June 2nd, 2020

Daily Market Commentary

Canadian Headlines

• Canadian shares climbed on Monday, led by consumer discretionary stocks, with investors focused on signs of economic recovery. The S&P/TSX Composite index rose 0.3% in Toronto. Royal Bank of Canada contributed the most to the index advance, increasing 2.2%, while Alaris Royalty had the largest gain, rising percentage 9.8%. Canopy Growth had the biggest drop, falling 8.1%. BlackBerry shares gained after Street Insider reported that Fairfax Financial recently held talks to buy the remaining shares it didn’t already own. Street Insider, citing an unidentified source, said BlackBerry has formed a special committee and hired bankers to assist in the matter. Prime Minister Justin Trudeau unveiled C$2.2 billion ($1.6 billion) in financial support for Canadian municipalities whose revenues have plunged because of Covid-19 lockdowns.

World Headlines

• European stocks rose to their highest level in 12 weeks, buoyed by optimism about economies reopening and stimulus measures. The Stoxx Europe 600 Index added 1.4% as of 9:21 a.m. in London. The DAX Index jumped 2.4%, playing catch-up as German markets reopened after a holiday and as Chancellor Angela Merkel seeks to broker a compromise on a second stimulus package. Deutsche Lufthansa AG jumped 7.1% after the airline overcame most of the barriers to receiving a $10 billion government bailout. European equities have retraced more than half the decline from a selloff that began in February. Easing lockdowns and unprecedented stimulus measures are boosting sentiment, sending the Stoxx 600 toward its 100-day moving average for the first time since late February. Still, escalating U.S.-China tensions have tempered some gains recently.
• U.S. equity futures rose alongside stocks in Europe and Asia on Tuesday as investors looked past worsening social unrest in America to positive signs on stimulus and the global economy. The dollar fell for a fourth straight day. Contracts for the S&P 500 turned higher after initially dropping in the wake of President Donald Trump’s promise to deploy large numbers of troops if cities and states don’t act to contain violence from protests over police brutality.
• Japanese shares advanced to a three-month high, as signs the U.S. economy may be recovering won over worries about ongoing civil unrest in America. The benchmark Topix index advanced for a second day, extending its gain from a March low to 28%. The Nikkei 225 Stock Average has climbed 35% from its March low. A closely watched measure of U.S. manufacturing rose in May for the first time in four months, rebounding from an 11-year low and suggesting the industry is beginning to stabilize at a depressed level after a pandemic-driven plunge.
• Oil rose past $36 a barrel as investors eyed a potential extension of record production curbs by OPEC+ while physical markets showed renewed signs of tightness. Futures in New York rose around 2.7%. Russia and several producers in the Organization of Petroleum Exporting Countries and its allies are said to favor an extension of one month to existing cuts, with consensus building toward that length within the group, according to three delegates. It was unclear whether OPEC’s key power, Saudi Arabia, had agreed to the suggestion, with the kingdom supporting an additional one to three months of curbs. Crude is rallying as the market for real barrels of crude is showing renewed signs of strength too. The bearish structure in the nearest futures contracts has disappeared, signaling tighter supplies. Russian Urals crude was bid last week at the highest level since Bloomberg began compiling data, as the nation accelerates record output cuts.
• Gold steadied as investors weighed protests across the U.S. and a new flare up in the Sino-American relationship that may threaten the hard-won trade deal between the two countries. U.S. futures slipped, while Asian stocks were mixed Tuesday after President Donald Trump threatened to deploy U.S. military forces if cities and states fail to contain violence from demonstrations sparked by the death of George Floyd, an unarmed black man, at the hands of Minneapolis police. Meanwhile, Chinese officials are reported to have told state-run agricultural companies to pause purchases of some American farm goods, endangering the ‘Phase One’ agricultural trade deal inked in January between the two sparring nations. It’s the latest move in escalating frictions that have supported bullion inching toward a seven-year high.
• France’s Finance Minister Bruno Le Maire vowed not to raise taxes, even as the coronavirus pandemic dealt a bigger blow to the economy than expected. The government is now forecasting an 11% contraction this year. Hong Kong’s leaders extended virus-prevention measures, including a ban on public gatherings of more than eight people and border restrictions, after a new cluster of cases. Tokyo saw infections spike a week after a state of emergency was lifted. In the U.K., Prime Minister Boris Johnson plans to reset his government’s agenda with a financial statement and a speech on the post-pandemic landscape.
• President Donald Trump threatened to deploy the U.S. military to end “riots and lawlessness” across the country in a Rose Garden address punctuated by the sound of explosions as federal officers dispersed peaceful demonstrators just outside the White House gates. Trump on Monday night called on governors and mayors to “dominate the streets” and announced that he was sending thousands of heavily armed military personnel into the nation’s capital after days of violent outbursts following the death of George Floyd, an unarmed black man, at the hands of Minneapolis police. The comments preceded another night of sometimes-violent unrest in U.S. cities, including New York, where looting and arrests continued despite a curfew. Macy’s iconic flagship store on 34th Street was among the businesses breached, according to the Associated Press.
• NetEase Inc. has started taking investor orders for a listing in Hong Kong that could raise as much as $2.8 billion, which could be the world’s second-largest initial share sale this year. The company plans to sell 171 million new shares in its second listing before exercising the over-allotment option, according to terms for the deal seen by Bloomberg. The offering by the Nasdaq-listed Chinese internet company is already oversubscribed, people familiar with the matter said. It has set the maximum offer price at HK$126 ($16.25) a share, meaning it could raise as much as $2.8 billion. NetEase’s listing is set to overtake coffee giant JDE Peet’s BV’s $2.5 billion initial public offering in Europe as the second-largest initial share sale this year. Only Beijing-Shanghai High Speed Railway Co. has raised more with its $4.3 billion IPO in January, according to data compiled by Bloomberg.
• Abu Dhabi’s state-owned energy producer is close to selling a multibillion-dollar stake in its natural gas pipelines to an investor group backed by Global Infrastructure Partners and Brookfield Asset Management Inc., in what is set to be one of the year’s biggest infrastructure deals. The buyers could sign an agreement with Abu Dhabi National Oil Co. for a 49% holding in the pipelines this month, according to people with knowledge of the matter, who asked not to be identified as discussions are private. A deal could value the pipelines at more than $15 billion, including debt, they said. Equity financing has been arranged and the bidders are negotiating the terms of a debt package with banks, the people said. While discussions are advanced and ongoing, the timing and valuation could still change, according to the people.
• Uday Kotak sold part of his stake in Kotak Mahindra Bank Ltd. for about 69.4 billion rupees ($919 million) as the billionaire cut his ownership in the lender he founded to comply with central bank regulations. Kotak sold 56 million shares of the bank at 1,240 rupees each, the top end of a marketed range, according to terms of the deal seen by Bloomberg News. The offer price was at a 0.7% discount to Monday’s closing price. The tycoon’s holdings will reduce to 26.1% from 28.93% after the sale. The disposal comes after a resolution in January of an unusual legal feud with the Reserve Bank of India over the pace at which Kotak, the bank’s founder and chief executive officer, should cut his stake in the lender. The two sides agreed that Kotak should lower his holding to 26% by August.
• Chinese government officials told major state-run agricultural companies to pause purchases of some American farm goods including soybeans as Beijing evaluates the ongoing escalation of tensions with the U.S. over Hong Kong, according to people familiar with the situation. State-owned traders Cofco and Sinograin were ordered to suspend purchases, according to one of the people, who asked not to be identified discussing a private matter. Chinese officials also told state-buyers to halt American cotton and corn imports, the person said.
• Deutsche Lufthansa AG shares surged after Europe’s biggest airline overcame most of the barriers to receiving a 9 billion-euro ($10 billion) bailout from the German government. The stock gained as much as 8.3% and was priced 6.6% higher at 9.75 euros as of 9:04 a.m. Tuesday, the first day of trading on the Frankfurt bourse since last week. Barriers to the rescue began to crumble late Friday, with Lufthansa agreeing to hand over operating slots at its main hubs to win European Union backing for the deal. Its supervisory board approved the compromise in a vote on Monday. Lufthansa is seeking emergency aid after the Covid-19 pandemic punctured a decades-long aviation boom, grounding flights and draining cash reserves. The company expects its fleet to be 100 aircraft smaller following the crisis, implying the loss of 10,000 jobs.
• Russia came close to its OPEC+ oil output target in May as the alliance prepares to discuss extending the record cutbacks. The nation’s producers pumped 39.7 million tons of crude and condensate last month as the deal kicked off, according to preliminary data from the Energy Ministry’s CDU-TEK unit. That equates to an average daily output of 9.388 million barrels, based on a 7.33-barrel-per-ton conversion ratio. Under the OPEC+ deal agreed in April, Russia pledged to cut only crude production, leaving condensate unrestrained. While the country doesn’t provide a breakdown between the two, if it pumped condensate at the level of 650,000 to 900,000 barrels a day that analysts estimate for the first quarter, crude-only supply reached 8.49 million-8.74 million barrels a day in May. Moscow’s target under the agreement was 8.5 million a day for May and June.
• German Chancellor Angela Merkel will seek to broker a compromise Tuesday on a second stimulus package to help Europe’s biggest economy recover from the deep recession caused by the coronavirus. Merkel’s government launched an initial shot of stimulus and guarantees in March to cushion consumers and businesses from the impact of the outbreak. Officials are now focusing on trying to bring the economy back from a contraction expected to exceed 6% this year, the deepest since the aftermath of World War II. Merkel will host officials from the ruling coalition of her Christian Democratic-led bloc and the Social Democrats in Berlin from 2 p.m. local time. They’ll attempt to thrash out a deal on a plan worth between 50 billion euros ($56 billion) and 100 billion euros, a person with knowledge of the matter told Bloomberg last week.
• France will push on with tax-cut plans and broad economic overhauls to help the country rebound from a recession that will be deeper than previously anticipated, Finance Minister Bruno Le Maire said. The economy will shrink 11% this year, more than the 8% previously predicted. Le Maire said that means France must continue with emergency support and pro-business reforms, and not raise taxes that could choke off growth. “The economy was almost stopped for three months and we will pay for it in growth,” Le Maire said on RTL radio. “We need to stay the course of reducing tax for households and giving businesses the margin to digitize, robotize and innovate.”
• An investment firm backed by the biggest U.K. banks is working on a 15 billion-pound ($18.8 billion) fund to inject money into smaller companies that could struggle to repay debt they’ve taken on during the coronavirus outbreak. Business Growth Fund is in talks with the government and investors such as insurers and pension funds on proposals for a public-private fund to invest in viable companies that have received loans of as much as 5 million pounds under a government crisis program, according to Chief Executive Officer Stephen Welton. About 46,000 loans totaling nearly 9 billion pounds have been made under the program so far, according to Treasury data.
• India’s biggest airline, IndiGo, said it’s unable to give any guidance on future capacity growth, as the coronavirus pandemic destroyed demand for air travel in one of the world’s fastest-growing aviation markets. The carrier, operated by InterGlobe Aviation Ltd., had earlier expected capacity to increase 20% in the year ending March 2021. A nationwide lockdown for about two months “significantly impacted” the company’s profitability, and it has put on hold discretionary expenses and certain capital expenditures, the company said in a statement to stock exchanges. Like airlines around the globe, IndiGo, the world’s biggest customer for Airbus SE’s best-selling A320neo jets, saw demand plunge as countries imposed border restrictions, holiday makers canceled trips and companies cut back on non-essential business travel. India has allowed a limited number of domestic flights to resume after a two-month nationwide grounding, giving airlines like IndiGo and SpiceJet Ltd. a chance to earn some much-needed revenue.
• Huadian Fuxin Energy Corp. surged the most on record after saying its state-owned parent plans to privatize the Hong Kong-listed clean energy-operating unit at an almost 66% premium to its previous close. The announcement to the city’s exchange late Monday is the latest in an emerging trend of Chinese state energy firms seeking to repackage and relist their renewable power units in search of higher valuations. Speculation of further take-private offers in the industry boosted other Hong Kong-listed renewable units Tuesday.
• American soybean exporters sold several cargoes to Chinese state-run buyers, according to people familiar with the matter, showing that some transactions are still going through even after officials in Beijing ordered a pause in some purchases. Shippers sold as many as four cargoes of U.S. soybeans from the new crop, said the people, who asked not to be named because the information is private. State-run stockpiler Sinograin was bidding earlier for Pacific Northwest cargoes, the people said. Chinese government officials have told major state-run agricultural companies to halt imports of some American farm goods including soybeans, people familiar told Bloomberg News on Monday. U.S. cotton and corn imports by state buyers have also been paused, a person said.
• As protests over the killing of an unarmed black man by Minneapolis police spread across the U.S., Mark Mason, one of Wall Street’s most senior black executives, debated whether to weigh in. People around him kept asking what he thought. On a conference call last week to honor a group of junior executives inside Citigroup Inc., an employee asked Mason, the bank’s chief financial officer, whether it planned to enter the political fray as it had on issues including gun control and protests by white supremacists. Mason’s wife and children encouraged him to speak up as well.
• Times may be tough for U.S. consumers, but a growing number of investors are betting that many Americans will fare well enough to keep paying their debts. Money managers like T. Rowe Price Group Inc. and Loomis Sayles & Co. are buying bonds backed by credit cards, mortgages and auto loans. Early reports suggest that fewer borrowers are falling behind on their obligations than unemployment data might otherwise imply, which is probably in part due to extraordinary measures that the Federal Reserve and the U.S. government are taking to support consumers and the economy. If all else fails, money managers expect the safeguards embedded in their bonds to protect them from any uptick in defaults. Some money managers made bets like that in the early days of the financial crisis and got burned. But this time may be different, in part because protections for investors in the securities have grown stronger over the last decade.
• This year was shaping up to be Sunnova Energy International Inc.’s best ever. California—already the biggest U.S. solar market—had started requiring most new homes to be powered by the sun. The rooftop solar company’s shares hit a new peak in early March, and analysts projected sharp growth. Even bad news hadn’t harmed Sunnova. Rolling blackouts, which big utilities had used the previous fall to help prevent wildfires? Just another reason homeowners might want Sunnova’s solar and battery products. A trade war hadn’t stopped the rise of residential solar. Even the novel coronavirus in China didn’t look like much of a problem. In late February the company increased its estimate for the number of new customers it would bring in for the year.
• Boris Johnson plans to re-set his government’s agenda with a major speech and a financial statement to prepare the U.K. for the new reality after the coronavirus pandemic. Amid forecasts of the worst recession in 300 years, Chancellor of the Exchequer Rishi Sunak is drawing up options to bolster the economy as the government withdraws its vast package of financial support in the months ahead, according to people familiar with the matter. For Johnson, the priority will be to focus on reasserting his broader political mission in the age of the virus, one person said. The Conservative Party leader and public face of Brexit, Johnson was elected with a large majority just six months ago on a promise to “level up” the forgotten parts of the country.

*All sources from Bloomberg unless otherwise specified