February 1, 2021

Daily Market Commentary

NEWS

Canadian Headlines

1. Corporate bond spreads widened last week for the first time in over a month, even as debt sales slowed down amid volatility in equity markets. The extra yield investors demand to hold Canadian dollar corporate bonds over government securities widened to 104.7 basis points Thursday compared to 101.3 basis points at the end of the previous week, according to Bloomberg Barclays indexes. The level backed up for the first time in five weeks as global equities slumped in a broad retreat after touching record highs earlier this month. Stocks plunged amid volatile retail trading and an uncertain outlook for coronavirus vaccine deployment.

World Headlines

1. European stocks gained Monday following their biggest weekly drop in three months as Reddit-fueled short squeezes spread to commodities, and there were signs of progress in the rollout of vaccines. The Stoxx Europe 600 Index climbed 0.8% at 9:49 a.m. in London, with natural resources stocks rising the most as silver became the target of retail traders. Precious metals miners Fresnillo Plc and Polymetal International Plc jumped 17% and 6.5%, respectively.
2. Global stocks and U.S. futures climbed as concern over volatile retail trading receded and China took steps to ease a cash crunch. Silver surpassed $30 an ounce for the first time since 2013 in a Reddit-fueled buying frenzy. Traders shook off concerns from last week’s selloff, the worst since October, and market strategists said the recent explosion of speculative retail buying won’t derail the bull market. Major drawdowns have usually occurred when there’s a worse outlook for growth, as well as signs of overvaluation beyond price-earnings ratios and credit spreads, JPMorgan Chase & Co. strategists led by John Normand wrote in a note Friday. Few markets show signs of extraordinary price momentum or excessive investor leverage, he said.
3. In China, a key cost of overnight borrowing fell from a five-year high, after the central bank extended credit for a second day to ease a cash crunch. The interbank repurchase rate slid about 55 basis points to 2.7795% on Monday, following a net 98 billion yuan ($15 billion) injection from the People’s Bank of China. The yuan weakened as much as 0.58% on Monday, the most since Nov. 4. The MSCI Asia Pacific Index added 1.7%, the biggest gain in three weeks.
4. Oil rose, following back-to-back weekly declines, as broader markets rallied. With headline prices largely range-bound over the past couple of weeks, the more significant market moves have been in the structure of the oil futures curve. Brent’s second-month contract is the most expensive versus a month later in more than a year. That formation — known as backwardation — has been growing in recent months and is a sign of market tightness. Keeping a lid on price gains, a Chinese purchasing managers’ index for manufacturing missed estimates in January, showing that efforts to rein in Covid-19 are affecting Asia’s largest economy. That compounded concerns that virus-related restrictions will stymie demand in the coming weeks. But with money flowing into commodities to hedge a price recovery as vaccines are rolled out, and with OPEC+ still restraining output, there are hopes that inventories will fall sharply this month.
5. Silver broke above $30 an ounce as the precious metal took center stage in the retail investor frenzy sweeping through markets. Most-active futures jumped as much as 13% to $30.35 an ounce on the Comex, the highest in eight years. That followed a weekend buying binge that overwhelmed online sellers of silver coins and bars from the U.S. to Australia. BlackRock Inc.’s iShares Silver Trust, the largest exchange-traded product tracking the metal, recorded an unprecedented $944 million net inflow on Friday.
6. Chancellor Angela Merkel will hold crisis talks with pharmaceutical executives, regional German leaders and European Commission officials Monday to speed up the continent’s stuttering vaccination push. In a shot of welcome news before the meeting, Bayer AG agreed to produce CureVac NV’s experimental coronavirus vaccine to help speed up the roll out of a promising shot. Meanwhile, Valneva SE, a French vaccine developer, said the U.K. government exercised an option to order 40 million extra doses of its shot for next year. Infections continued to show a slowing trend across many regions of the globe, including the U.S., though concerns remain about new variants. Italy will ease restrictions for most of the country starting Monday.
7. President Joe Biden and Democratic congressional leaders must decide whether to break the administration’s $1.9 trillion Covid-19 relief proposal into pieces after a scaled-down Republican plan emerged. The $600 billion GOP proposal offered to the president by 10 Republican senators on Sunday provides the potential to move a bipartisan bill that includes components from the Biden proposal, including funding for coronavirus vaccines and testing, and unemployment assistance. Democrats could still aim to enact the president’s other items, such as state and local government aid and a minimum-wage increase, separately — although they could lose the leverage that attachment to more direct Covid-19 aid funding would provide.
8. Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the 13th 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 $1.17 billion in the week ended Jan. 29, compared with gains of $459.5 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $7.25 billion.
9. Tilman Fertitta is taking his restaurant and casino empire public again through a merger with a special purpose acquisition company that values his Fertitta Entertainment Inc. at $6.6 billion, including debt. Fertitta is combining his closely held Houston-based business with Fast Acquisition Corp., a shell company taken public last year by fellow restaurateurs Sandy Beall and Doug Jacob. Bloomberg News reported earlier that the deal was in the works. Fast Acquisition surged as much as 49% in premarket trading Monday and was up 22% to $12.90 at 7:28 a.m. in New York. Institutional investors have agreed to invest an additional $1.2 billion for a roughly 35% stake in the business. Those investors include Fidelity Investments, BlackRock Inc. and Neuberger Berman, according to people familiar with the deal, who asked not to be named because the investors haven’t been made public.
10. BP Plc will sell a stake in an Omani gas block to Thailand’s national energy firm for $2.6 billion, part of a push to divest billions of dollars of assets and focus more on renewable energy. PTT Exploration and Production Public Co. Ltd. has agreed to pay the sum for 20% of Block 61, according to statements from both companies on Monday. The deal should help BP deliver on its goal of selling $25 billion of assets by 2025, easing its debt burden after the coronavirus pandemic hammered demand for energy. Like other oil majors, the company has also pledged to eliminate most of its greenhouse gas emissions over the coming decades.
11. Institutional investors are buying Kuaishou Technology’s Hong Kong shares before its Friday debut at a significant premium to the listing price, underscoring the high level of demand for the world’s biggest internet initial public offering in two years. Some trades were executed for HK$250 apiece in gray-market trading Monday, according to people familiar with the matter, who asked not to be identified as they are not authorized to speak to the media. That’s more than double the listing price of HK$115 and a bigger premium than the 50% jump on Ant Group Co.’s planned Hong Kong offering before it was scrapped.
12. Sequoia Capital and Singapore sovereign fund GIC Pte are among investors that agreed to buy a stake in clinical research and testing provider Novotech Pty from TPG, people with knowledge of the matter said. Kaiser Foundation Hospitals also plans to invest in Novotech, according to the people, who asked not to be identified because the information is private. TPG is selling more than 10% of Novotech in a transaction valuing the company at over $2.3 billion, said Joel Thickins, head of Australia and New Zealand for TPG Capital Asia. The clinical research firm is preparing for an initial public offering in Hong Kong later this year, said Thickins, who is also chairman of Novotech. The valuation makes the company one of the most successful investments for the private equity group in Asia, he said.
13. Exchange-traded funds cut 85,285 troy ounces of gold from their holdings in the last trading session, bringing this year’s net purchases to 94,214 ounces, according to data compiled by Bloomberg. This was the fourth straight day of declines, the longest losing streak since Dec. 14. The sales were equivalent to $157.6 million at the previous spot price. Total gold held by ETFs rose 0.1 percent this year to 106.8 million ounces. Gold declined 2.7 percent this year to $1,847.65 an ounce and rose by 0.2 percent in the latest session. State Street’s SPDR Gold Shares, the biggest precious-metals ETF, pared its holdings by 150,012 ounces in the last session. The fund’s total of 37.3 million ounces has a market value of $68.9 billion. ETFs also cut 3.95 million troy ounces of silver from their holdings in the last trading session, bringing this year’s net purchases to 17.6 million ounces. This was the biggest one-day decrease since Nov. 25 and the third straight day of declines.
14. Iran said the U.S. has to remove key economic sanctions and return to full compliance with the 2015 nuclear deal before any talks on resetting the Islamic Republic’s atomic program. The U.S. “cannot return to the nuclear accord with one signature in the way that they left with one,” Foreign Ministry spokesman Saeed Khatibzadeh said in a press conference in Tehran on Monday. The statement is a clear signal to the Biden administration that Iran expects relief from sanctions, and the full restoration of the United Nations resolution that underpins the deal, before it starts scaling back its nuclear activities. It also illustrates the major gulf between the longtime rivals. Last week, new Secretary of State Anthony Blinken said Iran needs to act first and any U.S. return to the accord may take a while.
15. Parcel locker company InPost SA has clinched a five-year deal with Amazon Inc. as the U.S. giant enters Poland’s revved up $19 billion e-commerce market. Fresh from last week’s successful initial public offering, InPost Chief Executive Officer Rafal Brzoska revealed the contract in an interview with Bloomberg. The Amsterdam-listed company will handle some Amazon deliveries in Poland through its network of automated lockers as well as directly to homes, he said. The deal, which doesn’t cover shipments abroad, will help maintain InPost’s revenues if Amazon eats into the dominant position of Allegro.eu SA, the east European country’s e-commerce leader and the biggest client for its parcel lockers. The Polish company is boosting capacity to accommodate what it expects to be a gradual ramp-up of operations by the U.S. giant.
16. Horizon Therapeutics Plc said it will purchase Viela Bio Inc. for about $3.1 billion to gain experimental treatments for rare diseases. Horizon will acquire all of Viela Bio’s issued and outstanding shares, paying $53 a share, according to a statement Monday, a 53% premium over Viela’s closing share price Friday. The transaction is expected to close by the end of the first quarter of 2021. British drugmaker AstraZeneca Plc agreed to divest its 27% interest in Viela Bio, for which it will receive proceeds and profit of about $760 million to $780 million, according to a separate statement.
17. Early buyers of Ukraine’s growth-linked warrants could be looking at a dividend generous enough to cover the full cost of their investment — with two decades still to go until maturity. Holders of the credit derivatives, which make a payout if Ukraine’s gross domestic product surpasses certain thresholds, may receive as much as 35 cents for each note if the rebound from an economic slump proves as swift as some analysts forecast, according to Vitaliy Sivach, a Kyiv-based bond trader at Investment Capital Ukraine. That would amount to a $1 billion windfall, payable in 2023 based on this year’s economic growth, and could further boost the warrants’ reputation as a quirky debt instrument promising outsize returns. The notes aren’t part of traditional bond indexes but have garnered a following among funds looking for riskier bets.
18. India will embark upon a new 3.06 trillion rupee ($42 billion) plan to revive loss-making electricity distributors after an earlier program started in 2015 failed to meet its goal to make them profitable. The new plan, unveiled by finance minister Nirmala Sitharaman in her budget speech on Monday, seeks to reduce losses at mostly state-run provincial power distributors whose poor financial health has plagued the industry for decades. Prime Minister Narendra Modi’s government plans to invest in upgrading supply systems, installing smart prepaid meters and separating supply lines for subsidized and non-subsidized customers, unlike in 2015 when it focused mostly on reducing the debt. The measures are aimed at boosting the financial viability of the retailers, Sitharaman said. The allocations will be made over five years and will be linked to the utilities meeting improvement targets.
19. Robinhood Markets Inc. reduced the number of companies with trading restrictions to eight from 50, ahead of Monday’s trading session, according to an update on its website. The current list includes GameStop Corp., AMC Entertainment Holdings Inc., BlackBerry Ltd., Express Inc., Genius Brands International Inc., Koss Corp., Naked Brand Group Ltd. and Nokia Oyj. Opening new positions in these securities is limited, according to Robinhood’s website, which listed the maximum number of shares and options contracts each user can hold. For those whose current holdings already exceed the limits, their positions won’t be sold or closed.
20. It is heresy in economic circles nowadays to talk about raising interest rates. With the virus still raging and economies still sputtering, rates need to be held at record lows for a long, long time, according to consensus thinking all over the globe. Except in Brazil. Traders there are frantically driving up interest-rate futures in anticipation that policy makers will lift the 2% benchmark rate next month. Encouraged by debate among central bankers themselves about how soon to tighten monetary policy, traders have determined that at a minimum the Selic rate will be raised by a quarter point in March, and maybe even as much as a half point. Either way, an increase would put Brazil in very rare territory. Central bankers in only one major economy in the world — Turkey — have lifted rates since the pandemic began. Like in Turkey, Brazil is grappling with concerns that are absent in most other countries: the possibility that inflation will surge after declines in the currency drove up the cost of imported goods. The real, down 23%, and the lira, down 19%, are two of the world’s worst-performing currencies over the past year.
21. Even within President Joe Biden’s White House, there’s debate about how to meet his promise to issue Americans another $1,400 each in stimulus checks. At least two of the president’s top economic advisers, Heather Boushey and David Kamin, have privately expressed reservations about the size of the checks and at what level they would begin to phase out for higher-income people, according to three people familiar with internal discussions. The aides worry that the checks will cost so much that there won’t be enough left over in Biden’s proposed pandemic relief bill for other priorities — supplemental unemployment benefits, an expanded child tax credit, or aid to states and local governments, the people said.
22. Thousands of U.S. health-care workers are still seeking Covid-19 vaccinations even as states and cities open eligibility to people far removed from the pandemic’s front line. Since Pfizer Inc./BioNTech and Moderna Inc. vaccine shipments began nationally in mid-December, the priority has been doctors, nurses and other professionals likely to come in contact with the novel coronavirus. But those unaffiliated with hospitals and major health systems — including private-practice physicians, dentists and therapists — say they’re being overlooked. Pediatrician David Berger, with a practice in Tampa, Florida, said his patients include babies and many children with autism who have a hard time wearing masks. Still, he couldn’t snag a vaccine appointment until Jan. 15, a month after Florida made them available. He said his physician’s assistant, who “sees more sick kids than I do,” had yet to find a slot as of Sunday.
23. The semiconductor industry grew 6.5% in 2020, fueled by demand for technology to support work and study from home in the pandemic, according to new figures from the Semiconductor Industry Association. Total sales were $439 billion, the SIA said in a statement. China was again the largest consumer of the electronic components, with its market growing 5% to $152 billion. The Americas region surged 20% to $94 billion. Sales into Europe dropped 6%. Semiconductor makers benefitted from employers and parents buying laptops and other devices for remote work. Beneath that positive trend, though, geopolitical fissures continued to stress the global technology supply chain.
24. Risks related to climate change and social issues will intensify the most in the next two years, finance executives predicted in a survey, and firms will have to find ways to cope. Environmental, social and governance issues topped the list of risk managers’ concerns in a Deloitte poll to be released on Monday, followed by cybersecurity and credit matters. More than half of the 57 firms surveyed were banks while the rest were in insurers, asset managers and other financial-services providers. Among the first things new U.S. President Joe Biden did was rejoin the Paris climate agreement. Last week, the main banking regulator froze a rule that would require firms to do business with companies such as oil drillers and gun manufacturers that they might avoid because of perceived reputational risk. The largest banks have committed billions of dollars to help racial minorities after nationwide protests last year rekindled awareness of systemic oppression.
25. The U.S. Air Force has set aside $336 million in development payments from Boeing Co. and is doling out the funds over time as the contractor shows progress in fixing the flawed camera system on its KC-46 tanker plane. It’s a new tactic after years of frustration at the Pentagon over persistent problems with the $44 billion tanker program that Boeing was awarded in 2011. So far, $135 million of the previously undisclosed set-aside has been released, according to the service.

“It is impossible for a man to learn what he thinks he already knows.” – Epictetus

*All sources from Bloomberg unless otherwise specified