February 9, 2021
Daily Market Commentary
- Canada’s SNC-Lavalin Group agreed to sell its oil and natural gas services business to Kentech Corporate Holdings Ltd., as the Dubai-based firm seeks to expand in markets such as the U.S. and Saudi Arabia. The sale is expected to be completed in the second quarter and will create a business with a project backlog of $1.1 billion, Kentech Chief Executive Officer John Gilley said in an interview. Kentech, which didn’t disclose deal terms, will finance the transaction with equity and debt, he said. HSBC Holdings Plc will provide receivables-backed financing for the deal and Kentech’s main shareholder, the private equity firm Blue Water Energy, will put in its own equity, Gilley said. The combined company may be listed via an initial public offering in the next five years, Gilley said. Energy producers have suffered over the past year as the coronavirus pandemic hammered economies and oil prices plummeted. Oil and gas firms had to cancel projects and cut spending. Gilley said the current “buyer’s market” gave Kentech the chance to pick up assets at a good price.
- European stocks fell as investors considered some underwhelming corporate profits, while energy shares bucked the trend, lifted by Total SE’s earnings and as oil advanced. The Stoxx Europe 600 Index dropped 0.4% by 10:46 a.m. in London. A sales miss at Nordic Entertainment Group AB dragged media shares lower. AMS AG shares retreated as much as 8.8%, as some analysts said the chipmaker’s first-quarter guidance was disappointing. In the meantime, Total climbed 1.3% after posting better-than-forecast results. European shares have risen in February, nearing their record high, after worries about retail-trading speculation eased, making way for optimism about an economic recovery and prospects of more U.S. stimulus. Investors are now carefully monitoring corporate results for signs of the strength of the profit recovery and to decide whether they should stay invested in equities at these levels.
- The global equity rally paused for breath on Tuesday as investors sifted through earnings and weighed the impact of rising inflation expectations with stocks at record highs. S&P 500 Index futures edged down after closing higher for a sixth straight session, spurred by signs the Biden administration is committed to passing a sizable aid bill. The dollar fell and Treasuries advanced. The difference between the U.S. five- to 30-year yield curve and its German equivalent reached its widest since 2011, mainly reflecting expectations for a stronger inflation pickup in America. Stretched valuations are giving investors pause as they cheer advancing vaccination efforts, rising stimulus prospects and a slowdown in coronavirus infections across the globe. With inflation expectations near the highest since 2013, questions have also begun to be raised about when the so-called reflation trade in bonds could start to threaten equities.
- Asian stocks posted modest gains, with the benchmark gauge rising for a third day as it looked set for another record high. In Japan, SoftBank Group shares rose 3.4% after reporting record profit in its Vision Fund. The stock was the biggest boost to Japan’s Topix Index for a second straight day and is closing on a record high. The Topix itself climbed 0.1%, extending gains from Monday when it reached its highest level since 1991. Blockchain and cryptocurrency stocks jumped after Bitcoin reached a fresh peak in the wake of Tesla’s announcement that it made a $1.5 billion investment in the digital currency.
- Oil erased earlier gains, but remained above $60 a barrel in London, on signs that a recent rally in headline prices could be overdone. Traders offered six cargoes in a North Sea pricing window on Monday, compared with a bumper buying spree earlier this month a sign some physical market strength may be easing. Brent’s relative strength index is in the most-overbought territory since 2012, another sign of a stretched market. Those warning signs are being weighed against more optimistic takes. Oil trader Trafigura Group talked up the prospect of a bull market in mid-year as demand recovers from the pandemic and stockpiles drain. U.S. crude inventories last week dropped for an eighth time in the last nine weeks, according to a Bloomberg survey.
- Gold climbed for a third straight day as the dollar and real Treasury yields declined, with traders weighing prospects for a fast-tracked stimulus package in the U.S. The precious metal headed for the longest run of gains since Jan. 5 after Democrats released the first draft of key legislation that will comprise President Joe Biden’s Covid-19 relief bill. Bets on a robust package of support are helping to underpin market-derived inflation expectations, which are at multiyear highs, and have fanned the so-called reflation trade. Bullion is rebounding from the lowest level since the start of December. A disappointing jobs report released Friday was taken as yet another sign Biden will prevail in pushing through his stimulus package, boosting inflation even as the economic recovery remains fragile. A report on Wednesday is forecast to show U.S. consumer prices rising at a quickening pace.
- Copper rose for a third day as progress toward a U.S. stimulus package brightened the outlook for demand, while supply of the bellwether metal continues to show signs of stress. The metal extended its climb after House Democrats released a draft text for key pieces of legislation that will comprise the latest Covid-19 relief bill. Global financial markets including raw materials such as crude oil have been supported by growing optimism about the $1.9 trillion package, which could boost infrastructure spending and support the recovery. The dollar slipped on Tuesday, making commodities cheaper for holders of other currencies, while inflation expectations are near the highest since 2013. Morgan Stanley reaffirmed its bullish copper view in a recent note, and Goldman Sachs Group Inc. has forecast a rally to $10,000 a ton.
- The coronavirus was most likely transmitted to humans through an animal or frozen wildlife products that carried the pathogen, a World Health Organization official said at a briefing on the results of the agency’s investigation in China. One of Angela Merkel’s allies said Germany needs to purchase shots at the national level because the European Union is too slow. A study found that children and staff at French daycare centers that stayed open during the first national lockdown had low rates of infection. Thailand’s drug regulator is expected to approve the vaccine by China’s Sinovac Biotech Ltd. for emergency use to kick off an inoculation drive that aims to cover about two-thirds of the eligible population by the end of the year. CanSino Biologics Inc.’s experimental shot is the latest candidate to show some protection against Covid-19.
- President Joe Biden and White House officials are siding with liberal Democrats stung by past efforts to reach compromise with Republicans and refusing to heed GOP appeals to scale back the administration’s $1.9 trillion stimulus. Biden entered talks last week with a group of Republican senators who proposed a bill just one-third the size of his pandemic-relief package. They were the first lawmakers he invited to the White House as president, raising concern on the left he might seriously entertain their counter-proposal. But on Monday, following a lobbying effort by Democratic lawmakers and activists who sought to keep Biden committed to his own plan, White House Press Secretary Jen Psaki said the stimulus will probably advance under a procedure that requires only simple majority support in the Senate.
- One of the world’s largest producers of the key raw material for solar panels is planning a massive expansion amid surging demand for clean energy. Xinte Energy Co. will build a polysilicon project able to produce about a third of current global production in Inner Mongolia, it said Monday in a filing to the Hong Kong stock exchange. The company’s shares have more than quadrupled since mid-December on the back of demand for the material that transmits electrons excited by photons of light, generating electricity.
- In 2014, as their video app Kuaishou began to take off, Su Hua and his co-founders started looking for money to expand. They quickly got a proposal from Ruby Lu, a venture investor who had spotted them earlier as promising engineers and given them feedback on previous businesses. But Lu’s proposal was trumped by a larger venture firm with a much higher offer, according to people familiar with the matter. She refused to concede. Lu pitched Su and his team that she would give them more than money, offering her personal engagement and the support of her partners at DCM Ventures. She won, even with a lower offer. On Friday, Kuaishou Technology started trading in Hong Kong after the biggest initial share sale for an internet company since Uber Technologies Inc. in 2019. By any yardstick, Lu’s investment has been a home run: the roughly $40 million that DCM put into Kuaishou is now worth about $14 billion after the stock more than tripled over its first three days.
- Two U.S. carriers conducted a military exercise in the South China Sea, signaling that U.S. President Joseph Biden and his administration are taking a strong stance to oppose China’s territorial claims in the disputed waters. The dual carrier operations by the Theodore Roosevelt Carrier Strike Group and the Nimitz Carrier Strike Group on Tuesday conducted a “multitude of exercises aimed at increasing interoperability between assets as well as command and control capabilities,” the U.S. Navy said in a statement. The exercises were used to demonstrate the Navy’s ability to operate in challenging environments, it said. “Through operations like this, we ensure that we are tactically proficient to meet the challenge of maintaining peace and we are able to continue to show our partners and allies in the region that we are committed to promoting a Free and Open Indo-Pacific,” Rear Adm. Doug Verissimo, commander, Carrier Strike Group (CSG) Nine, said in the statement.
- U.S. President Joe Biden’s push to slash carbon emissions may inadvertently give a short-term boost to energy companies in one of the world’s biggest polluters. Investors are betting that Russian oil giants such as Lukoil PJSC, Rosneft PJSC and Tatneft PJSC will rally as they mop up market share from rivals in the U.S. and and other countries seeking to switch to clean energy. An index of Russian energy stocks has returned 8% in dollar terms so far this year as crude prices rallied, compared with 2% for European oil and gas companies. “Governments will likely limit global companies’ capacities to drill and extract resources,” said Eduard Kharin, who helps oversee $1 billion of assets at Alfa Capital Asset Management in Moscow. “The global majors are entering a new market, a new industry where there are a lot of unknowns, and the return on capital is unclear.”
- The Bank of Japan is reluctant to scrap its targets for stock fund purchases at its policy review next month as it could give the impression it is dialing back its stimulus, according to people familiar with the matter. Some BOJ officials say that having no guidelines would leave the central bank’s stance too unclear, the people said. The existing numerical targets won’t limit the bank’s options as long as the BOJ makes clear in the review that it is taking a more flexible stance, they added. The review still has a month to go and has yet to reach any conclusions. Some economists and investors think the bank might scrap the targets to show it has the flexibility to jump in with firepower when markets are jittery, while buying a lot less the rest of the time.
- India will need to spend an additional $1.4 trillion to adopt clean energy technologies and be on a sustainable trajectory over the next 20 years, the International Energy Agency said in a report titled ‘India Energy Outlook 2021’ on Tuesday. The investment is around 70% higher than that envisaged under the country’s current policy, but would bring huge benefits including savings of the same magnitude on its oil import bill, the report said. India is set to experience the largest increase in energy demand of any country worldwide over the next 20 years as its economy continues to develop. Growth, industrialization and an expanding urban population will drive its energy use higher, raising the question of how best to meet that demand without exacerbating issues like costly energy imports, air pollution and greenhouse gas emissions, according to the report.
- Maybe you’ve heard: The pandemic is killing cities, fueling a rush to spacious houses in the suburbs. But beyond pricey New York and San Francisco, real estate demand is booming in downtowns across America. From Pittsburgh to Detroit and Phoenix, condos and townhouses within stumbling distance of bars and restaurants are hot. Like the families now upgrading to bigger suburban homes, young white-collar workers are taking advantage of record-low mortgage rates and flexible remote-work policies to move to desirable cities with relative affordability. Home prices in urban U.S. markets rose 15% in the three months through late January, slightly ahead of the annual pace in suburbia, according to data from brokerage Redfin, based on geographic designations developed by the Census Bureau. It’s a shift from early in the pandemic, when prices were lagging behind outer areas or even falling, a sign that Covid-19 vaccines are helping to fuel demand as nightlife makes its return.
- House Democrats are proposing to limit the next round of Covid-19 relief payments to households earning less than $200,000, after criticism that President Joe Biden’s $1.9 trillion stimulus package would benefit the rich. Draft legislation released Monday by the House Ways and Means Committee calls for $1,400 payments for single people earning $75,000 or married couples earning $150,000. The checks completely phase out for individuals making $100,000 or joint taxpayers making $200,000. The payments scale down more quickly than previous rounds, where the top levels were determined by the size of the payment and the number of children in the household.
- Tesla Inc. has unleashed a new buying frenzy for Bitcoin on bets that more companies will be soon following the path set by billionaire Elon Musk. Bitcoin soared as much as 7.9% and climbed above $48,000 for the first time on Tuesday. The moves extend a sharp rally in the cryptocurrency, which is up almost 40% since the beginning of February. The wider Bloomberg Galaxy Crypto Index jumped to a record and Bitcoin-related stocks rallied. Tesla announced on Monday that it had bought $1.5 billion in Bitcoin with corporate cash reserves. While crypto acolytes have been saying for some time that corporate adoption is imminent, in reality it had been limited to firms such as MicroStrategy Inc. and Square Inc. Tesla getting involved brings the discussion to the big leagues.
- Charitable giving to U.S. colleges fell flat last year as the pandemic upended another aspect of higher education. Schools took in $49.5 billion in the most recent fiscal year, according to a report released Tuesday by the Council for Advancement & Support of Education. The total, essentially unchanged from the prior year, marks the first time since 2009 that contributions haven’t risen. For most schools, the survey represents the 12 months through June. Johns Hopkins University in Baltimore topped the fundraising list for the second straight year, with $1.5 billion. Stanford University followed with $1.36 billion and Harvard University took in $1.2 billion. The Covid-19 pandemic is putting colleges under increasing financial pressure. With enrollments down, they’re collecting less revenue from students in dorms and dining halls. They’re also racking up new expenses for Covid-19 tests, retrofits such as adding plexiglass and upgraded technology.
- Fuel cell-truck startup Hyzon Motors Inc. agreed to a merger with blank-check company Decarbonization Plus Acquisition Corp. in a deal that values the two combined at more than $2 billion. The transaction will generate about $626 million of gross proceeds, including $400 million from participants in a private investment in public equity including BlackRock Inc., Fidelity Management & Research Co. and Wellington Management, according to a statement. It’s expected to close in the second quarter of this year. “Our differentiators are the legacy technology we already have, and leveraging it for this application,” Hyzon CEO Craig Knight said in an interview. “Over the next two years we will demonstrate vehicle operations that can better diesel.”
- Mask-wearing and stay-at-home orders have hurt makeup sales during the pandemic. With vaccines now offering hope for a return to normal, the market could be primed for a comeback. Sue Nabi, chief executive officer of cosmetics maker Coty Inc., said demand has already started to pick up again in China, which is further along in its recovery from the pandemic. That signals demand for makeup and nail-care items in harder-hit markets like the U.S. could be close behind.
- One of the nation’s biggest real-estate investors, which is run by a longtime friend of Donald Trump, is exploring ways to end a lucrative partnership with the former president’s real-estate company, people familiar with the matter said. The partnership includes two of the Trump Organization’s most valuable assets. Losing them would shrink the Trump Organization’s business, just as it has struggled with the decline in travel and leisure spending due to the coronavirus pandemic. A sale could benefit Mr. Trump’s businesses, which have more than $400 million in debt due in the next few years. Vornado Realty Trust executives have recently had internal discussions about buying out the Trump Organization’s 30% stakes in an office tower in Midtown Manhattan and in a property in San Francisco’s financial district that the companies jointly own, people familiar with the matter said. Vornado tried unsuccessfully to sell the properties last year. A plan to refinance them was shelved.
- Investor appetite for riskier debt continues to grow, with the average U.S. junk bond yield dropping below 4% for the first time ever. That’s making Asian high-yield debt much more attractive by comparison. The measure for the Bloomberg Barclays U.S. Corporate High-Yield index dipped to 3.96% on Monday evening, making it six straight sessions of declines.
“Mediocrity knows nothing higher than itself, but talent instantly recognizes genius” – Sir Arthur Conan Doyle
*All sources from Bloomberg unless otherwise specified