January 28th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian Prime Minister Justin Trudeau is losing support for a plan to expand the Trans Mountain oil pipeline, raising the stakes for his government as the project navigates continued legal challenges. About 37% of Canadians oppose the government-owned project, up from 31% in June, according to a poll published Tuesday by the Angus Reid Institute. Backing for the pipeline is at 55%, down from 58%, the survey showed. Canada’s C$4.5 billion ($3.4 billion) purchase of Trans Mountain in 2018 has been a political quagmire for Trudeau, costing him support among his environmentalist base while winning him little favor with voters in conservative, oil-rich Alberta. The poll suggests that even if Trudeau overcomes legal hurdles, the project will remain a dilemma for his government, with opposition escalating largely in strongholds for his Liberal party.
• BlackRock Inc., Global Infrastructure Partners and KKR & Co. are among suitors considering bidding for a stake in natural gas pipelines being sold by Abu Dhabi’s state-owned energy giant, people familiar with the matter said. Australia’s IFM Investors Pty and Ontario Teachers’ Pension Plan are also weighing offers for a stake in Abu Dhabi National Oil Co.’s gas pipeline unit, according to the people. A deal could value the business at as much as $15 billion including debt, the people said, asking not to be identified because the information is private.
• China has purchased Australian, Canadian and French wheat as Beijing looks to fill import quotas set by the World Trade Organization, according to people familiar with the matter. In the past two months, China bought about 1 million metric tons of wheat from the three countries, said the people, who asked not to be identified because the transactions are private. The purchases are part of the 9.6 million-ton annual wheat quota China allocates to buyers, the people said. China’s purchases come as traders are watching to see when the world’s top commodities importer will step up buying of U.S. farm goods. Beijing agreed earlier this month to boost purchases of American agricultural supplies by $32 billion over two years from pre-trade war levels.

World Headlines

• An early rebound in European stocks lasted little more than an hour, with investor focus returning to the coronavirus outbreak as China expanded travel restrictions. Travel shares gave up gains and miners extended losses, weighing on the Stoxx Europe 600 Index. The benchmark gauge was little changed as of 9:35 a.m. in London, wiping out an advance of as much as 0.5%. China will stop individual travelers to Hong Kong, Chief Executive Carrie Lam said Tuesday, further eroding market sentiment. European stocks saw the biggest sell-off in almost four months on Monday as global markets were gripped by fears about the implications of the virus outbreak. The Stoxx 600 has now erased all its gains for the year.
• S&P 500 index futures trim earlier gains, still up 0.3%, after European stocks turned flat on further concerns that the virus outbreak will hit global growth; China said it will stop individual travelers to Hong Kong to curb the spread of the coronavirus. Investors are keeping an eye out for a slew of earnings due this week including from Apple Inc. on Tuesday while also monitoring the impact of the deadly coronavirus. Even as containment efforts intensify, the likelihood of the virus disrupting global businesses and the world’s second-largest economy appears to be growing.
• Japanese shares fell for a second day and South Korean stocks sank as that market reopened after holidays. Trading is set to resume in Hong Kong Wednesday; the latest guidance from China, where the outbreak is still concentrated, is for markets to reopen Monday. The offshore yuan fluctuated after a sharp slide the previous day while the yen nudged higher for a sixth session. Crude oil declined. While China reported a further increase in both the death toll and number of infected people from the virus, its top securities regulator encouraged investors to evaluate the impact of the deadly coronavirus “rationally and objectively.
• Oil fell from the lowest close since mid-October amid growing alarm that the deadly coronavirus will hurt economic activity in China and beyond. Futures traded below $53 a barrel in New York, after losing 9% during five straight days of declines to Monday, on concern reduced travel will hit jet fuel demand in the world’s biggest oil importer. Chinese authorities have locked down cities with a combined 50 million people around the outbreak’s epicenter in Wuhan, and will stop individuals traveling to Hong Kong.
• Gold traded little changed after jumping Monday on rising concern over the impact of China’s deadly coronavirus. Exchange-traded fund holdings of the metal rose for a fourth day to the highest since November. Gold has gained about 4% so far this year, buoyed first by increased tensions between Iran and the U.S. and now on concerns about the virus outbreak. As the death toll in China topped 100 and the number of cases soared, the director-general of the World Health Organization visited Beijing to assess the response. Palladium prices seesawed, advancing as much as 3.2% before dipping to a small decline and then bouncing back up. The metal is now headed for its first gain in four days.
• With another delay in getting Boeing Co.’s 737 Max back in the air, an “absolute disaster” appears guaranteed when the planemaker reports fourth quarter results on Wednesday, according to a Vertical Research analyst. After a nightmarish year, analysts’ profit estimates for the period have plunged more than 70% over the past twelve months. Troubles for Boeing started with the fatal crash of two 737 Max airplanes within a span of five months, in late 2018 and early 2019, leading to a grounding of the jet, investigations to find a reason for the disasters and, finally, a production halt. Boeing has lost roughly one-fourth of its market value since the second crash last March, and its chief executive was replaced in December.
• Apple Inc. shares have marched higher for months on increasingly bullish expectations for new iPhones, surging AirPods demand and a growing slate of digital services. That rally will be tested on Tuesday by quarterly results from the tech giant, a new forecast and the looming risk of the deadly coronavirus in China. Wall Street is looking for the best revenue growth in five quarters, thanks to strong holiday sales. That’s already sparked stock gains that added more than $250 billion to Apple’s market value since late October. And yet, several analysts think Tuesday’s results, and a forecast for the current quarter, will beat expectations and keep the shares climbing.
• Airbus SE reached an agreement to settle long-running bribery investigations in the U.K., France and the U.S. in a deal that could cost the European airplane manufacturer in the range of $3 billion. A final agreement could be announced as early as this week, according to people familiar with the matter. The preliminary deal remains subject to approval by courts and authorities in the three countries, Airbus said in a statement Tuesday. The charges involve the use of intermediaries in securing jet orders, a practice that Airbus employed as it tried to reach parity with U.S. rival Boeing Co. A settlement, among the largest for corporate corruption in recent years, would allow Airbus to move past a probe that has shadowed the company for years, doing so at a time when Boeing is struggling with the grounding of its 737 Max aircraft following two deadly crashes.
• Britain will let Huawei Technologies Co. build the country’s next-generation mobile phone networks, denying a long-running attempt by the U.S. to have the Chinese tech giant barred. In a statement released midday in London, the U.K. said it will keep the high risk vendors out of the most sensitive core parts of the networks but will allow the company to supply other gear that’s critical to the roll-out of 5G, such as antennas and base stations.
• President Donald Trump’s lawyers begin their final day of arguments Tuesday having only barely noted the bombshell revelation from former National Security Adviser John Bolton that threatens to upset White House plans for a quick end to the Senate impeachment trial. Trump’s defense team will wrap up their case on Tuesday, followed by hours of questions from senators. Then will come what promises to be a dramatic debate and a moment of reckoning for a handful of Republican moderates over whether to call Bolton or other witnesses. While Trump and his allies delivered broadsides against Bolton on Twitter and to reporters on Monday, his lawyers mostly stuck to making a subdued presentation of legal arguments against the charges in the House articles of impeachment that he abused his power and obstructed Congress.
• China pledged to provide abundant liquidity for money markets and urged investors to evaluate the impact of the coronavirus objectively, as the nation prepared for a potentially tumultuous resumption of trading next Monday. Along with a potential sell-off in Chinese stocks, which haven’t traded onshore since Jan. 23, there’s a “large amount of funds” coming due Feb. 3, the People’s Bank of China said in a statement. It will conduct operations “to provide abundant liquidity in a timely manner to maintain reasonable and sufficient liquidity in the banking system,” it said.
• BorgWarner Inc. agreed to acquire Delphi Technologies Plcfor about $1.5 billion in an all-stock deal that unites two auto suppliers positioning for the industry’s transformational shift to hybrid and electric vehicles. Delphi Technologies stockholders will receive 0.4534 BorgWarner shares for each Delphi Technologies share held, according to a statement Tuesday. That would represent a premium of about 77% to Delphi Technologies’ closing price Monday. BorgWarner stockholders would own about 84% of the combined company, while current Delphi Technologies owners would hold 16%. The deal values Delphi Technologies at about $3.3 billion including debt, according to the statement. The companies see cost savings of about $125 million by 2023, they said.
• 3M Co. said it would eliminate 1,500 jobs as part of a global restructuring, as the manufacturer continues to grapple with challenges in a range of key markets. The cuts prompted a pretax charge of $134 million, the company said in a statement Tuesday as it reported earnings. The revamp will lead to pretax savings of as much as $120 million a year.
• The explosion ruptured the dusk settling over the desert in Surprise, Arizona. For hours, smoke had poured from a metal shed packed with lithium-ion batteries at a small electric substation. The batteries were tied to the electric grid, and somehow they had caught fire. Firefighters searching for the source of the smoke opened the shed door, and minutes later gases seeping from damaged batteries caused the explosion. Body-camera footage from the scene showed a firefighter dazed and breathing heavily as blood ran down his forehead. Two of the four people injured had to be airlifted to a hospital.
• Apple Inc.’s China-centric manufacturing base is at risk of disruption after the Lunar New Year holiday as the company’s partners confront the coronavirus outbreak that has gripped the country and caused more than 100 deaths. Virtually all of the world’s iPhones are made in China, primarily by Foxconn’s Hon Hai Precision Industry Co. at its so-called iPhone City in Zhengzhou and by Pegatron Corp. at an assembly site near Shanghai. Each of those locations is more than 500 kilometers away from Wuhan in central China, the epicenter of the viral outbreak, but that distance doesn’t immunize them from its effects.
• President Donald Trump is headed to the Jersey Shore on Tuesday to host a political rally for Jeff Van Drew, the congressman who switched parties to join House Republicans in protest of the impeachment vote. The president’s visit to Wildwood is intended to bolster the freshman lawmaker, who won his seat as part of the Democratic wave of 2018 but subsequently declared his “undying support” for the president during an Oval Office meeting. Trump has repeatedly touted Van Drew’s defection to argue that the Democratic-led impeachment inquiry is illegitimate, and told the lawmaker he would endorse his re-election bid.

*All sources from Bloomberg unless otherwise specified