January 22nd, 2020

Daily Market Commentary

Canadian Headlines

  • Canadian stocks ended a six-day advance Tuesday, when U.S. shares also retreated. The S&P/TSX Composite fell 0.1% at 17,572.28 in Toronto. Health care and industrials lagged while information technology and utilities rose. Air Canada sank by the most in 13 months as the Centers for Disease Control and Prevention said the first case of the Wuhan corona virus has appeared in the U.S. Bombardier Inc. is exploring a combination of its rail business with French rival Alstom SA, according to people familiar with the matter. Stephen Poloz is heading into the final few months of his term as Bank of Canada governor showing few signs of giving up his status as one of the industrialized world’s most hawkish central bankers.
  • Bombardier Inc., the embattled Canadian train and plane maker, is exploring a combination of its rail business with French rival Alstom SA, according to people familiar with the matter. The two companies have held preliminary talks about a rail deal in the past few months, said the people, who asked not to be identified because the discussions are private. Representatives for Alstom and Bombardier declined to comment. Alstom rose as much as 2.1% in early trading in Paris Wednesday. Bombardier ended 5.7% higher in Toronto Tuesday, giving the company a value of C$3.18 billion ($2.43 billion).
  • Stephen Poloz is heading into the final few months of his term as Bank of Canada governor showing few signs of giving up his status as one of the industrialized world’s most hawkish central bankers. At a decision Wednesday, the bank is widely expected to hold its key interest rate at 1.75%, keeping it unchanged for a 10th-straight meeting and leaving Canada with the highest rate among advanced economies. Markets also don’t see much chance that Poloz, who leaves office in June, will lower borrowing costs in any of his final three meetings after this one, with odds of a cut at less than 40% over that time. That’s despite having reason to cut, given the economy looks to have slowed sharplyat the end of last year.

World Headlines

  • European stocks rose as investors focused on positive releases from Berkeley Group Holdings Plc and Sage Group Plc, while Germany’s DAX benchmark climbed to a record. The Stoxx Europe 600 Index added 0.4% as of 8:25 a.m. in London, as global markets recovered from worries about the implications of China’s coronavirus. Germany’s DAX Index rose as much as 0.4% to surpass its all-time high, after ending a whisker below its previous closing peak on Tuesday.
  • U.S. equity-index futures gained on Wednesday as China took steps to contain the spread of a deadly virus that had rattled international markets. European stocks fluctuated amid political turmoil in Italy. Contracts on the three main American equity indexes all rose, with Netflix Inc. and International Business Machines Corp. climbing in the premarket as traders digested their earnings.
  • Chinese shares erased losses after Beijing said it will start a nationwide screening effort to tackle the outbreak. The yen dipped after gaining Tuesday on news of the contagion and potential disruption to spending during China’s week-long Lunar New Year. The yuan steadied, after tumbling the most in almost five months Tuesday in onshore trading. While the death toll from the respiratory virus rose to nine people, a sense that China is coming to grips with containing it gave traders the chance for bargain-hunting following yesterday’s declines. Investors stayed on the alert, however, with millions set to travel during the holiday and news that the deadly pathogen had spread to Hong Kong.
  • Oil declined on concerns that a coronavirus outbreak in Asia could spread and curtail demand in a market that’s already contending with plentiful supplies. Futures slipped 0.8% to trade near $58 a barrel in New York. Goldman Sachs Group Inc. said prices could slip about $3 a barrel if an outbreak plays out in the same way as the SARS epidemic in 2003. Prices have so far shown only a limited response to the halt of exports from OPEC member Libya, as U.S. inventories are forecast to expand from already-comfortable levels.
  • Gold and palladium steadied as investors assess China’s moves to contain a deadly virus after the developing outbreak rattled markets Tuesday. China’s National Health Commission detailed actions to contain the disease, even as the first case of the virus was reported in Hong Kong. The country has stepped up monitoring of transportation links and ordered a near-complete shutdown of the central city of Wuhan, where the virus originated. Palladium may face additional pressure in the coming weeks if big automakers comment on potential measures to cut usage of the metal when they report earnings, Citigroup said in a note Wednesday. The recent rally in platinum-group metals may have cost the auto industry about $8 billion over the past month, it said.
  • The bosses of some of the world’s biggest oil companies discussed adopting much more ambitious carbon targets at a closed-door meeting in Davos on Wednesday, a sign of how much pressure they’re under from activists and investors to address climate change. The meeting, part of the World Economic Forum program, included a debate on widening the industry’s target to include reductions in emissions from the fuels they sell, not just the greenhouse gases produced by their own operations, said people familiar with the matter. The talks between the chief executive officers of companies including Royal Dutch Shell Plc, Chevron Corp., Total SA, Saudi Aramco and BP Plcshowed broad agreement on the need to move toward this broader definition, known as Scope 3, the people said, asking not to be named because the session was closed to the press. The executives didn’t take any final decisions.
  • Berkeley Group Holdings Plc, the London-focused home builder, plans to increase capital returns to shareholders as it slows land buying and increases sales from its existing bank of projects. It shares rose more than 5% to a record. The company is proposing returning about 1 billion pounds ($1.3 billion) to shareholders over the next two years, an increase of about 455 million pounds over its previously stated ambition, according to a company statement on Wednesday. The decision comes after a period in which the company had amassed a large pipeline of projects that are now under construction and expected to lead to higher sales.
  • Michael Bloomberg is pledging to repair 240,000 miles of U.S. roads and 16,000 bridges by 2025 as part of a comprehensive public works plan that would send more than $1 trillion to state and local governments over a decade. Previous efforts to enact sweeping federal infrastructure plans have languished without a consensus on how to pay for them, and Bloomberg isn’t saying yet how he’ll fund his. Those details will be part of his forthcoming tax plan, the campaign said. Bloomberg argues that past spending hasn’t solved the problem because there hasn’t been a national plan to guide investments in needed work by local communities. The former New York mayor was to discuss his policy at the U.S. Conference of Mayors’ winter meeting Wednesday in Washington.
  • President Donald Trump said he’s begun talks with World Trade Organization director-general Roberto Azevedo on changing the structure of the body, which he complained has been unfair to the U.S. Azevedo will travel to the U.S. for negotiations, Trump said Wednesday at a news conference to close his visit to the World Economic Forum annual conference in Davos, Switzerland.
  • Burberry Group Plc became the latest victim of the Hong Kong protests as sales in that market dropped by half over the Christmas quarter, while the spread of a new viral disease in Asia risks dimming the outlook further. The stock fell as much as 4.1% even after the company raised its forecast for full-year sales growth to a low single-digit percentage. Asian demand is crucial to the British maker of $2,000 trenchcoats and $470 scarves, which gets about 40% of its sales from Chinese shoppers. After political protests in Hong Kong led to store closures and weighed on tourism for months, the luxury industry is now bracing for the impact of a lung ailment that first appeared in China in December. Hong Kong reported a suspected first case of the disease today.
  • Italy’s Luigi Di Maio resigned as leader of the anti-establishment Five Star Movement, as his fading populist party faced the prospect of being thrashed in regional elections this weekend. The 33-year-old Di Maio told a meeting of Five Star ministers that he’s stepping down from his party job, but plans to stay on as foreign minister at a meeting in Rome Wednesday, according to three officials briefed on the discussions. He plans to make a public statement this afternoon. The Five Star leader has faced mounting internal dissent as the party plunged in opinion polls and lawmakers abandoned his party. More than 20 lawmakers have left or been expelled since Di Maio opted to back a second coalition for Prime Minister Giuseppe Conte last September. The two latest defections came Tuesday.
  • China ramped up efforts to contain a respiratory virus that’s killed nine people and infected hundreds, as the outbreak spread to Asia’s financial capital with the first reported case of the deadly illness in Hong Kong. More cases of the pneumonia-causing virus emerged outside mainland China, with one diagnosis in the U.S. The Hong Kong patient is a 39-year-old man from Wuhan in central China, according to a government official. Health officials around the world are racing to control the SARS-like virus that first appeared last month. The World Health Organization will decide Wednesday whether to declare the virus a public health emergency of international concern, a designation used for complex epidemics that can cross borders.
  • The Senate set the terms for Donald Trump’s impeachment trial, but not before Majority Leader Mitch McConnell and the president got a reminder that a small group of GOP senators can determine how it will play out. The Senate voted 53-47 in the early hours of Wednesday to set the trial procedures after McConnell hastily revised his proposed rules in the face of a mini-rebellion from some Republicans over the compressed schedule for arguments in the case. Despite that, Republicans repeatedly wielded their Senate majority over more than 12 hours of intense — and at times volatile — debate to quash every Democratic attempt to subpoena documents and witnesses from the Trump administration related to the president’s dealings with the government of Ukraine.
  • Xerox Holdings Corp. is preparing to seek control of HP Inc.’s board after the personal-computer maker rejected efforts to negotiate an acquisition, according to people familiar with the matter. The iconic printer maker is expected to submit at least a majority slate of directors ahead of a Friday deadline for nominations to the 12-member board, said the people, who asked not to be identified because the matter is private. Xerox has no plans at this point to increase its bid for HP, the people said. The company is still finalizing its plans and may choose to run a full slate to replace the entire board, the people said.
  • The Pentagon made $35 trillion in accounting adjustments last year alone — a total that’s larger than the entire U.S. economy and underscores the Defense Department’s continuing difficulty in balancing its books. The latest estimate is up from $30.7 trillion in 2018 and $29 trillion in 2017, the first year adjustments were tracked in a concerted way, according to Pentagon figures and a lawmaker who’s pursued the accounting morass.
  • Johnson & Johnson is likely to draw much of its growth from sales of cancer and immunology drugs in the coming year, as the health-care giant issued 2020 earnings guidance roughly in line with what Wall Street expected. But fourth-quarter sales trailed estimates. For 2019, adjusted earnings per share are expected to be $8.95 to $9.10, against an average analyst estimate of $9.09.
  • Google’s chief executive officer has left no doubt in how important he thinks artificial intelligence will be to humanity. “AI is one of the most profound things we’re working on as humanity. It’s more profound than fire or electricity,” Alphabet Inc. CEO Sundar Pichai said in an interview at the World Economic Forum in Davos, Switzerland on Wednesday. Alphabet, which owns Google, has had to grapple with its role in the development of AI, including managing employee revolts against its work on the technology for the U.S. government. In 2018, a group of influential software engineers successfully delayed the development of a security feature that would’ve helped the company win military contracts.
  • Netflix Inc. shares edged higher in U.S. pre-market trading, though remain far below 2018 and 2019 highs, after a mixed earnings report that showed overseas growth helping to offset a slowdown at home amid increasing competition from Walt Disney Co. and Apple Inc. Analysts were generally positive about the results and, while first-quarter guidance missed estimates, Piper Sandler analyst Michael Olson said that the forecast may be conservative. Netflix added 8.3 million subscribers internationally in the fourth quarter to surpass 100 million paid memberships outside of the U.S. for the first time. Stifel analyst Scott W. Devitt noted that Disney+ appeared to have a less meaningful impact in available international markets than in the U.S. Still, the analyst cautioned of the potential impact from the broader rollout of Disney+ in EMEA toward the end of the first quarter.

*All sources from Bloomberg unless otherwise specified