July 30th, 2020
Daily Market Commentary
- Canadian equity markets rallied on Wednesday after Shopify Inc. climbed to a new record as its sales doubled. The S&P/TSX Composite index rose 1.1% in Toronto. Shopify climbed 6.8% after the e-commerce platform nearly doubled its revenue in the second quarter, crushing analysts’ estimates as a flood of merchants moved their businesses online during the pandemic. Meanwhile, Element Fleet Management Corp. was the best performing stock, surging 12%, after TD upgraded its rating to buy from hold after the company posted a stronger outlook on “several fronts.” Meanwhile, about one in seven small- and medium-sized Canadian companies surveyed at the end of June by the Canadian Federation of Independent Business said they are at least somewhat considering bankruptcy or winding down operations as a result of Covid-19. That would represent about 158,000 businesses in addition to the ones that have already closed, CFIB said.
- The Trump administration will allow the existing Keystone pipeline to carry more oil-sands crude into the Midwest and U.S. Gulf Coast while the conduit’s decade-old expansion project faces renewed legal hurdles. A White House permit issued Wednesday raises the cross-border shipping limit for the TC Energy Corp. line to 760,000 barrels a day, from 590,000 under a previous presidential permit, company spokesman Terry Cunha said in an email. The White House decision came after President Donald Trump’s earlier approval of TC Energy’s proposed Keystone XL expansion project was hampered by a federal court decision that blocked most construction.
- European stocks were poised for their worst drop in a month on the busiest day of the earnings season, with banks and carmakers leading losses. A slump in Germany’s economy added to the gloom. The Stoxx Europe 600 Index dropped 1.8% as of 11:56 a.m. in London, with all industry groups down. Auto shares retreated as Volkswagen AG swung to a loss and cut dividends, while Renault SA posted a record first-half loss. Banks were the second-worst performers as Lloyds Banking Group Plc slid 8.7% after its profit was wiped out by a fresh charge for bad loans. European equities have lost momentum since rallying to an almost five-month high on July 21, with the Stoxx 600 falling below its 50-day moving average. Further damping sentiment on Thursday, data showed Germany’s economy shrank the most in at least half a century in the second quarter.
- U.S. index futures fell ahead of a slew of earnings from American tech giants, with investors showing caution in the wake of a spike in German coronavirus cases, while the Federal Reserve provided a cautious outlook. The Federal Reserve’s pledge to use all of its tools to support the economic recovery was not enough to offset fears that the economy could suffer from the pandemic for a longer period of time. The dollar climbed. Investors will brace for GDP and jobless claims numbers, while Apple, Amazon.com, Alphabet, Comcast, Kraft Heinz and Mastercard are among companies due to report earnings later.
- Japanese stocks reversed early gains and fell after local media reported on possibly stricter measures on businesses and group activities as coronavirus cases continue to rise. Railway operators were the biggest drag on the Topix index. Tokyo will ask bars, restaurants and karaoke establishments to shorten their business hours, the Nikkei reported. The city found at least 360 cases on Thursday, TBS reported, after the country saw a record number of cases on Wednesday.
- Oil slipped along with equities in Europe and a strengthening dollar, while crude continued to trade in a narrow band. Futures in New York fell below $41 a barrel, a level that’s anchored prices for much of the week, with market volatility now at its lowest level in five months. European stocks declined with U.S. equity futures as investors weighed the prospect of more stimulus against a slew of earnings and the continued spread of the coronavirus.
- Gold retreated after rallying for nine days to a record, as investors weighed comments from the Federal Reserve on uncertainties over the economic recovery and the dollar ticked higher. Bullion has been supported as the U.S. central bank left interest rates near zero and vowed to use all its tools to drive the recovery from the downturn that Chair Jerome Powell called the most severe “in our lifetime.” He sounded a dour tone, noting that more fallout from the outbreak still lies ahead. U.S. deaths surpassed 150,000, the highest official toll in the world.
- Germany’s economy shrank the most in at least half a century in the second quarter, outlining the scale of the challenge facing Europe after the devastation of virus restrictions that slammed businesses and households. The 10.1% drop in output in the region’s largest economy is a harbinger of worse figures elsewhere. Spain, France and Italy will probably report even deeper contractions on Friday, reflecting a recession that prompted an unprecedented policy response from governments. While indicators show a rebound is already underway, the threat of job losses as well as mounting concerns about a resurgence in viral outbreaks risk slowing the return to pre-pandemic levels.
- Almost 10,000 people in the U.K. have been given an experimental Covid-19 vaccine from AstraZeneca Plc and the University of Oxford, a key step toward finding a shot that will help control the pandemic. Johnson & Johnson wants to start Phase 3 trials of its vaccine in September. Germany reported the highest number of new coronavirus cases in about six weeks, with the rate for new infections above the key threshold of 1.0 for a sixth consecutive day. Its economy plunged into a record slump in the second quarter. Hong Kong will relax its dine-in ban and allow breakfast and lunch services at restaurants starting Friday as the policy sparked a growing public outcry. The number of Americans killed by the virus exceeded 150,000 on Wednesday as death tolls surged to records in some of the hardest-hit and most populous states.
- United Parcel Service Inc. surged toward a record as the courier rode pandemic-related demand for e-commerce deliveries, health-care equipment and exports from Asia to post results that blew past estimates. Revenue jumped 13% to $20.5 billion in the second quarter, surprising analysts, who had predicted sales would drop from a year earlier to $17.5 billion. Adjusted earnings climbed to $2.13 a share, the company said in statement. That was about double analysts’ projections, based on the average of estimates compiled by Bloomberg. The strong results were fueled by “changes in demand that emerged from the pandemic, including a surge in residential volume, Covid-19 related health-care shipments and strong outbound demand from Asia,” Carol Tomé, who took over as chief executive officer on June 1, said in the statement.
- As negotiators from Goldman Sachs Group Inc. and the Malaysian government gathered at the Mandarin Oriental hotel in Kuala Lumpur last week, the two sides could hardly have been further apart on a 1MDB deal. The storied U.S. bank, needing to turn the page on one of the biggest scandals in its history, started with the same offer it made to the previous government: $1.75 billion. While this was a step up from the 1 billion ringgit ($235 million) that former leader Mahathir Mohamad said the bank offered last year, it was a far cry from Malaysia’s demand: more than $7 billion to resolve probes into the role Goldman’s bankers played in a scheme to plunder the nation’s sovereign wealth fund.
- Dunkin’ Brands Group Inc. said it expects to close about 800 stores in the U.S. permanently this year, as well as about 350 internationally. The closures are part of a “real estate portfolio rationalization,” and will mostly involve low-volume sales locations, Dunkin’ said. The U.S. locations represent about 8% of Dunkin’s total domestic restaurants, and accounted for about 2% of U.S. systemwide sales in 2019.
- Johnson & Johnson’s experimental coronavirus vaccine protected a group of macaques with a single shot in an early study, prompting the U.S. drugmaker to start trials in humans this month. All of the animals that were exposed to the pandemic-causing pathogen six weeks after the injection were immune except one, who showed low levels of the virus, according to a study published in the medical journal Nature. The health-care behemoth kick-started human trials on July 22 in Belgium and in the U.S. earlier this week. The data “show our SARS-CoV-2 vaccine candidate generated a strong antibody response and provided protection with a single dose,” Paul Stoffels, the drugmaker’s chief scientific officer, said in the statement. “The findings give us confidence as we progress our vaccine development and upscale manufacturing.”
- They’ve been billed as a solution to the rock-bottom interest rates weighing down the returns of America’s asset managers. Collateralized loan obligations — which package and sell leveraged loans into chunks of varying risk and return — have been touted as safe, high-yielding alternatives to everything from government bonds and mortgage securities to corporate debt. Insurers have become the biggest U.S. investors in the market, topping banks and hedge funds to amass a third of all domestic holdings, according to data compiled by the Federal Reserve. The love affair was sudden: By the end of 2019, they owned $158 billion of CLO bonds, a 22% jump from the prior year and almost double what they had in 2016, according to Barclays Plc figures.
- Eastman Kodak Co. is getting another shot at redemption. The 131-year-old company that once dominated the market for photographic film and made an ill-fated foray into cryptocurrencies is pivoting again. This time, Kodak plans to make ingredients for generic drugs, aided by a $765 million U.S. government loan, the first fruits of a Trump Administration program aimed at bolstering American drug-making capabilities in the age of Covid-19. News of the arrangement fueled a rally of as much as 2,760% for Kodak stock this week, with legions of day traders snapping up shares through the Robinhood Markets Inc.’s trading app.
- Electricite de France SA will cut 500 million euros ($587 million) from its operating expenses and sell an additional 3 billion euros of assets by the end of 2022 to curb mounting debt as the coronavirus pandemic saps earnings and threatens to delay its flagship nuclear projects. France’s main power producer, which has been struggling to fund investment with cash flow from its operations for most of the past decade, is under pressure again to contain debt as the crisis curbs electricity demand and prices, while also prolonging shutdowns at its nuclear plants. Earnings before interest, taxes, depreciation and amortization in the first half fell 1.6% to 8.2 billion euros, the company said in a statement on Thursday. The pandemic had an impact of about 1 billion euros, EDF said.
- Airbus SE cut back wide-body jet production after it burned through 4.4 billion euros ($5.2 billion) in the second quarter, in a further retrenchment meant to safeguard cash while it waits out a collapse in demand. Airbus will now aim to produce five A350 aircraft a month rather than the six targeted in April, the world’s biggest planemaker said in a statement Thursday. The move followed an even steeper cutback at archrival Boeing Co. announced a day earlier. With global fleets largely grounded during the second quarter, Airbus delivered one-third the number of planes it did a year earlier. The company is clamping down on costs with the aim of halting cash outflows in the second half, as it braces for a depressed travel market that could last for several years.
- Renault SA’s alliance with Nissan Motor Co. is showing increasing strain, with the Japanese partner mostly to blame for the French carmaker’s record 7.29 billion euro ($8.58 billion) first-half loss. Nissan alone accounted for 4.8 billion euros of that amount, including 4.29 billion euros of impairments and restructuring costs, the automaker said. Renault refrained from giving any financial guidance for the full year because of uncertainty around the coronavirus pandemic, though it said it is on track for cost savings and would put forth a turnaround plan in January. The global car-making alliance, which also includes Mitsubishi Motors Corp., has been shaken to its core since the November 2018 arrest of Carlos Ghosn, who was chairman of all three companies. The partnership was meant create a global powerhouse to compete against Volkswagen AG and Toyota Motor Corp.But an aggressive strategy fixated on volume growth proved wrongheaded when auto sales began to decline, and management turmoil has plagued efforts to adjust. Losses are now piling up, further testing their union.
- Credit Suisse Group AG Chief Executive Officer Thomas Gottstein is taking advantage of buoyant markets and the best first half in a decade to undertake a radical restructuring before a global recession brings a wave of defaults. The Swiss national — who took over from Tidjane Thiam in February — is combining investment banking with trading in a business to be renamed global investment bank that will also incorporate the lender’s separate Asia markets unit. The restructuring extends across other parts of the company as well, from wealth management to risk and compliance.
- The early signs are that bond investors agree with Federal Reserve Chairman Jerome Powell that the coronavirus still warrants extreme caution from policy makers. Longer-dated Treasuries outperformed their shorter-term peers Thursday, a sign that pessimism over the economy remains rife in markets. The greenbackalso rallied on demand for safe assets despite concerns its status as the world’s reserve currency of choice is at risk. The euro, the Australian dollar and Norway’s krone fell.
- Apple Inc. agreed in 2016 to halve its App Store fee for Amazon.com Inc. as part of a deal to put the e-commerce giant’s Prime Video app on Apple’s mobile devices and TV set-top box. Eddy Cue, an Apple senior vice president, and Amazon Chief Executive Officer Jeff Bezos negotiated directly on the deal, according to emails released Wednesday as part of a congressional hearing on anticompetitive behavior. The companies agreed to a 15% revenue share for customers who signed up through the app and no revenue share for users who already subscribed via Amazon or elsewhere, the emails showed. The deal, announced in December 2017, also allowed Amazon’s video service to integrate with Apple’s voice-activated digital assistant, Siri, and the iPhone maker’s TV app, which launched in 2016. In addition, the agreement gave Apple a 15% cut of subscriptions to Amazon Prime partners like Showtime for users who signed up originally through Apple.
- Procter & Gamble Co. posted a surge in sales this spring as higher at-home consumption of laundry detergent and dish soap plus continued stockpiling gave the consumer-staples giant a boost. But the pace of growth may slow from here. P&G, which makes cleaning staples including Tide, Dawn and Swiffer, posted a 6% jump in organic sales in the quarter ended June 30. That helped lift revenue in its fabric and home care unit by a record 14% during the fiscal fourth quarter. It also logged double-digit growth in family care, the home of high-demand Charmin, Bounty and Puffs.
- Initial deliveries of the U.S. Army’s $15 billion multipurpose combat vehicle built by BAE Systems Plc have slipped at least five months because of startup woes compounded by coronavirus impacts on the company and its subcontractors. The first three production models in the planned 2,936-vehicle program were supposed to be delivered in March but are now delayed until mid-August following production challenges that included welding issues, parts availability, assembly line readiness and installation of advanced manufacturing capabilities. That was before Covid-19 caused further delays, the Army said in a statement.
- ConocoPhillips expects to fully restore production from the lower 48 states in September after shutting in about a quarter of its output because of the oil-market crash. The Houston-based company restored curtailed production in Alaska in July, it said Thursday as it reported a second-quarter adjusted net loss of 92 cents per share. The result missed the 58-cent loss estimated by analysts surveyed by Bloomberg. U.S. oil production has tumbled by some 15% from its record high of 13.1 million barrels a day in February and many analysts are predicting it will take years before it reaches those levels again, given the amount of investment needed. That Conoco, one of the industry’s more financially resilient companies with high cash reserves, has a dampened expectation for future production spells trouble for the rest of the sector.
*All sources from Bloomberg unless otherwise specified