January 26, 2021

Daily Market Commentary

NEWS

Canadian Headlines

1. Canadian equities rose Monday with tech stocks in the limelight ahead of corporate earnings. The S&P/TSX Composite Index gained 0.3% as BlackBerry Ltd. jumped 31% to its highest level since 2011. Materials and health care were among laggards. Oil gained the most in about a week with expectations for tighter global supply offsetting concerns that a bumpy Covid-19 vaccine rollout will further blunt demand. Moderna Inc. said its vaccine will protect against two known variants of the Covid-19 virus, but it plans to start human studies of a booster shot for a strain from South Africa that may cause immunity to wane more quickly.
2. BlackBerry shares jump 18% in U.S. premarket trading, adding to the 28% gain it registered on Monday. RBC cut its rating on the stock to underperform following the recent rally. Stock is up 172% YTD and is among a slew of stocks boosted by retail traders and touts on Reddit. RBC cuts stock to underperform from sector perform, with the valuation now at multi-year highs and above peers despite no change to the company’s fundamental outlook

World Headlines

1. European equities advanced on Tuesday, as share buybacks, earnings and deal-making activity outweighed concerns over the virus spread and Italian politics. The Stoxx 600 Index extended gains to trade up 1% by 12:01 p.m. London time, while Italy’s FTSE MIB Index was up 1.2%, shrugging off the resignation of Prime Minister Giuseppe Conte. Financial services led European sectoral gains as EQT AB surged 20% after the Swedish private equity firm agreed a $1.9 billion property deal. UBS Group AGwas also a standout, jumping 2.1% after the wealth manager met or beat all of its targets in 2020, and planned a $4.5 billion buyback. Naturgy Energy Group SA was also a big mover, up 16% after IFM Global Infrastructure offered to buy a stake in the Spanish firm for $6.1 billion, while Finland’s Nokia Oyj extended Monday’s gains with an 8% rise as the stock was promoted in a Reddit forum.
2. Global stocks were mixed as M&A deals gave a boost to Europe, while worries about new virus variants and hurdles to the Biden administration’s stimulus proposal fanned a risk-off mood in the U.S. and Asia. S&P 500 equity futures fluctuated while Treasury yields climbed as President Joe Biden said he’s open to negotiating his $1.9 trillion Covid-19 relief proposal. On Monday, the top Senate Democrat said lawmakers said an aid package was unlikely before mid-March. GameStop Corp. extended its surge in premarket trading, climbing 16% as day traders cotinued to pile into the heavily shorted video-game retailer.
3. Asian stocks retreated from a record as investors paused following rallies in Hong Kong and South Korea. U.S. Senate Majority leader Chuck Schumer’s expectation of timing for approval of a new aid package also weighted on sentiment. Vietnam was Asia’s worst-performing market as stocks continued to face profit-taking pressures. Hong Kong’s stock benchmark was dragged by Tencent, which slumped after an 11% gain on Monday. China’s unexpected withdrawal of funds from the financial system amid a warning about asset bubbles also weighed on sentiment, with indexes in Shanghai and Shenzhen sliding. Toyota was among the biggest drags on the MSCI Asia Pacific Index, even after Nikkei reported the automaker sees a limited impact from a semiconductor shortage. Samsung Electronics and Hong Kong Exchanges & Clearing also weighed on the regional equity benchmark as investors pocket profits from recent gains.
4. Oil traded near $53 a barrel in New York as concerns over the pandemic’s latest hit to demand were tempered by signs of tighter global supply. Futures in New York increased 0.5% after rising 1% on Monday. A flare-up of the coronavirus in China is threatening fuel demand during the Lunar New Year period, with the government encouraging millions not to travel to prevent the outbreak from spreading further. Seaborne exports of Russia’s flagship Urals crude will drop by almost 20% in February from a month earlier, adding to lower Iraqi production and crimped Libyan shipments. Prompt timespreads for the U.S. benchmark and global Brent are in a bullish market structure and widening, indicating shrinking supplies.
5. Gold traded in a narrow range as investors counted down to this week’s Federal Reserve policy meeting, and tracked the Biden administration’s efforts to deliver a $1.9 trillion Covid-19 relief proposal. Bullion has started 2021 under pressure, after posting the biggest gain in a decade last year as the pandemic roiled markets. The metal’s appeal has been tarnished by improved prospects for growth and a pause in the dollar’s decline. A rise in benchmark Treasury yields above 1% also proved to be a headwind this month, although these have retraced some ground.
6. Germany urged the European Union to limit vaccine exports as a standoff with AstraZeneca Plc over delivery delays worsened. Chancellor Angela Merkel told colleagues the risks from faster-spreading variants means the country is “sitting on a powder keg,” according to Bild newspaper. Ireland is set to extend its lockdown even amid signs the outbreak there is easing, and the U.K. government is expected to announce plans for quarantining travelers. New Zealand is likely to keep its borders closed to the world through most of 2021. Thailand found a record number of cases in a migrant labor cluster near Bangkok. Vaccine coverage won’t reach a point that would stop transmission of the virus in the foreseeable future, the World Health Organization said. United Nations Secretary-General Antonio Guterres said the world risks more virus variations by not pushing for vaccines in developing nations.
7. Sweden’s EQT AB, one of Europe’s biggest private equity firms, added about a fifth to its share price after striking a $1.9 billion deal that gives it access to real estate markets across North America and Europe. Stockholm-based EQT agreed to take over closely held Exeter Property Group, it said on Tuesday. It will pay about $800 million in new shares and the rest in cash. The announcement drove EQT’s stock up roughly 20%, giving it a record valuation of more than $30 billion. The takeover gives the Swedish company control over a U.S.-based property business with more than $10 billion under management in an asset class that’s become increasingly popular among institutional investors after years of ultra-low interest rates.
8. IFM Global Infrastructure has offered to buy 23% of Naturgy Energy Group SA in an all-cash offer. The 23 euros ($28) per share tender offer is aimed at all existing shares of the Spanish energy group, according to a filing Tuesday by Naturgy. GIP and Rioja, two shareholders who own about 21% of Naturgy each, have said they will not accept the offer. Rioja is a joint venture between CVC and Spain’s March family. The move indicates IFM would work together with CVC and GIP, who acquired their stakes in late 2016. The two private equity groups have had a tense relationship at times with Chairman Francisco Reynes. Naturgy shares, which were down 18% over the past year before trading, rose more than 16% on Tuesday.
9. Boris Johnson is expected to announce the government’s plan for quarantining travelers arriving in the U.K. to stop the spread of new coronavirus strains from overseas. The prime minister will chair a meeting of senior ministers on Tuesday to weigh up options for requiring new arrivals to isolate in hotels. “There will be an announcement on this issue later on today,” U.K. Vaccine Minister Nadhim Zahawi said on Sky News on Tuesday, warning that it is too early for people to think about booking summer holidays. “As we vaccinate more people, it becomes more and more important that we protect against any new variants coming in.” The U.K.’s death toll is on course to pass 100,000 this week and, with hospitals close to capacity and infections still high, Johnson is some distance from meeting the conditions he set for loosening national restrictions when he imposed them on Jan. 4. He is under pressure from members his own Conservative Party to set out a road map for leaving the country’s third national lockdown, amid fears it will wreck businesses and tip the economy into a double dip recession.
10. Bitcoin’s price could exceed $50,000 over the longer term as the digital asset vies with gold for investment flows, according to cryptocurrency exchange Luno and brokerage OSL. “We’re talking about Bitcoin over the next three, five, 10 years slowly inching away at gold’s market capitalization,” Vijay Ayyar, head of Asia Pacific with crypto exchange Luno in Singapore, said in an online question and answer session with Bloomberg Tuesday. If that happens, “you are way over $50,000,” he said. Bitcoin quadrupled last year, eventually reaching an all-time high of almost $42,000 in early January before sliding back by about $10,000. The rally split opinion, with some commentators pointing to increased interest from long-term investors and others citing speculative buying.
11. Senate Republican leader Mitch McConnell has backed off from a key demand that had held up a power-sharing agreement after two Democratic senators agreed not to vote to do away with the rule he wanted to preserve — the filibuster. McConnell had refused to agree to any deal with Majority Leader Chuck Schumer to share power in the 50-50 Senate without a pledge that Democrats wouldn’t jettison the filibuster, which allows the minority to block legislation by requiring 60 votes to advance most legislation. While both sides claimed victory, McConnell’s position was becoming untenable and risked provoking the Democrats into doing the opposite of what he wanted and eroding the filibuster out of the gate. There’s also potential risk down the line if Republicans engage in maximum obstruction and anger Manchin and Sinema.
12. General Electric Co. soared after predicting that cash from its industrial operations would jump this year, signaling renewed progress in Chief Executive Officer Larry Culp’s effort to turn the company around. Industrial free cash flow will be $2.5 billion to $4.5 billion this year, GE said in an earnings statement Tuesday. Analysts had been expecting $2.57 billion for the closely watched metric, which investors view as a gauge of the strength of the company’s manufacturing divisions. The outlook provides a new boost for Culp’s push to restart the repair job he began before the pandemic, when GE was attempting to emerge from an epic corporate collapse. The company generated $4.4 billion in industrial free cash flow in the fourth quarter, smashing expectations for $2.8 billion.
13. GameStop Corp. extended its surge in premarket trading on Tuesday, albeit at a less intense pace than defined Monday’s wild ride. The stock rose as high as $100 before paring gains to trade at $89.48 at 6:21 a.m. in New York. It closed 18% higher at $76.79 on Monday, briefly touching a record high of $159.18, and has more than quadrupled this month. GameStop, which has turned into a battleground for short sellers and retail traders, triggered at least nine trading halts for volatility on Monday. Options trading has also surged. The stock’s surge was in part fueled by an army of Reddit-charged day traders who used the website’s WallStreetBets forum to pump up shares and fight back against the eye-popping levels of short interest. Bets by Gabe Plotkin’s Melvin Capital and Andrew Left’s Citron Research have faced a reckoning in the battle with GameStop’s retail fans.
14. Exchange-traded funds investing in companies with responsible environmental, social and corporate governance practices lured a record $85 billion in the U.S. and Europe in 2020, and are still raking it in. Pumped up by the flows, stocks in many of these funds are trading at frothy price-to-earnings multiples that are increasingly hard to justify. Take U.S. fuel-cell maker Plug Power Inc., for instance. The unprofitable company’s more than 2,000% rally since early 2020 outpaces even Tesla Inc’s. With the Nasdaq 100 trading near dot-com-era-high valuations of the early 2000s, the likes of Bank of America Corp. are floating warning balloons. And after astronomical surges in shares of renewables — the poster child of ESG investing — market players, including JPMorgan Chase & Co., are trying to be more selective to avert the risk of a sudden pullback.
15. UBS Group AG plans to buy back as much as 4 billion francs ($4.5 billion) of shares over the next three years, bolstering shareholder returns after income from managing client assets and investment banking propelled gains at the world’s largest wealth manager. The lender is doubling the size of a previous program and said it expects to repurchase up to $1.1 billion of shares in the first quarter, according to a statement on Tuesday. The bank finished off the year strongly, with fourth-quarter net income of $1.7 billion that beat analyst estimates and the Zurich-based firm meeting or beating all its targets in 2020.
16. Italian Prime Minister Giuseppe Conte will resign on Tuesday morning to avoid a damaging defeat in the Senate and maneuver for a return at the head of a new government. Conte will preside over a cabinet meeting at 9 a.m. in Rome and then head to President Sergio Mattarella’s office to formally step down, according to a government statement. The idea is that by preemptively offering his resignation to Mattarella, who oversees the formation of ruling coalitions, Conte will then be asked to take another shot at putting together a government, according to officials who asked not to be named discussing confidential deliberations. Mattarella will start meeting with parties on Wednesday afternoon to discuss who could be the next prime minister, an official said.
17. Didi Chuxing Technology Co. is close to finalizing a $1.5 billion round of funding for its on-demand trucking unit from investors including Temasek Holdings Pte, surpassing its fundraising target as investors count on a Chinese economic recovery to fuel shipping. Jack Ma’s Yunfeng Capital and IDG Capital will join the financing for Didi Freight, an Uber-like trucking service, a person with knowledge of the matter said. Other investors in the unit’s debut round include the investment arm of real estate giant Country Garden Holdings Co., a unit of CITIC and Hidden Hill Capital, the person said, asking not to be identified discussing a private deal. The total amount exceeded its target of about $400 million by several-fold. China’s economy roared back to pre-pandemic growth rates in the fourth quarter after its industrial engines fired up to meet surging demand for exports. That boom is straining a domestic logistics network already taxed by a post-Covid 19 resurgence in e-commerce. Startups like Full Truck Alliance — backed by SoftBank Group Corp. — and tech giants such as Alibaba Group Holding Ltd. are now introducing technology to try and streamline the shipping process, connecting merchants with truckers and delivery firms.
18. Ant Group Co. could resume its plans for an initial public offering once problems are resolved, China’s central bank chief said, offering some relief to global investors seeking signs on what the future holds for the world’s largest fintech giant. People’s Bank of China Governor Yi Gang said relevant agencies are still investigating issues related to monopolies at billionaire Jack Ma’s Ant Group, adding that the matters were “complicated” and some risks were related to consumer privacy. To resolve the problems, regulators need a clear legal framework, Yi said on a panel at the World Economic Forum on Tuesday.
19. Janet Yellen won confirmation to become U.S. Treasury secretary, building out President Joe Biden’s team as the administration struggles to win bipartisan support for a $1.9 trillion Covid-19 relief plan for shoring up a weakening economic recovery. The first woman to serve in the post, Yellen will take charge of a department with responsibilities spanning tax policy and government spending to financial stability, economic sanctions and foreign-exchange policy. She’ll also oversee ties with the Federal Reserve, which she previously chaired. She was confirmed by the Senate 84-15 Monday evening. Yellen already saw the uphill fight the administration faces in its stimulus campaign last week, with Republicans on the Senate Finance Committee rejecting her arguments that historically low interest rates offer an opportunity for expansive deficit spending. White House economic adviser Brian Deese similarly ran into challenges from a bipartisan group of lawmakers Sunday, who asked for the basis for such a large package so soon after December’s $900 billion bill.
20. The apartment business has weathered the Covid-19 pandemic better than most of the real-estate sector. That is starting to change. Owners of multifamily buildings are falling behind on loan payments. Banks view a greater number of rental loans as high risk, and fewer lenders are available to help struggling developers with financing. Eviction protections, lower rent collections and unprecedented declines in the asking rent in some urban markets are also taking their toll on apartment owners. Niche corners of the multifamily business that were popular with investors before the pandemic are now some of the worst off. Ratings companies have downgraded bonds tied to senior-housing and student-housing properties, and some co-living companies, where tenants lease rooms in shared apartments, are also struggling. Earlier this month, the co-living operator Quarters closed all of its U.S. operations, filing for 10 bankruptcies.
21. Johnson & Johnson issued a stronger forecast for its 2021 financial results than Wall Street expected, after the health-care giant’s fourth-quarter performance was helped by soaring sales of its biggest-selling drugs. The health-care conglomerate expects full-year adjusted earnings per share of $9.49 to $9.60, compared with an average analyst estimate of $8.99.
22. Verizon Communications Inc. exceeded Wall Street profit estimates and gave a full-year earnings forecast that topped expectations, in a sign that the Covid-19 pandemic and a costly 5G network expansion aren’t threatening the bottom line. The largest U.S. wireless carrier forecast 2021 profit of $5 to $5.15 a share, compared with the $5 that analysts predicted. For the fourth quarter, the company posted earnings of $1.21 a share, excluding some items, but a gain of just 703,000 regular monthly wireless subscribers. Analysts expected earnings of $1.17 a share and 1.04 million new wireless subscribers. Revenue of $34.7 billion was slightly above the $34.4 billion estimate.
23. Twitter Inc. acquired the newsletter publishing company Revue for an undisclosed sum, part of an effort to expand its business and give writers who distribute their work on Twitter more features. Revue’s service, which lets people manage newsletter publishing and subscriptions, will continue operating as a “standalone service” within Twitter, the company said Tuesday in a blog announcing the deal. Twitter will eliminate some of the service’s fees to encourage more people to create newsletters, and will take a 5% cut on subscription revenue collected through Revue. Part of Revue’s appeal to Twitter is that it could help expand the business outside of advertising, which generates more than 85% of Twitter’s annual revenue, and give some of the site’s more popular users a way to make money from their followers.
24. BlackRock Inc. Chief Executive Officer Larry Fink escalated his call for corporate leaders to focus on the environment in the wake of the Covid-19 crisis, and pledged new measures to address climate change. Companies should disclose plans for how their business models will be compatible with a net-zero economy, Fink said in his annual letter to CEOs Tuesday. Drawing parallels between the deadly consequences of the pandemic and the effects of global warming, Fink wrote that positioning for the long term means preparing for the realities of climate change. “The pandemic has presented such an existential crisis — such a stark reminder of our fragility — that it has driven us to confront the global threat of climate change more forcefully and to consider how, like the pandemic, it will alter our lives,” Fink wrote in the letter.

“The secret of all victory lies in the organization of the non-obvious.” – Marcus Aurelius

*All sources from Bloomberg unless otherwise specified