June 11, 2021

Daily Market Commentary

Canadian Headlines

  • Canadian equities rose Thursday with mining companies leading the way. The S&P/TSX Composite Index rose 0.2% as seven of eleven sectors gained. Materials and tech led, while health care retreated. Gold erased early losses after U.S. inflation data showed domestic prices rising slightly faster than expected, causing real Treasury yields to decline. Transat AT Inc., the vacation operator that Air Canada tried to buy, will discontinue its nascent hotel division and increase its presence in Eastern Canada in an effort to restart its business and return to profit. Shares advanced for a fifth session.
  • After four years of acquisitions, former investment banker Adam Waterous’s vision for a private Canadian oil producer has come to fruition. Waterous Energy Fund has merged its two portfolio companies — Strathcona Resources Ltd. and Osum Oil Sands Corp. — into a single entity and arranged a C$1 billion ($827 million) covenant-based loan that will allow it to pay dividends, which the companies couldn’t do under previous reserve-based arrangements. The parallel deals mark the culmination of a plan, started in 2017, to build a privately-owned oil company that is able to secure a low cost of capital from banks and provide investors with substantial regular payouts, Waterous said. That’s in contrast to the typical approach of energy companies controlled by private equity firms, which tend to focus on exploring new fields or improving mid-tier assets with a goal of selling them to larger operators.
  • Intact Financial Corp. and Tryg A/S will use a joint venture to allow them to exit the Danish assets of insurer Codan in a deal worth just over $2 billion. The assets will be sold to Alm. Brand A/S, which is based in Copenhagen, in a divestment that has been anticipated since Tryg teamed up Intact of Canada last year to acquire RSA Insurance Group Plc. RSA accepted a 7.2 billion-pound ($10.2 billion) takeover offer from Canada’s Intact and Tryg of Denmark in November, marking the biggest acquisition of a U.K.-listed company of 2020. Since then, Intact has been trying to find a buyer for the Danish assets of Codan, which is part of the RSA group.

World Headlines

  • European stocks extended a record high as investors weighed prospects of continued policy support in spite of higher inflation. The Stoxx Europe 600 Index was up 0.6% as of 12 p.m. in London, with almost all sectors in the green. Miners and utilities led gains, while banks fell with bond yields. The Stoxx Europe 600 Basic Resources Index climbed for a second day as base metals gained across the board. Spanish blood-plasma makerGrifols SA soared after U.S. competitor Vertex Pharmaceuticals Inc. halted a closely watched effort to develop a therapy for liver disease. Europe’s benchmark has edged higher all week, on track for its sixth straight record close. Stocks have rallied on expectations of an economic recovery, with inflation concerns easing after the European Central Bank on Thursday renewed its pledge to maintain stimulus measures even as it upgraded forecasts for growth and price rises.
  • Global stocks extended a record high and U.S. Treasuries were steady amid growing confidence inflation will prove transitory, leaving scope for continued central-bank support. The MSCI All Country World Index was poised for a fourth weekly advance. S&P 500 Index futures rose 0.2% after the benchmark gauge scaled a new high Thursday. Vertex Pharmaceuticals Inc. tumbled 13% in premarket trading after halting the development of a therapy for a rare genetic disorder. Faster-than-expected U.S. consumer-price growth for May was largely driven by categories associated with economic reopenings, bolstering the view price pressures may ease later in the year. With the Federal Reserve setting a high bar for reconsidering its dovish stance, the data ended up stoking risk appetite across global markets.
  • Asian equities rose, tracking gains in U.S. peers overnight as investors saw key inflation data as leaving scope for ongoing central-bank support. Technology stocks contributed most to gains in the MSCI Asia Pacific Index, with Meituan and TSMC the biggest boosts among individual stocks. Financials dipped after the U.S. benchmark Treasury yield declined overnight to the lowest since March. Vietnam and South Korea led gains among key regional equity gauges. Stocks declined in China after the government asserted sweeping powers to seize assets and block business transactions as part of an effort to hit back against sanctions by the U.S. and its allies.
  • Oil headed for a third straight weekly gain on signs of an improving demand outlook, with the International Energy Agency warning that the market will need extra supply next year. Futures in New York have bounced around the $70-a-barrel mark this week, closing Thursday at the highest level since October 2018. The IEA said Fridaythat OPEC and its allies will need to lift output to keep the market adequately supplied, though predicted demand won’t reach pre-virus levels until late 2022. Road traffic in the U.S. and much of Europe is largely back to pre-pandemic levels, but jet fuel remains far below where it was in 2019. There are also risks to the demand outlook as parts of Asia and Latin America continue to grapple with virus cases.
  • Gold held an advance as Treasury yields remained near a three-month low amid expectations that inflation will prove transitory, keeping ongoing central-bank support intact. U.S. data on Thursday showed the consumer price index rose 0.6% in May, more than forecast and the second-largest advance in more than a decade, but not enough to fan concerns of early monetary tightening by the Federal Reserve. Real yields eased after the data, boosting the appeal of non-interest bearing bullion.
  • Malaysia extended the nationwide lockdown by two weeks as the number of daily cases remains elevated, Defense Minister Ismail Sabri Yaakob said. The first phase of the lockdown, due to end on June 14, will continue until June 28. The decision to extend was made as new infections continue to exceed 5,000 daily. The U.K. says there are now a total of 42,323 cases of the Delta variant, first identified in India, an increase of 29,892 in a week, according to a weekly update of variant data by Public Health England. Germany may encounter a fourth wave as a result of the Delta variant that’s spreading across the U.K., but it won’t spur another hard lockdown of the kind the country experienced in the winter, Chancellor Angela Merkel’s chief of staff told RTL/ntv in an interview.
  • Federal Reserve Chairman Jerome Powell and his colleagues appear to be winning over investors with the argument that the current surge in consumer prices won’t last. On Thursday, when news broke that U.S. inflation climbed to 5% in May for the first time since 2008, yields on the key 10-year Treasury note moved in the opposite direction — falling to a three-month low of around 1.43%. And while bond-market gauges of expected inflation edged upward, they remained well short of this year’s high reached in May.
  • SIGNA Sports United is to combine with Yucaipa Acquisition Corporation at an implied enterprise value of approximately $3.2 billion, according to a statement. Transaction encompasses up to approximately $645m of gross proceeds through a cash contribution of approximately $345m held in Yucaipa’s trust account (assuming no redemptions), and a fully committed upsized PIPE of approximately $300m.
  • Chinese ride-hailing company Didi revealed a $1.6 billion net loss for 2020 as it moves ahead with plans for a U.S. initial public offering. The company in its first public filing for the IPO listed the offering as $100 million, a placeholder that will change when the company discloses terms for the share sale. Didi filed Thursday under the business name Xiaoju Kuaizhi Inc., with Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.leading the offering. Didi, one of the largest investments in SoftBank Group Corp.’s portfolio, accelerated its listing plans after its business rebounded as the coronavirus pandemic ebbed in China. The company has been considering seeking a valuation of as much as $70 billion to $100 billion in the IPO, Bloomberg News reported in April.
  • British Prime Minister Boris Johnson and President Joe Biden heaped praise on each other as the two leaders sought to re-launch the U.K.-U.S. relationship at a time of rising tensions over the fallout from Brexit. “Prime Minister Johnson and I had a very productive meeting,” Biden told reporters after the leaders met at a beach resort ahead of the Group of Seven summit in Cornwall, England, on Thursday. “We affirmed the special relationship.” For his part, Johnson hailed Biden and his team as a “breath of fresh air” and described their conversation as “wonderful.” In an interview with the BBC, the prime minister acknowledged his distaste for the term “special relationship” as a bit of a cliche. He described it instead as “indestructible.”
  • China Youran Dairy Group Ltd. and its shareholder, private equity firm PAG, have raised about HK$5 billion ($643 million) after pricing the dairy product maker’s Hong Kong initial public offering at the low end of a marketed range, according to people familiar with the matter. The company and funds managed by PAG have priced 715.4 million shares at HK$6.98 each, the people said, asking not to be identified because the information is private. They had marketed the shares at HK$6.98 to HK$8.66 apiece, the prospectus showed. Youran Dairy’s flotation was met with mediocre investor demand as some retail buyers canceled orders, the Hong Kong Standard reported on Thursday. Orders placed through margin financing stood at HK$1.29 billion on Thursday, down about 8% from Monday, the Standard reported. The pricing was first reported by IFR.
  • China is turning to its mammoth — and secretive — state reserves as the world’s top commodities consumer accelerates its campaign to rein in surging raw material costs. The country is planning to expand pork inventories to strengthen control over the market, while authorities have urged quicker construction of coal reserves infrastructure and are mulling a price cap as energy costs soar. The latest push centers on base metals, with China set to offer copper, aluminum and zinc directly to end-users to curb a rally, according to people familiar with the matter, who asked not to be identified as the plan isn’t public. Commodities have stormed to the highest in a decade, with copper to coal hitting records last month, as demand outstrips supply and the global recovery gathers pace. That’s fanning concerns that manufacturers will eventually need to pass higher costs on to consumers, hurting the economy. Authorities have already targeted the country’s futures market, singling out hoarders and speculators, and pressuring some firms to pare back bullish bets.
  • Just eight months after celebrating a narrow escape from financial disaster, Chinese billionaire Hui Ka Yan finds himself back in crisis-fighting mode. Resurgent concerns about the health of China Evergrande Group, Hui’s flagship property company, have pushed its stock to within a hair’s breadth of the lowest level since March 2020. Bondholders are rushing for the exit too, spooked by missed payments at the developer’s affiliates and a report that regulators are probing Evergrande’s ties to an obscure bank in northern China. It’s yet another dramatic turn of events for a tycoon whose ups and downs are extreme even by the standards of China’s volatile markets. At $19 billion, Hui’s net worth has tumbled by about a third since he clinched a deal with investors to avert a cash crunch in September. It’s down by more than half from a 2020 peak, according to the Bloomberg Billionaires Index.
  • Citadel Securities reached a truce with a British hedge fund over the attempted hiring of a senior trader, ending a lawsuit that was set to consider the makeup of a secret algorithm. Ken Griffin’s market maker and GSA Capital Partners LLP reached a confidential settlement, GSA said in a statement Thursday. The agreement followed claims that GSA Capital obtained information on a closely-guarded trading strategy when it sought to recruit a former quant researcher, Vedat Cologlu, at Citadel Securities.
  • While U.S. homeowners are celebrating the surge in home equity amid another housing boom, mortgage-bond investors fret over the higher loan sizes being packaged into the securities. The larger a mortgage loan, the more apt the homeowner is to refinance when given the opportunity to do so. As all mortgages are prepaid at par, and most of the mortgage universe is trading at a premium, this can hurt performance. Using Bloomberg’s Collateral Performance Research tool to look at the trend in newly originated mortgages’ average loan size, those packaged into Fannie Mae 30-year pools has averaged about $293,000 since the beginning of 2020, up 9% compared to 2019. For those packaged into Ginnie Mae II 30-year pools, it’s just above $258,000, 8% higher compared to 2019.
  • A bipartisan group of 10 senators has agreed to pitch a $1.2 trillion eight-year infrastructure spending package to President Joe Biden, according to people familiar with the deliberations. The proposal, backed by Republicans including Mitt Romney and Democrats including Joe Manchin, calls for $579 billion in net new spending beyond outlays that Congress was already expected to enact, according to the people. That is still well below the $1.7 trillion Biden had proposed in his direct talks with a Republican group of senators led by Shelley Moore Capito of West Virginia. The Biden-Capito negotiations ended in failure earlier this week. The White House has instead turned its focus to the potential with the bipartisan group of senators.
  • PG&E Corp.’s new chief executive officer, Patricia Poppe, once doubted the reality of climate change. Now, it may shape her fate. The state her electric utility serves, California, is growing hotter and drier, and it frequently catches on fire. Too often, PG&E’s power lines have provided the spark. Years of deadly blazes triggered by the company’s equipment leveled neighborhoods from Napa Valley to the Sierra Nevada foothills and finally drove PG&E into bankruptcy in 2019. To get back out, PG&E had to pay $25.5 billion in lawsuit settlements—and sell its historic San Francisco headquarters to raise cash. Now California’s fire season has arrived early. PG&E has spent the last three years trying to harden its system, installing insulated wires and stronger poles, and shutting off power lines altogether when fire danger grows high. Poppe, who joined PG&E in January, knows that she will be judged on how well she and the utility to responds to fires and other climate-related disasters.
  • Prime Minister Boris Johnson will give leaders a beachside welcome, formally kicking off three days of summitry along the English coast after meeting U.S. President Joe Biden for the first time on Thursday. The focus for the Group of Seven on Friday will be on the economic recovery as the world’s most-developed nations discuss ways out of the pandemic. Also look for signs of whether Brexit-related tensions will flare up in meetings on the side.
  • The Biden administration is pressing the United Arab Emirates to remove Huawei Technologies Co. from its telecommunications network and take other steps to distance itself from China, raising the risk that the country’s purchase of some $23 billion in F-35 jets and drones may be at stake, people familiar with the matter said. The U.S. is asking the UAE to remove Huawei equipment from its networks within the next four years — before it’s scheduled to get the F-35 in 2026 or 2027 — but Emirati officials have countered that they’d need longer plus an alternative that’s as affordable, according to three of the people, who spoke on condition of anonymity to discuss private negotiations. The conversations have turned in part on the feasibility of obtaining alternative equipment from Samsung Electronics Co., Ericsson AB or Nokia Oyj.
  • KKR & Co. has acquired an almost $800 million loan portfolio from CIT Group Inc. as it seeks to expand its footprint in the aviation sector. The deal is part of the global investment firm’s launch of a new commercial aviation lending platform, AV AirFinance Limited, which will provide secured financing to airlines, lessors, manufacturers and investors. The purchase includes more than fifty loans for about sixty commercial aircrafts, according to a company statement. The loans, on average, yield in the mid-single digits and have about four years remaining before maturing. KKR’s acquisition adds to its growing presence in the aviation space. It agreed to buy Atlantic Aviation from Macquarie Infrastructure Corp for $4.48 billion in cash, assuming its debt and restructuring obligations, Bloomberg News reported  earlier this week. The firm also provided a credit facility of as much as $150 million to California-based private aviation company Jet Edge International.
  • International banking regulators’ proposal to classify Bitcoin as the riskiest of assets dragged cryptocurrencies further into the mainstream financial world. It would also make it extremely costly for banks to hold digital tokens on their balance sheets, potentially delaying crypto’s wider adoption. The Basel Committee on Banking Supervision proposed that a 1,250% risk weight be applied to a bank’s exposure to Bitcoin and certain other cryptocurrencies. Bitcoin jumped on the announcement, then erased the gains. It was trading around $36,200 as of 10:30 a.m. in Hong Kong on Friday.
  • Element Solutions Inc., a specialty chemicals company, has made a binding offer to buy France’s Coventya SAS for about 420 million euros ($511 million), including debt, the company said in a statement. The cash deal is expected to add 7 cents to Element’s annualized adjusted earnings per share before synergies, according to the statement. That represents accretion of about 5% based on the company’s adjusted EPS guidance of $1.30 or greater for 2021. Element expects to create at least $15 million of annual synergies over the two years following close of the deal.

“Find out where the people are going and buy the land before they get there.” – William Penn Adair

*All sources from Bloomberg unless otherwise specified