June 14, 2021

Daily Market Commentary

Canadian Headlines

• Group of Seven nations backed away from plans to set a target for making sure most new cars sold are greener vehicles, instead pledging only speed up efforts to move away from combustion engines. In the final communique Sunday, the bloc include an autos section that was far more modest than earlier versions being discussed. It pledged to do more to electrify the transport sector but didn’t set firm target dates. “We recognize that this will require dramatically increasing the pace of the global decarbonization of the road transport sector throughout the 2020s, and beyond,” the leaders wrote.
• Recipe Unlimited said Monday that it agreed to sell “substantially all” assets comprising its Milestones restaurant brand to Quebec-based restaurant operator Foodtastic Inc. for an undisclosed amount. The sale is expected to close within 60 days, subject to customary closing conditions. “This transaction enables Recipe to further rationalize our portfolio to focus on large brands that generate significant free cash flow and dominate their segment with younger brands that offer attractive opportunities for accelerated new restaurant growth,” said Recipe Unlimited’s chief executive officer, Frank Hennessey.

World Headlines

• European equities rose on Monday, poised for a seventh straight record, as easing inflation concerns boosted investor optimism about the recovery. The Stoxx Europe 600 Index was up 0.2% as of 11:56 a.m. London time, with lower-than-average trading volume reflecting quiet summer trading. Energy shares led gains as oil hit a 32-month high, while carmakers underperformed. Germany’s DAX Index also hit a fresh record. European stocks are set for their longest winning streak since April 2019 as reassurances from policymakers this month eased concerns that faster inflation will spur a tapering of monetary stimulus. The gains have pushed the Stoxx 600’s relative strength index above 70, indicating overbought territory.
• U.S. equity futures and stocks posted modest gains Monday as investors prepared for a key Federal Reserve meeting later in the week. The rally in bond markets lost steam. S&P 500 futures signaled the gauge was poised to add to Friday’s fresh record. An advance in European equities was led by shares in energy firms. The Treasury 10-year yield rose to 1.46% after hitting three-month lows on Thursday amid the biggest weekly slide since December. French and German government bond peers also reversed course with yields turning higher. Investors are on the lookout for signals from the Fed about a timetable for scaling back emergency monetary stimulus. Investors anticipate the central bank will reaffirm the pace of bond purchases this week, even if it delivers projections for interest-rate liftoff in 2023, according to economists surveyed by Bloomberg. The decision is due Wednesday.
• Asian stocks were little changed as a number of the region’s markets were shut for a holiday, with investors awaiting for the outcome of a key Federal Reserve meeting in the later this week in the U.S. The MSCI Asia Pacific Index swung between a 0.2% gain and 0.1% loss after capping its first weekly decline in a month on Friday. Healthcare stocks provided the biggest support to the regional benchmark, while financials were a drag. Markets were closed in China, Hong Kong, Taiwan and Australia.
• Oil hit a 32-month high as the rollout of coronavirus vaccines boosted demand expectations for Europe and the U.S., and confidence faded over a quick return of Iranian crude supply. Futures rose 0.9% in New York, building on a run of three weekly gains. Iran’s foreign ministry said Monday there was “very little time left” for world powers to resolve outstanding differences to revive a 2015 nuclear deal, even though an agreement was in place to remove sanctions on the country’s energy sector. Iran goes to presidential elections this week. There were expectations a deal to lift Iranian oil sanctions would be in place ahead of the vote, said Giovanni Staunovo, a commodity analyst at UBS Group AG. “That seems not to be the case anymore.”
• Gold extended its decline as a U.S. bond rally lost steam ahead of this week’s Federal Reserve meeting, which may give clues on the future path of monetary policy. Bullion retreated on Monday as Treasury yields ticked higher, making the non-interest bearing metal seem less attractive. Last week, gold struggled to make significant gains past $1,900 an ounce, which may have resulted in pressure from technical traders, according to Georgette Boele, senior precious metals strategist at ABN Amro Bank NV. Fed officials could project interest-rate liftoff in 2023 amid faster economic growth and inflation, but they won’t signal scaling back bond purchases until August or September, according to economists surveyed by Bloomberg. More than half predict the quarterly rate-forecast “dot plot,” released after the conclusion of the central bank’s two-day gathering on Wednesday, will show the median of 18 officials penciling in at least one 2023 increase.
• Copper edged below $10,000 a ton as traders awaited further cues on monetary policy from the U.S. Federal Reserve meeting this week. Officials could project interest-rate liftoff in 2023 amid faster economic growth and inflation, according to economists surveyed by Bloomberg, though respondents see no rush by the Fed to scale back monetary stimulus. Some 40% expect the central bank to take its first step toward tapering its current $120 billion in monthly bond purchases in late August.
• Britain’s Prime Minister Boris Johnson is expected to announce a four-week extension in pandemic restrictions beyond June 21 because of a surge in the delta variant. The Group of Seven backed Japan’s plan to proceed with the Olympic Games in Tokyo as a symbol of global unity in the battle against the pandemic. Meanwhile, the group fell short on a pledge to donate 1 billion additional vaccine doses to developing nations. Apple Inc. plans to drop its mask requirement for vaccinated customers at many U.S. stores beginning next week. A federal judge has tossed out a lawsuit brought by employees of a Houston hospital contesting a requirement that staff be vaccinated. The U.S. death toll is approaching 600,000.
• GlaxoSmithKline Plc will pay U.S. company iTeos Therapeutics Inc. as much as $2.1 billion to develop a potential immune therapy as the British drugmaker rebuilds its pipeline of cancer drugs. Glaxo and iTeos agreed to develop and commercialize the monoclonal antibody treatment, which is in early-stage trials against advanced solid tumors, they said in a statement Monday. iTeos will receive an upfront payment of $625 million, with additional milestone payments of up to $1.45 billion. Glaxo has been expanding in the lucrative field since Emma Walmsley took over as chief executive officer in 2017. The company, which had sold its cancer assets to Novartis AG in 2015, now has three oncology drugs on the market, with the therapy area making up about a quarter of its pipeline. The deal comes a week before a key investor day where Glaxo will detail plans to split in two, spinning off its consumer unit into a separate business.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the 32nd straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $1.5 billion in the week ended June 11, compared with gains of $1.42 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $30.9 billion.
• When Federal Reserve policy makers gather this week to discuss the U.S. economic recovery from the pandemic, they’ll see a job market that’s improving at a faster pace for some than for others. The dashboard of indicators Fed Chair Jerome Powell and his colleagues have said they are watching to determine how far the country is from reaching their maximum employment mandate shows White and Asian Americans with college educations are faring better than everyone else. The U.S. central bank’s rate-setting Federal Open Market Committee meets Tuesday and Wednesday to discuss where policy is headed next. Last year, Fed officials redefined their goal of full employment as an “inclusive and broad-based” one.
• Despite a short squeeze that pushed benchmark Treasury yields to a three-month low last week, Wall Street sees plenty of reasons for bonds to sell off again. Strategists at JPMorgan Chase & Co. turned bearish on 10-year Treasuries ahead of Wednesday’s Federal Reserve meeting, saying markets are now pricing in a too shallow rate-hike outlook. Their peers at Morgan Stanley are bracing for a hawkish surprise from the U.S. central bank and a team at TD Securities is also calling for a “tactical short” in benchmark bonds. “Given rich valuations and a benign implied tightening pace, we turn bearish in 10-year Treasuries,” wrote a JPMorgan team including Jay Barry. “The pendulum has swung over the current quarter as Treasuries have moved from extremely cheap to extremely rich.”
• British Prime Minister Boris Johnson is preparing to delay his plan to lift England’s pandemic restrictions amid concerns that a rapid rise in Covid-19 cases could put hospitals under strain. The surge in the delta variant has forced Johnson and his team to rethink their blueprint for ending social distancing rules on June 21. Instead, officials now expect the premier to announce a delay of as long as four weeks to the easing of most rules when he sets out his decision to the nation on Monday evening. There may be some relaxation of restrictions on weddings and major sporting events to allow larger public gatherings to take place, one official said. A delay would be a blow to entertainment and hospitality businesses that have been closed or operating under tight controls during the pandemic. Final decisions will be taken on Monday.
• The Chinese owner of a nuclear plant near Hong Kong said it’s operating safely even as its French minority owner requests an extraordinary board meeting to discuss gas build-up in a reactor. Electricite de France SA, which owns 30% of the Taishan nuclear plant in Guangdong, said in a statement that Unit 1 has experienced increased concentration of some noble gases in its reactor. It’s a known phenomenon, and the company has requested the meeting to present all data and make necessary decisions. China General Nuclear Power Corp., the majority owner of the plant, said Sunday on its website that environmental indicators at and around its Taishan plant in Guangdong are normal, and that Unit 1 is operating normally and Unit 2 was reconnected to the grid last week after an overhaul. CGN didn’t immediately respond to emailed questions about the EDF statement.
• Iran warned there was “little time left” for world powers to revive the 2015 nuclear deal as efforts to clinch an agreement before key elections failed to overcome the main sticking points over the weekend. Saeed Khatibzadeh, spokesman for Iran’s Foreign Ministry, said “technical, political, legal and practical issues remain,” while insisting there was no impasse at the talks in Vienna. He said a broad agreement to lift U.S. sanctions on Iran’s industrial sectors, including energy, had been reached but gave no details.
• President Joe Biden sought to reassure U.S. allies by emphasizing Washington’s commitment to the North Atlantic Treaty Organization, calling a strong alliance “essential for America” as he turned the page on a period when Donald Trump questioned its value. At a NATO summit in Brussels Monday, leaders will tout “a new chapter in transatlantic relations,” according to a draft of the meeting’s conclusions seen by Bloomberg. They’ll also discuss defense priorities such as China, an increasingly hostile Russia and the threats posed by climate change.
• Novavax Inc.’s Covid-19 vaccine candidate showed strong efficacy against the coronavirus, including mutated variants, in a large trial. The shot was 90% effective at preventing symptomatic Covid and 100% effective at preventing moderate and severe symptoms, the U.S. biotech firm saidMonday. The shot was 93% effective against variants of concern, it said. The vaccine uses a recombinant protein technology, also used in the vaccine candidate developed by Sanofi and GlaxoSmithKline Plc. At over 90%, the overall efficacy of the vaccine is close to reported rates for mRNA shots developed by Pfizer Inc. with BioNTech SE and by Moderna Inc., as well as the Sputnik V vaccine from Russia, using viral vector technology. However, immunologists tend to caution against comparing efficacy results across different trials as conditions and evaluation methods aren’t the same.
• A global minimum corporate tax would generate around $150 billion in extra revenue for governments across the world, according to the official overseeing frenetic talks to get a deal between 139 countries in coming weeks. “This is not an anecdotal amount,” Pascal Saint-Amans, director of the center for tax policy at the Organization for Economic Cooperation and Development, said on BFM Business television Monday. “In some ways, this is the end of the work on regulating globalization for greater tax justice.” After seven years of technical work on an overhaul of international taxation, negotiators at the OECD will meet in Paris June 30 with the aim of making a proposal before a meeting of the Group of 20 industrialized nations in July. That follows an agreement between the Group of Seven to set a floor on corporate tax rates of “at least 15%” instead of the current average of 6% to 7%.
• Tesla Inc.’s Elon Musk tweeted that he’s decided to sell his last remaining house a week after a report said he and others billionaires paid little or no income taxes for several years. The electric-car maker’s chief executive officer tweeted earlier this month that he only has one house in the San Francisco Bay area that is rented out for events, and that if he sold, it “would see less use, unless bought by a big family, which might happen some day.” Musk, 49, first announced plans more than a year ago to sell his homes and most of his possessions as a way to blunt criticism of his wealth. Within days, he put two of his California properties on the market.
• President Joe Biden’s quest to enact his $4 trillion economic agenda enters a turbulent new phase Monday as the U.S. House comes back into session and Democratic representatives ramp up pressure on the Senate to produce a bipartisan compromise or stop prolonging the effort. Addressing the demands of progressive Democrats to go it alone will be a major challenge for Speaker Nancy Pelosi and her top lieutenants in the coming weeks. She’ll need to keep an eye as well on moderate Democrats, who are leery about any solo package in the absence of the party having enough Senate votes to power it through.
• Apple Inc. is working on new Apple Watch models and health features, spanning display and speed upgrades, an extreme sports edition and body temperature and blood sugar sensors. The Cupertino, California-based tech giant is planning to refresh the line this year — with a model likely dubbed the Apple Watch Series 7 — by adding a faster processor, improved wireless connectivity and an updated screen, according to people with knowledge of the plans. Next year the company plans to update the main Apple Watch alongside a successor for the lower-end Apple Watch SE and a new version targeting extreme sports athletes. Apple had previously aimed to put a body temperature sensor in this year’s model, but that is now more likely to be included in the 2022 update. The blood-sugar sensor, which would help diabetics monitor their glucose levels, is unlikely to be ready for commercial launch for several more years.
• Google revealed a raft of updates to its Workspace productivity suite, including new features for free users, a paid plan for entrepreneurs and fresh capabilities for its Meet videoconferencing system in an effort to better compete with Microsoft Corp.’s products. One of the moves, dubbed Workspace for Everyone, will extend the collaboration tools that corporate users receive to non-paying consumers, the Alphabet Inc. company said Monday in a series of blog posts. Google will also offer a tier called Workspace Individual designed for entrepreneurs, which extends premium features of the software to small businesses, and it has upgraded Meet for a hybrid work future, in which some employees attend meetings in the office and others from home. The effort helps “make the location of work less relevant, assists in the idea that people should be able to work and do what they need to do regardless of where they are and the device they’re using,” Javier Soltero, vice president and general manager of Google Workspace, said in an interview.
• Apollo Global Management Inc. has committed to invest as much as $500 million to alternative investment firm Victory Park Capital’s growth lending strategy. The senior secured credit facilities will be originated by Victory Park. The new partnership will focus on asset-backed lending to companies that aggregate third-party sellers on Amazon.com Inc. and other e-commerce sites, marking Apollo’s entry into the sector, according to a statement. “One of the hallmarks of what we do in structured credit is look for companies with good business models and predictable recurring revenues, then find better ways to lend to them — that means safely, longer and under less restricted terms,” Bret Leas, Apollo senior partner and global head of structured corporate credit & ABS said in a phone interview.
• For mortgage investors, a Freddie Mac 30-year lending rate trending near 3% for the last two months has kept the potential for higher prepayment speeds alive and reinforces the importance of watching servicer behavior. With mortgage bonds, the pace at which the underlying homeowners are paying off their home loans — either by refinancing or sales, for the most part — is critical. Investors receive their funds back at par, and with most of the mortgage universe trading at a premium, this can hurt returns. Bloomberg’s Collateral Performance Research tool can be used to dig into a mortgage cohort’s underlying collateral to see which firms are responsible for servicing the loans within it. Not all mortgage servicers are alike, and it’s important to identify which ones are most aggressively getting homeowners to refinance.

“Investing is a business where you can look very silly for a long period of time before you are proven right.” – Bill Ackman

*All sources from Bloomberg unless otherwise specified