June 10th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian equities snapped a two-session winning streak Tuesday alongside U.S. shares on concern that the blistering rally in risk assets overshot economic prospects. The S&P/TSX Composite Index fell 0.9%, the most since May 13. Nine of 11 sectors fell, while tech and materials gained. Canada’s energy index lost 2.9% Tuesday. Prior to Tuesday, oil & gas shares saw ferocious gains in firms such as ShawCor Ltd., which rose 185% in three sessions. Oil driller Baytex Energy Corp. rose about 50% during the same period.
• Royal Dutch Shell Plc, the world’s largest liquefied natural gas trader, expects buying and selling of the fastest-growing fuel to recover to levels seen before the pandemic. Global LNG demand took a severe hit when nations imposed lockdowns to combat the spread of the coronavirus, impacting the fuel’s use in everything from power plants to transport and factories. That came on top of the biggest glut of the fuel the world has ever seen, helped by two mild winters in a row.

World Headlines

• European stocks erased their earlier advance, declining for a third straight session as investors took profits after recent gains. The Stoxx Europe 600 Index dropped 0.2% as of 10:40 a.m. in London, after rising as much as 0.9%. Travel and leisure and automakers — among the best performers in the rally since mid-May — led losses on Wednesday. Energy shares also lagged as oil retreated on signs U.S. stockpiles expanded. Equities have lost steam this week after surging to a three-month high on Friday amid a stimulus boost. A rotation into cyclicals and value shares is also paused after a strong move.
• U.S. futures fluctuated and European stocks turned lower as investors weighed a grim economic forecast by the OECD with the expectation of more support from the Federal Reserve. The dollar slipped. Contracts on the S&P 500 and Dow Jones Industrial Average swung between gains and losses after the international group forecast a 6% contraction in the global economy this year. Nasdaq 100 futures traded in the green all morning.
• Japanese stocks pared early losses and closed mixed as investors weighed the upcoming Federal Reserve policy decision and the sustainability of the recent surge in risk assets. The Topix ended 0.2% lower, paring a morning drop of as much as 0.8%. The Nikkei 225 Stock Average reversed a loss to close above 23,000 for a third day. S&P 500 futures advanced with the Federal Open Market Committee meeting set to conclude later Wednesday. The underlying U.S. gauge fell 0.8% Tuesday, one day after erasing its loss for 2020.
• Oil retreated to near $38 a barrel after a U.S. industry report signaled a surprise jump in crude inventories, underscoring the market’s patchy road to rebalancing. Futures dropped 2.4% in New York. The American Petroleum Institute reported that stockpiles expanded by 8.42 million barrels last week, according to people familiar with the data. If confirmed by government figures later on Wednesday, it would be the largest build since the end of April. Inventories at a key European hub jumped to a two-year high last week, Genscape Inc. reported.
• Gold held a two-day advance as investors weighed a weaker dollar and a pause in the stock market rally ahead of the Federal Reserve’s policy decision later Wednesday. The precious metal has its fair share of supporters. Goldman Sachs Group Inc. says gold prices could rise beyond $2,000 an ounce if the Fed decides to tolerate above-target inflation, although the bank said that wasn’t its base case, and reiterated its 12-month forecast for $1,800. Separately, billionaire money manager Jeffrey Gundlach is bullish on gold in the long-term, predicting it will reach new highs, and is sticking with his weak-dollar call.
• The global iron ore market may flip to a deficit if a virus-driven mine halt in Brazil persists and prices are now “on a knife edge,” UBS Group AG said in a warning that reflects a rising tide of concern over the suspension’s potential implications. Futures held above $100 a ton. The halt of Vale SA’s Itabira complex after workers contracted Covid-19 is expected to tighten the market, UBS said in a note, predicting elevated prices until there’s clarity on output. Separately, National Australia Bank Ltd. raised 2020 forecasts, and Macquarie Wealth Management said it saw rising supply risk.
• Germany’s foreign minister urged Israel on Wednesday to pursue a negotiated settlement with the Palestinians rather than unilaterally annex West Bank land, as European officials step up their opposition to a proposed move they see ending Palestinian hopes for an independent state. With Israel vowing to begin the annexing process next month, Heiko Maas set aside concerns that prohibited travel since the coronavirus pandemic broke out to meet with his newly installed Israeli counterpart, Gabi Ashkenazi. He’ll hold virtual talks with Palestinian officials.
• After 34 years of conspiracy theories, Swedes have finally been told who killed Olof Palme, their prime minister until his violent death on a Stockholm street corner. At a highly anticipated press briefing on Wednesday, prosecutor Krister Petersson said the assassin was Stig Engstrom, a former employee of Skandia who committed suicide two decades ago. Engstrom had worked as a graphic designer for the firm. Because he’s no longer alive, the case will now be closed.
• Inditex SA plans to invest 2.7 billion euros ($3 billion) to boost e-commerce operations of chains like Zara and Bershka and expand store space to gain an edge on rivals as the pandemic snarls the clothing-retail industry. The Spanish retailer aims to get more than a quarter of its sales from the web by 2022 after online growth helped mitigate a 44% drop in first-quarter sales. Inditex delayed a special bonus dividend after reporting its first quarterly loss since it went public two decades ago.
• Airbus SE will hold jetliner production at current levels for now after deciding that a one-third reduction in monthly output announced in April is sufficient to cope with the hit to demand from the coronavirus pandemic. Airbus plans to produce 48 aircraft a month across its A320 narrow-body and A330 and A350 wide-body models, and any further adjustments to output “should be minor,” the Toulouse, France-based planemaker said. The company has also said it will slow a ramp up in build rates for the smaller A220 jet made in North America, and is winding down the A380 superjumbo.
• China is offering employees of some large state-run companies intending to travel overseas the option of being inoculated with two coronavirus vaccines currently in development. The Organization for Economic Co-operation and Development forecast that the pandemic will cause a global economic slump of 6% this year. The European Union plans a “gradual and partial” easing of a ban on most travel to the bloc as of July 1, while blaming China and Russia for spewing out false and misleading information about Covid-19. Anthony Fauci, the director of the U.S. National Institute of Allergy and Infectious Diseases, said the pandemic is his “worst nightmare” and warned that the deadly outbreak is far from over even as U.S. infections rose at the slowest daily pace since March.
• CrossFit Inc. chief executive officer Greg Glassman is out at the fitness company he co-founded, the latest senior leader to step down as the U.S. reckons anew with its history of racial injustice and police brutality. “I created a rift in the CrossFit community and unintentionally hurt many of its members,” Glassman said in a statement late Tuesday, days after he tweeted about the Black Lives Matter protests and the death of George Floyd at the hands of Minneapolis police. Affiliate gym owners, employees and customers criticized the posts as insensitive and tone-deaf. Adidas AG’s Reebok also said it would end its longtime sponsorship of the CrossFit Games after the event in 2020, according to Footwear News.
• The rebound in global stocks back to December levels — before the world had heard of Covid-19 — has outstripped the monetary stimulus pumped into economies by global policy makers, raising the stakes for the V-shaped rebound that has been priced in. The global stock market’s capitalization has climbed by roughly $22 trillion from the March low. Tallies of central bank stimulus are fraught with challenge, but Morgan Stanley last month predicted $13 trillion in cumulative balance-sheet expansion during the current easing cycle from the U.S., euro region, Japan and U.K. through the end of 2021.
• The U.S. Air Force has delayed by four years a decision on whether the $44 billion KC-46 tanker program should be approved for full-rate production while contractor Boeing Co. tries to show it has fixed the flawed camera system used for the plane’s midair refueling mission. An Air Force statement issued late Monday said the decision will come in July to September of 2024. It was previously planned for this September, Ann Stefanek, a spokeswoman for the service, disclosed on Tuesday. The latest delay means the Air Force and lawmakers who provide funds for the troubled tanker will have an even longer wait before learning whether the aircraft put under contract in 2011 will be effective in its combat mission and can be maintained.
• Goldman Sachs Group Inc.’s commodities business, once the crown jewel of its trading operation, is rediscovering its old touch in turbulent markets. The commodities unit generated more than $1 billion in revenue this year through May, pouncing on wild swings for its best start in a decade, according to people with knowledge of the matter. Much of the boost came from oil trading overseen by Anthony Dewell and Qin Xiao, who correctly positioned their desks for the collapse in prices, the people said, asking not to be identified discussing confidential information.
• The coronavirus pandemic is splintering the world economy, and policy makers can’t risk a premature withdrawal of lifelines to businesses and the most vulnerable people, the OECD warned. It made the grim assessment as it forecast a global slump of 6% this year, more than the World Bank earlier this week. That’s based on a scenario of the virus continuing to recede. A second wave, which the OECD said is an equally likely scenario, could mean a 7.6% contraction.
• U.S. Secretary of State Michael Pompeo criticized HSBC Holdings Plc for backing China’s move to impose national security legislation in Hong Kong, underscoring the increasing political pressures on multinationals dependent on the former British colony. Pompeo accused the London-based banking giant in a statement Tuesday of assisting the Chinese Communist Party’s “coercive bully tactics” against the U.K. The criticism by the top U.S. diplomat comes after one of the largest shareholders in HSBC and Standard Chartered Plc expressed discomfort with the banks’ decision to support the legislation without knowing its provisions and how they will be used.
• SoftBank Group Corp.’s Arm Ltd. and its Chinese venture clashed publicly over whether the venture’s CEO had been fired, a dispute that threatens to disrupt a Western company central to the global semiconductor industry. The conflict erupted after the British firm told Bloomberg News the board of Arm China — jointly owned by Arm and investors including China’s sovereign wealth fund — voted to oust Chief Executive Officer Allen Wu. Hours later, Arm China posted a statement to its official WeChat account asserting he was still in charge, a stance repeated across domestic social media. The U.K. firm then fired back to say Wu had been dismissed after an investigation uncovered undisclosed conflicts of interest and violations of employee rules.
• The demand for dollars from overseas banks slumped in a sign that the Federal Reserve successfully fended off a dollar shortage earlier this year. Banks on Wednesday decided not to roll over almost $100 billion of the original 84-day Fed swap agreements they got from operations conducted by the European Central Bank, Bank of Japan and Bank of England. Eight banks took just $480 million at the ECB’s three-month dollar swap operation, down from $75.8 billion taken by 44 banks in March. The BOJ received just over half of the $30.3 billion maturing from its first three-month operation, while the BOE received no bids at all.
• China’s factory deflation deepened in May and consumer price gains slowed, signaling that the recovery from the first quarter coronavirus slump remains uncertain. The decline in the producer price index widened to 3.7% in the month from April’s 3.1%, the National Bureau of Statistics said Wednesday. That compares to the median estimate of a 3.3% drop. The consumer price index rose 2.4% in May from a year earlier, following a 3.3% gain in April, and missing the median forecast for a 2.7% increase.
• Bank of Japan officials at next week’s policy meeting will assess the impact of measures taken so far to soften the virus blow and don’t see a pressing need for any further major moves for now, according to people familiar with the matter. The central bank will also continue to watch bond prices and will stick with a flexible approach on controlling the yield curve for the time being, allowing for some fluctuations provided 10-year bond yields stay around 0% as targeted, according to the people. With financial markets stabilizing and most businesses still able to access funding, the BOJ is in a position to sit tight and monitor developments, though it remains willing to take more action if needed, the people said.
• While the coronavirus pandemic is accelerating the death of coal in developed nations, the dirtiest fossil fuel is alive and kicking in Asia. Demand for electricity plunged — and with it the need for coal — as factories around the world sat dormant and people spent months at home. In the U.S. and Europe, that’s expected to accelerate the shift away from the fuel. But in Asia, which makes up three-fourths of global consumption, the appetite for coal is roaring back and expected to continue growing after briefly being tripped up by the virus. Coal is caught between conflicting geographies — one where its demise is celebrated in favor of cleaner options, and another where the cheap fuel powers rapidly developing economies. At stake is a $200 billion industry at the crux of the global fight to rein in carbon emissions that are driving climate change.
• Joe Biden is working to show he’s an ally for black voters in their fight against police brutality, yet the likely Democratic nominee is only willing to go so far. In the wake of George Floyd’s death while in Minneapolis police custody, Biden has taken a tough stance against police misconduct, urging additional training for law enforcement and an end to choke-holds. Yet his calls for change stop short of the policies the protesters say they want to see. He has held off on agreeing with demands to “defund the police,” making clear instead that he wants community policing and body cameras. He’s yet to talk to protest leaders. And he hasn’t followed other prominent Democrats in joining marchers on the streets.

*All sources from Bloomberg unless otherwise specified