July 18th, 2019

Daily Market Commentary

  • Canadian Headlines
    • Canadian stocks fell for a second day — and the fourth in the past five — on Wednesday, as sinking industrials dragged down the benchmark. Energy and consumer discretionary shares also lost ground, as the S&P/TSX Composite Index declined by 0.1% to 16,484.21 in Toronto. Health-care shares were the biggest gainers, fueled by Curaleaf Holdings Inc. announcing a plan to buy Chicago-based Grassroots Cannabis in a cash and stock deal valued at about $875 million. Additionally, Supreme Cannabis Co. entered into a definitive agreement to buy privately held Truverra Inc. for about C$20 million.
    • Group of Seven finance chiefs acknowledged gathering threats to the global economy and gave a cautious pledge to provide fiscal support if those dangers materialize. After a two-day meeting in Chantilly, France, finance ministers and central bankers declared risks for the global economy remain “tilted to the downside,” even if growth is stabilizing and there should be a moderate pickup next year. That’s a later timeline for improvement than envisioned at the Group of 20 summit in Osaka last month. “Fiscal policy should be flexible and growth-friendly, while rebuilding buffers where needed,” according to a summary of the talks prepared by the French G-7 presidency. “Monetary policy will continue to support economic activity, while remaining mindful of financial stability and recognizing that monetary policy alone cannot address all economic challenges.”
    • Timbercreek Asset Management Inc., a Canadian real estate investment firm, plans to more than double its exposure to publicly listed companies amid an increasingly competitive private market. Timbercreek aims to grow its global real estate investment trust portfolio to C$5 billion ($3.8 billion) from just over C$2 billion, prompted by an inflow of capital from pension funds and institutional investors who are looking for better returns in markets like the U.S., Europe, Hong Kong and Japan.
    • Canadian natural gas producers are asking Alberta’s government to give drillers a break on their royalty payments in return for cutting back output during periods of heavy pipeline maintenance, a bid to smooth out the province’s volatile gas market. That would give producers an incentive to dial back their output when capacity on TC Energy Corp.’s Nova Gas Transmission Ltd. pipeline system, which moves gas around and out of Alberta, is reduced due to regular maintenance or work on its expansion, according to executives involved in the talks. Without such an incentive, drillers often continue to push gas into the system despite the reduced capacity, resulting in volatile and low prices, they said.
    • Aurora Cannabis will supply a minimum of 400 kg of medical cannabis over the two-year contract as the sole company selected in the Italian government’s tender.

     

  • World Headlines
    • The Stoxx Europe 600 fluctuated after earlier declines on disappointing results from German software giant SAP, U.K. fashion retailer Asos and Nordea Bank. The pound rose on hopes for a Brexit compromise stemming from a new Irish border plan, while the yen was steady after earlier rallying amid reports of fresh trade tensions between Japan and South Korea. A gauge of the dollar was little changed.
    • U.S. equity futures and European stocks trimmed an earlier drop as investors weighed the latest corporate earnings along with the outlook for global trade. Treasuries edged down. Contracts on the S&P 500 and Nasdaq indexes were modestly lower after Netflix Inc.’s surprise loss of U.S. customers last quarter sent its shares plunging in pre-market trading. With less than two weeks before the Federal Reserve’s policy meeting at which investors expect an interest-rate cut, the central bank’s anecdotal Beige Book report yesterday suggested the outlook was generally positive and the labor market remains tight. Yet companies are still struggling to pass on higher wages and tariff-related costs to customers, and the start of earnings season hasn’t improved sentiment.
    • Equities fell across Asia, led by a 2.1% slump in Tokyo amid reports that Canon Inc. operating profit could slump this year. WTI oil headed for its first advance this week, climbing above $57 a barrel in New York. Investors betting on rate cuts in Asia were proven right on Thursday, as central banks in South Korea and Indonesia lowered benchmarks. Both countries’ currencies strengthened modestly. That’s after similar moves by central banks in Malaysia, India and the Philippines.
    • Oil extended gains after Iran confirmed it had seized a foreign oil tanker in the Persian Gulf earlier this week. Brent crude gained as much as 1.3%, reversing some of the heavy losses the global benchmark suffered in the previous two sessions. Iran’s Revolutionary Guards said it captured a foreign vessel on July 14 alleged to be smuggling 1 million liters of fuel in the Persian Gulf, according to state-run Press TV news channel. It was unclear whether the report was referring to the Riah, a small ship that entered Iranian waters and stopped transmitting its location around the same time.
    • Gold pulled back from a near six-year high as investors weighed the scale of expected interest rate cuts by the Federal Reserve. Silversurged to the highest in five months. The Fed is widely expected to reduce rates at its July 30-31 meeting, on the heels of dovish moves from central banks in Asia this week and potential easing from the European Central Bank next week. Still, a handful of regional Fed presidents appear uneasy about cutting rates while their baseline economic outlook remains solid. The Fed’s Beige Book economic report Wednesday showed the economy expanded at a modest pace.
    • As Microsoft Corp.’s popular Windows 7 software nears its expiration date, the company is funneling corporate customers toward a subscription-based package of products rather than a simple renewal, boosting revenue even as personal-computer growth stagnates. The Redmond, Washington-based company reports earnings late Thursday, and results are expected to get a lift from Microsoft 365, a cloud-based bundle of the Windows 10 operating system, versions of Office productivity software, and security programs — the products Microsoft’s business clients want to have for every worker.
    • Last Christmas may have been a let down, but American shoppers are finally warmed up just in time for back-to-school spending. U.S. outlays this summer will rise 5.1% — the most in eight years — as wage gains and near-peak employment translate to higher sales, retail research firm Customer Growth Partners estimates. Americans will spend a record $616 billion this year, accelerating from last year’s growth of 4.5%.
    • As negative yields engulf everything from Brazil’s state oil company to Hungarian sovereign debt to euro junk, investors are seeking refuge in high-yield bond ETFs. Europe-listed funds have attracted over 5 billion euros ($5.6 billion) since January, more than in any full year going back to at least 2010, according to data compiled by Bloomberg Intelligence. The largest exchange-traded fund tracking the debt — BlackRock Inc.’s 8.5 billion-euro IHYG — took in 640 million euros in the week ended July 5, smashing a record it set just two weeks before, the data show.
    • Netflix Inc. shocked investors by reporting a drop in U.S. customers and much slower growth overseas, raising fears that the streaming giant is losing momentum just as competitors prepare to pounce. The shares plunged 11% to about $323 in pre-market U.S. trading after Netflix reported the loss of 130,000 customers in the U.S. — the result of higher prices and a weak slate of TV shows. It signed up 2.8 million subscribers internationally in the period, roughly half what the company predicted. “Netflix has a difficult road ahead, with looming competition and the removal of popular content,” said EMarketer Inc. analyst Eric Haggstrom. But a stronger lineup of new shows in the current quarter could help attract former subscribers, he said.
    • Slow progress on key initial demands from Presidents Donald Trump and Xi Jinping is raising doubts about whether the U.S. and China will actually return to the negotiating table to overcome their much deeper differences. Trump complained again this week that China wasn’t buying the large volumes of U.S. agricultural goods that he claims Xi promised to purchase. Meanwhile, there’s been no improvement in how the U.S. treats telecommunications giant Huawei Technologies Co., a key demand of China. With the conflict dragging on, reaching a comprehensive trade deal as Trump gears up for re-election next year increasingly seems like a remote possibility, according to people familiar with the matter, who spoke on the condition of anonymity.
    • The pound rallied as comments by the European Union’s chief negotiator rekindled hopes that a compromise may be found over the Irish border, which has been a major hurdle in breaking the Brexit deadlock. Sterling advanced for a second day after Michel Barnier said he was open to an alternative plan for the border, though he cautioned there would be no easy solutions. The currency extended its gains after retail sales in the U.K. for June came in better than forecast and as U.S. traders arriving at their desks at the New York open took the Barnier comments positively.
    • Japan’s Government Pension Investment Fund has room to invest $26 billion in domestic stocks to keep holdings near its portfolio target, according to JPMorgan Chase & Co. The world’s largest pension fund’s holdings of Japanese stocks fell to 23.6% of assets at the end of March, the lowest since March 2017. The weighting may have dropped to 23.3% as of July 5, meaning it can buy about 2.8 trillion yen ($26 billion) in shares if it rebalances in line with its target, according to JPMorgan’s securities unit in Japan.
    • EasyJet Plc said a surge in late leisure bookings is lifting ticket prices, aided by a cooler summer in the U.K. and northern Europe. Revenue per seat, which reflects fares, is higher and sales for the three months through June rose 11% from a year ago, Luton, England-based EasyJet said in a statement Thursday. A drop in flight cancellations has cut costs and new analytics are helping it set fares at more profitable levels.
    • TDR Capital, the private equity firm that owns the Stonegate Pub Co., agreed to buy the U.K.’s EI Group Plc for about 1.3 billion pounds ($1.6 billion) in cash. EI Group holders will get 285 pence a share, Stonegate said in a statement. That’s a 38% premium to Wednesday’s close. The stock surged as much as 40% to 289 pence in London trading on Thursday after Bloomberg reported the takeover talks. The combination makes strategic sense because the two companies have complementary portfolios and skills, EI Group Chairman Robert Walker said in the statement. TDR’s pubs include the Slug & Lettuce, Yates and Walkabout chains. The deal is the second take-private for London-based TDR in a month after it agreed to buy U.K. online used-car seller BCA Marketplace Plc at the end of June.
    • The U.S. is preparing to send 500 troops to Saudi Arabia in response to rising tensions with Iran, CNN reported, citing unidentified defense officials. They will be based at the Prince Sultan air base and are part of the additional 1,000 troops the Pentagon announced last month it was sending to the Middle East, CNN said. The U.S. chose the base because security assessments show it would be a difficult target for Iranian missiles, it said.
    • Vodafone Idea Ltd. has hired Bank of America Corp. and Morgan Stanley to help sell its fiber assets as India’s largest mobile carrier by users seeks to bolster its finances, people familiar with the matter said. The bankers will initiate discussions with potential buyers for the fiber assets, which could be valued at as much as 130 billion rupees ($1.9 billion), the people said, asking not be identified as the talks are private. A final decision has yet to be made on the valuation and the stake to be sold, and the company could bring in more banks for the sale, the people said. Representatives for Vodafone Idea and Morgan Stanley declined to comment, while a Bank of America spokesman didn’t immediately respond to requests for comments.
    • Kinder Morgan Inc. said its $2 billion Elba Island liquefied natural gas project in Georgia, which is about a year late, is in advanced stages of the commissioning and startup process, but didn’t provide a time frame for the beginning of production. Its Gulf Coast Express gas line linking the Permian shale basin to the U.S. Gulf Coast, on the other hand, is “slightly” ahead of its Oct. 1 in-service date, according to an earnings statement released after the market closed Wednesday. The project should be in full service in the last seven to 10 days of September, Chief Executive Officer Steve Kean said during a conference call.
    • Iran is capable of shutting the Strait of Hormuz — a crucial choke-point for oil flows — but doesn’t want to do it, the country’s foreign minister said. “We certainly have the ability to do it, but we certainly don’t want to do it because the Strait of Hormuz and the Persian Gulf are our lifeline,” Mohammad Javad Zarif said Wednesday in an interview with Bloomberg Television in New York. “It has to be secured. We play a big role in securing it, but it has to be secure for everybody.”
    • Indonesia’s central bank cut its benchmark interest rate for the first time in almost two years and pledged more easing to come as it shifts focus to supporting growth in Southeast Asia’s biggest economy. The seven-day reverse repurchase rate was lowered by 25 basis points to 5.75% on Thursday, in line with the forecasts of most economists surveyed by Bloomberg. The decision came hours after a similar move from South Korea’s central bank and after dovish signals from the Federal Reserve that it will cut interest rates for the first time in a decade in July. It underscores central bankers’ concerns about a worsening global economy and mounting trade tensions.
    • Japan’s liquefied natural gas imports in the first half of the year dropped to the lowest since the 2011 Fukushima nuclear disaster as reactor restarts and mild weather cut demand for the fuel. The world’s biggest buyer of LNG purchased 38.59 million tons in January-June, down 8.2% from the same period last year, the biggest semi-annual drop since 2009, according to preliminary data from the Ministry of Finance. The slump in imports comes amid an uptick in atomic and renewable output, and as mild summer temperatures limit seasonal demand.
    • Toshiba Memory Corp., the world’s second-largest memory chipmaker that was spun out of its parent last year, is changing its name to Kioxia as it gears up for an initial public offering. By taking a new name, the semiconductor company is marking a clean break from its roots as a unit of Toshiba Corp., which retained a 40% stake after selling it to a group led by Bain Capital. Kioxia is an invented word that combines the Japanese word for memory — kioku — and axia, the Greek term for value. The new moniker takes effect Oct. 1 under the full name Kioxia Holdings Corp.

*All sources from Bloomberg unless otherwise specified