January 21st, 2020

Daily Market Commentary

Canadian Headlines

• Huawei Technologies Co. Chief Financial Officer Meng Wanzhou shouldn’t be dispatched to the U.S. because her alleged crimes don’t meet Canada’s legal tests for extradition, her defense lawyers said at the opening of hearings. At issue in a legal battle that has severely strained Canada-China relations is whether her extradition request meets the crucial test of double criminality: Would her alleged crime have also been a crime in Canada? If the judge rules it doesn’t meet that standard, she could be discharged, according to Canada’s extradition rules.

World Headlines

• European stocks retreated at the start of trading on Tuesday, led lower by miners, luxury-goods firms and autos as risk assets globally sold off on concerns around the outbreak of a virus in China, while results from UBS weighed on the banking sector. The Stoxx 600 Index slid 0.9% at 8.18 a.m. London time, led lower by UBS Group AG, which fell 5.5% after the Swiss bank missed key targets for 2019. In contrast, EasyJet Plc rose 3.5% after the budget airline predicted a lower first-half loss thanks to robust demand and lower levels of capacity at rivals.
• U.S. equity futures retreated alongside European stocks on Tuesday, tracking broad declines across Asia amid mounting worries about a deadly virus in China and after a series of negative developments in Hong Kong. Contracts on the three main U.S. equity benchmarks all pointed to a drop when Wall Street returns from the long weekend.
• Financial markets in Asia reeled on concern a deadly virus emanating from China will spread through the region. Moves were exacerbated as traders closed out positions in the run-up to Lunar New Year holidays. Chinese shares in Hong Kong headed for their worst day since October 2018, while global traders offloaded more than 7 billion yuan ($1 billion) of mainland shares through exchange links. MSCI Inc.’s Asian gauge dropped 1%.
• Oil fell as global markets remain comfortably supplied despite the suspension of exports from Libya, and as equities faltered on political and economic worries in Asia. Brent crude slipped as much as 1.4% in London, approaching $64 a barrel. Libyan ports have been closed on the order of militia leader Khalifa Haftarwhile he haggles over a peace settlement with the national government. Yet crude markets remain calm because “the world is awash with oil, mainly coming from the United States,” International Energy Agency Executive Director Fatih Birol said in a Bloomberg TV interview at the World Economic Forum in Davos.
• Palladium is poised to snap a 13-day winning streak after prices dropped back through $2,500 an ounce, with U.S. investors returning from a long weekend. Gold inched lower, erasing earlier gains. Palladium fell as much as 4% after setting a fresh record earlier this week. Goldman Sachs sees further upside for the metal and the potential for prices to test $3,000, but signaled it would be a volatile ride. The recent risk-on rally has cooled down amid tensions in Hong Kong and signs that a deadly virus in China is spreading. Renewed growth concerns also added to the gloomy picture, potentially supporting havens like gold, with the International Monetary Fund trimming its global growth outlook for this year.
• President Donald Trump’s impeachment trial formally opens in the Senate on Tuesday, promising to shape his legacy, deepen the country’s political divisions and influence control of power in the nation’s capital for years to come. While the president faces little risk of removal from office by the Republican-led Senate, the trial may bring to life new details of Trump’s Ukraine scandal and help sway undecided voters in the 2020 elections.
• Reynolds Consumer Products Inc., the maker of Reynolds Wrap aluminum foil and Hefty trash bags, set the terms for a proposed U.S. initial public offering that could raise as much as $1.3 billion. The company plans to offer 47.17 million shares at an estimated price range of $25 to $28 apiece, it said in a regulatory filing Tuesday. It also added Academy Securities Inc. to a junior role on the deal, bring the total number of arrangers to 11. For the nine months ended Sept. 30, Reynolds said it had net income of $135 million on revenue of $2.2 billion, according to the filing.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the 15th 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 $3.12 billion in the week ended Jan. 17, compared with gains of $1.02 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $5.56 billion.
• Melrose Industries Plc, the British buyout specialist, is considering selling the bulk of its Nortek division, people with knowledge of the matter said. Birmingham-based Melrose is working with advisers to weigh options for the division’s air businesses, which sell products including heating, ventilation and cooling systems, according to the people. It is seeking to raise more than $3 billion from the sale, the people said, asking not to be identified because the information is private. Melrose bought Nortek Inc. in 2016 for $2.8 billion including debt. The original Nortek businesses’ adjusted operating profit has risen 40% under Melrose’s ownership.
• Cruise LLC, the autonomous-car startup majority owned by General Motors Co., will show its first vehicle designed to operate without a driver on Tuesday, people familiar with the matter said. The vehicle Cruise has been developing along with GM is a purpose-built electric, autonomous model designed to be more spacious and passenger-friendly than a conventional, human-driven car. It lacks traditional controls like pedals and a steering wheel, freeing up room for commuters who will share rides, said the people, who asked not to be named ahead of the vehicle’s unveiling at an event in San Francisco. Cruise will be making a case that transportation causes many problems that its planned services can fix. In a blog post in December titled “We Need to Move Beyond the Car,” Cruise Chief Executive Officer Dan Ammann said that it’s time vehicles moved from individual ownership to an autonomous sharing model that reduces the emissions, accidents and congestion caused by today’s cars.
• IBM called for rules aimed at eliminating bias in artificial intelligence to ease concerns that the technology relies on data that bakes in past discriminatory practices and could harm women, minorities, the disabled, older Americans and others. As it seeks to define a growing debate in the U.S. and Europe over how to regulate the burgeoning industry, IBM urged industry and governments to jointly develop standards to measure and combat potential discrimination.
• The U.K. labor market held up in the face of political turmoil in the three months through November, breaking a run of disappointing data that had boosted bets on a Bank of England interest rate cut this month. While the pound climbed after the release, the figures, which cover the period before Boris Johnson’s decisive election win, weren’t enough to shake the markets’ view that a reduction in rates this month is more likely than not. The report showed the employment rate hit a record high after the number of people in work surged by 208,000, the most in almost a year and double the market forecast. The jobless rate held at a four-decade low of 3.8%, although basic wage growth slowed modestly to 3.4% from 3.5%, the Office for National Statistics said.
• China’s mysterious respiratory virus has caused six deaths and infected a number of medical workers, a sign the outbreak has entered a new phase with the illness spreading from person to person. Health-care workers contracting the new illness indicates that it is more easily transmitted than previously thought, bringing the disease — part of the coronavirus family — to a higher risk level, reminiscent of the Severe Acute Respiratory Syndrome, or SARS, pandemic in Asia 17 years ago that killed 800 people. China on Tuesday raised the number of confirmed cases to 291.
• India’s National Stock Exchange has surpassed America’s CME Group Inc. to become the world’s largest derivatives bourse by volume. Mumbai-based NSE traded the most contracts in the world last year, the exchange said in a statement, citing data from the Futures Industry Association. Volume on the Indian exchange grew 58% to about 6 billion derivative contracts in 2019, surpassing CME’s 4.83 billion.
• UBS Group AG slashed its financial targets after falling short of several metrics in a year that propelled U.S. peers to new profit records, a fresh sign that Europe’s banks are falling further behind Wall Street. The Swiss lender, one of the most solid performers of the large European lenders in recent years, fell the most in eight months in Zurich trading after paring ambitions for profit, cost efficiency and dividend growth. While it benefited from a trading rebound, a pivot away from investment banking and toward wealth management left it exposed to the impact of negative interest rates and fickle clients who pulled money in the final quarter.
• President Donald Trump launched a veiled attack on environmental “alarmists” in a speech to business and political leaders in Davos, taking a swipe at the World Economic Forum’s key focus this year. Speaking at the Swiss resort town on Tuesday, Trump invoked those who predicted an “overpopulation crisis” and the end of oil, saying: “These alarmists always demand the same thing, absolute power to dominate, transform and control every aspect of our lives.” He also said: “This is not a time for pessimism, this is a time for optimism. Fear and doubt is not a good thought process, because this is a time for tremendous hope and joy and optimism and action, but to embrace the possibilities of tomorrow, we must reject the perennial prophets of doom and their predictions of the apocalypse.”
• Embattled steel giant Thyssenkrupp AG has narrowed the list of bidders for its elevator unit, which is expected to fetch more than 15 billion euros ($17 billion), people familiar with the matter said. Asian private equity firm Hillhouse Capital has decided against a bid, while Brazilian-American investment firm 3G Capital is also out of the running, the people said, asking not to be identified because the information is private. A consortium including Blackstone Group Inc., Carlyle Group LP and Canada Pension Plan Investment Board proceeded to the next round, as did a rival group backed by Advent International, Cinven Ltd. and the Abu Dhabi Investment Authority, they said.
• McDermott International Inc. plunged as much as 29% following a report that it’s preparing to file for bankruptcy to address its more than $4 billion debt load. The Houston-based company, which builds oil platforms and gas-export plants for energy producers, is negotiating a restructuring plan that could see its debt converted into equity with existing term-loan lenders getting the majority of the shares, according to people with knowledge of the matter. Unsecured creditors would receive less than 10% of the equity along with warrants, one of the people said.
• Uber Technologies Inc. is Morgan Stanley’s top pick among U.S. internet stocks for 2020, with the broker predicting a 57% rally in the ride-hailing giant’s stock on improving profitability and the potential for growth in shared cab services. Morgan Stanley’s $55 price target for Uber is among the more bullish on the Street, with the average 12-month estimate only implying a 25% gain for the shares, according to data compiled by Bloomberg. The San Francisco-based company is rated buy by 28 analysts, including Morgan Stanley, while 12 have a hold recommendation and none suggest selling the stock.

*All sources from Bloomberg unless otherwise specified