January 7th, 2019
Daily Market Commentary
· After a wild year for the cannabis sector, it’s appropriate that 2019 kicks off with a focus on Aphria Inc., the Canadian pot producer that was attacked by short sellers and is now the target of a hostile takeover bid. Aphria reports results for the fiscal second quarter on Jan. 11, and there will undoubtedly be plenty of questions on the conference call about the allegations from short sellers that it overpaid for “worthless” assets in Latin America. Aphria called the claims by Quintessential Capital Management and Hindenburg Research “malicious and self-serving.”
· Contracts on the S&P 500 and Nasdaq indexes edged lower and the Stoxx Europe 600 Index dropped for the third time in four sessions. In Asia, shares in Japan led a broad rally. Treasury yields fell following a surge on Friday. Fresh talks between the U.S. and China helped sap demand for the greenback, while the pound slipped against the euro as U.K. lawmakers sought to avoid a no-deal Brexit. The common currency remained solidly up even as data showed German factory orders fell more than expected in November.
· U.S. stocks were set to extend gains after Federal Reserve Chairman Jerome Powell signaled the latest market turbulence will keep the central bank in a dovish stance. Futures contracts on the S&P 500 Index expiring in March rose as much as 0.8 percent after the underlying gauge had it’s best gain in over a week on Friday. Futures contracts on the Dow Jones Industrial Average and Nasdaq 100 climbed as much as 1 percent each.
· It’s the start of the first full week of stocks trading in Asia for 2019, and optimism is in the air — about $304 billion of confidence to be precise. With a sea of green in markets across the region, the MSCI Asia Pacific Index rallied as much as 2.1 percent Monday, eking out its first hint of gains for the new year. Japan’s Topix index surged 2.8 percent, and Taiwan was next in line with a 2.2 percent climb.
· Oil headed for its longest stretch of daily increases in more than 17 months as the U.S. Federal Reserve sought to soothe investor concerns, China moved to stimulate its economy and OPEC production cutbacks took effect. Futures in New York rose as much as 3.2 percent after a fifth consecutive gain on Friday, when they settled at the highest closing level in two weeks. Crude is rising with other risk assets after Fed Chairman Jerome Powell said the central bank could pause interest-rate increases if the U.S. economy weakens. Data last week showed OPEC is following through on pledges to cut output.
· Spot gold gained as the dollar edged lower and China added to its reserves of the yellow metal for the first time in more than two years. Other precious metals also rose, with palladium and platinum building on Friday’s rally that saw palladium climb to a fresh record. The gains come against a backdrop of the possibility of a slower pace of U.S. rate hikes following Federal Reserve Chairman’s Jerome Powell’s speech last week.
· German factory orders fell more than expected in November, though the numbers were distorted by airplane orders that masked signs of underlying momentum. Orders slid 1 percent from October, and posted a year-on-year decline of 4.3 percent, the biggest in more than six years. The monthly decline was partly due to aircraft orders, which had jumped in October, as well as weakness in the euro area. While there are questions over the outlook for the German economy, the euro area’s biggest, the Bundesbank has long expressed confidence that it will overcome the slump seen in mid-2018. Responding to the factory data on Monday, Commerzbank said the decline “should not be over interpreted.”
· China’s yuan headed for its strongest level against the dollar in a month, unperturbed by the central bank’s monetary easing as the country’s economy slows. The Chinese currency climbed as much as 0.4 percent, the most since Dec. 4, to 6.8436 per dollar, taking its advance since mid-December to almost 1 percent. The greenback, meanwhile, is on the decline against most currencies, falling to a more than two-month low Monday on signs the Federal Reserve may pause interest-rate increases.
· Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the 12th 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 $1.39 billion in the week ended Jan. 4, compared with gains of $231.9 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $1.33 billion.
· Singapore state investment firm Temasek Holdings Pte is exploring options for its stake in global retailer A.S. Watson Group, including a partial sale, people with knowledge of the matter said. Temasek is working with an adviser to consider possibilities for its 25 percent holding in A.S. Watson after receiving some preliminary interest, according to the people, who asked not to be identified because the information is private. It bought the stake in A.S. Watson, which is a unit of Hong Kong tycoon Victor Li’s CK Hutchison Holdings Ltd., for HK$44 billion ($5.6 billion) in 2014.
· Eli Lilly & Co. agreed to buy Loxo Oncology Inc. for about $8 billion in cash in the first major deal by new Chief Executive Officer Dave Ricks. Deal for $235 per share seals Lilly’s commitment to oncology, which has become the Indianapolis-based drugmaker’s predominant area in drug development. The offer represents a premium of about 68% to Loxo’s closing stock price on Jan. 4.
· Senator Elizabeth Warren’s first trip to Iowa as a likely presidential candidate highlighted her fiery anti-Wall Street populism and could set the tone for the sprawling field of Democrats expected to jockey for the right to challenge President Donald Trump in 2020. Warren’s critiques of Wall Street’s political influence struck a chord with many of the Iowans who came to see her, 13 months ahead of the Iowa caucuses that formally kick off the nomination race.
· If recent history is any guide, federal contractors could be out more than $200 million a day in lost or delayed revenue from the partial government shutdown, based on data compiled by Bloomberg. The companies run the gamut, from businesses that provide upgrades to flight communications and air traffic systems, to producers of anti-malarial and HIV medicines in Africa, to operators of government cafeterias. Since Dec. 22, thirteen major federal departments and agencies have closed as Republicans and Democrats argue over whether Congress should provide President Donald Trump with money to build a wall along the U.S. border with Mexico. Those agencies have mostly stopped awarding new money for contracts.
· In weighing a bankruptcy, power giant PG&E Corp. may be firing a warning shot to California lawmakers: Help us or watch the largest utility in your state go insolvent. The company is considering whether to file for bankruptcy protection as soon as February to organize the billions of dollars in potential liabilities from wildfires its equipment may have ignited, people familiar with the situation said Friday. The filing isn’t certain, the people said, but it may be enough to force the hand of state legislators who could come up with a rescue package. The shares were down about 19 percent in pre-market trading.
· Chinese Vice Premier Liu He unexpectedly attended the first day of talks aimed at resolving the trade dispute between the world’s two biggest economies, according to people familiar with the matter and a photo seen by Bloomberg. Liu is the top economic adviser to Chinese President Xi Jinping, who led previous negotiations in Washington that produced a deal that President Donald Trump then repudiated. China had previously said the talks would be led by a lower-ranking official from the Ministry of Commerce.
· The bank at the center of Europe’s biggest money laundering scandal will test the market’s interest in its debt this week. On Monday, Danske Bank A/S will start talking to investors in the U.S. and Europe about selling them non-preferred senior notes. Danske plans to issue as much as 40 billion kroner ($6.1 billion) in the securities in 2019. It’s a major chunk of the bank’s total funding plan of up to roughly $12 billion for the year, Christoffer Mollenbach, head of treasury, said in an interview.
· Indian stocks gained, joining peers across Asia, after comments by the U.S. Federal Reserve chief eased concerns of a tighter policy path, and on renewed appetite for riskier emerging-market assets. The S&P BSE Sensex climbed 0.4 percent to 35,850.16 in Mumbai after dropping 1.1 percent last week. The NSE Nifty 50 Index also advanced 0.4 percent.
· After a hiatus of more than two years, China is adding to its gold reserves again. The People’s Bank of China increased holdings to 59.56 million ounces by the end of December, or about 1,853 metric tons, from 59.24 million ounces previously, according to data on the central bank’s website. They had been unchanged since about 130,000 ounces were added in October 2016.
· Goldman Sachs Group Inc. chopped back its near-term metals forecasts as China’s economy has “decelerated notably,” while balancing that outlook with a prediction mainland policy makers will respond by stoking expansion in the second half, aiding a revival in copper and aluminum. The bank — which had been consistently bullish on raw materials heading into 2019 — now sees copper at $6,100 a metric ton in three months and $6,400 in six, down from earlier forecasts of $6,500 and $7,000, according to an emailed report received on Monday. The 12-month target was held at $7,000.
· Commodities took a kicking in 2018 — with deep losses in everything from oil and copper to coffee and sugar — so what’s in store for the 12 months to come? The inaugural What to Watch of the year offers a selective run through of prospects and pitfalls for some of the top raw materials, and it’s a reasonably positive picture that emerges. That road map comes ahead of a busy period. The U.S.-China trade fight will be in focus this week, with a U.S. delegation in Beijing for talks from Monday. In addition, there’ll be more pointers on the macroeconomic outlook, with the World Bank updating its Global Economic Prospects report on Tuesday and a speech from Federal Reserve Chairman Jerome Powell on Thursday. Investors will also be tracking the U.S. government shutdown as disruption drags on.
· Sears Holdings Corp. is preparing for the potential that this year will be its last. The storied retailer started laying the groundwork for a liquidation after Chairman Eddie Lampert’s bid to buy several hundred stores out of bankruptcy fell short of bankers’ qualifications, people with knowledge of the matter said. Sears representatives summoned liquidation firms and other advisers to emergency meetings on Friday after rejecting Lampert’s $4.4 billion bid to buy and operate Sears stores, said the people, who asked not to be identified because the discussions were private. Sears would now focus on preparing for liquidation sales to begin as early as mid-month, they said.
· Canyon Capital Advisors plans to vote against Rowan Cos. Plc’s $2.4 billion sale to Ensco Plc on the grounds that the all-stock deal undervalues Rowan and exposes its shareholders to operational and financial risks. Rowan investors would be better served if the offshore oil-rig operator ran a competitive sale process that resulted in the company being sold for a higher price or broken up and sold in parts, Canyon said in a letter to Rowan’s board dated Jan. 4 that was obtained by Bloomberg.
*All sources from Bloomberg unless otherwise specified