July 7th, 2020

Daily Market Commentary

Canadian Headlines

• As a wave of pent-up homebuying emerges across the U.S., a pesky and oft-forgotten trade dispute with Canada is boosting building costs. A long-simmering spat between the U.S. and Canada over softwood lumber is adding to the expenses homebuilders face in the fallout from disruptions related to the coronavirus pandemic, said David Logan, director of tax and trade policy analysis for the Washington-based National Association of Home Builders. Lumber mills in the Pacific Northwest cut production amid lockdowns, and builders are buying more wood from Canada, he said. Canadian producers are paying average tariffs of more than 20% on timber shipments to the U.S., and that translates into an average price increase of about 8% in the U.S., Logan said. Construction is topping forecasts, and builders will be forced to absorb the additional expenses, he said. Framing lumber accounts for as much as a fifth of the material costs of erecting a home.

World Headlines

• European stocks retreated from a one-month high reached on Monday after Germany reported weaker-than-expected industrial data. The Stoxx Europe 600 Index dropped 1.1% as of 10:18 a.m. in London, with all 19 industry groups lower. Technology and real estate shares led losses, while autos outperformed. Germany’s DAX Index dropped 1.4% after May factory orders missed forecasts. Adding to the gloom, the European Commission forecast a deeper contraction than previously estimated for the euro area’s economy this year. Although the Stoxx 600 had rallied on stimulus measures and bets of an economic recovery, rising coronavirus infections in parts of the world are casting a shadow on the rebound.
• U.S. futures dropped with global stocks as European officials warned the economy will take longer to recover and Germany reported weaker-than-expected industrial data. The dollar advanced. Airline shares led losses in U.S. pre-market trading. Investors are catching their breath after a ferocious rally that pushed the Nasdaq Composite to a record high. While recent reports show that global economy could be past the worst of the slump, it’s a long road back to pre-crisis levels.
• Japanese stocks fell as investors eyed the impact of dividend payments on exchange traded funds due later this week. Drugmakers were the biggest drag on the Topix index. Electronics stocks gained after the Nasdaq Composite climbed to a record high. Market observers looked for a possible selloff in stocks as some of the largest ETFs look to raise funds for annual dividend payments due this week.
• Oil dropped to trade near $40 a barrel before U.S. government data that’s forecast to show gasoline stockpiles increased, while rising virus infections raised concern stricter controls will be extended. U.S. gasoline supplies expanded by 1 million barrels last week, according to a Bloomberg survey, while nationwide crude stockpiles are projected to have fallen for a second week. Official data is due Wednesday with industry figures expected later Tuesday. Meanwhile, rising coronavirus cases have forced major fuel-consuming states including California, Florida and Texas to reimpose measures such as shutting bars and banning indoor dining, with lockdowns also re-emerging in other corners of the globe.
• Gold slipped Tuesday as the dollar advanced, but remains trapped in this month’s narrow trading range near its highest since 2012. While a slew of economic reports since last week added to risk-on sentiment, the resurgence in coronavirus cases from Australia to the Americas limited losses in havens like bullion. European officials expect a deeper economic slump than previously estimated this year, while Germany reported weaker-than-expected industrial data. Net bullish bets in U.S. gold futures and options rose to a nine-week high, Commodity Futures Trading Commission data showed on Monday.
• Donald Trump’s first weeks as president were marked by a travel ban — one he imposed on seven Muslim-majority countries. Now with four months left until the next U.S. election and the coronavirus pandemic spiking at home, Americans are the ones barred from most overseas travel. For critics of Trump’s “America First” worldview, there is bitter irony in this moment. They point to the new travel ban — with other nations barring entry to U.S. citizens because of the virus — as one of many symbols of America’s lost standing. There’s its inability to muster allies to its causes, the decision to quit the World Health Organization and the failure of its “maximum pressure” campaigns on North Korea, Iran and Venezuela to achieve their goals.
• President Donald Trump has made his position clear: “SCHOOLS MUST OPEN IN THE FALL!!!” he tweeted Monday. As Covid-19 surges in parts of the U.S., many teachers aren’t convinced. The pandemic’s ever-shifting nature has robbed school districts of the ability to plan with certainty — not only for instruction, but to provide protective equipment and intensive cleaning. Even if a sustained decline in infections allows them to open their doors, many are preparing a mix of in-person and remote education that is certain to fall short of the president’s expectations. “The reality is that they have to map out several scenarios for the fall with the real possibility that they don’t know what the scenario will be on the first day of school,” said Bethany Gross, associate director of the Center on Reinventing Public Education at the University of Washington at Bothell, which has been tracking districts’ responses to the coronavirus shutdown.
• Several trading apps of key Chinese brokers are struggling to keep up as millions of the country’s mom and pop traders race to seek a quick buck in a surging market. Users reported intermittent service connections and slowness at trading app of Huatai Securities Co. on Tuesday, while another leading broker Guotai Junan Securities Co. also had delays in real-time pricing and money transfer on Monday. Complaints also surfaced about other apps. The glitches came as trading volume in the mainland stocks boomed, hitting a five-year high and totaling 3.2 trillion yuan ($455 billion) in the first two days of the week, according to data compiled by Bloomberg.
• Investors are so worried about the U.K.’s prospects that they’re ignoring the recent uptick in the economy and betting on an extended period of weakness. They’ve piled into havens, driving government bonds to record highs. Yields on long-dated bonds dipped below those in Japan, an economy mired in low growth and high debt levels for the last two decades. And traders are again betting on negative rates in 2021, despite the Bank of England saying that officials didn’t discuss the monetary policy at their meeting last month.
• Germany’s export-reliant economy is showing the wounds of weak global demand. Factory orders and industrial production rose less strongly than economists expected in May, damped by sluggish demand from outside the euro area. The numbers underscore the need for 1.3 trillion euros ($1.5 trillion) in German government support, the most in the European Union by far aimed at cushioning the downturn caused by the coronavirus pandemic.
• The University of Oxford is facing renewed pressure as it remains locked in a battle with anti-racism campaigners over a limestone statue on its grounds of British colonialist and alumnus Cecil Rhodes, which has become symbolic of Oxford’s historical ties to colonialism — and a failure to reflect the diversity of today’s U.K. Elsewhere in the country City, University of London is dropping Sir John Cass’s name from its business school due to his ties to the slave trade. President Donald Trump said he opposes renaming the NFL’s Washington Redskins despite calls to change what many view as an offensive reference to Native Americans. Trump’s decision to weigh in on the debate over National Football League and Major League Baseball team names is the latest example of him inflaming racial tensions as he faces sinking poll numbers over his handling of protests against police brutality and the coronavirus pandemic.
• China’s equity market is firmly in the spotlight after an almost unprecedented rally that helped lift global stocks to a one-month high. The speed of the past week’s gains in China is in many ways unseen since the stock bubble that burst five years ago. Monday’s surge alone added more than $460 billion to Chinese stock values, behind just one day in July 2015 as the biggest increase in shareholder wealth since the global financial crisis. The advance continued on Tuesday, though at a slower pace. The CSI 300 Index rose 0.6% at the close to extend its five-year high, with trading volume more than three times the three-month full-day average. The offshore yuan strengthened past 7 per dollar for the first time since March.
• SoftBank Group Corp. shares touched their highest level in two decades as a series of buybacks helped the stock recoup losses suffered during the coronavirus market rout. The stock rose 4.6% to 6,190 yen ($58) on Tuesday, the highest since March 2000. That’s more than double the level in mid-March, which marked the virus-impacted low point for the company, whose market value has since surged by roughly $68 billion. The benchmark Topix index was little changed on the day. SoftBank’s recovery is something of a vindication for founder Masayoshi Son, who unveiled plans to sell 4.5 trillion yen of assets to reduce debt and bankroll record share buybacks. Son has frequently complained that SoftBank’s shares, even at their peak, have traded at less than the value of its portfolio of investments. Even after the recent gains, the stock still trades at a discount of about 50%, according to company’s own calculations.
• Novovax awarded $1.6 billion funding from Operation Warp Speed to support large-scale manufacturing of NVX-CoV2373, including production of 100 million doses starting in late 2020. Under the agreement, Novavax will demonstrate it can rapidly stand up large-scale manufacturing and transition into ongoing production, including the capability to stockpile and distribute large quantities of NVX-CoV2373 when needed
• Eldorado Resorts’ subsidiary Colt Merger issued $3.4b of 6.250% Senior Secured Notes due 2025, $1.8b of 8.125% Senior Notes due 2027 and $1b of 5.750% Senior Secured Notes due 2025. Proceeds of the offering initially will be placed in escrow pending satisfaction of certain conditions, including consummation of the company’s previously announced acquisition of Caesars Entertainment Corporation
• Cellnex Telecom SA, Europe’s largest wireless tower operator, is considering raising more than 3 billion euros ($3.4 billion) of fresh capital as it seeks to build a warchest for future acquisitions, people familiar with the matter said. The Barcelona-based company is discussing a potential share sale with advisers and could announce the plan as soon as this month, according to the people, who asked not to be identified because the information is private. Cellnex is still working out the exact size and timing of any capital increase, the people said. The company is scheduled to announce its second-quarter results on July 20, according to its website. Shareholders are scheduled to meet for their annual meeting on July 21 and the meeting’s agenda includes the delegation of powers to the board to increase share capital.
• Bulgari Chief Executive Officer Jean-Christophe Babin said he expects the LVMH-owned jeweler to recover most of the sales it lost due to the Covid-19 pandemic over two years. “I’m confident that over a period of 24 months, we will have recovered most of what was lost during Covid,” he said in a Bloomberg TV interview. “In our business, it’s never lost, it’s more postponed.” The CEO also said he’s sticking to a plan to expand a line of luxury hotels despite the coronavirus outbreak. Within the next two to three months, the brand will announce plans for further openings, including the first in the U.S., he said.
• Russian investigators have detained an adviser to the head of the country’s space agency on charges of treason, Roscosmos said Tuesday. The Federal Security Service said Ivan Safronov was suspected of passing information on arms sales and other defense and security matters to a North American Treaty Organization country that it didn’t name, the state-run RIA Novosti news agency reported. Safronov is a prominent former journalist who had only worked at Roscosmos for a few months. The agency said the case wasn’t related to his work there but it is cooperating with investigators.
• Google, Facebook Inc., Microsoft Corp. and Twitter Inc. won’t process user data requests from the Hong Kong government amid concerns that a new security law could criminalize protests. Last Wednesday, when the law took effect, Google paused production on any new information requests from Hong Kong authorities, said a spokesperson for the Alphabet Inc. unit. “We’ll continue to review the details of the new law,” the spokesperson added. It’s unclear what types of actions will violate the new law, but police arrested a man last week for brandishing a Hong Kong independence flag. Protesters have rallied against the law, and the government has threatened fines and imprisonment for service providers that fail to remove messages. In response, the U.S. has revoked some trade benefits with Hong Kong related to sensitive technology. American officials have expressed fears that the new law signals Beijing’s intention to take full control of Hong Kong, which has operated with more autonomy and freedom than cities on the mainland.
• Samsung Asset Management Hong Kong Ltd. is changing the underlying benchmark for its oil ETF after it was unable to track the current index following a dramatic sell-off and subsequent rally in crude prices this year. Samsung Asset said it worked with S&P Dow Jones Indices to come up with a new index that will track multiple contract months for oil futures to mitigate the risk from holding a single-month contract, the Hong Kong-based money manager said in a statement late Monday. Once the new U.S. dollar index is rolled out in August, it will eventually be weighted 55% to the one-month forward index, 30% to the two-month index and 15% to the three-month, according to the statement. The ETF fell 2% in Hong Kong on Tuesday, the most in a week.
• Deutsche Bank AG’s booming trading desks are set to see the frenetic activity of the first six months slow in the second half as the exceptional market situation created by the coronavirus ebbs, according to Chief Executive Officer Christian Sewing. The German lender benefited from continued momentum in markets through June, Sewing said during a webcast hosted by Bloomberg on Tuesday. While the bank is on track or ahead of the restructuring plan he announced a year ago despite the pandemic, he said, debt capital markets is one area of activity that’s set to decelerate in the coming months.
• Morgan Stanley analysts lifted their bull-case price target for Tesla Inc. to $2,070 after an “extraordinary” rally saw the stock overshoot a previous best-case scenario of $1,200. But they still don’t recommend buying Tesla shares. After better-than-expected delivery numbers in an “extremely difficult” second quarter for the auto sector, Tesla now appears less risky than other carmakers, analyst Adam Jonas said.
• The pandemic is poised to usher in the biggest retreat for global meat eating in decades. Per-capita consumption is set to fall by almost 3% in 2020 to the lowest since 2011, according to data from the United Nations. Meanwhile, analysts across the globe are predicting declines not just per-capita, but also for overall demand in their regions. That’s a dramatic turnaround for an industry that’s come to rely on steady growth. Notably, the shift is happening in every major market, including in the U.S., where it’s predicted that per-capita meat consumption won’t return to pre-pandemic levels until at least after 2025.

*All sources from Bloomberg unless otherwise specified