January 27th, 2020

Daily Market Commentary

Canadian Headlines

• Justin Trudeau returns to a fragmented parliament Monday facing sharp domestic divisions with the clock ticking on two of the tougher decisions of his political career. The prime minister must determine whether China’s Huawei Technologies Co.should be allowed to develop Canada’s fifth-generation wireless networks. He also needs to approve or reject a massive new oil project, even as he strives to reduce the nation’s greenhouse gas emissions. Getting sign-off on the new North American free trade agreement, which he’ll tackle right away, should be easy by comparison. Trudeau’s approval rating got a bump from his handling of the Jan. 8 jet crash in Iran that killed 57 Canadians. He’ll need that goodwill as he starts his second mandate in a much more precarious position than his first. Canada’s economy slowed sharply at the end of last year, so smoothing relations with commodity hungry China will be crucial. As will getting the nation’s energy sector back on its feet after a $30 billion exodus of foreign capital.

World Headlines

• The Stoxx Europe 600 Index headed for its worst decline since October, with the mining group dropping by 4%. Ten-year Treasury yields and West Texas crude futures fell to three- and five-month lows, respectively. A key measure of risk for the debt of Europe’s most fragile companies jumped to the highest in nearly two months.
• U.S. stock index futures slid Monday as investors reacted to the spread of the deadly coronavirus over the weekend. S&P 500 Index futures contracts expiring in March fell as much as 1.3% as of 8:50 a.m. in London, after China extended the Lunar New Year holiday for an unspecified period of time to help stem the spread of the coronavirus that has killed at least 80 people. Dow Jones Industrial Average contracts for March and the Nasdaq 100 were down 1%.
• Major Asian markets were closed for holidays with the exception of those in India and Japan, where stocks slumped and the yen climbed. A London-listed iShares China ETF dropped more than 7%. The offshore yuan erased this month’s trade-deal-driven gains in the wake of news that the virus continues to spread, with no peak in sight.
• Oil tumbled to the lowest in more than three months on fears China’s deadly coronavirus will hit demand in a market that already has plentiful supply. Futures plunged more than 3% as China reported an increase in fatalities and infections. While the country extended the Lunar New Year holiday to control the outbreak, more cases have been reported in other parts of the world. Goldman Sachs Group Inc. predicted that global oil demand may fall, but Saudi Arabia said it believes the crisis so far will have a “very limited impact” on consumption.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the 16th 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 $311.7 million in the week ended Jan. 24, compared with gains of $3.16 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $5.91 billion.
• Online mattress retailer Casper Sleep Inc. plans to raise as much as $159 million in its initial public offering, setting up a test of investor appetite for pioneering firms whose losses have grown with their revenue. The New York-based company said in a filing Monday that it planned to sell 8.35 million shares for $17 to $19 each. Casper, founded in 2014, became one of the leading brands in the so-called “bed-in-a-box” industry thanks to its pioneering status in the niche and savvy marketing. Since then, a slew of competitors have emerged in the U.S. and abroad. From 2016 to September 2019, it spent $422.8 million on marketing, according to an earlier filing.
• An election held in the U.S. in 2020 could do a lot to shape global climate outcomes in the immediate future. It won’t feature Joe Biden, Bernie Sanders, or Elizabeth Warren, and the winner won’t live in the White House. It’s a race for a seat on the Texas Railroad Commission, which holds immense power over the state’s vast oil and gas industry. Booming oil and gas production across the Permian Basin of West Texas has made this little-known regulator, with three voting members, a pivotal decision-maker for the American contribution to climate change. The reason for this comes down to natural-gas flaring. Drillers in Texas, as in other places, are allowed to burn off vast amounts of natural gas that is a by-product of oil production. This is done, in part, because of the expense involved in capturing the gas, putting it into pipelines, and moving it to processing facilities.
• China’s death toll from the coronavirus climbed to at least 80 as the country extended the Lunar New Year holiday in an effort to contain an infection whose spread accelerated around the globe. Premier Li Keqiang visited Wuhan, the city at the epicenter of the disease, on Monday as the government faces pressure to combat the epidemic. World Health Organization Director-General Tedros Adhanom Ghebreyesus said he’s heading to Beijing to meet with the government and assess the response. Chinese authorities said the virus isn’t yet under control despite aggressive steps to limit movement for millions of people who live in cities near the center of the outbreak.
• U.K. Prime Minister Boris Johnson will put his friendship with President Trump to the test this week as he is poised to allow Huawei Technologies Co. a role in the country’s fifth-generation wireless broadband networks. In the week that the U.K. ends its 45-year relationship with the European Union, Johnson is expected to make a series of critical infrastructure decisions that could shape his premiership — and the country — for years to come. The premier is preparing to give Huawei a role in developing 5G, despite calls from Trump to ban the Chinese firm over concerns that it could make the network vulnerable to spying in the future. Huawei has always denied posing a security risk. An announcement could come as early as Tuesday.
• Russia’s oil production surged to a five-month high in January following a new agreement to apply OPEC+ output cuts only to the country’s crude, not its condensate. The preliminary data seen by Bloomberg cannot be used to gauge whether Russia has improved its compliance with OPEC+ cuts because they don’t provide a separate figure for crude. Moscow successfully lobbied to have its output of condensate — a light oil extracted from natural gas — excluded after missing its target for many months in 2019.
• German business expectations took a surprising turn for the worse at the start of the year, underscoring the challenges Europe’s largest economy faces in exiting a protracted slowdown. The unexpected drop in the closely watched Ifo confidence index puts a dent in some of the optimism about Germany after stronger-than-forecast manufacturing figures on Friday. But the latest report was mixed rather than wholly negative. January’s decline was driven by dwindling prospects in services and construction while manufacturing improved.
• India further reduced — to $3.3 billion — the amount of debt bidders for Air India Ltd. will need to absorb and eased some eligibility requirements, as Prime Minister Narendra Modi tries once again to sell the national carrier. Expressions of interest are invited by March 17, according to preliminary terms published Monday. The entire company will be sold but effective control needs to stay with Indian nationals, and bidders would need to accept a little more than a third of Air India’s debt — down from two-thirds the last time around when not a single suitor could be found.
• Japanese Prime Minister Shinzo Abe’s upcoming choice of candidate to join the Bank of Japan board could shed light on the leader’s current thinking on the importance of achieving a stubbornly difficult inflation goal. Abe’s nomination to replace Yutaka Harada is scheduled to take place Tuesday morning, according to a document seen by Bloomberg. The choice will be closely watched by investors and economists trying to gauge the depth of the prime minister’s commitment to hitting 2% inflation, seven years after setting that goal.
• China’s massive financial markets may remain closed until at least next Monday after authorities extended the Lunar New Year break by three days as they grapple with the worsening virus crisis. There has been no official comment from the China Securities Regulatory Commission or the Shanghai or Shenzhen stock exchanges on whether markets will reopen on Friday as originally planned. In 2003, officials extended a May Day holiday market closure by four trading days during the outbreak of SARS. Meantime, Shanghai authorities advised that companies shouldn’t start work until at least Feb. 9.
• A survey of U.S. companies showed that hiring was flat in the fourth quarter, the first unchanged reading in a decade and the latest signal that the labor market is cooling off. Eighteen percent of 95 firms reported that employment had risen over the past three months, while an equal share said it had fallen, according to a National Association for Business Economics survey of member firms released Monday. That net reading of zero was the first since the fourth quarter of 2009 and it followed declines in the past two periods, from 24 in the second quarter of 2019 and 8 in the third quarter.
• China’s deadly virus outbreak is threatening the outlook for casino operators in the world’s largest gambling hub. The number of mainland Chinese visitors to Macau fell 80% on Sunday, the third day of the holiday, compared with the equivalent day during last year’s Lunar New Year break, according to the city’s tourism office. For the first three days of the holiday, arrivals were down 66%, the data show. That’s a blow for an economy which is reliant on the gambling industry, and comes after casinos suffered their worst year since 2015. The outlook is unlikely to get any better as China limits travel for its citizens, including overseas tour bans, amid the growing death toll caused by the novel coronavirus.
• The world’s largest energy traders enjoyed one of their best ever years in 2019 as pipeline outages, dramatic changes in ship fuel regulations and Middle East conflicts shook up the global oil market. The bonanza extended beyond the independent traders like Vitol Group and Trafigura Group Ltd. to the in-house units of oil giants Royal Dutch Shell Plc, Total SA and BP Plc, which made billions of dollars in profits. For the independents, the bumper year all but guarantees a fat bonus season for a group of companies that’s largely owned by their executives and senior staff. For the European oil companies, the trading boom will help Shell, BP and Total to weather a tough year in other parts of their business.

*All sources from Bloomberg unless otherwise specified