June 18, 2021

Daily Market Commentary

Canadian Headlines

• Canadian stocks fell on Thursday, after cyclical stocks underperformed, while investors rotated into tech stocks after U.S. Federal Reserve officials signaled they’re preparing the way for a tapering of bond purchases. The S&P/TSX Composite index fell 0.4% in Toronto. Miners, energy and financials were the worst performers, while tech stocks rallied. Meanwhile, foreign investors are piling back into Canada’s $3.2 trillion stock market after a pandemic-driven exodus. The nation’s equities are on pace to record the highest foreign inflows since 2017, adding $22.7 billion as of the end of April, according to Bloomberg calculations based on Statistics Canada data.
• Billionaire Gina Rinehart’s Hancock Prospecting Pty. is reviewing options for a coal project in Canada after regulators said the planned mine isn’t in the public interest. The Grassy Mountain project in southwest Alberta, intended to supply metallurgical coal for steelmaking, could have adverse environmental impacts on water quality, fish habitat and vegetation, according to a local review panel report published Thursday. Environment and climate change minister Jonathan Wilkinson will consider the findings before a final decision is made on approvals, Canada’s government said in a statement. Wilkinson said earlier this month that Canada won’t approve new thermal coal projects to supply power stations.

World Headlines

• European shares drifted lower, after a hawkish Federal Reserve halted the longest streak of gains since 1999. The Stoxx Europe 600 Index slid 0.5% as of 11:15 a.m. in London, with oil, banking and insurance companies dropping the most, while real estate stocks gained. A gauge of health-care shares touched a record intraday high. European equities are ending the week on a more sober note after closing at nine consecutive records, the longest run since 1999. The winning sequence paused Thursday as investors assessed the Fed’s earlier timetable for rate liftoff.
• U.S. futures were mixed as investors unwound some of this year’s dominant reflation trades. Treasuries advanced and commodities extended a slump. Contracts on the Nasdaq 100 Index outperformed after a fresh bout of rotation from cyclical stocks pushed the tech-heavy gauge to another record. Those on the S&P 500 Index drifted lower. Benchmark Treasury yields slid below 1.5% as traders pulled back longer-term inflation expectations. Popular trades linked to hotter inflation are in retreat after the Federal Reserve signaled it was preparing for earlier interest-rate increases, helping to rein in speculation that price pressures could get out of hand.
• Asian stocks fell and are on track for their biggest weekly drop in more than a month, as the selling of financial and other cyclical shares overshadowed buying in growth stocks. The MSCI Asia Pacific Index lost as much as 0.4% at one point after reversing an earlier gain of 0.2%. Financial-sector stocks dropped and were the biggest drags on the benchmark, while health-care, consumer discretionary and communications service shares advanced. Toyota Motor was the biggest contributor to the decline.
• Oil fell for a second day, dropping below $71 a barrel in New York, as the Federal Reserve’s plan for future interest-rate hikes derailed bets on commodities. West Texas Intermediate slipped 0.6% after sinking 1.5% on Thursday — the biggest drop in four weeks — amid a broad sell-off in materials from copper to gold. Investors are dialing back popular trades linked to hotter inflation after the Fed signaled it would raise rates twice by the end of 2023.
• Gold rebounded after dropping in the wake of a hawkish turn by the Federal Reserve, but is still headed for the biggest weekly loss in nine months. The metal climbed on Friday as U.S. bond yields eased. Prices tumbled this week after Fed officials signaled monetary policy tightening could start earlier than expected, with Chair Jerome Powell saying that the central bank would begin a discussion about scaling back bond buying. Still, Powell cautioned that discussions about raising interest rates would be “highly premature.” The central bank also signaled it was alive to threats of runaway price rises sparked by persistently higher-than-expected inflation readings
• Microsoft Corp. plans to add four new data centers within China by early 2022 in a wider effort to expand its service capacity across Asia, according to people familiar with its strategy who asked not to be named as its details are not public. Microsoft’s expansion in China is among the fastest for the company on the continent and in March it announced plans to expand its data center network with a greater presence in the northern region around Beijing. The Redmond, Washington-based tech giant already has six data centers in the country, operated by local partner 21Vianet, and now seeks to capitalize on a global surge in demand for internet services during the pandemic. The rapid growth is driven by Chinese businesses, slow to digitize in years past, now migrating to the cloud. New regulations, including a sweeping set of data security edicts coming into effect in September, are also prompting domestic and foreign enterprises to shift to local data management and boosting IT spending. The cloud market in China is expected to grow to $46 billion in 2023, according to a government white paper cited by Microsoft.
• The European Union lifted travel restrictions for U.S. residents, in the latest step toward a return to normal flying despite concerns over the spread of potentially dangerous coronavirus variants. Albania, Hong Kong, Lebanon, Macau, North Macedonia, Serbia, and Taiwan were also added to a so-called “white list” of countries from which non-essential travel is allowed. The new rules will take effect within days, as soon as they are published in the Official Journal of the EU. While some EU member states already allow vaccinated Americans to visit, inclusion in the white list means that restrictions will be lifted across the bloc. It also means that countries can allow quarantine-free travel from the U.S., independently of vaccination status.
• Wall Street banks and financial exchanges are grappling with how to observe Juneteenth, the June 19 federal holiday signed into law by President Joe Biden Thursday to commemorate the end of slavery in the U.S. Most government workers will be granted paid time off June 18 as the holiday falls on Saturday this year, but the same won’t be true for the financial markets. Before deciding whether to close, U.S. exchanges — primarily the New York Stock Exchange and Nasdaq — rely on input from several participants including banks, broker-dealers and regulators.
• Biel Crystal Manufactory Ltd., a supplier of cover glass to Apple Inc., is planning a Hong Kong initial public offering that could raise as much as $2 billion, according to people with knowledge of the matter. The maker of touch screens is working with China International Capital Corp., HSBC Holdings Plc and JPMorgan Chase & Co. on the offering, the people said. The company plans to submit a listing application soon, they said, asking not to be identified as the information is private. The IPO could raise $1 billion to $2 billion though the final size has not been determined yet, the people added. Deliberations are ongoing and more banks could be added, the people said. A representative for Biel Crystal didn’t immediately respond to requests for comment, while representatives for CICC, HSBC and JPMorgan declined to comment.
• Acciona SA, a Spanish engineering firm, is seeking as much as 2.45 billion euros ($2.9 billion) in an initial public offering in its renewables unit, in what is set to be Spain’s largest listing in six years. Acciona Energia shares will be offered at 26.73 euros to 29.76 euros each, according to a statement late Thursday. That would indicate an equity value of 8.8 billion euros to 9.8 billion euros. Acciona is selling 15% to 25% of the business. The offering is the biggest listing in Madrid since airport operator Aena SME SA’s 4.26 billion-euro listing in 2015. Acciona is pushing ahead with the deal even as clean-energy stocks struggle this year, amid rising bond yields and worries about faster inflation. The European Renewable Energy Index has slipped 16% this year after surging 92% in 2020.
• Digital payments startup Paytm will ask for shareholder permission to sell about $1.6 billion in new stock as part of what’s set to be India’s largest-ever initial public offering. The company wants to sell 120 billion rupees ($1.61 billion) in new shares plus a potential 1% for over-allotment, the company said in a notice for an extraordinary shareholder meeting scheduled for July 12 in Delhi. Paytm, formally called One97 Communications, is joining a global share sale frenzy with a plan to offer as much as $3 billion of shares in the IPO, Bloomberg News reported last month. Its shareholders include SoftBank Group Corp., Berkshire Hathaway Inc. and Ant Group Co.
• California faces a white-knuckle evening of possible blackouts with grid officials warning that power supplies may not meet demand as a triple-digit heat wave grips the western U.S. The Golden State could run short of electricity between 7 p.m. and 9 p.m. as solar power production fades with sunset, grid managers warned Thursday. All available generation sources were either already in use or expected to be at that time, according to officials, who also urged Californians to turn off unneeded lights and appliances to prevent outages. California Governor Gavin Newsom issued an emergency declaration to free up additional energy sources by temporarily lifting air pollution rules. Grid officials said Thursday afternoon that it expected to keep the lights on through the evening unless anything major changes.
• Taiwanese President Tsai Ing-wen expanded efforts to buy vaccines from Germany’s BioNTech SE Friday, meeting with leaders of two tech giants in an attempt to reach a deal hindered by complications involving China. Tsai met with Mark Liu, chairperson of Taiwan Semiconductor Manufacturing Co., and Hon Hai Precision Industry Co. founder Terry Gou Friday afternoon to discuss purchasing vaccines, Presidential Office spokesman Chang Tun-han said in a text message. The attempt to recruit high-profile intermediaries represents the government’s latest move in long-running efforts to buy vaccines from BioNTech. Taiwan has so far been unable to obtain Pfizer-BioNTech vaccines either directly from the German company or from Shanghai Fosun Pharmaceutical Group Co., which has an agreement to develop and distribute them in the greater China region that includes Hong Kong, Macau and Taiwan.
• Boris Johnson’s Conservatives are reeling from a major political upset after losing a special election in a wealthy district outside London that had been a stronghold for the U.K.’s ruling party for almost 50 years. The Liberal Democrats defied political pundits to win the by-election in the constituency of Chesham and Amersham, northwest of the capital, a seat that had been held by the Tories since it was created in 1974. For Johnson, the result is a rare but significant blip on his record as an election winner who led his party in 2019 to its biggest majority in Parliament since Margaret Thatcher was leader.
• U.K. exports of products such as milk and cheese to the European Union collapsed by more than 90% during the first quarter from a year earlier, according to figures compiled by the Food and Drink Federation based on HMRC data. In what the trade group said was a “disaster” for the industry, overall food and drink shipments to the EU in the period were down 2 billion pounds ($2.7 billion) from the same three months in 2019. The U.K. formally left the EU’s trade bloc in early 2020. The figures are “a very clear indication of the scale of losses that U.K.” manufacturers face in the longer-term due to new trade barriers with the EU,” Dominic Goudie, the head of international trade at the Food and Drink Federation, said in a statement on Friday.
• North Korean leader Kim Jong Un said he’s ready for “both dialogue and confrontation,” offering an opening for talks as U.S. President Joe Biden’s new nuclear envoy heads to the region to build support for a strategy toward Pyongyang. The comments, made in a plenary meeting of the Central Committee of his ruling Workers’ Party of Korea on Thursday, are the first high-level suggestion of talks since Biden replaced Donald Trump, who met Kim three times. Pyongyang has so far rebuffed Biden’s requests for dialogue as a “time-delaying trick” and lambasted the U.S. president’s comments that were critical of North Korea’s arms buildup.
• The European Central Bank said it will extend a key plank of its pandemic relief measures by nine months to ensure lenders keep supplying credit to the economy. The ECB will to allow lenders to continue to exclude deposits held at central banks when calculating their leverage ratio until March next year, according to a statement from the central bank Friday. Bloomberg reported on Wednesday that the ECB was set to extend the relief. 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.
• Elon Musk’s tunneling startup the Boring Co. is working on much wider tunnels than publicly announced, which could significantly expand the reach of the business. The tunnels that the company is pitching to some potential clients are 21 feet in diameter, dwarfing the 12-feet tunnels the Boring Co. has built to date. The wider throughway would accommodate two shipping containers side by side, according to a copy of a pitch obtained by Bloomberg. The larger tunnels would be a major expansion in scope for Boring Co., which has up until this point worked on tunnel systems designed to transport passengers. When the company started in 2016, Musk spoke about tunnels hundreds of miles long for high-speed transportation that could “solve traffic.” But the company has recently scaled down its goals, pitching shorter projects within cities. Most recently, it completed 1.7 miles of tunnel under Las Vegas.
• A massive methane plume detected earlier this month over Russia stemmed from emergency repairs that forced the partial shutdown of a Gazprom PJSC pipeline, the company said, taking responsibility for one of the energy sector’s most intense recent leaks of the superpotent greenhouse gas. Gazprom’s enormous methane leak, first identified in satellite data by geoanalytics firm Kayrros SAS, points to what’s a worldwide problem preventing the release of a greenhouse gas with 80 times the impact of carbon dioxide in the short term. The Russian gas giant said its pipeline repairs on June 4 released 2.7 million cubic meters (1,830 metric tons) of methane. That has roughly the same short term planet-warming impact of 40,000 internal-combustion cars in the U.S. driving for a year, according to the Environmental Defense Fund.
• Chinese officials are drawing up plans to further loosen birth restrictions and transition toward policies that explicitly encourage childbirth, according to people familiar with the matter, reflecting increased urgency in Beijing as economic growth slows and China’s population mix skews older. Policy makers are discussing the possibility of fully doing away with birth restrictions by 2025, the end of the ruling Chinese Communist Party’s current five-year economic plan, according to one of the people. According to that person, China will likely begin by eliminating birth restrictions in provinces where the birthrate is the lowest before enacting nationwide changes.

“He who does not work will not eat.” – John Smith

*All sources from Bloomberg unless otherwise specified