June 17th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian equity markets rose for a third day along with U.S. stocks as optimism over a recovering U.S. economy overrode concern that coronavirus cases are growing from Texas to China. The S&P/TSX Composite index rose 1% in Toronto, bringing the three-day gain to 3.1%. Health care, energy and financials were the best performing stocks, while materials were the worst performing sector. Foreign investors mopped up the flood of new issuance by Canadian governments and companies, a sign the nation continues to be viewed as a safe haven. Investors from outside the country bought a net C$49 billion ($36 billion) of Canadian securities in April, the largest monthly purchases from abroad on record, Statistics Canada reported Tuesday. Bank of Canada Governor Tiff Macklem said the bank will continue purchasing Canadian government bonds until the economic recovery is well underway, sticking to a promise by his predecessor, Stephen Poloz.
• Justin Trudeau is beginning to wean millions of people off government support in what will be one of the trickiest economic policy maneuvers in Canada’s recent history. Three months after Covid-19 threw the economy into suspended animation, the prime minister is planning to wind down an aid program that offers C$2,000 ($1,480) a month to workers who lost their jobs or had their hours cut because of the pandemic. The program worked — almost too well. About 8.4 million Canadians, more than 40% of the labor force, received at least one payment from the Canadian Emergency Response Benefit at one point. Just 1.2 million have stopped receiving it. Removing CERB will be a delicate balancing act.
• Bank of Canada Governor Tiff Macklem said a full recovery is a long way off for the country’s economy, requiring interest rates to remain at historical lows indefinitely. Macklem, speaking Tuesday in his first public appearance since taking the helm at the central bank on June 3, said the biggest risk to the country’s outlook is that the policy response would be too weak, unnecessarily prolonging the crisis.
• Mexico plans to keep migrant workers from traveling to Canada amid a wave of coronavirus outbreaks on farms, threatening a labor squeeze in the northern nation’s fruit and vegetable industry as harvests start to ramp up. There will be a “temporary pause” on migrant workers traveling to Canada while protocols and sanitary situations are reviewed, Daniel Millan, a spokesman for Mexico’s Foreign Ministry, said Tuesday in an email. The move comes amid concerns there are inadequate protections to keep workers safe from Covid-19 after two workers died and hundreds fell ill on farms in Ontario.

World Headlines

• European stocks opened broadly neutral on Wednesday, as market participants weigh hopes for additional U.S. fiscal and monetary stimulus against jitters over resurgent virus cases and geopolitical tensions overseas. The Stoxx Europe 600 Index was up 0.3% as of 8:17 a.m. in London, with 11 of 19 sectors in positive territory. Health care and utilities gained the most, while miners and insurance firms narrowly declined. Equities in the region had slumped late last week after surging in early June, but recouped lost ground after Bloomberg reported on U.S. considerations for additional stimulus spending worth $1 trillion. Cyclical industries have led the latest rebound, with construction and banking stocks rising the most this week.
• U.S. equity futures advanced alongside shares in Europe as investors looked past an increase in coronavirus cases to focus on government and monetary stimulus. Oil fell while the dollar was little changed. Investors are reflecting optimism as they hunt for fresh catalysts after Federal Reserve Chairman Jerome Powell said Tuesday that the U.S. economy has a long way to go before it reverses the substantial damage done by the pandemic.
• Japanese shares slipped on renewed worries over the coronavirus, reversing course following their biggest rally since March. The Topix, which climbed 4.1% Tuesday, dropped with automakers weighing most. The Nikkei 225 Stock Average also pared some of yesterday’s 4.9% surge. Beijing raised its Covid-19 emergency response to the second-highest level after coronavirus infections resurged, China Central Television reported, citing a briefing by the city’s government. All schools will restore online courses, and college students will stop returning to campus, it said.
• Oil pared an earlier decline as equities rose, shrugging off some concerns about a second wave of coronavirus cases in China. Futures in New York were 0.7% lower, after falling as much as 3.1%. Stock markets in Europe gained as traders looked at stimulus measures to help boost the economy, including in the U.S. However, any recovery is fraught with risk as a new phase of virus infections emerges in Beijing, forcing the government to close all schools and cancel more than 1,200 flights.
• Gold steadied as investors weighed comments from Federal Reserve Chairman Jerome Powell on the uncertain future for the U.S. economy with lingering concerns over further coronavirus outbreaks, as well as escalating geopolitical tensions. Powell said the U.S. economy may be entering a period of significant improvements in employment, but one that will leave the labor market “well short” of the robust levels seen just before the pandemic. His testimony, delivered via video-conference before the Senate Banking Committee on Tuesday, echoed views he gave last week after policy makers signaled rates would probably stay near zero. Powell will appear before the House Financial Services Committee later Wednesday.
• China ramped up efforts to stem a growing virus outbreak in Beijing. The city reported 31 new virus cases Wednesday, taking the total to 137, and a local official said the number of cases could grow “for a period of time.” Schools are closed and more than 1,200 flights were canceled Wednesday, though officials hope to avoid sealing off the city. Sweden’s top virus expert said herd immunity in his country is being “surprisingly slow” to develop, while New Zealand’s prime minister called in the military to enforce quarantine after two positive tests linked to visitors from the U.K. Infections are on the rise in many parts of the world: Indonesia overtook Singapore in Southeast Asia, Iran warned it may need a new lockdown, while Brazil registered a record 34,918 new infections.
• South Korea warned North Korea against further provocations, after Kim Jong Un’s regime pledged to dismantle the last remnants of President Moon Jae-in’s legacy of rapprochement and move troops into disarmed border areas. Moon’s office urged North Korea to tread carefully after the country reduced to rubble a $15 million liaison office set up north of the border in 2018 as a symbol of reconciliation. Earlier Wednesday, North Korean state media unleashed a fresh stream of threats and insults against South Korea and Moon, including a personal rebuke from Kim’s sister, Kim Yo Jong.
• HSBC Holdings Plc has restarted cutting as many as 35,000 jobs, three months after the coronavirus outbreak forced it to pause a long-awaited overhaul to boost profitability. “Since February we have pressed forward with some aspects of our transformation program, but we now need to look to the long term and move ahead with others, including reducing our costs,” Chief Executive Officer Noel Quinn said in a memo published Wednesday.
• U.K. inflation slowed to just a quarter of the Bank of England’s target in May, boosting the case for policy makers to add to their stimulus plan at their meeting this week. Consumer prices increased just 0.5% from a year earlier, the weakest since 2016, amid falling prices of auto fuel and recreational goods. The core rate, which excludes volatile energy and food prices, slipped to 1.2%. The pound was little changed following the Office for National Statistics report Wednesday.
• European Union diplomats are furious that President Donald Trump shut them out of talks between Serbia and Kosovo, fearing not only that EU interests will be sidelined but that the two countries’ long-term interests will suffer. Three officials familiar with the behind-the-scenes maneuvering in the Balkans said the transatlantic snub ignores years of EU efforts at reconciliation between the two sides and they suspect the main focus for U.S. Special Envoy Richard Grenell is delivering a quick win for his boss. Ahead of November elections, it could burnish his chances to be secretary of state in a second Trump term.
• Deutsche Lufthansa AG issued a plea to investors to turn up and vote for a 9 billion-euro ($10 billion) bailout package or risk tipping Europe’s largest airline into insolvency. The carrier said Wednesday it expects attendance at its June 25 shareholder meeting to fall below 50% of votes, meaning two-thirds of stockholders would need to vote in favor if the bailout package. If more than half of investors participate, a simple majority is all that’s needed to pass the measure.
• Germany is ramping up its debt issuance, raising the most out of a sale of its benchmark bond in about six years. It sold 4.14 billion euros ($4.6 billion) of debt that mature in 10 years, even though demand for the securities declined, with the offering seeing an oversubscription of just under twice the amount offered. That’s the least since April. Fund managers are uncertain whether bunds will rally or slide given the risks of a second wave of the virus and the prospects for an economic recovery. Yet unprecedented levels of asset buying from the European Central Bank are maintaining a perceived shortage of the securities in the market.
• China Pacific Insurance Group Co. gained as much as 2.1% on its first day of trading on the London Stock Exchange, after raising $1.8 billion from investors in the biggest European stock offering ever from a Chinese company. Global depositary receipts rose to $17.96 in early trading on the Shanghai-London Stock Connect segment of the LSE’s main market, compared with the $17.60 offer price, the bottom of the marketed price range. The Shanghai- and Hong Kong-listed insurance group sold 102.9 million GDRs in a public offering and proceeds could rise to as much as $2 billion if the over-allotment option is fully exercised. In addition, cornerstone investor Swiss Re AG bought 28.9 million GDRs.
• Yes Bank Ltd. is planning to raise at least 80 billion rupees ($1 billion) in a public offering of shares to boost its capital, according to people familiar with the matter. The bank, which counts two of India’s largest lenders State Bank of Indiaand HDFC Ltd. as its investors, will kick off the fundraising soon, the people said. That could help Yes Bank raise its Tier-1 core capital ratio to around 10%, from 6.3% as of end-March, said the people, who asked not to be identified as the information is private.
• Nintendo Co.’s stock has found a 1-Up in an unexpected place. Shares in the videogame maker have climbed to a new two-year high, driven by rising fears of a coronavirus second wave. With cases expanding worldwide including in the U.S. and China, the stock has broken out of its two-month plateau. Nintendo’s Switch console-handheld hybrid was one of the hit products during global lockdowns, buoyed by the success of laid-back social simulator Animal Crossing: New Horizons.
• Bain Capital Credit has closed a new distressed debt and special situations fund, with more than $3.2 billion in commitments, according to Jeff Robinson, one of the firm’s heads. About 50% of that total has been invested and committed, with the majority being deployed in the last three months, Robinson said. “While we do this in all market environments, now is one of the most attractive ones we’ve seen,” Robinson said in an interview. “On the distressed side, in any 10-year period, there are maybe two great years to be a distressed investor, and we’re in the midst of those two great years.”
• President Donald Trump’s family real estate company sought relief from lenders earlier this year for a retail property it owns in Manhattan. The stretch of storefronts at the base of the Trump Plaza on the Upper East Side, whose tenants have included a vitamin shop and a Mephisto shoe outlet, is a minor part of the Trump Organization’s portfolio of hotels and resorts. But it provides a glimpse into how the president’s own U.S. businesses are handling the coronavirus pandemic that has battered retailers and the economy. According to investor disclosures filed in May, the Trump Organization asked its lenders for Covid-19 related relief on the loan against the retail space. The sides were working toward a “possible solution,” according to one disclosure that didn’t provide details of what the company sought or whether any concessions were received. Landlords that have had a hard time collecting rent from tenants during the crisis have looked for ways to curb their own financial burdens, including temporary reductions in interest payments and extended repayment periods.
• The Treasury Department is considering holding off on giving more companies access to an untapped $17 billion relief fund for national security businesses in case Boeing Co. and General Electric Co. eventually need the money, according to people familiar with the matter. The loan program was created under the $2.2 trillion Cares Act with the two defense giants specifically in mind, according to Treasury Secretary Steven Mnuchin. But so far, both companies have taken a pass, saying they don’t need the government loans after raising cash on Wall Street. Only about 20 companies applied for loans by the program’s May 1 deadline, according to the Defense Department. There are about 300,000 companies in the Pentagon’s contractor supply chain, and some have turned to other Cares Act programs to win federal support. Treasury has until the end of the year to use the funds.

*All sources from Bloomberg unless otherwise specified