January 29, 2021

Daily Market Commentary

Canadian Headlines

1. Canada for years has danced around the global electric vehicle transition, touting its environmental importance while simultaneously propping up traditional auto manufacturing and defending its oil sands industry. But several recent developments suggest the shift to EVs is gaining traction. The combination of Joe Biden’s presidency in the U.S., coupled with a Democratic-led Congress and pandemic-loosened purse strings in Canada, could jump-start the change — helped by a big boost from industry. In the past six months, three global automakers have announced big electric vehicle investments in Canada’s most populous province. General Motors Co. said on January 15 that it will invest nearly C$1 billion to produce electric commercial vans in Ingersoll, Ontario. Ford plans to spend roughly C$1.2 billion to begin building five battery-powered cars in Oakville, Ontario, from 2025. And in fall 2020, Fiat Chrysler said it would invest as much as C$1.5 billion to create its own electric vehicle platform in the province. The announcements were hailed by the union representing more 20,000 autoworkers at the three companies, as was the promise of close to C$600 million in provincial and federal government funding for the Ford plant. (GM and Fiat Chrysler are still in discussions with both governments for support).

World Headlines

1. Risk-off sentiment returned to Europe on Friday, with stocks extending their worst weekly slump since October. Some of the region’s most-shorted shares fell. The Stoxx Europe 600 Index dropped 1.1% as of 9:54 a.m. in London, with almost all sectors in the red, mirroring a global sell-off. Retailers and insurers led the losses, while a Goldman Sachs Group Inc. basket of Europe’s most-shorted stocks declined 1.7%. Shares such as Evotec SE, Varta AG and CD Projekt SA slid 5% or more, after climbing earlier this week in a spillover from GameStop Corp.’s day trader-fueled rally. European stocks are down 2.3% this week, almost erasing their third monthly gain, weighed down by tighter lockdowns, vaccine snags and U.S. retail trading volatility. Investors are assessing valuations after the Stoxx 600 reached an almost 11-month high on Jan. 14. Still, the benchmark showed some resilience Thursday, recouping an intraday slump of more than 2% by the close.
2. American equity futures slid along with stocks in Europe Friday amid lingering concerns about volatile retail-trader speculation in the U.S. and a cash squeeze in China. Treasury yields ticked higher and the dollar erased gains. S&P 500 futures dropped after the U.S. gauge rebounded Thursday from its worse loss since October. GameStop Corp. and AMC Entertainment Holdings Inc. surged in pre-market trading after brokerage Robinhood Markets Inc. said it will ease some curbs on activity in stocks whipsawed by online chat rooms. Crude oil inched higher and gold rose. Global stocks are set for their worst weekly slide in about three months, partly on the turmoil caused by hoards of day-traders hatching stock bets that roiled hedge funds and strained trading platforms. Some strategists say investors should buy the dip because of the expected stimulus-fueled economic recovery from the pandemic. Others fear an uneven vaccine rollout signals a fragile outlook amid stretched valuations.
3. Asian stocks fell for a fourth straight session on the last trading day of January, on track for the worst weekly loss since March. Chipmakers and suppliers were the largest drags on the regional benchmark, with Samsung Electronics falling 2%, TSMC down 1.7% and Tokyo Electron slumping almost 5%. Better-than-expected earnings in some Asian semiconductor-related companies failed to boost sentiment. Korean chipmaker SK Hynix’s fourth-quarter earnings more than tripled and beat estimates, and in Japan, Advantest’s operating income also exceeded expectations as the testing device maker raised its forecast. Chinese stocks slid as a money-market rate in China surged to the highest in almost six years, reflecting tight liquidity in the financial system.
4. Oil steadied amid surprisingly robust economic data from Europe, while the spread of a new Covid-19 variant and lockdowns raised concerns about the near-term recovery in fuel demand. West Texas Intermediate futures held above $52 a barrel after the biggest decline in almost a week on Thursday. Three of the euro area’s four largest economies — Germany, France and Spain — rounded off the pandemic year suggesting the region can avoid a deeper recession. The virus variant identified in South Africa has reached the U.S. just as Europe is set to tighten its rules on the export of vaccines. Stay-at-home orders to combat the spread of the disease have hit travel and crimped consumption of fuels from China to Los Angeles.
5. Mexico overtook India as the country with the third-highest number of fatalities after the U.S. and Brazil. The virus variant identified in South Africa reached the U.S. with two cases found in South Carolina. Brazil’s President Jair Bolsonaro said Covid will be with us forever. Struggling to keep up in the vaccination drive, the European Union is poised totighten rules on vaccine exports, while European Commission President Ursula von der Leyen slammed AstraZeneca Plc for cutting the number of doses it would deliver to the bloc in the first quarter. A new vaccine from Novavax Inc. was effective in big trials in the U.K. and South Africa, but its efficacy appeared to be reduced in South Africa where the mutation is prevalent.
6. Caterpillar Inc. fourth-quarter earnings beat analysts’ expectations as reopening economies stoked demand for its signature yellow machines. The company said it expects stronger year-over-year sales this quarter, led by construction industries. The world’s biggest maker of mining and construction equipment posted adjusted fourth-quarter earnings of $2.12 a share, according to a statement Friday. That compares with the $1.45 average of analysts’ estimates compiled Bloomberg. Sales also topped expectations, while still falling below a year earlier. Caterpillar’s stock is coming off its best quarter in three years in a bet on improving demand for machinery used in construction and infrastructure as economies recover from the coronavirus. A broad rebound in commodity markets may mean the return of customers in the metals and oil-exploration businesses after pandemic shutdowns crushed orders.
7. President Joe Biden and his top advisers have derided the Trump administration’s playbook for distributing coronavirus vaccines, but so far have made only modest changes to the plan that’s meeting their target pace of more than one million shots a day. Biden has said vaccine distribution was in “worse shape than we anticipated.” White House Chief of Staff Ron Klain said a Trump administration plan “did not really exist.” Adviser Cedric Richmond said they “didn’t leave a plan.” Xavier Becerra, Biden’s choice for health secretary, said it was like taking over a plane in a nosedive. But while Biden’s approach to the virus — frank warnings about the pandemic, mask mandates on federal property — is a reversal from Trump’s policies, his administration’s distribution of vaccines so far looks little different from that of its predecessor. Before Biden was sworn in, vaccines already were being delivered at a pace to meet his goal of 100 million doses in his first 100 days as president.
8. New York markets had just fired up, and the investing world was tuning in for Thursday’s episode of the continuing drama: Legions of Robinhood Markets investors versus hedge-fund Goliaths. But within minutes, a shock wave invisible to the outside world rattled the mechanics of Wall Street — sending Robinhood rushing for more than $1 billion of additional cash. The stock market’s central clearing hub had demanded large sums of collateral from brokerages including Robinhood that for weeks had facilitated spectacular jumps in shares such as GameStop Corp. The Silicon Valley venture with the wildly popular no-fee trading app came to a crossroads. It reined in the risk to itself by banning certain trades and unwinding client bets — igniting an outcry from customers and even U.S. political leaders. By that night, word was emerging that Robinhood had raised more than $1 billion from existing investors and drawn hundreds of millions more from bank credit lines to weather the storm.
9. British bootmaker Dr. Martens Plc jumped as much as 18% as it began to trade in London after owner Permira Holdings and other shareholders raised 1.3 billion pounds ($1.8 billion) in the U.K.’s largest domestic initial public offering since September. The shares climbed 17% to 432.10 pence at 8:08 a.m. in London from the IPO price of 370 pence. The IPO priced 350 million existing shares at the top end of an initial range, the company said in a statement Friday. It values Dr. Martens at 3.7 billion pounds, which is more than 10 times the 300 million pounds Permira paid for the bootmaker in 2014. Dr. Martens’ is the largest IPO in London by a U.K. company since online shopping emporium THG Plc raised 1.88 billion pounds ($2.4 billion) in September, according to data compiled by Bloomberg.
10. Singapore’s sovereign wealth fund, GIC, has agreed to buy a minority state in a unit of Duke Energy Corp., allowing the utility to forgo a plan to issue shares to raise capital. GIC will purchase a 19.9% stake in Duke’s Indiana unit for $2.05 billion, according to a statement Thursday. Proceeds will fund the utility owner’s increased $58 billion to $60 billion capital plan without having to raise $1 billion of common equity. North Carolina-based Duke will remain majority owner and sole operator of the unit. The deal will provide Duke with an infusion of cash just months after it rebuffed a takeover offer from NextEra Energy Inc., the world’s largest utility owner by market value. For the sovereign fund, the deal allows it to use its capital to speed the energy transition of a fossil fuel-heavy business.
11. Exchange-traded funds cut 198,898 troy ounces of gold from their holdings in the last trading session, bringing this year’s net purchases to 179,500 ounces, according to data compiled by Bloomberg. This was the third straight day of declines, the longest losing streak since Dec. 14. The sales were equivalent to $366.6 million at yesterday’s spot price. Total gold held by ETFs rose 0.2 percent this year to 106.9 million ounces. Gold declined 2.9 percent this year to $1,843.17 an ounce and remained little changed in the latest session. State Street’s SPDR Gold Shares, the biggest precious-metals ETF, pared its holdings by 140,637 ounces in the last session. The fund’s total of 37.4 million ounces has a market value of $69 billion.
12. A new Covid-19 vaccine from Novavax Inc. was effective in big trials in the U.K. and South Africa, though its protective power appeared to be reduced in South Africa, where a worrisome mutation is prevalent. The results indicated that another highly potent vaccine could soon be available to help ameliorate the pandemic, in addition to existing vaccines from Pfizer Inc., Moderna Inc., and AstraZeneca Plc that are authorized in various countries. But the South Africa results also suggested that the virus is starting to mutate in ways that could make vaccines less effective over time.
13. A raft of national GDP figures today for the fourth quarter revealed more resilience in the euro area economy than anticipated as lockdown restrictions tightened through 4Q. We had expected euro-area GDP to contract by 1.5% in 4Q, but these upside surprises point to a milder hit to activity. Even so, things will get worse in the first quarter before they get better. We see the spread of a new, more infectious and deadly variant of Covid-19 prompting longer and more restrictive lockdowns across the region.
14. The European Union is poised to ban Covid-19 vaccine exports if drugmakers fail to meet delivery targets within the bloc, stepping up its battle for doses as governments warn of shortages in the weeks ahead. The crisis is showing little sign of being resolved a week after AstraZeneca Plc warned that issues at a plant in Belgium mean deliveries this quarter will be less than half that initially planned. Countries are being forced to slow the rollout of inoculations, aggravating an already-sluggish pace across the EU.
15. South Korea-based SK Innovation is planning to build Europe’s largest battery plant in Hungary in what officials said was the biggest greenfield investment in the eastern European Union member’s history. SK Innovation will invest $2.3 billion in what will be its third battery plant in Hungary, Foreign Minister Peter Szijjarto said at a briefing on Friday. Construction will be completed in 2028, SK Innovation said in a statement. It said financing will be secured “externally according to its construction schedule.”
16. SoftBank Group Corp. priced 177 billion yen ($1.7 billion) of debt Friday in its first bond sale in more than a year, a deal that met with less investor demand than other similar notes sold this month. The Japanese technology conglomerate led by Masayoshi Son sold the hybrid securities at a maturity of 35 years with an option to be called after five years, and a coupon of 3%, according to Nomura Securities Co. The company had earlier boosted the size from an initial target of about 100 billion yen. SoftBank Group raised the deal size to capture virtually all the investor demand for the subordinated debt offering, with the issuance size being similar to total demand, according to an underwriter. Bids for the notes still lagged compared with other comparable securities priced recently. Mitsubishi Estate Co. garnered demand of 7.7 times this month for its subordinated offering.
17. The recent drop in short-term U.S. dollar borrowing costs pushed one of the world’s key borrowing benchmarks to a record low on Friday. The three-month London interbank offered rate for dollars was set at 0.20188%, below the previous nadir of 0.20488% reached on Nov. 20. The benchmark has fallen in all but one of the past nine trading days, weighed down as rates on Treasury bills and repurchase agreements have been pressed lower amid a glut of cash in short-term markets.
18. GameStop Corp. and other day-trader favorites surged back after Thursday’s tumble as brokerages said they would start to ease trading restrictions, setting the scene for another wild day on the markets. GameStop, the face of the retail craze that’s gripped Wall Street and drawn scrutiny from Washington, rallied as much as 143% and was up 98% at $383 as of 6:55 a.m. in New York. The heavily shorted video-game retailer plunged 44% in Thursday’s U.S. cash session. AMC Entertainment Holdings Inc. rose 55% in premarket after falling 57% on Thursday. The stocks rallied after Robinhood Markets Inc. said it would lift some trading restrictions that prevented legions of investors from buying shares that had been going straight up for days. The online brokerage said clients would be able to make limited purchases of some of the companies that it blocked, but did not provide further details.
19. Bitcoin surged above $38,000 after Tesla Inc. founder Elon Musk mentioned the cryptocurrency on his Twitter profile. Musk’s page on Twitter simply said #bitcoin with no further explanation, but speculation that the world’s richest man might be a Bitcoin investor was enough to set off a dramatic rally. Prices spiked as much as 15% in a matter of minutes, the biggest intraday move in almost a year. Bitcoin pared gains later in the London trading day. The cryptocurrency was up 11% to $37,088 as of 11:29 a.m. local time, after jumping as high as $38,089.
20. Chevron Corp. surprised analysts with a fourth-quarter loss as weak fuel demand slammed its refining business and the company incurred hefty charges from its takeover of Noble Energy Inc. The California oil titan lost a penny per share during the fourth quarter, compared with the Bloomberg Consensus for a 7-cent profit. Oil and natural gas production rebounded from the lowest in more than two years as the explorer assimilated fields acquired in the Noble deal and restarted wells briefly curtailed during last year’s crude-price collapse. In a harbinger for the rest of the oil industry, Chevron’s results evince the challenges facing energy producers battered by 2020’s pandemic-driven collapse in demand and prices. With commodity markets staging a broad rebound, the world’s biggest oil drillers can begin to wean themselves off debt and seek to rebuild their reputations with investors.
21. President Joe Biden has ordered the federal government to buy electric vehicles made in America with union labor. There’s just one problem: No such vehicles exist. Tesla Inc., the leading U.S. electric vehicle manufacturer, has several American-made models, but it isn’t unionized. And while General Motors Co.employs union labor to make the electric Chevrolet Bolt, roughly three-quarters of its components come from outside the U.S. — missing the 50% threshold to be considered American-made under federal procurement law. To be sure, Biden’s executive order, issued Wednesday, is designed to spur investment in the nascent plug-in car market and didn’t come with a deadline. So there’s time for automakers to adjust. Two of them — General Motors and Nissan Motor Co. — announced commitments this week to produce carbon-neutral fleets in coming decades. Ford Motor Co. has previously pledged to become carbon neutral by 2050.
22. Treasury Secretary Janet Yellen faces one more headache on an agenda packed with everything from Covid-19 relief to addressing inequality and overhauling tax policy: tensions over foreign-exchange intervention. The dollar has tumbled 13.1% from its high last March, thanks in part to historic moves by the Federal Reserve to pump liquidity into the financial system and pull down American borrowing costs. While policy makers abroad at first benefited from U.S. action to stave off a global credit crunch, the appreciation of their currencies more recently threatens to curtail their own recoveries. So from Europe to Thailand to Chile, officials have laid out plans for sustained intervention. For Yellen, who this month set herself apart from previous Democratic administrations by rejecting a return to a “strong dollar” policy, that could pose a challenge. The new Treasury chief just pledged to U.S. lawmakers she’d work on ways to “put effective pressure on countries that are intervening in the foreign exchange market to gain a trade advantage.”
23. “Food systems” is one of those abstractions that for years has been largely confined to academic and policy-making circles, but in the time of Covid-19 it’s renewed a very real debate around hunger and poverty. What essentially is a $10 trillion complex web of people and processes that ensure food travels from farm to fork is undergoing its greatest scrutiny yet. How to transform it has been a subject of all three food-focused panels at this year’s virtual Davos confab. You know something isn’t right when some 690 million people go hungry every day, healthy diets remain out of reach for billions — just as one-third of food goes wasted while obesity is on the rise. Then there is a huge environmental toll from food production and meeting future challenges of a growing global population and climate change. The pandemic further exacerbated the vulnerabilities, said David Beasley, the head of World Food Programme.
24. Ship congestion around the ports of Los Angeles and Long Beach hit an unprecedented level, worsening the bottleneck at the busiest gateway for U.S. imports. A record 38 container ships are awaiting berth space — 36 at anchor and two more that were directed to wait in designated areas at sea until anchorages are available, the Marine Exchange of Southern California said in a note late Thursday. It’s the first time since 2004 that so-called drift zones have been used to manage traffic into the neighbouring ports. Just how long it lasts hinges on whether the carriers maintain scheduled sailings to the U.S. or cancel some trips in coming weeks. The best-case scenario to relieve the pressure: a seasonal decline in shipments from Asia after Chinese New Year in mid-February.

“Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.” – Demosthenes

*All sources from Bloomberg unless otherwise specified