March  1, 2021

Daily Market Commentary

Canadian Headlines

• L3Harris Technologies to sell its Military Training business to CAE for $1.05b cash and its Combat Propulsion Systems and related businesses to Renk for about $400m cash. CAE sees deal adding low teens percentage to EPS in first full year after closing, including synergies. CAE plans to fund acquisition and other related costs through issuance of ~$550m subscription receipts to two institutional investors on a private placement basis.

World Headlines

• European stocks bounced on Monday, led by renewed strength across the region’s cyclical sectors as sovereign bonds recovered from last week’s selloff. The Stoxx 600 Index was up 1.7% by 9:38 a.m. London time, on track for its biggest intraday gain since Pfizer Inc. and BioNTech SE’s positive vaccine studyin November. The travel and leisure sector rose 2.4% on optimism that an easing of lockdown restrictions is on the horizon. Danone SA advanced 2.4% as it prepares to sell its $1 billion stake in China Mengniu Dairy Co. this year. Europe’s benchmark index also recouped all of Friday’s losses, when a selloff in sovereign bonds sparked worries that a spike in yields could weigh on lofty valuations, especially in high-flying sectors such as technology.
• Nasdaq 100 futures lead gains among contracts for U.S. equities gauges, tracking a surge in European stocks, as sovereign bonds rebounded further and indicated calmer markets following the turmoil that accompanied a slide in government debt last week. Futures on the Nasdaq 100 advanced 1.6% as of 8:11 a.m. in London, with those on the S&P 500 and Dow Jones up 1.2% and 1.1%, respectively.
• Asian stocks bounced back from Friday’s tumble as technology giants climbed and expectations rose for changes in Hong Kong’s benchmark index. Tencent was the biggest boost to the MSCI Asia Pacific Index, which rose 1.5 after posting its worst drop in 11 months on Friday. SoftBank Group gained after it reached a settlement with WeWork and its co-founder Adam Neumann. The Hang Seng Index climbed 1.6% after plans were announced to expand the gauge to 55 members from 52. Hang Seng Indexes Co. is also expected to confirm later Monday whether it will undertake a major revamp that would make it easier to include new stocks. Key equity gauges also climbed more than 1% in Japan, Australia, China, Vietnam, Indonesia, India and Philippines.
• Oil rebounded from its biggest slump since November ahead of a key OPEC+ meeting that may see some supply returned to a fast-tightening market. Futures in New York rose above $62 a barrel. The alliance gathers on Thursday and is expected to loosen the taps after prices got off to their best ever start to a year. But it’s unclear how robustly the group will act, with the Saudi Arabian energy minister calling for producers to remain “extremely cautious.” Oil’s recovery from the impact of the pandemic has been driven by Asian demand, as well as fiscal and monetary stimulus. Data Monday showed most key manufacturing economies gained ground last month, with China staying in expansionary territory. Positive sentiment in equity markets also aided crude, while President Joe Biden’s $1.9 trillion relief plan moved closer to realization after passing the House of Representatives.
• Gold rebounded after its biggest monthly slump since late 2016 as dovish comments from the world’s major central bankers helped curb rising bond yields. Last week’s sell-off in sovereign debt stabilized after central banks from Asia to Europe provided reassurance that policy support remains in place. Bets on accelerating inflation are raising concerns that there could be a pullback in monetary policy support despite assurances from the Federal Reserve that higher yields reflect economic optimism for a solid recovery. European Central Bank data published Monday will show whether it has taken action to counter rising rates.
• The Biden administration is moving to put semiconductors, artificial intelligence and next-generation networks at the heart of U.S. strategy toward Asia, attempting to rally what officials are calling “techno-democracies” to stand up to China and other “techno-autocracies.” The new framing for the U.S. rivalry with China has been given added urgency by the sudden global shortage of microchips needed in products such as cars, mobile phones and refrigerators. The strategy would seek to rally an alliance of nations fighting for an edge in semiconductor fabrication and quantum computing, upending traditional arenas of competition such as missile stockpiles and troop numbers. Current and former government officials, along with outside experts, say the administration’s plans in the technology sphere are a microcosm of its broader plans to take up a more alliance-oriented but still hostile approach to China after a more chaotic approach under President Donald Trump.
• Senate Democrats are jettisoning a proposal to use the tax code to penalize corporations that don’t raise the minimum wage for their lowest-paid workers in an effort to keep President Joe Biden’s broader stimulus plan on track for quick passage, according to two people familiar with the matter. Democrats were left seeking alternatives after the Senate parliamentarian ruled Thursday that raising the federal minimum wage to $15 an hour as part of the $1.9 trillion pandemic relief legislation failed to qualify under fast-track budget rules that Democrats are using to pass the stimulus without Republican support. Senate Finance Committee Chairman Ron Wyden and Budget Committee Chairman Bernie Sanders proposed tax penalties on big companies that pay low wages along with incentives for smaller companies as an alternative. But it became clear over the weekend that getting all 50 Senate Democrats to agree on specific language would risk missing the March 14 deadline for extending expiring supplemental unemployment benefits, said one of the people, who spoke on condition of anonymity to describe private discussions.
• The U.K is trying to trace a person infected with a Brazilian variant of the coronavirus that authorities say may be more resistant to vaccines. Starting Monday in Europe, Italy will tighten curbs in some cities to counter an acceleration of the virus caused by new variants, particularly the strain first found in the U.K. Oslo will close restaurants and shops to also curb an acceleration of new cases caused by virus strains. Hong Kong plans to start bookings for Pfizer-BioNTech vaccinations this week. Elsewhere in Asia, India’s Prime Minister Narendra Modi took his first dose of the vaccine while the Philippines, which has the second-worst outbreak in Southeast Asia, started inoculations. Johnson & Johnson’s one-shot Covid-19 vaccine was cleared for distribution after U.S. Centers for Disease Control and Prevention formally recommended that adults 18 and older should receive it.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the 17th 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 $1.99 billion in the week ended Feb. 26, compared with gains of $1.13 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $12.6 billion.
• AstraZeneca Plc raised about $1 billion selling its stake in another coronavirus vaccine maker, Moderna Inc., reaping a gain after the U.S. company’s shares soared in response to the pandemic. The U.K. drugmaker shed its entire holdings in Moderna last year, Astra said when it published results last month. The Times reported Monday that Astra had raised about $1.2 billion with the transaction. Moderna shares quintupled in value last year, allowing the U.K. company to get a windfall as it invested in developing its own Covid-19 vaccine with the University of Oxford. It’s not clear when Astra sold the stake. The drugmaker said it raised $1.4 billion last year through the sale of stock holdings, mostly in Moderna, suggesting it sold before the most recent run-up in Moderna’s shares.
• Thai Airways International Pcl is seeking a capital infusion of as much as 50 billion baht ($1.65 billion) under a debt restructuring plan set to be submitted to a bankruptcy court to keep the flag carrier operational, according to people familiar with the matter. The fund may be raised through equity, loans or convertible securities, said the people, who asked to not be identified before the debt plan is submitted to the court in Bangkok on Tuesday. The capital infusion plan will need to be backed by the airline’s hundreds of credit-holders and approved by the court, they said. Under the debt rehabilitation plan discussed by the court-appointed planners, banks and bondholders will have to take minimum haircut on their exposure, the people said.
• Johnson & Johnson’s Covid-19 vaccine could protect millions more Americans from contracting the coronavirus. The key will be assuring people that the single-shot vaccine is worth taking, as its overall efficacy appears lower than the two-dose ones already on the market in the U.S. J&J’s shot, which U.S. regulators authorized Saturday, is more convenient than the vaccines cleared by the Food and Drug Administration last year. It requires one injection and can be stored for months in a refrigerator. State health officials and the Biden administration see it as a way to quickly host mass clinics as more transmissible virus variants continue to spread. Yet the ease of distributing the vaccine will need to be balanced with the risk of creating the perception that J&J’s shot is an inferior option. At first blush, J&J’s formula looks less effective than the vaccines from Pfizer Inc.-BioNTech SE and Moderna Inc. It was found to be 72% effective in preventing moderate-to-severe Covid-19 cases in the U.S., and 66% effective globally. Pfizer-BioNTech and Moderna respectively touted 95% and 94% efficacy in preventing symptoms of the disease.
• Donald Trump didn’t formally announce his candidacy for president at the year’s marquee conservative gathering, but inched close enough to effectively freeze the 2024 Republican field and put would-be rivals on notice that he remains both king and kingmaker. The former president’s central argument at the Conservative Political Action Conference in Orlando, Florida, on Sunday was that he’s the best candidate to win in 2024 because, he claims, he never lost in 2020. In his first public appearance since leaving office Jan. 20, Trump spent about half his 90-minute speech on false claims of widespread election fraud in November, and hinted that the 2020 contest may not have been his last. “Who knows? I may even decide to beat them a third time.”
• Trustpilot, a Denmark-based online platform for consumer reviews, plans an initial public offering in London, boosting the city’s image as a hotspot for listings in Europe. At least 25% of its shares will be available for trading and the company expects to be eligible for FTSE U.K. indexes, it said in a statement Monday. The IPO would raise about $50 million to fund growth and repay debt, and allow existing shareholders to sell shares. Trustpilot is seeking a valuation of around 1 billion pounds ($1.4 billion) in the IPO, according to two people familiar with the matter, who asked not to be identified discussing private information. Trustpilot, which is based in Copenhagen, would rank as the first large company from the European Union to tap the London stock market this year, showing that the city is still attractive to foreign listings after Brexit.
• Phone companies including Altice Europe NV’s SFR unit and Bouygues Telecom have begun removing Huawei Technologies Co.’s wireless equipment from large French cities after the government moved to purge the Chinese vendor from all but isolated parts of the country. The work started at the beginning of 2021, when France’s Constitutional Council signed off on a ruling that forces carriers to rip out Huawei gear in densely populated areas where networks are being upgraded to fifth-generation wireless technology, according to people familiar with the situation. Unlike countries such as the U.K., France is seeking to strike a middle ground that would allow Huawei to remain a supplier while keeping it out of the more integral parts of its wireless infrastructure. President Emmanuel Macron’s government has devised rules making it riskier for operators to use Huawei 5G kit.
• China’s Inner Mongolia has banned cryptocurrency mining and declared its intention of shutting all such projects by April, spurring fears the world’s No. 2 economy will take more steps this year to eradicate the power-hungry practice. The autonomous region, a favorite among the industry because of its cheap power, also banned new digital coin projects, according to a draft plan posted on the Inner Mongolia Development and Reform Commission’s website Feb. 25. The aim is to constrain growth in energy consumption to about 1.9% in 2021. The announcement unnerved an industry that’s already been through a years-long Chinese campaign to shrink it down amid concerns over speculative bubbles, fraud and energy waste. The draft policy was released weeks after the National Development and Reform Commission — China’s top economic planner — blasted Inner Mongolia for being the only province to fail to control energy consumption in 2019.
• Senator Elizabeth Warren, Representative Pramila Jayapal introduce a bill with a 2 percent annual tax on the net worth of households and trusts between $50 million and $1 billion. Lawmakers seek 1 percent annual surtax, or 3 percent tax overall, on the net worth of households and trusts above $1 billion. Bill includes anti-evasion and avoidance measures, including: a 30 percent minimum audit rate for taxpayers subject to the ultra-millionaire tax, a 40 percent “exit tax” on the net worth above $50 million of any U.S. citizen who renounces their citizenship in order to escape taxes.
• After last week’s fire-sale in bonds, some traders say expectations for interest-rate hikes have become too aggressive and it’s time to buy. While swaps traders see the Federal Reserve raising rates in March 2023, some strategists say that’s too much and recommend buying short-maturity bonds to fade the move. Five-year Treasuries outperformed on Monday, while their 30-year counterparts extended declines, with yields climbing further above 2.20%. In the U.K., where money markets have completely priced out rate cuts, UBS Group AG sees rates eventually meeting “fundamental resistance.” The rapid reflation-fueled selloff that besieged bond markets last week is showing signs of stalling as investors take advantage of better valuations and with central banks lining up to emphasize that they’re in no rush to start tightening monetary policy. Traders are due to get a sense of whether poicy makers backed up their words with actions last week, with data on European Central Bank bond-buying due later.
• The largest power generation and transmission cooperative in Texas has filed for bankruptcy protection in the wake of power outages that caused a national energy crisis during the winter freeze last month. Brazos Electric Power Cooperative has filed for Chapter 11 in the U.S. Bankruptcy Court for the Southern District of Texas, according to a statement. It listed both estimated assets and liabilities of $1 billion to $10 billion. The Brazos bankruptcy is likely to be one of many after four million homes and businesses went without heat, light and water during a deep winter freeze. This caused as much as $129 billion in economic losses. The state’s broader market set a record for the most expensive week of power in U.S. history. The impact on individual companies is only starting to emerge, with some racking up huge losses while oil and gas producers saw their output halted.
• Google is under growing pressure to pay for information that, for two decades, the search provider snipped from the web — and made a mint from — without paying a penny. Australian and French efforts to force Google to compensate news publishers are only the latest examples of a trend spanning the globe. Canada is considering a similar requirement and rival Microsoft Corp. has urged the U.S. to pass a comparable law. In response, Google has begun paying for more information, but on its own terms rather than rules imposed by strict new laws. In October, the company committed $1 billion to fund a News Showcase that lets users discover and read stories from a variety of sources. The company also recently agreed to pay News Corp. tens of millions of dollars over three years. Beyond news, Google has been licensing more information about weather, stocks and cryptocurrency that appear at the top of search results.
• Netflix Inc. and Walt Disney Co. emerged as the big winners at the Golden Globe awards, taking home most of the evening’s prizes for their films and television shows, in an awards show tailor-made for the unusual pandemic-affected times. Disney grabbed the top award, best dramatic motion picture, for “Nomadland,” while the film’s director Chloe Zhao became the second-ever woman to take home that prize. Netflix especially dominated in television, with “The Crown” and “Queen’s Gambit,” grabbing a handful of awards at the ceremony. In all, the two studios won 15 of the prizes handed out Sunday by the Hollywood Foreign Press Association in a NBC broadcast hosted by comic actors Tina Feyand Amy Poehler. The dominance of the top global streaming service and the top traditional studio won’t surprise many. For the past year, many theaters have been closed, and the biggest new films have been delayed or put online. That also meant studios had to hold back at least some of their multimillion-dollar marketing budgets, making it harder to suss out clear favorites. Instead, online viewing was on the rise, with even Disney leaning hard into the change, expanding its Disney+ streaming service and debuting top films over the internet.
• Warren Buffett made no splashy deals in 2020, and he didn’t weigh in on some of the year’s most contentious topics in his much-anticipated annual letter. Behind the scenes, the 90-year old billionaire was hardly inactive. Berkshire Hathaway Inc. was firing up another engine: stocks — both buying its own and trading others. The conglomerate snapped up $24.7 billion of Berkshire shares last year, a stark record for the business sitting atop a $138 billion cash pile. It also almost doubled the volume of buying and selling of other stocks compared to 2019.
• U.S. freight railroads are trying to take advantage of a train enthusiast president who’s concerned about global warming with a lobbying campaign depicting their industry as a solution to climate change. The Association of American Railroads, which represents such heavyweights as CSX Corp. and Berkshire Hathaway Inc.’s Burlington Northern Santa Fe, is advancing policy proposals it says would help pare greenhouse gas emissions — including some that would disadvantage competitors trucking goods. he proposals include replacing the current gasoline tax with a fee on vehicle miles traveled and dedicated government funding for passenger rail that could appeal to President Joe Biden’s fondness for Amtrak. The group is outlining its ideas in a white paper being released Monday.

“The best form of flattery is to master the art of listening.“ – Chinese Proverb

*All sources from Bloomberg unless otherwise specified