June 16, 2021

Daily Market Commentary

Canadian Headlines

• Canadian equity markets advanced on Tuesday, marking the fourth consecutive gain for the benchmark index, as energy and tech stocks outperformed. The S&P/TSX Composite index rose 0.4% in Toronto. Energy stocks were the best performers after oil climbed as a chorus of prominent traders in the crude market said prices will continue to rise after a nearly 50% rally so far this year. Health care stocks were the worst performers, led by pot companies, after Cowen lowered Tilray’s estimates citing Canadian Covid-19 headwinds. Meanwhile, Glass Lewis urged BlackBerry investors to vote against Prem Watsa as lead director, arguing that he should be held accountable for an executive compensation plan that isn’t in shareholders’ interests.

World Headlines

• European shares rose toward their ninth successive record, as investors rotated out of cyclical sectors and into defensives ahead of a key decision by the U.S. Federal Reserve. The Stoxx Europe 600 Index rose 0.2% as of 11:47 a.m. in London, after briefly erasing gains earlier. Gains in utilities and chemical companies offset losses in automakers and miners. European equities are on their longest record-setting streak since 1999, pushing into overbought territory. Investors will look to the Fed meeting for any signs of early tapering, with the statement set to include updated projections for interest rates and economic forecasts.
• U.S. equity futures fluctuated as investors turned cautious before a policy decision from the Federal Reserve. Oil extended a powerful rally and Treasuries were steady. Contracts on the S&P 500 index drifted between modest losses and gains after the underlying gauge snapped a three-day winning streak amid weakness in technology and real estate. Chemical producers led a small advance in European stocks. The 10-year Treasury yield hovered around 1.5%. The dollar edged lower versus major peers. Investors are marking time before the Fed’s policy decision due Wednesday, as concerns mount that officials could pencil in a timetable for tapering stimulus injections that have driven a market boom. The latest statement is set to include updated projections for interest rates and economic forecasts.
• Asian equities slid from a two-week high, led by a retreat in consumer discretionary and health-care shares, amid market wariness over the outcome of this week’s FOMC meeting. The MSCI Asia Pacific Index fell 0.3% after reversing an earlier gain of as much as 0.2%. Meituan, Alibaba Group Holding and Sony Group drove a subgauge of consumer discretionary shares lower, while a measure of healthcare stocks is poised to halt the longest rally in more than a year. A measure of the region’s financial stocks climbed, set to snap a three-day losing streak and cushioning the market’s drop.
• Oil crept higher as industry data pointed to a substantial decline in U.S. crude stockpiles and fuel sales in India showed signs of recovering. Inventories dropped by 8.54 million barrels last week, according to people familiar with the American Petroleum Institute’s data. That would take levels to the lowest in over a year if confirmed by government data due later Wednesday. Oil is also being helped higher by positive demand signals from Asia. Indian gasoline and diesel sales rebounded in the first half of June as the number of new Covid-19 cases in the country slowly started to ease. China processed a record volume of crude oil last month on a barrels a day basis, according to Bloomberg calculations based on data published by the National Bureau of Statistics.
• Gold steadied near the lowest level in four weeks as investors awaited the conclusion of the Federal Reserve’s two-day meeting for clues on monetary policy. The U.S. central bank is inching toward the start of a long road to normalizing its relationship with the rest of Washington and Wall Street. After spending the past 15 months providing unprecedented help to the federal government and investors via trillions of dollars of bond purchases, it could start preliminary discussions about scaling back that support, although actual steps in that direction are likely still months off. Bullion’s retreat from an almost five-month high comes as investors weighed inflation pressures and possible responses by central banks. Fed officials could project interest-rate liftoff in 2023, but they won’t signal scaling back bond purchases until August or September, according to economists surveyed by Bloomberg.
• There’s nothing like a crisis to spur a rethink of your spending habits. Consumers have been socking away money in their savings accounts during the Covid lockdowns. It turns out that businesses have been putting money away, too. Non-financial companies in the S&P 500 Index that reported results in April and May boosted their cash holdings by 12% from a year ago, according to data compiled by Bloomberg, which is detailed below. Amazon.com Inc., Google-parent Alphabet Inc. and American Airlines Group were among the firms showing the largest dollar increases.
• Presidents Joe Biden and Vladimir Putin started a summit in the Swiss city of Geneva in an effort to dial back tensions between the two former Cold War adversaries that have reached the highest level in years. The meeting with Putin, the first of Biden’s presidency, may last for more than four hours including talks with a broader group. Officials from both countries are keeping expectations low for the outcome, with the leaders looking to agree on a new round of arms-control negotiations and restoring diplomatic links severed in recent years.
• With inflation and economic growth accelerating this year, Federal Reserve Chair Jerome Powell and his colleagues may consider moving up a discussion on scaling back monetary stimulus and penciling in a first interest rate hike as soon as 2023. The Federal Open Market Committee is all but certain to hold interest rates near zero at the conclusion of a two-day policy meeting Wednesday, and repeat a vow to keep buying bonds at the current $120 billion monthly pace. The panel will release a statement and quarterly economic forecasts at 2 p.m. in Washington, and Powell will hold a press briefing 30 minutes later. “I think what we will hear from Chair Powell is that they have sort of agreed that it will be prudent to start those conversations in coming meetings,” said Julia Coronado, a former Fed economist and president of MacroPolicy Perspectives. “Depending on the next couple of jobs reports, it could happen as soon as July that they start these conversations.”
• European Union government envoys agreed to lift travel restrictions for U.S. residents, a diplomat familiar with the meeting said, the latest step toward a return to normal despite concerns over the spread of new variants. The U.K. Parliament will vote on prolonging England’s pandemic restrictions, with members of Prime Minister Boris Johnson’s conservative party saying this extension must be the last, 15 months after the country first went into lockdown. Indonesia reported the most new coronavirus cases since late February. California fully reopened its economy, while New York lifted its remaining restrictions. The developments took place on a day when U.S. pandemic deaths topped 600,000, a grim reminder of the toll the virus has taken on the nation.
• Full Truck Alliance Co., an Uber-like trucking startup, is looking to raise as much as $1.57 billion in a initial public offering, which would make it one of the biggest U.S. listings by a Chinese company this year. The firm, backed by investors including SoftBank Group Corp. and Tencent Holdings Ltd., is offering 82.5 million American depositary shares for $17 to $19 apiece, according to a filing with the U.S. Securities and Exchange Commission. There is a concurrent private placement in which the Ontario Teachers’ Pension Plan Board and Mubadala will each purchase $100 million worth of Class A ordinary shares. At the top of that range, the IPO would rival January’s listing by Beijing-based RLX Technology Inc., which raised more than $1.6 billion including so-called greenshoe shares. The offering of Full Truck Alliance, which operates a truck-sharing app that connects merchants that need shipping with truck drivers, also has a provision for underwriters to issue additional greenshoe stock, which would likely push it past RLX’s total.
• Krafton Inc., the company behind hit mobile game PlayerUnknown’s Battlegrounds, filed to raise as much as 5.6 trillion won ($5 billion) in a South Korean initial public offering that’s likely to be the country’s largest ever. The gaming company will sell more than 10 million shares at 458,000 won to 557,000 won apiece, Pangyo-based Krafton said in a filing Wednesday. The top of the range exceeded general market expectations and would grant Krafton a market capitalization of 28 trillion won, based on the number of common shares. Krafton plans to finalize the price July 9 and list on July 22.
• Iceland is headed for the biggest initial public offering in its history, as a bank that was dragged down by the country’s 2008 financial crisis now has investors piling in to own a piece of the rebuilt product. Islandsbanki hf says the 55.3 billion kronur ($457 million) it’s offering was oversubscribed “multiple times,” thanks to “substantial interest from both retail and institutional investors.” The IPO, which values Islandsbanki at about $1.3 billion, is a milestone moment for a bank that suffered a body blow during the financial crisis of 2008. Iceland’s bloated financial system was flattened after foreign loans dried up, and the country required assistance from the International Monetary Fund. Islandsbanki, known as Glitnir back then, was taken over by the state.
• EQT AB is weighing an initial public offering of Azelis, a distributor of specialty chemicals and food ingredients, according to people familiar with the matter. The private equity firm is being advised by Lazard Ltd. on the listing plans, the people said, asking not to be identified discussing confidential information. Azelis could be valued at about 5 billion euros ($6 billion) in any IPO, the people said. Goldman Sachs Group Inc. and JPMorgan Chase & Co. are also working on the listing, the people said. EQT is eyeing a listing of Azelis after the summer, the people said. Deliberations are ongoing and decisions on value and timing of an IPO may change depending on market conditions and investor appetite, according to the people.
• Blackstone Group Inc. is nearing an agreement to acquire office developer Soho China Ltd. in what would be its biggest real estate investment in Asia’s largest economy, people familiar with the matter said. The private equity firm could announce a deal as soon as this week, the people said, asking not to be identified because the matter is confidential. Soho China could be valued at about $3 billion in a transaction, the people said. The developer has a market value of about HK$19.8 billion ($2.55 billion) based on its last closing price. Soho China shares were halted from trading Tuesday in Hong Kong, pending an announcement under the city’s takeover code. The suspension came after its stock price surged 48% last week, the most since the company went public in 2007.
• Regulators are worried about hidden risks to investors and even the financial system stemming from a fast-growing corner of the crypto market meant to be immune from volatility. Their focus is on so-called stablecoins, a form of cryptocurrency that has a fixed price, typically one dollar, and is backed by real-money reserves. At the end of May, the total market capitalization of stablecoins, which include ones offered by crypto firms Tether and Centre, broke $100 billion. But in recent weeks, lawmakers and officials from the Federal Reserve and the administration have expressed alarm both in public and private that some consumers won’t actually be protected should one of the firms not have the backing they purport to have. They also say the growing size of stablecoins has created a situation where huge amounts of U.S. dollar-equivalent coins are being exchanged without touching the U.S. banking system, potentially blinding regulators to illicit finance.
• For 10 of the world’s biggest banks, past transgressions in the European Union look set to cost them millions of dollars in fees. Firms including JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp.and Barclays Plc have been frozen out of syndicating bond sales for the European Commission’s roughly 800 billion-euro ($970 billion) NextGenerationEU program, which is expected to issue 80 billion euros of debt this year. The banks have been temporarily barred from the lucrative trades as the bloc assesses whether they’ve done enough to fix previous breaches of antitrust rules. The move has the potential to reshape debt league tables for the region, hand hefty fees to smaller competitors and even weigh on bankers’ bonuses. Tuesday’s 20-billion euro issuance by the bloc — the largest amount the EU has raised in a single transaction — may have generated more than $20 million in fees, according to estimates by Bloomberg.
• U.K. inflation surged unexpectedly past the Bank of England’s target for the first time in almost two years, an increase that will add to speculation about when monetary policy could be tightened. Consumer prices rose 2.1% from a year earlier, the highest since July 2019, the Office for National Statistics said Wednesday. Economists and the BOE had expected an increase of 1.8%. Core inflation jumped to 2%, the most since August 2018. The pickup reflected higher prices for fuel, restaurant meals, clothing and recreational goods as the economy took a further step out of lockdown. The central bank expects inflation to breach its 2% target temporarily and fall back at the end of 2022. The data could embolden those economists who are concerned that higher prices could prove more persistent given the rapid pace of recovery.
• The European Central Bank is set to extend a key plank of its pandemic relief measures by nine months to ensure lenders keep supplying credit to the economy, according to people familiar with the matter. The ECB’s supervisory board plans to allow lenders to continue to exclude deposits held at central banks when calculating their leverage ratio until March next year, said the people, who asked to remain anonymous as the matter isn’t public. The measure still needs approval from the ECB’s Governing Council to take effect, they said. An ECB spokesman declined to comment. The exemption, which would otherwise expire on June 27, effectively makes banks look stronger and allows them to do more business with existing financial reserves.
• More than half the money that flowed into European funds last year went into sustainable products, according to the Association of the Luxembourg Fund Industry, which represents the region’s biggest fund market. As a result, a record 1.12 trillion euros, or $1.4 trillion, in investor cash has now been steered toward strategies that address environmental, social and governance considerations, according to the study, which is the first in a series that ALFI is planning to do on ESG allocations. The development means that 11% of European assets under management are now in sustainable funds. The study shows that total sustainable assets have more than doubled since 2018, adding to evidence that growth in some corners of ESG investing is approaching an exponential pace. Adeline Diab of Bloomberg Intelligence estimates that total ESG debt issuance surpassed $3 trillion in early June, with two-thirds of that amount generated over the past year and a half alone.
• Lundin Energy AB will neutralize its share of direct emissions from the Johan Sverdrup offshore field in Norway, a first for a major oil facility. The Stockholm-based company will buy offsets from projects that absorb greenhouses gases, such as reforestation, to cancel the emissions from about 100,000 barrels a day of crude, Nick Walker, Lundin’s president and chief executive, said in an interview. Lundin is trying to be a first mover as the fossil fuel industry feelsincreasing pressure from banks, investors and governments to clean up. While the company’s offsets won’t cover greenhouse gases produced by customers burning the oil — so-called Scope 3 emissions that account for the vast bulk of the carbon released — it’s betting that there’ll be a market for fuels that are even a little greener amid the decades-long transition to clean energy.
• China has stepped up its campaign to rein in commodity prices and reduce speculation in a bid to ease the threat to its pandemic rebound from soaring raw material costs. State-owned enterprises were ordered to control risks and limit their exposure to overseas commodities markets by the State-owned Assets Supervision and Administration Commission, according to people with knowledge of the matter. The companies have been asked to report their futures positions for Sasac to review, said the people, who asked not to be identified because the information is confidential. In a second development, the National Food and Strategic Reserves Administration will soon release state stockpiles of metals including copper, aluminum and zinc, the agency said in a statement Wednesday. The metals will be sold in batches to fabricators and manufacturers, it said, without giving the volumes to be released.
• The truce between the U.S. and the European Union over aircraft subsidies left intact doubts that the dispute will ever get fully resolved and end transatlantic tariff threats for good. One of the main pillars of Tuesday’s framework agreement suspending tariffs for five years, which the White House and the European Commission hailed as historic, is the right for either side to reimpose duties if the other party doesn’t live up to the deal’s principles. U.S. Trade Representative Katherine Tai said it’s a way to ensure compliance and to show how serious the Biden administration is about enforcing these terms.

“There are no good or bad stocks. The company is either good or bad. Stocks are just stocks.” – Kenneth L Fisher

*All sources from Bloomberg unless otherwise specified