July 28th, 2020
Daily Market Commentary
- Canadian equity markets climbed on Monday, led by health care and materials stocks. The S&P/TSX Composite index rose 1% in Toronto. Health Care stocks were the best performers, led by stocks such as Aphria Inc. which climbed 12%. Materials stocks also outperformed led by gold and silver miners. Gold hit a record high after a plunge in the U.S. dollar, negative real rates in the U.S. and bets the Federal Reserve will keep policy accommodative when it meets this week. Silver also followed gold price’s rally. Meanwhile, consumer sentiment in Canada showed renewed strength on an improving outlook for real estate and the economy, weekly telephone polling showed. The Bloomberg Nanos Canadian Confidence Index, a composite measure of financial health and economic expectations, recorded its biggest one-week jump since mid-June, to 48.4 from 46.7 a week earlier.
- The global coronavirus pandemic is proving challenging for Canada’s largest life insurers, with analysts expecting the biggest profit decline in eight years amid a slowdown in insurance sales, higher credit losses and bruised investments. Most expect an average decline in adjusted per-share profit of more than 10% from a year earlier for the four lifecos — Manulife Financial Corp., Sun Life Financial Inc., Great-West Lifeco Inc. and IA Financial Corp. — as the economic impacts of Covid-19 weigh on operations. The last time earnings were that bad was in the second quarter of 2012, according to Bloomberg data, when lower interest rates and stock-market declines precipitated a C$300 million ($225 million) loss at Manulife and plunging profits at its peers.
- European stocks climbed, snapping a two-day drop, as investors weighed prospects for U.S. stimulus and earnings reports. The Stoxx Europe 600 Index rose 0.3% as of 8:19 a.m. in London, with all industry groups in the green except personal and household goods, dragged lower by LVMH after its first-half profit missed estimates. Peugeot maker PSA Group climbed 3.8% after sticking to its outlook, while Games Workshop Group Plc jumped 5.5% after posting an increase in full-year profit. European equities have lost some ground after climbing to an almost five-month high last week as investors weigh fresh coronavirus outbreaks against better-than-expected earnings. Although a Citigroup Inc. index shows analyst profit upgrades turned positive for the first time this year, it may not be enough to boost equities that have already rallied hard in anticipation of a recovery.
- Contracts on the S&P 500 and Nasdaq 100 indexes fell from their session highs but stayed in the green. LVMH dropped after the French luxury conglomerate reported earnings that missed analyst expectations. Investors are betting setbacks in the fight against the coronavirus will lead Federal Reserve Chairman Jerome Powell to signal Wednesday that rates will stay near zero for longer. Health officials are tackling rising cases in countries ranging from Japan and China to Germany, underscoring the difficulty of curbing the pandemic.
- Japanese shares erased a morning gain and finished the day lower as traders awaited earnings from some key companies. Automakers and railway operators were the biggest drags on the Topix index while pharmaceutical makers gained. Daiichi Sankyo Co. surged after it forged a $6 billion cancer drug pact with AstraZeneca Plc. Technology shares tracked gains in U.S. peers overnight.
- Oil edged lower on signs that market fundamentals are getting shakier, though there was broader support from the recent slide in the dollar. Futures in New York declined toward $41 a barrel. The market’s structure tumbled on Monday in London and the Middle East, and the value of physical crude barrels in key regions has weakened. Russia’s Urals oil is being offered at three-month lows, and key swaps tied to the North Sea crude that prices much of the world’s oil have also slipped.
- Gold’s record-breaking rally showed signs of flagging after futures touched $2,000 an ounce for the first time. Silver also fell as investors assess whether precious metals rose too high, too fast. Both metals retreated after touching fresh highs earlier Tuesday as traders looked to lock in profits. While there’s no end in sight to the economic turmoil unleashed by the coronavirus pandemic and expectations are that more stimulus will be needed to boost growth, investors may seek out more bullish signals before pushing prices higher.
- The U.S. dollar’s reign as the world’s reserve currency is coming under threat, as evinced by the recent surge in gold prices, according to Goldman Sachs Group Inc. The greenback faces several risks, including that the U.S. Federal Reserve may shift toward an “inflationary bias,” a rise in political uncertainty and growing concerns surrounding another spike in coronavirus infections in the country, according to Goldman strategists. They added that the debt buildup as a result of the pandemic may lead to debasement fears. “Real concerns around the longevity of the U.S. dollar as a reserve currency have started to emerge,” wrote Goldman strategists including Daniel Sharp. “Gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows.”
- The European Central Bank extended a de facto ban on banks returning capital to shareholders and urged them to show restraint on bonuses after the coronavirus outbreak, dealing a blow to lenders who lobbied for business as usual. The supervisor asked that banks not pay dividends or buy back shares at least until January, three months longer than initially indicated, and “to be extremely moderate with regard to variable remuneration,” according to a statement Tuesday. The ECB said it will review its stance again in the fourth quarter. Separately, the Bank of England said it will also conduct a review at the end of the year of any plans by Britain’s biggest banks to pay dividends or resume buybacks. At the BoE’s urging, HSBC Holdings Plc, Barclays Plc and Lloyds Banking Group Plc, among other large firms, suspended payouts earlier this year.
- A renewed increase in coronavirus infections around the world raised challenges from Asia to Europe. Following a steady rise in cases in tourism-reliant Spain, Madrid reacted with anger to curbs imposed by the U.K. on travel to the country. Beijing confirmed a new case after going weeks without any, while Hong Kong is considering a delay in legislative elections after a surge in infections. Malaysia and Tokyo also saw an increase in cases and Vietnam is battling a flare-up. Moderna Inc. received a second round of funding for an experimental vaccine and kicked off its late-stage trial, while Pfizer Inc. and BioNTech SE said they would begin a later-stage study for their top candidate.
- Senate Republicans presented their $1 trillion plan to bolster the pandemic-ravaged U.S. economy in a series of bills that would trim extra unemployment benefits, send $1,200 payments to most Americans and shield businesses, schools and other organizations from lawsuits stemming from coronavirus infections. The package was pulled together after days of negotiations between Senate Republicans and President Donald Trump’s emissaries that didn’t completely settle differences within the GOP over the size and scope of additional federal spending in response to the pandemic.
- Tencent Holdings Ltd. has offered to buy out and take private search engine Sogou Inc. in a $2.1 billion deal, adding to a slew of Chinese technology giants seeking to delist from U.S. bourses. Shares of the social media heavyweight climbed as much as 4.7% Tuesday, buoyed by speculation it will more closely integrate Sogou’s AI technology with its own services and devices to gain an edge on rivals like TikTok-owner ByteDance Ltd. Tencent has in past years come under pressure from ByteDance and other up-and-coming rivals in the emergent short-video arena. Beijing-based Sogou — whose name translates as “search dog” — has long been the default in a slew of Tencent products including its marquee social app WeChat. It’s also been making a push into artificial intelligence.
- Apple Inc.’s newest services have yet to generate meaningful revenue, making it harder for the largest technology company to expand beyond the iPhone and other hardware. Last year, the Cupertino, California-based company launched four new services: TV+, Arcade, News+ and the Apple Card. After a few quarters on the market, the offerings haven’t contributed much to Apple’s top line. When Apple reports results on July 30, investors will be looking for updates on these offerings. Services growth has been a bright spot in recent years as iPhone sales have slowed. For the fiscal third quarter, analysts forecast $13.1 billion in revenue from services, up 15% from a year earlier. Most of those gains will come from existing services, such as the App Store and licensing deals, rather than the new offerings.
- Facebook Inc. won a temporary halt to a demand by European Union investigators to turn over vast amounts of data, potentially frustrating efforts to build an antitrust case against the U.S. tech giant. The EU General Court suspended the European Commission’s requests for information including data Facebook deemed as “highly sensitive personal information,” according to two decisions dated July 24. Facebook sued the Brussels-based commission on July 15, citing “the exceptionally broad nature” of the EU’s orders. It also filed two challenges seeking a court suspension of the EU data demands.
- The Czech Republic moved closer to building another nuclear reactor by pledging financial support for a project it considers key to meeting its climate goals. The government signed a deal with utility CEZ AS on Tuesday, in which it agrees to pay a fixed price for electricity from the planned new unit at the aging Dukovany atomic plant. The state has also pledged to provide a cheap loan to CEZ that will be interest-free for the duration of the construction between 2029 and 2036. While nuclear power has for years been the cornerstone of the country’s plans to curb carbon emissions and boost its energy independence, this is the first time the state has offered financial help. The plan depends on securing a European Union endorsement for the state aid. If approval is granted, the 70% state-owned CEZ says the new 1,200 MW unit will be profitable.
- A Malaysia court has sentenced former leader Najib Razak to 12 years imprisonment after ruling him guilty of all charges in the first of a series of trials linked to 1MDB. Najib received his guilty verdict on Tuesday in the case involving 42 million ringgit ($10 million) of funds deposited in his personal accounts from a former unit of 1MDB. His lawyer has said an appeal against the ruling is a certainty, while seeking to keep him out of jail during the appeal process. The judge sentenced him with 12 years in jail for one count of abuse of power, as well as 10 years each for three charges of money laundering and three criminal breach of trust charges, to be served concurrently. He must also pay a fine of 210 million ringgit.
- Caught in the crossfire between Washington and Beijing, HSBC Holdings Plc is fighting forces that threaten to upend a business built on connecting China to the West. Chairman Mark Tucker is overseeing a sweeping review of HSBC’s U.S. and European operations with an eye toward unloading businesses beyond repair, as doubts grow that 35,000 job cuts announced in February will be enough to revive the slumbering giant, say people familiar with the matter. The stakes could hardly be higher for the London-based institution that earns almost all of its profit in Asia. The 155-year-old bank broke its silence last week over its role in the U.S. pursuit of a Huawei Technologies Co. official after a barrage of Chinese media attacks. Executives have discussed their bind with the Bank of England and begun wargaming potential disruptions to Hong Kong’s U.S. dollar peg, as the worsening political situation endangers its appeal.
- Gold has just smashed a record, and every major bank agrees that it’ll cross $2,000 an ounce. What happens next is where forecasts diverge. JPMorgan Chase & Co. says the rally that has already seen prices rise 27% in 2020 could start to lose steam later this year. Goldman Sachs Group Inc., Citigroup Inc. and Bank of America Corp aren’t ready to call it quits just yet, with the latter seeing the metal soaring to as high as $3,000 an ounce. Gold has emerged as the safe haven of choice among investors as the pandemic upends economies worldwide. The spot metal touched $1,981.27 on Tuesday, about $60 above the previous peak set in 2011, boosted by a drop in real rates, the recent weakness in the dollar, massive government stimulus and flaring U.S.-China tensions. Gold is serving as an attractive hedge as yields on Treasuries that strip out the effects of inflation fall below zero.
- President Donald Trump is spending nearly all of his advertising money to keep states he won in 2016, playing a game of defense in areas a Republican incumbent should be able to count on. More than 92% of his state-based spending in the month of July is in states he won in 2016, according to a Bloomberg analysis of television advertising data compiled by Advertising Analytics. Joe Biden, leading in all national polls, is spending in seven key states that Trump won in 2016, too, banking on at least some of them swinging Democratic with widespread voter dissatisfaction over Trump’s handling of the coronavirus and the accompanying economic crash.
*All sources from Bloomberg unless otherwise specified