July 21, 2021

Daily Market Commentary

Canadian Headlines

• Canadian equity markets gained on Tuesday as investors bought the recent dips in stocks, led by health care companies. The S&P/TSX Composite index rose 1.1%, after falling 1.3% on Monday. All of the sectors were in the green, with health care and tech stocks leading the outperformance. In the oil patch, seven Canadian natural gas producers are teaming up with a West Coast Indigenous group to propose a new liquefied natural gas facility for British Columbia’s coastal waters, after years of failed industry efforts to make such projects a reality.
• Canadian National Railway Co. is cashing in on a commodities boom that’s fueling demand for exports from Canada. Strong orders for goods such as metals, lumber and oil gave Canada’s largest railway a boost in the second quarter, with total freight revenue jumping 14% from a year earlier. That helped the Montreal-based company post profit that was almost double that of a year ago, when the Covid-19 pandemic took hold. The positive earnings report came as the company pursues a takeover of Kansas City Southern. It’s awaiting a decision by the Surface Transportation Board that will determine whether it can proceed with a deal.

World Headlines

• European stocks gained for a second day as a volley of better-than-expected results helped calm nerves over the delta variant of Covid-19 that sparked a selloff at the start of the week. The Stoxx Europe 600 Index was up 1.3% by 11:03 a.m. in London after at least 14 index members beat analysts’ earnings estimates. ASML Holding NV surged after forecasting a giant increase in sales that beat analysts’ estimates. Novartis AG gained after the Swiss pharmaceutical giant said second-quarter profit exceeded expectations. Spain’s Ibex-35 Index outperformed as banking shares gained along with Inditex SA. The region’s equities spent the early part of the summer near record-high levels before fears over the surge in virus cases sparked the worst one-day drop since last year on Monday. Investors were quick to buy the dip though as the appetite for stocks remains high and as they closely monitor the earnings reports for signs of recovery strength among the largest companies.
• U.S. index futures as a slew of corporate earnings took the focus off concerns about the economic impact of coronavirus flareups. Treasuries slipped and the dollar strengthened. Contracts on the S&P 500 climbed and those on the Nasdaq 100 fluctuated before edging higher after bargain hunters helped the S&P 500 to all but erase Monday’s slide in a rally led by cyclicals such as industrial stocks. Treasury 10-year yields rose further above 1.2% though it remains to be seen if the recovery in yields has legs amid lingering concerns about the delta virus variant that led traders to pare back bets on a Federal Reserve rate hike. The dollar extended its rally against a basket of major currencies to a fifth day.
• Elsewhere, MSCI Inc.’s index of Asia-Pacific shares pared gains though remained on course to snap a three-day drop. Country performance was mixed, with Japan higher and Hong Kong retreating. On the virus front, South Korea and Thailand reported record infections. Japan’s top Covid-19 adviser said new cases in Tokyo, where the Olympics start this week, could hit a record in early August. Johnson & Johnson’s single-dose vaccine produced relatively low levels of antibodies against the delta variant, according to a study that hasn’t yet been peer reviewed.
• Oil reversed losses, resuming its recovery from a rout earlier in the week as sentiment firmed in wider markets. West Texas Intermediate crude rose 1.3%, after dropping 1.1% early Wednesday. European equities climbed a second day and U.S. index futures moved higher. Crude tumbled 7.3% on Monday on concern that the fast-spreading delta variant of the coronavirus will continue to restrict the economic recovery. Futures also dipped earlier Wednesday after the American Petroleum Institute was said to report an 806,000-barrel gain in U.S. crude inventories. If confirmed by government data, that would be the first weekly increase since May. But the API also reported a large decline at the key pricing point of Cushing, Oklahoma.
• Gold steadied as the dollar held gains and stocks continued their rebound following a sharp drop driven by concerns about Covid-19 flareups. Improved risk sentiment saw European stocks and U.S. futures gain again on Wednesday after sharp losses at the start of the week. Ten-year benchmark Treasury yields climbed further above 1.2% as demand for havens eased, while the dollar extended a recent rally, curbing bullion’s appeal. Still, heightened fears over the spread of the delta coronavirus variant persist, prompting traders to pare back bets on Federal Reserve rate hikes, anticipating that ultra-easy policy may still be required. U.S. jobs figures Thursday will be the next key data point for investors trying to gauge the need for stimulus.
• South Korea and Thailand reported record infections. Japan’s top Covid-19 adviser said new cases in Tokyo, where the Olympics start this week, could hit a record in early August. Hong Kong kept most social-distancing measures for the next two weeks. Johnson & Johnson’s single-dose vaccine produced relatively low levels of antibodies against the delta variant, according to a study that hasn’t yet been peer reviewed. Delta makes up 83% of all sequenced cases in the U.S., up from 50% in early July, authorities said. A White House official and a senior spokesperson for House Speaker Nancy Pelosi tested positive for Covid-19. Both had been vaccinated and are among several recently infected U.S. staffers.
• Chancellor Angela Merkel’s cabinet approved a 400 million-euro ($470 million) aid package to provide immediate help for people in areas devastated by floods in western Germany. The funds represent an initial estimate and reconstruction costs could run into the billions over the long term, according to Finance Minister Olaf Scholz, citing damage of about 6 billion euros from the last such disaster. The federal government will make half the funds available, with the rest coming from hard-hit states, including North Rhine-Westphalia and Rhineland-Palatinate. The money will come from the current budget and will be made distributed by the states to the people affected as quickly as possible, Scholz said.
• Volvo Cars has agreed to take control of its China ventures from parent Geely Automobile Holdings Ltd., potentially boosting its valuation ahead of a planned share sale. The deal will make Volvo the first major foreign automaker to gain full control over its Chinese operations, the Swedish company’s Chief Executive Officer Hakan Samuelsson said in a statement Wednesday. The companies declined to comment on terms of the deal. Next year, China is set to remove the 50% cap on foreign automakers’ investments in joint ventures that make gasoline-powered cars, after lifting the limit for electric-vehicle manufacturers in 2018. Tesla Inc. was the first non-Chinese carmaker to set up a wholly owned venture in the world’s biggest car market.
• Foxconn Technology Group’s automobile arm and Nidec Corp. said they plan to establish a Taiwan-based joint venture by the end of this year as they deepen ties by developing and selling powertrains for electric vehicles. The companies will “conduct feasibility studies and contract negotiations with the aim of concluding a joint venture,” they said in a statement Wednesday. The venture will focus on development, production and sales of traction motors and related systems. Other details will be decided in further talks, they said. Foxconn, the world’s biggest assembler of iPhones, and Nidec signed an agreement in March to supply traction motors — the collection of components including the motor, gears and drive shaft that propel a vehicle — to global automakers, combining their large-scale manufacturing experience.
• The imminent return of the U.S. debt ceiling is causing angst for money-market traders once again. While the risk that Uncle Sam might default by missing a payment on a bill or two is minuscule, investors are wondering if and how the Treasury can slash its giant cash pile to the level the department has indicated would be consistentwith its policies and the 2019 act that suspended the limit. And they’re concerned about the impact any moves could have on short-term funding markets, which underpin much of the global financial architecture. The Treasury Department has indicated it would reduce its cash balance to $450 billion by July 31, when the debt cap’s suspension ends. The reason for this is to prevent the Treasury from building up a cushion ahead of a suspension. But it’s unclear whether the government is on track to reach its target from a current balance of $700 billion — or what will happen if it fails to do so. Indeed, projections by financial research firm Wrightson ICAP indicate that the cash balance will be above $450 billion at the end the month.
• Les Wexner spent more than five decades building the apparel business he founded with a $5,000 loan from his aunt into one of the world’s biggest fashion retailers. Now, in just a matter of months, the Ohio billionaire has almost completely severed his ties with L Brands Inc., the owner of Victoria’s Secret and Bath & Body Works. Wexner, 83, completed the sale of about $2.2 billion shares of L Brands this week, according to a regulatory filing late Monday, taking his total disposals this year to about $2.7 billion and leaving him with a stake of less than 2%. Wexner has a net worth of about $10 billion, with his L Brands holding now making up just a fraction of his wealth, according to the Bloomberg Billionaires Index.
• Senate Republicans are set to thwart Majority Leader Chuck Schumer’s attempt to speed President Joe Biden’s agenda through the chamber by blocking his bid to start Senate debate on a yet-unfinished infrastructure plan. Schumer’s decision to force an early test vote Wednesday afternoon spurred a faster pace in protracted talks for a $579 billion infrastructure plan, but not the completed deal GOP senators are demanding as a prerequisite to begin debate. If the vote to move forward on the Senate floor fails to get the 60 votes needed, as expected, talks among a bipartisan group of 22 senators could continue, at least a few more days. Schumer could use a procedural maneuver to try again.
• Treasury Secretary Janet Yellen will have to manage two separate sets of delicate negotiations this fall around a global corporate-tax accord, each with clashing deadlines that could threaten the ultimate success of the deal. Group of 20 nations plan to finalize the details of a landmark global minimum tax and a rewrite of international tax rules at a summit in late October. That’s also right when congressional Democrats hope to be nearing passage of a $3.5 trillion bill that’s the party’s one shot to make much of President Joe Biden’s economic agenda a reality. Any change in the parameters in one negotiation risks jeopardizing the other deal.
• Johnson & Johnson raised its annual adjusted earnings and revenue forecast as quarterly sales rebounded strongly from a year ago, when the pandemic stifled non-Covid procedures. Profit for 2021 will be $9.60 to $9.70 a share, New Brunswick, New Jersey-based J&J said Wednesday, helped by Covid vaccine sales. The drugmaker had forecast as much as $9.57 a share in April. J&J also hiked its annual revenue outlook to as much as $94.6 billion from an earlier range that topped out at $91.6 billion. Second-quarter adjusted earnings were $2.48 a share, the drugmaker said, beating analysts’ average estimate of $2.29. Revenue of $23.3 billion also beat Wall Street’s view.
• The U.K. is heading for yet another round of quarreling with the European Union over its post-Brexit future, with Boris Johnson’s government preparing to set out key demands on Northern Ireland and the two sides at loggerheads on the status of Gibraltar. Ministers will announce Wednesday in Parliament how they want to overhaul the so-called Northern Ireland protocol — the part of the Brexit divorce treaty which sought to avoid a hard border on the island of Ireland. The step will almost certainly antagonize the EU, which has said the agreement cannot be rewritten. The British move comes a day after Foreign Secretary Dominic Raab lashed outat the EU’s plan for a post-Brexit deal for Gibraltar, accusing the bloc of trying to undermine the U.K.’s “sovereignty” over the territory. At the same time, Johnson’s government is trying to persuade France to do more to stop migrants from trying to cross the English Channel.
• More than two dozen people have died and 100,000 have been evacuated as catastrophic floods swept through the central Chinese province of Henan. China Central Television reported that 25 people have been killed while seven others are missing, citing a local government briefing. The city of Zhengzhou earlier said at least 12 died on a subway there. Videos circulating on social media showed passengers trapped in subway cars on Tuesday evening local time with water up to their shoulders as a torrent cascaded through tunnels, while others depicted cars floating down broad avenues in Zhengzhou, which has a population of 10 million.
• Brisbane was selected to host the 2032 Olympics under a new selection process that saw it as the sole candidate, making Australia a three-time host of the summer games. The International Olympic Committee approved Brisbane’s bid in a 72-5 vote, according to a statement on Wednesday. The selection process was overhauled in 2019 to prevent bidding wars among cities. “This new approach is lighter, more collaborative, more compact, and has a positive impact. Now we always have a significant pool of interested parties for 2036, and even for 2040,” IOC President Thomas Bach said in the statement.
• Verizon Communications Inc. exceeded wireless-subscriber growth estimates for the second quarter, with promotions for new phones helping the carrier in the race to sign up customers for new, faster 5G services. Verizon signed up 528,000 regular monthly subscribers in the quarter, according to a statement Wednesday; the figure includes 275,000 phone net additions. Analysts had predicted a 360,400 gain. Profit rose to $1.37 a share, excluding some items, compared with the $1.30 a share average of analysts’ estimates.
• HSBC Holdings Plc stopped providing mortgages to buyers of China Evergrande Group’s unfinished residential properties in Hong Kong, according to people familiar with the matter. The suspension on new mortgages covers two Evergrande projects under construction in the financial hub, the people said, asking not to be named as the matter is private. It was unclear what triggered the decision by Hong Kong’s biggest bank or whether other lenders made similar moves. “It’s believed that other banks could follow suit after a leading bank refused to process mortgage applications for the developer’s unfinished units,” Eric Tso, chief vice president at mReferral Corporation (HK) Ltd., a mortgage referral company, said in a statement on Evergrande Wednesday that didn’t name the bank.
• Harley-Davidson Inc. reported better-than-expected sales and profit in the second quarter as demand in its largest market recovered from the pandemic shutdowns of last spring. Adjusted earnings were $1.41 a share from April through June, the Milwaukee-based company said Wednesday, beating the average analyst estimate of $1.26. Retail motorcycle sales jumped 43% in North America and 24% worldwide. Chief Executive Officer Jochen Zeitz, a former Puma SE executive who took the helm of the troubled manufacturer in February 2020, has slashed costs, trimmed Harley’s product portfolio, culled dealerships and tightened inventory in order to raise prices. He’s plowing the savings into electrification and higher-end motorcycles.
• Aflac Inc.’s asset-management arm plans to invest $2 billion in sustainable infrastructure investment firm Denham Capital as the insurer seeks to increase environmentally-conscious holdings while pursing yield amid low interest rates. Denham will use the funds primarily to purchase the senior debt of sustainable infrastructure projects, according to a statement released Wednesday. Separately, Aflac Global Investments will put $100 million toward a dedicated equity fund run by Denham. The partnership, hashed out over the course of about a year, will help Denham to build capital while giving Aflac other avenues for investment as low rates weigh on insurance portfolios that heavily favor fixed-income securities.
• China, the world’s top commodities consumer, said it will increase the amount of base metals it sells from its state reserves in its latest effort to keep a lid on surging raw material costs. China will sell 30,000 tons of copper, 90,000 tons of aluminum, and 50,000 tons of zinc from stockpiles on July 29, the National Food and Strategic Reserves Administration said in statements on its website Wednesday. That’s 50% to 80% higher than its previous auction earlier this month. Dipping into its metals reserves is probably the most tangible of China’s months-long efforts so far to tame commodities inflation, which helped factory-gate prices to a 13-year high in May. As such, the interventions, which are expected to run through the end of the year, are closely watched as markers of Beijing’s ability to contain a rally that’s global in nature.
• Connecticut’s Democratic senators see two emerging deals totaling some $4.1 trillion as the ticket to modernizing rail in the U.S. Northeast, adding a new wrinkle to the fragile agreements on the legislative underpinnings of President Joe Biden’s economic agenda. Chris Murphy and Richard Blumenthal are typically reliable votes in an evenly divided Senate where Democrats can spare few, if any, defections on Wednesday’s high-stakes procedural vote to debate a $579 billion bipartisan infrastructure package. Neither of them have said they would sink that measure, but their last-minute push for more rail financing makes clear that every Democrat has sway in the talks on both the infrastructure plan and a related $3.5 trillion budget blueprint

“If you want to be the best, you have to do things that other people aren’t willing to do.”– Michael Phelps

*All sources from Bloomberg unless otherwise specified