over its clients’ money to third-party SPAC sponsors.
• Merck & Co. agreed to acquire Pandion Therapeutics Inc., a biotechnology company developing therapies for autoimmune diseases, for $1.85 billion. The agreement, worth $60 per share in cash, is at more than double the Cambridge, Massachusetts-based company’s closing price Wednesday. Pandion’s potential treatment for ulcerative colitis and other autoimmune diseases, known as PT101, has completed a Phase 1a clinical trial that achieved its primary objective of safety and tolerability, the companies said in a statement.
• Boeing Co. was planning to strengthen protective engine covers on its 777 jets months before a pair of recent serious failures, including one near Denver last weekend, according to an internal Federal Aviation Administration document. The plane maker and regulator had been discussing potential fixes even longer–for about two years, according to people familiar with the matter. The talks began after two failures in 2018, one on a 777 operated by United Airlines Holdings Inc. and the other on a Southwest Airlines Co. 737. Because potential modifications to 777 external engine covers, commonly known as cowlings, had various shortcomings, “Boeing has decided to redesign the fan cowl instead of trying to modify existing fan cowls to address both the structural strength concerns” and moisture issues, according to the internal FAA document reviewed by The Wall Street Journal.
• Chancellor of the Exchequer Rishi Sunak is giving himself scope to raise corporation tax in next week’s budget to help fund some of the massive spending Britain accrued during the pandemic, after a similar proposal from U.S. Treasury Secretary Janet Yellen. The U.K. expects to keep business levies competitive with the other Group of Seven nations, two officials familiar with the matter said. At 19%, the domestic rate is the lowest in the G-7, with the U.S. the next most competitive at 21%. Yellen’s proposal to lift the U.S. rate to 28% gives the U.K. chancellor more room to maneuver, given rates in Canada, France, Germany, Italy and Japan are all above 25%. If the U.S. follows through on those plans, Sunak has space to raise the U.K. rate by as much as six percentage points in the coming years, and still leave Britain with the lowest level of corporation tax in the G-7. The Treasury declined to comment.
• L Catterton, the private equity firm backed by luxury French fashion house LVMH, is nearing an agreement to acquire iconic German sandal maker Birkenstock, people with knowledge of the matter said. The investment firm and the family behind Birkenstock could announce a deal in the next week, the people said, asking not to be identified because the information is private. The transaction could value Birkenstock at about 4 billion euros ($4.9 billion), they said. L Catterton has been competing with buyout firm CVC Capital Partners, which was close to sealing a deal earlier this year, the people said. In the end, the family owners of Birkenstock preferred L Catterton’s track record with family-backed consumer brands as well as its ability to expand in Asia, Bloomberg News reported this month.
• Anheuser-Busch InBev NV, the world’s largest brewer, warned that higher raw material costs and adverse currency shifts will weigh on profitability this year. That’s set to limit the earnings rebound it expects in 2021 as bars and restaurants in Europe begin emerging from pandemic-induced lockdowns. The stock fell as much as 5.4% Thursday morning. Brewers have been pummeled by the pandemic as their most profitable business — supplying bars — has been under threat. Molson Coors Beverage Co. said business restrictions to contain the pandemic in Europe had a “significant impact,” and Heineken NV announced plans to cut 8,000 jobs. Carlsberg A/S expects a rebound later in the year, but said the first quarter would be extremely challenging in Europe.
• Best Buy Co. reported weaker-than-expected holiday sales and said anticipated shifts in consumer spending back to areas like dining out and travel could hamper its performance this year. Shares of the electronics retailer fell in U.S. premarket trading. Comparable-store sales in the U.S. — a key gauge of performance — rose 12.4% in the fiscal fourth quarter that ended Jan. 30, missing the average projection from Consensus Metrix. The mid-point of its sales growth forecast range for the current year also fell short of analysts’ estimates. Although demand for its goods remains above normal levels, “there is a high level of uncertainty related to the impacts of the Covid-19 pandemic that makes it difficult to predict how sustainable these trends will be,” Chief Financial Officer Matt Bilunas said in a statement. The company’s sales forecast — which it called a “working assumption” — assumes that consumers resume spending in areas like travel and dining out in the back half of the year.
• Pfizer Inc. and partner BioNTech SE have begun a clinical study to see if a third shot of their existing Covid-19 vaccine can stimulate stronger immune responses against new variants. The clinical trial will examine safety and immune responses of a third dose of the vaccine in as many as 144 people who participated in the companies’ Phase 1 study. The dose is being given six to 12 months after the initial two-dose regimen, and researchers will test blood from the participants to see if it enhances levels of antibodies produced against new strains from South Africa and elsewhere. In addition, the companies plan to begin a human study of a new vaccine that is specific to the newly circulating variant that emerged in South Africa, the companies said in a release. That trial could begin in about a month, depending on negotiations with regulators, said Philip Dormitzer, Pfizer’s chief scientific officer for viral vaccines.
• Emerging markets are taking the Treasury selloff on the chin, but if the reflation trade comes for shorter-dated U.S. bonds, the real pain may be yet to come. Bets on faster economic growth are shaking up the world’s largest debt market at the long end. Now, Fidelity International and Aberdeen Standard Investments are keeping a wary eye on notes up to three years to maturity, whose yields along with the 10-year have yet to break out to multi-year highs. A deepening rout at this point of the curve would signal a faster-than-expected pace of monetary tightening ahead and increase the competition for global capital, the thinking goes. All that has the potential to turn an orderly selloff in developing-country assets into something far more disruptive.
• Airbnb Inc. and DoorDash Inc. are set to report their first financial results as publicly traded companies Thursday, offering investors a glimpse of how their businesses fared during the last quarter of 2020 when Covid-19 cases were surging again. While the fourth-quarter numbers will be important for investors to gauge how the two are managing their operations, what they’ll really be looking for are comments about the future, when coronavirus lockdowns ease, vaccines become more widespread and people begin traveling and going to restaurants again. Airbnb is expected to benefit from the waning days of the pandemic as people venture further from home while DoorDash has seen a boom from more delivery orders while people ordered in. The two companies, which debuted on the stock market a day apart in December, have both seen their shares gain significantly since their highly publicized listings. Home-rental site Airbnb is the top-performing IPO in the past 12 months, excluding foreign companies and listings that raised below $1 billion. Its stock is up 194%, while food delivery service DoorDash ranks among the top-10 and its shares are up 73% from the debut.
• Tesla Inc. has told workers it will temporarily halt some production at its car assembly plant in California, according to a person familiar with the matter. Workers on a Model 3 production line in Fremont were told their line would be down from Feb. 22 until March 7, said the person, who asked not to be identified because the information is private. Impacted staff were told they would be paid for Feb. 22 and Feb. 23 and not paid for Feb. 28, March 1, 2 and 3. They were advised to take vacation time, if they had it. While production-line outages aren’t unusual for automakers, they cost the companies revenue. Tesla said last month that it’s trying to mitigate the effects of a global semiconductor shortage on its operations and that it expects to increase global vehicle deliveries by more than 50% this year.
• Credit Suisse Group AG is worried its workers are burning out as they enter a second year of largely working from home. The Swiss bank is hoping it can soon begin to bring some employees back into the office, at least part of the time, to help them avoid fatigue that comes with working from home, according to Brian Chin, who leads the firm’s trading and investment-banking arm. Chin spoke from the firm’s offices in New York at a virtual investor conference hosted by the Zurich-based bank. The world’s largest banks sent workers home in droves early last year to stem the spread of the deadly coronavirus pandemic. Efforts to bring them back late last year were stymied by a resurgence of the virus.

“Pride is often used to cover a weakness“ – Chinese Proverb

*All sources from Bloomberg unless otherwise specified