June 13th, 2019

Daily Market Commentary

• Canadian Headlines
  • Canadian equities fell alongside U.S. equities as both the loonie and crude oil weakened in the wake of American crude stockpiles climbing and the U.S.-China trade war continuing to put pressure on demand. The S&P/TSX Composite Index dropped 0.1% to 16,227 in Toronto, pulled down by three of the 11 sectors. Energy, financials and health care were the worst performing sectors, while materials were the best. Meanwhile, a Canadian program designed to speed up the hiring of foreign talent is attracting thousands of tech workers and other skilled employees, many of whom are unhappy with restrictive U.S. immigration policies.
  • Investors from Singapore to Toronto are wondering why North America’s vaunted urban sprawl ebbed before the billions they pumped into a giant “land banking” firm could pay off. Walton Group of Companies, a Calgary-based real estate firm that had delivered 12 percent annual returns in the past, sold them on the idea of investing roughly $10,000 or more apiece in rural properties outside of fast-growing cities such as Phoenix, Toronto and Atlanta. But $3.8 billion in land assets, 92,000 investors and 106,000 acres later, the expected sprawl and the hoped-for fat returns have mostly not yet happened. Some backers say their shares were worth only 20% of what they put in based on the most recent 2017 appraisal. And about 90 Canadian investors have hired a private investigations firm, U.S. Justice Coalition, to track the proceeds of Walton’s land syndication.
  • Donald Trump is set to host Canadian Prime Minister Justin Trudeau next week as the American president’s tariff threats continue to cloud the outlook for the countries’ trade deal with Mexico. Trudeau will visit Washington on June 20 and is tentatively scheduled to meet Trump that day, according to a Canadian official who spoke on condition of anonymity because the visit hasn’t been announced. The White House didn’t immediately respond to a request for comment. Trade and China will dominate the agenda, the official said. The two leaders will discuss ratification of the replacement for the North American Free Trade Agreement, known as USMCA, which still faces varying hurdles. They’ll also talk about an ongoing fight over U.S. tariffs on Canadian softwood lumber — a decades-old dispute between the countries — and on Trump’s potential tariffs on uranium, of which Canada is a major producer.
  • Hudson’s Bay Co. reported a weak sales quarter, reinforcing a bid by its chairman to take the retailer private. Lord & Taylor, a chain the company is prepared to sell or merge, was among the under-performers. Comparable sales, a closely watched metric for the industry, fell 2.1%, the biggest drop in at least eight quarters. They grew 2.4% at Saks Fifth Avenue, which has been the Toronto-based company’s bright spot for several quarters.

   

• World Headlines
  • European equities erased earlier losses and climbed, led by oil shares after a suspected tanker attack in the Gulf of Oman sent crude prices surging. The Stoxx Europe 600 Index added 0.2% after falling as much as 0.3%. Oil stocks, including Total SA and BP Plc, advanced as Brent rebounded after a report that a crude tanker was on fire in the Gulf of Oman. Roche Holding AG jumped 1% after the Rituxan study met its primary endpoint in a phase 3 Pemphix study. Ferguson Plc increased 6.5% after activist Trian Fund Management LP bought a 6% stake in the U.K. plumbing-equipment supplier.
  • U.S. equity futures advanced with European stocks on Thursday, shrugging off losses in Asia as well as a host of simmering geopolitical tensions. Oil surged and Treasuries nudged higher. Investors are doing their best to stay upbeat amid a host of worries just now. Exact details of the tanker incident remain unclear, but it follows other attacks in the region last month. That comes as tensions simmer in Hong Kong following Wednesday’s clashes between police and protesters, the trade dispute between the U.S. and China remains unresolved, and President Donald Trump fires fresh barbs at Germany. The hope for many traders is a newly dovish Federal Reserve can help blunt some of these threats.
  • Asian stocks fell for a second day, with most major markets in the region down. Hong Kong stocks declined after a massive protest against a law that would allow extradition to mainland China. The Hong Kong legislature scrapped a meeting to discuss the extradition bill, according to a statement on its website. China stocks erased an early decline to rise 0.1% in a steep rebound. Technology was the biggest drags on the region’s benchmark stock index. Asian semiconductor stocks joined a global selloff in chip stocks, as Evercore ISI warned that a recovery in demand for memory chips may not pick up until the second half of next year.
  • Oil rebounded from the lowest in almost five months as two tankers were damaged in a suspected attack in the Gulf of Oman, just weeks after a previous incident in the region. Brent crude soared as much as 4.5% following reports of an assault on ships near the Strait of Hormuz, a critical passage for cargoes from the Middle East. The Japanese owner of one of the vessels told local media it had been hit by a “shell.” The second tanker, owned by Norway’s Frontline, suffered three detonations, the Norway Maritime Authority said. Both ships were evacuated.
  • Gold climbed for a second day as weaker-than-expected U.S. inflation data bolstered the case for the Federal Reserve to cut interest rates. The metal is also benefiting from haven buying as an array of geopolitical risks continue to threaten the world’s economies. On the trade front, President Donald Trump said he had no deadline for China to return to negotiations, other than the one in his head. Meanwhile, oil jumped Thursday as two tankers were damaged in a suspected attack in the Gulf of Oman.
  • OPEC said that international trade tensions are hurting demand for oil, slashing its estimates for consumption earlier in the year and predicting further challenges ahead. The organization, due to meet in the coming weeks to set production levels for the second half, said demand increased by less than 1 million barrels a day in the first quarter after cutting its assessment by more than 20%. The world economy is headed for its weakest growth in a decade, buffeted by a prolonged tariff battle between the U.S. and China.
  • New entrants to the London ride-hailing market could potentially pose a risk to one of Uber Technologies Inc.’s most profitable markets, according to analysts at Morgan Stanley. Every 400 basis point change in U.K. rideshare adjusted net revenue would result in a $100 million hit to Uber’s 2020 profit, analysts led by Brian Nowak wrote in a note on Thursday. The country accounted for 4-8% of Uber’s 2018 rideshare bookings, they estimated.
  • Alibaba Group Holding Ltd. has filed confidentially for a Hong Kong listing, people familiar with the matter said, moving closer to what is potentially the city’s biggest share sale since 2010. The online emporium filed a stock listing application with the exchange this week without the need for financial disclosures, the people said, requesting not to be named because the matter is private. It is said to have picked China International Capital Corp. and Credit Suisse Group AG as lead banks. The offering from China’s largest corporation could raise as much as $20 billion, though Alibaba hasn’t finalized its fundraising target, the people said. An Alibaba representative declined to comment.
  • ESR Cayman Ltd. has decided to delay a Hong Kong initial public offering to raise as much as $1.24 billion, citing unfavorable market conditions. The logistics real estate developer announced its decision in a statement to the Hong Kong stock exchange on Thursday. ESR and some of its shareholders, including Warburg Pincus and Goldman Sachs Investments Holdings (Asia) Ltd., were planning to sell 560.7 million shares at HK$16.2 to HK$17.4 apiece, according to a prospectus. At $1.24 billion, ESR’s share sale would have been the biggest in Hong Kong this year. The company initially planned to start trading on June 20. Deutsche Bank AG and CLSA Ltd. are joint sponsors for the offering.
  • Hertz disclosed that it on June 26, it will distribute to shareholders subscription rights to buy up to 57.92 million new shares in a rights offering. Each right entitles holder to buy 0.688285 shares at subscription price of $12.95 per share
  • For most of the last six years, Xi Jinping has been largely free to define the terms of his rule. But with challenges piling up from the U.S. trade war to mass protests in Hong Kong, his presidency is increasingly being dictated by events. This week alone, President Donald Trump threatened to hike tariffs if China’s leader fails to meet with him at the Group of 20 meeting in Japan; hundreds of thousands of protesters rallied against an extradition law in Hong Kong; and signs emerged that China’s economy is struggling, with manufacturing slipping and an 8.5% decline in imports indicating slowing domestic demand.
  • Surging ethanol prices threaten to slow the benefit farmers may receive from Donald Trump’s new fuel rules allowing greater sales of the biofuel. Ethanol is getting more expensive relative to gasoline as floods raise production costs while stockpiles of the motor fuel swell. Futures for ethanol were about 17 cents a gallon below gasoline Wednesday, compared with 82 cents on April 24. The deluge across the middle of the U.S. has slowed farmersfrom planting crops, boosting the price of corn, the primary feedstock used to make the biofuel. The tightening gap is shrinking the profit from blending ethanol into the finished gasoline sold at the pump. If it remains narrow for an extended period, fuel suppliers may be slower to use more of the mostly corn-based additive, despite new rules put into effect last week by Trump. That move, a show of support to Midwest farmers hit by the U.S.-China trade war and the massive floods, was strongly opposed by refiners, and further puts agriculture and petroleum interests at odds over market share.
  • DNB ASA named Kjerstin Braathen as new chief executive officer, taking over after Rune Bjerke who is stepping down after almost 13 years at the helm of Norway’s largest bank. The appointment came after “an extensive process to find the right person to take over the baton,” the Oslo-based bank’s board said. Braathen, who is currently chief financial officer, will take over as of Sept. 1 and become the first woman to be the top boss at the bank.
  • Two oil tankers were damaged on Thursday in a suspected attack near the entrance to the Persian Gulf, stoking fears that high-stakes diplomatic efforts won’t avert a military confrontation between the U.S. and Iran. Oil prices surged. The incidents, including an attack on a Japanese-operated vessel, were the second in a month to hit ships near the Strait of Hormuz chokepoint, through which about 40% of the world’s seaborne oil travels. They come as Japanese Prime Minister Shinzo Abe, a rare ally of both Donald Trump and Iranian leaders, visits Tehran in an effort to ease tensions.
  • China, the world’s largest consumer of corn after the U.S., is likely to slash state sales of the commodity this year in an effort to halt the rapid depletion of stockpiles that are used to temper food inflation. The government will probably sell 50 million tons at most from its temporary inventories, according to an estimate by the China National Grain and Oils Information Center. That’s about half of what it sold last year. After the sales end, which will probably be in September, less than 50 million tons is expected to be left in the stockpiles, equivalent to about two months’ consumption and the least since 2012, according to Bloomberg calculations based on Nanhua Futures Co. data.

*All sources from Bloomberg unless otherwise specified