July 9th, 2019

Daily Market Commentary

  • Canadian Headlines
    • Alberta, Canada’s largest oil producer, plans to refrain from selling debt until its new government releases a budget update this fall, according to a province official. The province’s last issuance came in March, ahead of elections which saw United Conservative Party leader Jason Kenney unseat the New Democratic Party’s Rachel Notley as premier. Alberta’s business activity is recovering as oil prices climb and Canada’s overall economy also ticks upward after a slowdown in the first quarter. A Canadian Federation of Independent Business barometer index shows Alberta soaring 7 points to 59, the highest in about 18 months, yet it still remains shy of the national average of 61.5 points.
    • Natural gas pipeline companies in Mexico are in for billions of dollars of payments if they lose a tug of war with President Andres Manuel Lopez Obrador, but the tussle could also cost the nationalist president investments he needs to get the economy back on track. At the heart of the dispute with companies like Canada’s TC Energy Corp. are take-or-pay contracts signed with the previous administration that saw Mexico’s state-run power utility footing the bill for gas that was never delivered. The Federal Electricity Commission, known locally as CFE, is considering about $3 billion in arbitration for four of the seven pipeline contracts at stake.

     

  • World Headlines
    • Auto and chemical makers led the Stoxx Europe 600 Index lower after BASF SE issued a profit warning, slashing its forecast for 2019 “mainly due to the trade conflicts.” Stocks reversed gains in Japan, fluctuated in South Korea and saw modest slides in Hong Kong and China.
    • U.S. stock futures and European shares retreated alongside Asian equities as markets extended a downbeat start to the week. The dollar strengthened for a third day. S&P 500 futures pointed to a third session of declines as investors await more clues on the path for U.S. monetary policy. Trading may continue to be choppy ahead of key testimony this week from Federal Reserve Chairman Jerome Powell as investors assess prospects for easing following conflicting signals on the global economy. Treasuries declined, while gold and the yen both dropped for fourth day. Italian bonds bucked the trend, rising as the country took advantage of low borrowing costs to sell more debt.
    • Japan’s Topix index drifted lower ahead of Federal Reserve Chairman Jerome Powell’s testimony to Congress later this week, which may give clues on the path of interest rates. The benchmark gauge erased an early advance to decline alongside Chinese stocks and U.S. equity futures trading in Asia. Technology shares declined in Tokyo after Apple Inc. dragged U.S. peers lower on an analyst downgrade. Japanese defensive stocks climbed.
    • Oil steadied near $58 a barrel in New York as investors awaited guidance from the Federal Reserve on interest rates and as tensions in the Persian Gulf maintained the risk of supply disruption. West Texas Intermediate futures added 0.2%, recouping earlier losses. Fed Chairman Jerome Powell is scheduled to testify to Congress on Wednesday and Thursday, likely giving investors clues on the path for U.S. monetary policy. Tensions in the Middle East remained high, as BP Plc kept a ship in the Persian Gulf for fear it might be seized by Iran in retaliation for British forces arresting a vessel carrying the Islamic Republic’s crude last week.
    • Gold fell for a fourth day, its worst run since mid-May, after the dollar strengthened and as investors await a key testimony from Federal Reserve Chairman Jerome Powell. The recent run of losses was set in train by payrolls data that pointed to a resilient economy and raised doubts over what to expect at the Fed’s policy meeting later this month, although financial markets are still pricing in a rate cut. Powell will testify before Congress on Wednesday and Thursday.
    • The pound was within touching distance of a two-year low as signs of economic downturn mounted in a market increasingly betting that policy makers will have to cut borrowing costs. The currency approached its weakest level since April 2017 as disappointing retail sales and suggestions that the U.K. economy could be set for its worst quarter since 2012 sapped sentiment. The bleak economic outlook is adding to risk factors for sterling, with money markets pricing in a rate cut by the Bank of England next year.
    • Jerome Powell is likely to leave Federal Reserve interest-rate cuts firmly on the table when he appears before Congress this week, even though the latest U.S. jobs report dialed down the urgency to ease borrowing costs. The Fed chairman, who has been hectored for months by President Donald Trump for not cutting rates, will probably repeat language from the Federal Open Market Committee’s June statement that it will “act as appropriate’’ to sustain the economic expansion — reinforcing bets the central bank will cut at its July 30-31 meeting.
    • As the U.S. and China prepare to restart trade talks, few in Beijing see a clear pathway to a lasting deal. Pessimism dominated in conversations last week with about a dozen bureaucrats, government advisers and researchers in China’s capital following the latest truce between Presidents Donald Trump and Xi Jinping. Most saw Trump’s election strategy as being the paramount factor for whether a deal was possible in the short term. “Trump’s biggest aim is reelection in 2020,” said Wei Jianguo, former vice minister of commerce and now a vice chairman of the China Center for International Economic Exchanges. “All of his actions are aimed toward it.”
    • PepsiCo Inc. reported quarterly profit that beat estimates as brands including Mountain Dew soda and Doritos chips boosted results. Second-quarter earnings, excluding some items, amounted to $1.54 a share, compared with the average projection of $1.50. Revenue of $16.44 billion was narrowly ahead of estimates.
    • Deutsche Bank AG shares dropped on growing skepticism about the cost of a sweeping overhaul, at one point marking the biggest two-day decline in more than three years. The shares fell as much as 6.5% to 6.35 euros on Tuesday in Frankfurt before paring their declines to about 3.7%. They have lost almost 10% since the bank announced its overhaul on Sunday, erasing about $1.6 billion of the lender’s value. Deutsche Bank’s riskiest bonds also fell.
    • WPP Plc is planning to announce the sale of a majority stake in its Kantar market-research business to Bain Capital within days, people familiar with the matter said. Bain has been discussing the purchase of a 60% stake, one of the people said, asking not to be identified because the deliberations are private. The parties are finalizing terms of an agreement and are preparing to make an announcement as soon as the next two days, the people said.
    • China denounced a possible U.S. weapons sale to Taiwan as a violation of international law, after the State Department approved a weapons package including tanks, missiles and other armaments for the island. Chinese Foreign Ministry spokesman Geng Shuang said Tuesday that the country had lodged “stern representations” with the U.S. and urged it to immediately withdraw the sale. His comments came in response to a Pentagon statement Monday announcing the State Department’s determination and saying the sale would help Taiwan “maintain a credible defensive capability.”
    • After a cold, soggy start to the summer, it’s finally feeling like summer in the U.S. Midwest, and corn fields are recovering. A turn toward warmer weather should be beneficial for the battered crop, and government data signal that conditions are starting to bottom out. The changing weather also means that investors are tapping the brakes on their bullish bets after prices took a spectacular ride higher. Key growing areas are likely to stay warmer and drier this week, helping the crop catch up to normal growing stages after the heavy rains caused record planting delays. Corn’s rally has started cool off after futures in the second quarter surged 21%, the best such performance since 2014. The contract for December delivery fell for the first time in five days in Chicago on Tuesday.
    • The Trump administration overstepped its authority with a rule to force drug companies to include the price of their medicine in advertisements, a federal judge ruled Monday. Merck & Co., Eli Lilly & Co., Amgen Inc. and a trade group for advertisers sued the government last month to block the regulation, which would have required the companies to include drug list prices in the ads, which are a key part of pharmaceutical marketing.
    • Airbus SE will ask airlines operating 25 of its older A380 planes to inspect their wings for possible cracks, a problem that’s arisen in the past on the double-decker aircraft. Some fissures were found on planes in service, a condition that could reduce the wings’ structural integrity if not corrected, the European Union Aviation Safety Agency said Friday. The regulator is proposing an airworthiness directive related to the matter.
    • A tiny company linked to Prime Minister Viktor Orban’s closest business ally agreed to take over a much bigger unit of Deutsche Telekom AG’s local subsidiary in Hungary, in the most high-profile acquisition to date for the premier’s circle of business partners. 4iG, partly owned by Lorinc Meszaros, a former gas fitter from Orban’s home village, signed the deal to acquire T-Systems, the information technology services arm of Magyar Telekom Nyrt., according to a statement on Tuesday. The price wasn’t disclosed and the deal is subject to a full due diligence and regulatory approval. The parties expect to finalize the transaction this year.
    • An Indian court denied Naresh Goyal, founder of India’s once largest airline by market value, permission to fly overseas after the government told the court a $2.6 billion fraud investigation involving Jet Airways India Ltd. is underway. The Delhi High Court’s single-judge bench of Justice S.K. Kait expressed apprehension Goyal may not return like others facing allegations of fraud. “I won’t name but some people are sitting outside the country, and India is not able to bring them back,” Kait said. The court sought government’s written response and said it will hear the case again on Aug. 23.
    • PetroChina Co. looks cheap on many levels, perhaps none more so than comparing it to the value of its reserves beneath the Earth’s surface. By plotting its enterprise value against reserves, China’s state-run oil and gas champion is the cheapest among global energy firms tracked by Sanford C. Bernstein & Co. Its shares have sunk 14% in Hong Kong this year to trade almost at the lowest since 2005. That’s despite a 19% gain in crude prices.
    • Piper Jaffray to acquire 100% of the equity and partnership interests in Sandler O’Neill for total consideration of $485 million. Piper Jaffray will pay $350 million in cash to Sandler O’Neill equity holders at the time of closing; and $135 million in restricted consideration, primarily in restricted stock of Piper Jaffray Companies, to Sandler O’Neill employee partners
    • Chinese supermarket operator Wumart Stores Inc. and an investor group backed by rival Yonghui Superstores Co. are among suitors that proceeded to the final round of bidding for German food wholesaler Metro AG’s China business, people with knowledge of the matter said. Yonghui has teamed up with Hillhouse Capital, according to the people, who asked not to be identified because the information is private. Tencent Holdings Ltd. is in talks to join their consortium, the people said. A group consisting of Meicai, a Chinese startup that helps farmers sell vegetables to restaurants, and Hopu Investment Management Co. have also been picked for the final round, the people said.
    • DP World Plc mandated banks to raise about $1 billion of bonds to finance the acquisition of Topaz Energy & Marine Plc, according to three people with knowledge of the plans. The world’s largest port operator hired Citigroup Inc., Dubai Islamic Bank PJSC and Standard Chartered Plc to arrange investor meetings in Hong Kong, Singapore and London from July 10, according to a document sent to investors and seen by Bloomberg. The Dubai-based firm plans to sell benchmark 10-year Islamic bonds and is also considering long-dated conventional bonds, the document shows. Barclays Plc, Deutsche Bank AG, Emirates NBD Capital, First Abu Dhabi Bank PJSC and HSBC Holdings Plc have also been hired as joint lead managers and bookrunners.
    • The backdrop for miners is ready to brighten in the second half of this year. They just need a resolution of the trade war between the U.S. and China to light a fire under their stocks. Metal prices and mining equities have been at the mercy of trade headlines all year, and business fundamentals have a taken a back seat. To be sure, easier central bank policies around the world have helped some metals, especially gold and silver. But a resolution of the trade tension between U.S. and China — or at least some steps to bring down the temperature — could prove the ultimate catalyst for the metals and mining complex.

*All sources from Bloomberg unless otherwise specified