January 16th, 2020

Daily Market Commentary

Canadian Headlines

• Canada’s equity benchmark hit a third consecutive record high after the U.S. and China signed the first phase of a trade deal and pot stocks surged on strong earnings. The S&P/TSX Composite Index added 0.4% to 17,415.17. Cannabis stocks were the biggest gainers after Organigram Holdings Inc. reported revenue that beat the highest analyst estimate. Hexo Corp. gained 16% and Aurora Cannabis Inc. added 15%. Materials were also strong as gold prices advanced, with fund managers saying they see another leg up for the precious metal amid low interest rates, a weaker dollar and the coming U.S. presidential election. Novagold Resources Inc. added 4.7% and Yamana Gold Inc. gained about 4%.
• Bombardier Inc. indicated it could pull out of the joint venture with Airbus SE that makes the A220 jetliner as the program’s costs increase. The Canadian company said Thursday a ramp-up in production at the Airbus Canada Ltd. Partnership that manufacturers the plane will require additional cash investment, pushing back the break-even point and generating lower returns across the lifetime of the project. As a result, and following its exit from other commercial aerospace activities, Bombardier is “reassessing its ongoing participation” in the A220, the Montreal-based business said in an earnings update. The value of the joint venture is also likely to be diminished and Bombardier will disclose the amount of any writedown when it reports final 2019 results.

World Headlines

• European stocks gave up early gains on Thursday, as losses in carmakers and disappointing earnings updates offset positive sentiment from the U.S. and China trade deal. The Stoxx Europe 600 Index dropped 0.1% as of 10:26 a.m. London time. Autos were the worst performers among sector after upbeat end-of-the-year car-sales data prompted worries the strength could be short-lived. Pearson Plc tumbled after the education publisher forecast another drop in demand for U.S. college textbooks, while Whitbread Plc also slid after a lackluster third-quarter update. Even though European equities traded near record highs this year thanks to a rally across tech stocks, the Stoxx 600 Index has been relatively range-boundin January as investors awaited clarity on the trade deal, and the start of the fourth-quarter earnings season.
• American equity futures climbed on Thursday and European shares fluctuated in the wake of the signing of the U.S.-China trade deal, an event that helped drive global stocks to record highs. Bonds drifted and the dollar was steady. Contracts for all three main American gauges pointed to more gains after Wall Street hit records a day earlier. Futures on the Nasdaq 100 did slightly better after tech bellwether Taiwan Semiconductor Manufacturing Co. projected quarterly revenue well above analysts’ estimates.
• Oil traded near its lowest closing level in six weeks as cautious hopes that the U.S.-China trade pact will support demand were offset by signs of ample supply. Futures held near $58 a barrel on Thursday after settling the previous day at the lowest since Dec. 3. While the deal between Washington and Beijing promises increased Chinese purchases of American energy, and defuses some of the tensions that weighed on global markets last year, U.S. government data showed that combined inventories of crude and refined products rose to their highest since September.
• Gold held an advance following the signing of the U.S.-China phase-one trade deal, with investors seeking to assess how consequential the accord will be for currency policy, relations between the two economies and global growth. Palladium notched yet another record. While the pact was inked on Wednesday, questions remain over whether Donald Trump’s efforts to rewrite the relationship with Beijing will go any further. Trade Representative Robert Lighthizer said the administration was focused on implementing the initial pact, and any further talks would come only after that. Even amid the tentative trade peace, there’s still optimism about the haven’s outlook. Gold’s rally isn’t over, according to fund managers, who see another leg up aided by lower-for-longer interest rates, a weaker dollar and the U.S. presidential election, which could provide multiple catalysts for gains.
• Morgan Stanley fixed-income traders completed a clean sweep by Wall Street banks, surpassing analysts’ estimates and joining the rest of the industry in staging a roaring comeback. Like its bigger counterparts earlier in the week, Morgan Stanley reported a massive surge in bond-trading revenue that lifted annual profit to an all-time high. Fees from the unit more than doubled while equity trading was virtually unchanged, according to a statement Thursday. The firm also beat analysts’ estimates for merger advice and stock and debt underwriting. “Firmwide revenues were over $10 billion for the fourth consecutive quarter, resulting in record full year revenues and net income,” Chief Executive Officer James Gorman said in the statement.
• As he signed an initial trade deal with China on Wednesday, President Donald Trump promised further negotiations to tackle some of U.S. companies’ most long-standing complaints would begin “very, very shortly” and that tariffs on some $360 billion in imports from China would remain in place as leverage. What he didn’t say is that almost no one thinks those negotiations aimed at getting China to rein in its vast web of industrial subsidies and reduce the role of state-owned companies in the economy are likely to either be easy or come to fruition anytime soon. That means American businesses are likely to face another year or more of the tariff bills and supply chain turmoil that prompted many to plead for the president to sign the partial deal.
• The U.S. and China signed what they billed as the first phase of a broader trade pact on Wednesday amid persistent questions over whether President Donald Trump’s efforts to rewrite the economic relationship with Beijing will ever go any further. The deal commits China to do more to crack down on the theft of American technology and corporate secrets by its companies and state entities, while outlining a $200 billion spending spree to try to close its trade imbalance with the U.S. It also binds Beijing to avoiding currency manipulation to gain an advantage and includes an enforcement system to ensure promises are kept.
• Turkey’s central bank opted for the smallest interest-rate cut since embarking on an easing cycle under a new governor, balancing demands for lower borrowing costs from President Recep Tayyip Erdogan against the risk of a market backlash. The Monetary Policy Committee reduced its key rate on Thursday to 11.25% from 12% at this year’s first scheduled meeting. Its fifth straight decrease pushed the benchmark below zero, when adjusted for inflation. But with the latest move coming in below most forecasts, the lira appreciated after the decision and was trading 0.4% stronger at 5.8494 against the dollar as of 2:53 p.m. in Istanbul.
• Chancellor Angela Merkel clinched a deal to kickstart Germany’s stalled coal exit, offering billions in compensation to utilities and affected regions so that closures of plants can start this year. In talks that began Wednesday evening and lasted well into the night, the government hammered out a timeline with state leaders to shut down the country’s coal-fired power generation by 2038, a plan that includes 40 billion euros ($44.6 billion) in compensation for impacted regions. Utility RWE AG, Germany’s biggest coal-fired power producer, will receive 2.6 billion euros in payments, according to a person familiar with the matter. The stock was up 1.7% mid-morning and a spokesman said the company would comment later Thursday. Lignite operators in eastern Germany will receive 1.75 billion euros, German Finance Minister Olaf Scholz said at a press conference in Berlin.
• The Bank of England has called on financial businesses to speed up their move away from Libor, a discredited benchmark that underpins $300 trillion of contracts including bonds and loans, which is due to be phased out by the end of 2021. Market makers will be encouraged to shift pound-denominated interest-rate swaps on March 2 from Libor to its replacement, the Sterling Overnight Index Average, the central bank said in a statement Thursday. The move is part of a wider effort to speed up transition in the derivatives market. Banks have until the end of September to cease issuing cash products linked to sterling-denominated Libor, and should establish a framework for the transition of products linked to the rate, the BOE said. There’s a $12 trillion backlog of legacy loans that need conversion.
• U.K.-based energy explorer Premier Oil Plc can move ahead with its plan to extend debt maturities and buy gas fields in the North Sea, a Scottish court ruled on Thursday. Judge Sarah Wolffe ruled the company can proceed to a creditor vote on a proposed change in terms on $2 billion-worth of debt, heading off a challenge by Premier Oil’s largest creditor, Asia Research & Capital Management. The decision clears the first hurdle for Premier Oil, which now needs to achieve at least 75% of support from each creditor class in order to proceed. ARCM had sought to delay the timetable proposed by the company for the scheme of arrangement, claiming it was “ambushed” by Premier Oil and had insufficient time to respond, Wolffe said.
• China brought forward the planned opening of its $21 trillion capital market by eight months, swinging the door open for global investment banks such as Goldman Sachs Group Inc. The New York-based powerhouse, and rivals including JPMorgan Chase & Co.and Morgan Stanley, will now be allowed to apply to form fully owned units to do a broad array of investment banking and securities dealing in the Communist Party-ruled nation in April, compared with an earlier timetable set for December.
• India’s top court told wireless carriers including Bharti Airtel Ltd. and Vodafone Idea Ltd. that they need to pay $13 billion of dues to the government, rejecting an appeal by operators struggling to stem losses and reduce debt. A three-judge Supreme Court bench headed by Justice Arun Mishra on Thursday dismissed review petitions filed by the telecommunication companies against the October verdict. Under that ruling, Vodafone Group Plc’s India venture has to pay $4 billion, while Bharti Airtel got a $3 billion bill — all due on Jan. 24. The court’s rebuff is the latest setback for the survivors of a brutal tariff war sparked by the 2016 entry of billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd., an upstart that disrupted the industry with free calls and cheap data. Both Bharti Airtel and Vodafone Idea, with a combined net debt of about $30 billion, reported record losses in the quarter through September, and were counting on the court to reverse its order.
• UBS Group AG is restructuring its wealth management business in Asia as the Swiss bank implements a sweeping global revamp driven by new wealth co-head Iqbal Khan. LH Koh, head of the private bank’s China international business, was appointed co-head of global family office for Asia Pacific, according to people familiar with the matter. He will share duties with the unit’s current chief, Anurag Mahesh, said the people, who asked not to be named because the information is private.
• Far Point Acquisition Corp., the blank-check company launched by former New York Stock Exchange President Thomas Farley, is nearing a purchase of Swiss payments company Global Blue for $2.6 billion including debt. The deal would hand Global Blue a U.S. listing and an additional $1 billion from Far Point and investors including Alibaba Group Holding Ltd. affiliate Ant Financial Services Group and Daniel Loeb’s activist hedge fund Third Point LLC, people familiar with the matter said. It could be announced as soon as Thursday. Global Blue, which processes transactions for international shoppers, has been majority owned since 2012 by Silver Lake. The private-equity firm plans to retain a minority stake, the people said.
• For the first time in more than seven years, Morgan Stanley is recommending selling Tesla Inc. shares.
• Optimism around the electric-car maker’s core business growth in China is now priced into the stock, analysts led by Adam Jonas wrote in a note. They also slashed their valuation of the firm’s mobility unit, citing a legal and regulatory environment that’s unsupportive of a robo-taxi network roll-out. Tesla’s stock price has more than doubled since the beginning of October, helped by a surprise third-quarter profit, strong deliveries and quick construction of a factory in China. Morgan Stanley’s downgrade comes at a time when the rally has left the analyst consensus price target in the dust.
• Boeing Co. is reorganizing its piloting staff into a more cohesive unit after a disjointed reporting structure contributed to communications lapses while the 737 Max was being developed. The move, effective Jan. 17, affects company aviators who train commercial airline pilots, prepare jets for delivery and develop training materials and flight crew manuals. Instead of being divided between two divisions, they will now join Boeing’s elite flight-test pilots in a single unit, Boeing Test and Evaluation, according to an internal memo viewed by Bloomberg News.
• Nissan Motor Co. has revealed more details of an exhaustive probe into Carlos Ghosn, a week after its fugitive former leader accused the Japanese carmaker of being behind the plot to have him arrested. The report on the investigation, submitted to the Tokyo Stock Exchange on Thursday, found that many others were involved in improprieties besides its former chairman, with those involved located both in Japan and overseas. Three people in senior roles were punished for their involvement, though their names, titles and specific steps to discipline them were not revealed.
• Suppliers that stocked the shelves during Sears Holdings Corp.’s bankruptcy are being forced to swallow losses and some employees won’t get severance they are owed, even as law firms are guaranteed full payment for their work on the retailer’s chapter 11 case. A year after the storied retailer sold its best stores and assets to ESL Investments Inc., the investment firm owned by former Sears Chief Executive Edward Lampert, the shell left behind in bankruptcy is struggling to pay its debts after racking up more than $200 million in bills from lawyers and advisers.
• Southwest Airlines said it is proactively removing Boeing‘s 737 Max aircraft from its flight schedule through June 6, citing continued uncertainty around its return to service.
• When Salesforce.com Inc. emerged two decades ago, it lashed out at the software establishment: large companies that allegedly locked clients into dated products. Now, a coalition of newer rivals have extended that criticism to the cloud applications pioneer.  Ten software upstarts kicked off a public campaign Thursday that knocks customer relationship management, or CRM, titans, including Salesforce, Oracle Corp. and SAP SE, by saying the large comanpies keep clients trapped in subpar software suites, potentially shutting out smaller rivals with newer technology.

*All sources from Bloomberg unless otherwise specified