July 26, 2021

Daily Market Commentary

Canadian Headlines

• Pembina Pipeline Corp. terminated its C$8.5 billion ($6.7 billion) agreement to acquire Inter Pipeline Ltd. after Brookfield Infrastructure Partners LP raised its hostile bid for the Canadian energy company. Inter Pipeline said Monday in a statement it will pay a C$350 million termination fee to Pembina. “Inter Pipeline’s Board of Directors is open to engaging with Brookfield in an effort to reach a mutually agreeable transaction in the best interests of shareholders,” Inter said. The battle to control Inter follows years of failed attempts to build major projects like TC Energy Corp.’s Keystone XL and Energy East, potentially making existing lines more valuable. Inter owns pipeline infrastructure across Western Canada, connecting oil and natural gas producers with domestic and foreign customers.
• Rio Tinto Plc workers went on strike over labor contracts at an aluminum smelter in British Columbia on Sunday, their union said in a statement. About 900 Rio Tinto workers at smelting facilities in Kitimat were on strike as of 12:01 a.m. local time Sunday, Unifor said in a release posted on the union’s website. The union accused the company of violating existing contracts by using contractors and temporary employees and failing to address concerns over pensions and retiree benefits. Staff and employees required under an order by the B.C. Labour Relations Board have taken on duties to continue operations, Simon Letendre, a Rio Tinto spokesman, said in an email. The company is assessing how the strike will affect aluminum production and will work to limit disruptions. The strike commenced after the current collective labor agreement expired, he said.

World Headlines

• European stocks retreated from a record high amid a focus on earnings, with global risk sentiment being hit by the latest government crackdown in China. The Stoxx 600 index was down 0.3% by 10:34 a.m., with automakers, healthcare and media sectors falling the most. Tech investor Prosus NV slumped 10% after China’s move to place restrictions on the country’s education tech sector caused a plunge in shares in online giant Tencent Holdings Ltd. Royal Philips NV dropped 3.2% after forecasting full-year margin improvement at the lower end of the range. In the meantime, travel shares bucked the declines and advanced as Ryanair Holdings Plc jumped after the airline said it intends to pump more capacity into European markets in the coming months, keeping ticket prices low. Miners also climbed as base metal prices rose.
• U.S. futures fell with stocks on Monday as concerns about the global economic outlook weighed on risk sentiment. Treasuries rose. Contracts on key U.S. gauges slipped following a record close for Wall Street on Friday. European equities fell from an all-time high, with data showing German business confidence unexpectedly fell in July. Shares in China and Hong Kong tumbled amid a selloff in education tech companies after Beijing announced sweeping reforms of the industry. The real yield on U.S. 10-year debt fell to a record low on mounting concern the delta virus variant will derail the economic recovery. Treasuries rose ahead of this week’s Federal Reserve meeting, at which officials will likely discuss the outlook for stimulus.
• Asian equities slid as Chinese stocks slumped after Beijing unveiled a sweeping overhaul of the education tech sector, banning firms that teach the school curriculum from making profits, raising capital or going public. The MSCI Asia Pacific Index dropped as much as 1%. Shares of Chinese private education firms plummeted, causing the Hang Seng Tech Index to plunge by a record 7.1% intraday. Tencent and Alibaba were the biggest drags on the regional benchmark. China’s latest move extends a corporate crackdown that has already rattled some of the nation’s biggest internet companies and mainland firms that have sought overseas listings. The government says it is trying to decrease workloads for students and overhaul a sector that has been “hijacked by capital.”
• Oil headed for the first decline in five days as investors assessed the outlook for demand amid a resurgence in Covid-19 and as broader markets were on a softer footing. Futures in New York dropped to trade near $71 a barrel after a volatile week of trading that saw prices swing wildly in a $7 range. There are signs that demand for fuels such as gasoline has increased as vaccination programs are rolled out, although the fast-spreading delta variant has raised concerns about the short-term outlook. Tight restrictions have been renewed including curfews in some places.
• Gold edged higher as a crackdown in China’s tech sector weighed on risk sentiment, while investors awaited a Federal Reserve meeting this week for further guidance on the next steps for monetary policy. At their meeting this week, Fed officials aren’t expected to signal a reduction in support for the U.S. economy but will debate how to scale back massive bond purchases when the time comes. Pressure on Chair Jerome Powell to start the taper sooner rather than later has probably been eased by the recent slide in bond yields, as investors worry the spreading delta coronavirus variant could sap the nation’s recovery. Bullion has just posted its first weekly decline since mid-June, with investors focusing on global growth and prospects for stimulus even as the pandemic rages on in many parts of the world. European Central Bank president Christine Lagarde said last week the central bank won’t derail the economic recovery by withdrawing emergency support too early.
• Covid infections globally increased the most in two months amid the spread of the delta variant, a surge across the U.S. and low vaccination levels in most Southeast Asian nations. About 3.73 million people were infected around the world in the week ended July 25, led primarily by six countries — the U.S., Brazil, Indonesia, U.K., India and Spain — according to data compiled by Bloomberg and Johns Hopkins University. The number of cases in the U.S. surged by 62% over the previous week. However, fatalities have stayed relatively low in the U.S., U.K. and Spain due to high vaccine coverage, while deaths are soaring in India, Brazil and Indonesia. Infections in Tokyo almost doubled from a week ago, according to city data released Monday. Meanwhile, Olympics organizers reported 16 more cases, including three among athletes, on the fourth day of the spectator-free games.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the second 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 $656.5 million in the week ended July 23, compared with gains of $1.25 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $34.2 billion.
• China announced a broad set of reforms for private education companies, seeking to decrease workloads for students and overhaul a sector it says has been “hijacked by capital.” The new regulations, released over the weekend, ban companies that teach school curriculums from making profits, raising capital or going public. They can no longer offer tutoring related to the school syllabus on weekends or during vacations. They also can’t give online or academic classes to children under the age of six, a segment of the population that had increasingly been pushed to start studying early. China’s education technology sector had grown to $100 billion as companies catered to parents seeking to give their children every advantage. Beijing’s reforms will fundamentally alter the business model, forcing firms and their investors into extensive changes. In one dramatic shift, overseas investment is prohibited in companies that teach school subjects and any company in violation must rectify the situation, according to a notice released by the State Council, the country’s most powerful administrative authority.
• GoTo, Indonesia’s most valuable startup, is in discussions with investors to raise as much as $2 billion ahead of stock-market listings at home and in the U.S., according to people familiar with the matter. The internet firm, created through the merger of ride-hailing giant Gojek and e-commerce provider PT Tokopedia in May, has begun the process of raising $1 billion to $2 billion at a valuation of between $25 billion and $30 billion, the people said, asking not to be named as the matter is private. GoTo is among a fast-rising group of Southeast Asian companies that are taking advantage of investor interest in the region, which has a population of over 650 million and a vibrant tech startup scene. Both Grab Holdings Inc. and PropertyGuru Pte are planning to go public in the U.S. via blank-check firms, while Indonesian e-commerce firm Bukalapak.com is set to be the first homegrown unicorn to list on the local exchange in August. GoTo is expected to follow suit.
• Euro-zone banks are set to reopen the cash taps to investors, putting them back among the region’s highest-yielding stocks to own. The European Central Bank said Friday evening that it will let a cap on dividends and buybacks expire at the end of September. While it urged banks under its supervision to act with caution, 6 billion euros ($7.1 billion) is expected to be distributed in the fourth quarter, according to Bloomberg forecasts. The Stoxx 600 Banks Index rose 0.1% by 11:13 a.m. in London, bucking a drop in European equities. The market has been anticipating a surge in bank dividends this year, with euro-area banks dividend futures sharply outperforming the underlying index. BNP Paribas SA, Intesa Sanpaolo SpA, ING Groep NV and KBC Group NV are among banks itching to return excess capital.
• The real yield on U.S. 10-year debt fell to a record low as concerns grew over the outlook for economic growth. The rate, which strips out inflation, fell five basis points to minus 1.127%. The move was compounded by a lack of trading liquidity, with the 10-year breakeven rate — a market proxy for the average annual rate of consumer prices over the next decade — holding steady at 2.34%. Still, it points to souring investor sentiment amid the rapid spread of the delta variant that threatens to derail the economic recovery. And it comes as investors piled into haven assets after a surprise hit to Germany’s business confidence.
• Senators negotiating a $579 billion infrastructure package are aiming to finish negotiations early this week, under pressure from colleagues to salvage an August recess and to allow the Senate to turn to preventing a government shutdown and debt ceiling default in the fall. A pending five-week break scheduled to begin Aug. 9 is motivating the 22-member bipartisan group to end dickering over relatively minor components of their plan after Republicans spurned Senate Majority Leader Chuck Schumer’s deadline for action last week. Getting the deal turned into legislation that can pass Congress is a major political goal for President Joe Biden, who ran for office pledging to govern as a centrist who could work with the Republicans. That promise is widely seen as helping him win him suburban swing voters, who also will have a significant role in deciding control of Congress in the 2022 midterms.
• China lashed out at U.S. policies in a tense start to high-level talks in Tianjin, handing the Americans lists of demands and declaring the relationship between the world’s two largest economies in a “stalemate.” Vice Foreign Minister Xie Feng told visiting Deputy Secretary of State Wendy Sherman that some Americans seek to portray China as an “imagined enemy,” according to accounts released by the Foreign Ministry at the first talks between the two sides since an acrimonious exchange in Alaska earlier this year. “The China-U.S. relationship is now in a stalemate and faces serious difficulties,” he said, according to the ministry. Still, Xie said Beijing was willing to seek common ground and deal with the U.S. on an equal footing.
• Bitcoin surged near $40,000 as a crypto-related job ad from Amazon.com Inc. stoked speculation about the company’s involvement in the industry. The job posting, which was reported by CoinDesk last week, said the Amazon is looking for an executive to develop the company’s “digital currency and blockchain strategy.” Analysts have also wondered whether the move could eventually lead to Amazon accepting Bitcoin as a method of payment. Bitcoin rose 11% to $38,302 as of 11:07 a.m. in London, and earlier prices came within a few hundred dollars of reaching the $40,000 mark. Ether and other digital currencies also advanced.
• Ryanair Holdings Plc intends to pump more capacity into European markets in the coming months, keeping ticket prices low so it can overpower weaker rivals as travel rebounds in Europe. The region’s biggest low-cost carrier said Monday that it expects to post a profit this quarter, even as it prioritizes filling planes until demand fully rebounds. The summer high season should help propel Ryanair to breakeven or leave it with a small loss for the year ending in March, assuming vaccine rollouts contain the pandemic, the company said as it posted a smaller-than-expected first quarter loss. Ryanair is putting its strong balance sheet to work, hedging on fuel prices to hold down costs, expanding in places such as Italy, Scandinavia and Morocco, and rolling out a fleet of new Boeing Co. 737 Max planes it dubs “Gamechangers” for their ability to ferry passengers more efficiently across Europe. It’s betting rivals from network giants Air France-KLM and Deutsche Lufthansa AG to a restructured Alitalia SpA won’t be able to keep up.
• German business confidence unexpectedly slipped in July, signaling concern that supply bottlenecks and resurgent infections could slow the recovery. A gauge by the Munich-based Ifo Institute fell to 100.8 from 101.7 in June. Economists in a Bloomberg survey had expected an improvement. An index measuring expectations slipped to the lowest in three months, while current conditions continued to improve. “Companies are becoming a lot less optimistic for the coming months,” Ifo President Clemens Fuest said in an interview with Bloomberg Television. “In manufacturing, almost two thirds of all companies are telling us they’re experiencing supply problems.”
• Royal Philips NV will buy back as much as 1.5 billion euros ($1.8 billion) of its stock, using roughly half the cash proceeds from offloading its appliances unit to reward shareholders. The Dutch company announced the buyback program Monday along with growth in sales and operating profit that was in line with analyst estimates. Philips reiterated it expects to close the sale of its appliances unit to private equity firm Hillhouse Capital this quarter, which is expected to bring in about 3 billion euros. The maker of respiratory gear and body scanners said sales in the three months ended in June climbed to 4.2 billion euros as clients in the medical field resumed spending on elective-procedure products after a pandemic-related slump.
• The world’s biggest mining companies are about to start revealing how much cash they’re churning out from this year’s commodity boom. Look out for record profits followed by eye-watering dividend payouts. The top-five western diversified miners may have earned a combined $85 billion for the first half of the year, according to analyst estimates, more than double the level from a year ago. Rio Tinto Group, the first to report on Wednesday, is expected to announce $22 billion of profit for the six months, on a par with its total for all of 2020. The mining sector has been one of the biggest beneficiaries from the world’s efforts to emerge from the pandemic. The trillions of dollars poured into recovery packages have ignited demand for commodities like steel, iron ore and aluminum, driving prices sharply higher and sending inflation pressures rippling through the global economy.
• U.S. regulators are wagering a major shakeup of the multitrillion-dollar interest-rate swaps market is just what’s needed to wean Wall Street off the London interbank offered rate for good. In a key development in the shift from the discredited benchmark, beginning Monday, swaps desks will switch from Libor to the Secured Overnight Financing Rate when entering into most interdealer trades, effectively changing how they hedge their interest-rate risk. The move is designed to ignite a flurry of activity in derivatives tied to SOFR, ensuring enough liquidity to help establish a forward-looking term structure, a critical holdup that’s prevented various cash markets from embracing the rate. It’s the first step in a renewed effort to push firms toward the benchmark ahead of the year-end deadline to ditch Libor for new transactions, and comes amid increasing competition from a slew of new reference-rate providers seeking to carve out their own slice of the post-Libor landscape.
• PerkinElmer Inc. agreed to buy BioLegend, a privately held provider of life science antibodies and reagents, for about $5.25 billion in shares and cash. The transaction, the largest-ever acquisition for Waltham, Massachusetts-based PerkinElmer, is expected to close by the end of this year, subject to regulatory approvals, the companies said in a statement Monday. BioLegend provides antibodies and reagents for biomedical research to academic and pharmaceutical clients in fast-growing areas such as cytometry, proteogenomics and recombinant proteins. It has more than 700 employees, mostly in the U.S., and is expected to generate about $380 million of revenue in 2022, according to the statement.
• Arabica coffee jumped above $2 a pound in New York, extending gains to more than 30% over the past week, on fresh concern about freezing weather in key Brazilian growing regions. Futures rallied as much as 10% to $2.08 a pound, resuming their advance after dipping at the end of last week. Forecasters expect low temperatures in coming days, potentially damaging crops further following a cold spell that pushed prices to the highest since 2014 on Friday. “It looks like we’re set for another explosive week ahead, with cold weather coming back into coffee-growing regions from midweek onwards,” Alex Boughton, a broker at Sucden Financial Ltd., said in a note.
• If an energy transition is underway around the world, it hasn’t reached the streets of Ilha da Conceicao, the working-class district at the heart of Rio de Janeiro’s oil revival.  There, buses and trucks are piling into Baker Hughes Co.’s shipyard, where the energy services giant is churning out hundreds of kilometers of oil and gas piping. One street over, Exxon Mobil Corp. is loading supplies to explore the country’s biggest offshore oil fields. Royal Dutch Shell Plc and TotalEnergies SE have similar plans for later this year. The scene points to an uncomfortable truth: First-world politicians may be trying to wean the globe off fossil fuels, but in cash-starved, resource-rich nations like Brazil, oil remains king. Outside of the U.S. and OPEC, Brazil is set to add more crude production through 2026 than any other country. Last year, while the rest of the world was throttling back on oil production in the throes of the pandemic, Brazil was one of the few that raised output, adding more than any other non-OPEC country apart from Norway. It wants to double crude output by 2030 to become the world’s fifth-largest exporter, and even if it doesn’t hit that target, low-cost oil plays have positioned the country well to emerge as one of the world’s last holdouts in the energy transition.
• Hasbro Inc., the largest U.S. toy company, reported revenue that beat analysts’ estimates after products linked to movies staged a comeback. Sales rose 54% to $1.32 billion, beating analysts’ predictions of $1.2 billion. The company reported a second-quarter profit on Monday of $1.05 a share, excluding some items.
• Tesla Inc., which has gone from the best-performing large-cap stock in 2020 to one of the biggest laggards in the S&P 500 this year, is going to need more than a solid earnings report to reinvigorate its shares. The electric-vehicle maker is expected to notch an eighth consecutive quarterly profit on Monday. That’s no mean feat for a company that, according to Chief Executive Officer Elon Musk, was at the brink of bankruptcy while trying to scale up the production of the Model 3 sedan just a few years back. Once criticized for its inability to consistently make money, Tesla was handsomely rewarded last year when it posted its first four quarters of profits in a row. The stock surged more than 700% and was added to the S&P 500.
• Strategists are pushing back against “peak growth” worries in markets, arguing some stocks tied to U.S. economic reopening have been oversold. Widespread U.S. vaccinations support economic growth and laggards such as airlines and hotels should rebound in coming months, Goldman Sachs Group Inc. strategists including David Kostin wrote in a note. Equities that suffered on concerns over the delta Covid-19 variant, like energy, are set to rally from this week, according to Fundstrat Global Advisors LLC’s Tom Lee. “Investors are concerned about the impact on economic growth from the delta variant, but the new strain should not pose a major market risk,” the Goldman team wrote Friday. It backs “tactical positions in virus-exposed cyclicals alongside longer-term investments in high-quality secular growth stocks.”

“He who is not courageous enough to take risks will accomplish nothing in life.”– Muhammad Ali

*All sources from Bloomberg unless otherwise specified