June 5th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian stocks declined, snapping three straight days of gains, in tandem with a drop U.S. and Europe equity markets amid concern that the recent rally had gone too far. The S&P/TSX Composite index fell 0.3% in Toronto. Tech and consumer staples were the worst-performing sectors, while real estate, health care and materials were the best. One of Canada’s largest private lenders wants sell as much as 11% of its loans to help ride out the coronavirus crisis. Bridging Finance Inc. has already sold C$30 million in loans ($22 million) and plans to offload a further C$170 million to other direct lenders and institutional investors, Chief Executive Officer David Sharpe said by phone. The firm, which has C$1.8 billion in assets under management, froze redemptions on its funds in April. Canadian banks’ exposure to oil-and-gas loans has surged to a record as energy firms tapped credit lines to combat plunging oil prices. Energy loans at the country’s six largest lenders jumped 23% to C$71.6 billion ($52.9 billion) in their fiscal second quarter from the prior period.
• Bombardier Inc. plans to eliminate 2,500 jobs at its aviation division following a slump in demand for business jets. Manufacturing operations in Canada will bear the brunt of the cutbacks, to be carried out this year, Bombardier said in a release Friday. Overall, the group employs nearly 60,000. Two years of selling assets has left Bombardier particularly exposed to the vagaries of the private-jet market amid a wide-reaching recession. Demand in that market is forecast to drop 30% because to the pandemic, Bombardier said. The Montreal-based company said it would give an update on its outlook Aug. 6.
• Canada’s housing agency announced it will tighten mortgage qualification rules for high-risk borrowers, a controversial move that could curb credit in an economy trying to emerge from its deepest contraction of the postwar era. The state-owned Canada Mortgage & Housing Corp., which offers default insurance to home buyers with low down payments, said it will narrow eligibility criteria as of July 1. Buyers will need higher credit scores and lower debt burdens to qualify, the agency said Thursday in Ottawa. Evan Siddall, CMHC’s chief executive officer, said the move would protect new home buyers from falling prices and reduce taxpayer risk to any market correction. The changes though could slow housing market activity just as the federal government, and the nation’s banking regulator and central bank, have been flooding the economy with hundreds of billions in cash to stoke credit and fuel a recovery.

World Headlines

• European stocks resumed their rally after Thursday’s brief pause, set for their strongest week of gains in two months on the back of stimulus measures and economic optimism. The Stoxx Europe 600 Index climbed 1.4% as of 10:03 a.m. in London, taking its advance this week to 6%, before a key U.S. jobs report. Cyclicals once again dominated, with banks and autos in the lead. Oil-and-gas shares outperformed as OPEC+ was set to extend output cuts. European stocks have been on a tear since mid-May, outperforming Wall Street. With the region’s fiscal and monetary stimulus plans moving in lockstep, and economies restarting activity, the Stoxx 600 is up for a third week, on track for its longest such winning streak this year.
• U.S. stock futures rose and Treasuries fell as investors focused on government stimulus and shrugged off data that’s expected to show one-in-five Americans is unemployed. The focus for traders this morning will be the U.S. jobs report, which is likely to reflect a deepening recession across the country. But despite the grim economic news, markets are continuing to a historic rally. The S&P 500 is on track for a third week of gains, and an index of the dollar has fallen to the lowest since March. Markets are riding a wave of enthusiasm as investors bet on a global economy awash with stimulus. Fiscal and monetary aid measures from Frankfurt and Berlin exceeded expectations this week, and reports showed that Trump administration officials increasingly expect to spend up to $1 trillion in the next round of stimulus.
• Japanese shares erased early losses and rose Friday afternoon, capping their third weekly gain ahead of a closely watched report on U.S. employment that may provide more clues on the health of the global economy. The benchmark Topix index rebounded after falling by as much as 0.5%, and the Nikkei 225 Stock Average reversed an earlier drop of 0.6%, as both gauges advanced for a fifth straight day. Automakers were the biggest boost to the Topix, while air carriers also climbed after American Airlines Group Inc. said it would increase flights in July. The yen extended losses against the U.S. dollar to a fourth day.
• Oil headed for a sixth weekly gain after OPEC+ reached a tentative agreement to prolong its record production cuts. Brent crude was back above $40 a barrel, while futures in New York rose 2% on Friday. After almost a week of wrangling, Saudi Arabia and Russia clinched a deal with Iraq over its compliance, paving the way for the agreement’s extension into July instead of tapering them. OPEC will meet at 1 p.m. London time on Saturday, followed by a gathering of the wider group later to sign off on the pact, delegates said.
• Gold headed for the longest run of weekly losses since September as the rally in equities curbed haven demand and investors awaited U.S. jobs data for indications about the shape of the economy. Bullion’s appeal has weakened as more economies reopen awash with stimulus, the coronavirus pandemic shows signs of easing in some countries and trade tensions between the U.S. and China appear to be cooling. Holdings in gold-backed exchange-traded funds fell for the first time since April on Thursday, ending the longest run of inflows in more than a year. Global stocks are near the highest since early March amid optimism for a quick economic recovery, with recent data showing U.S. jobless claims slowed. The May employment report due Friday may show shrinking job losses, but also the highest unemployment since the 1930s.
• While the April employment report reflected the eye of the storm in terms of the number of job losses, the May release could show the impact spreading across a broader spectrum of industries and roles, even though the overall size of job losses may significantly shrink. An estimated 7 million layoffs in May will likely reflect not only continued job losses in those industries hardest hit in March and April (leisure and hospitality), but also a new wave of job losses in tangential sectors due to significant and by now prolonged weakness in demand. The latest Beige Book report showed economic activity continuing to deteriorate even in regions that started to remove lockdown measures at the end of April/beginning of May, suggesting a rebound in jobs will still be limited.
• Germany’s flag carrier is being removed from the country’s benchmark stock index for the first time since the gauge’s inception more than three decades ago, after travel restrictions aimed at stemming the coronavirus pandemic sent the stock plunging. Deutsche Lufthansa AG will be replaced by real estate company Deutsche Wohnen AG in the DAX Index, Deutsche Boerse said in a statement Thursday night. The change will come into effect June 22. Shares in Lufthansa, which this week agreed to a 9 billion-euro ($10 billion) state bailout package, rose as much as 7.8% on Friday, paring their loss this year to 34% and giving the airline a market capitalization of about 5.2 billion euros. That makes it the 60th largest German company by market value, while the DAX is reserved for the country’s 30 biggest companies. Deutsche Wohnen rose as much as 3.4%.
• Malaysia unveiled 35 billion ringgit ($8.2 billion) in additional stimulus to help the economy recover from the coronavirus pandemic. The new plan, which follows a late-March stimulus package worth nearly $60 billion, includes 10 billion ringgit in direct fiscal injection to the economy, Prime Minister Muhyiddin Yassin said in a speech Friday. The announcement comes as countries across Southeast Asia and around the world struggle back to their feet after lockdowns and restrictions brought commerce to a halt. Governments across the region have rolled out economic support to shield consumers and businesses from the worst of the blow, while central banks including Malaysia’s have lowered interest rates and taken steps to keep liquidity flowing.
• NetEase Inc. raised about HK$21 billion ($2.7 billion) in its Hong Kong stock offering, people with knowledge of the matter said, as Chinese companies grapple with rising tensions between Beijing and Washington. China’s second-largest gaming company priced 171 million new shares at HK$123 each, equivalent to a 2% discount to its Thursday closing price on Nasdaq, said the people, who asked not to be identified as the information is private. That comes after investors subscribed for many times more than the total stock offered. The company earlier set a maximum price of HK$126. The shares are expected to start trading in Hong Kong on June 11.
• Amazon.com Inc. is in preliminary talks to buy a stake in No. 2 Indian carrier Bharti Airtel Ltd. for at least $2 billion, Reuters reported, joining Facebook Inc. and other U.S. giants in betting on one of the world’s fastest-growing internet arenas. The U.S. online retailer is in early-stage discussions to buy about a 5% stake in the Indian wireless operator, Reuters said, citing anonymous sources. A deal will help Amazon access Bharti’s 300 million subscribers — a user base akin to the entire U.S. population. On Friday, the Indian carrier said in a statement it wasn’t considering any proposal to sell a stake to Amazon, referring to reports as “speculative.”
• A multi-sector trident of companies priced shares worth over $1 billion on Thursday, showing the rebounding strength of U.S. initial public offerings even as the coronavirus pandemic continues and social justice protests spread. Shift4 Payments Inc., a software company that powers payment and money transfers, priced its shares at $23 apiece, above the marketed range of $19 to $21 to raise $345 million, according to a statement.
• A shifting battlefield map is imperiling Donald Trump’s re-election, putting the president on the defensive in states his team didn’t expect to be competitive. Democrat Joe Biden has pulled further ahead in the industrial Midwestern states that Trump won in 2016, as Trump’s handling of the coronavirus and the resulting job losses prompted a precipitous slide in his support. Trump summoned top political advisers to the White House Thursday for a meeting to reverse the decline. In addition to the coronavirus outbreak and the recession, the president now faces a third crisis — nationwide protests over police mistreatment of African-Americans that have turned to rioting and looting in some places, leading Trump to suggest deploying the military to crack down on the demonstrations.
• Employees of Estee Lauder Cos., one of the world’s largest beauty businesses, called for the ouster of a board member and family heir over his support for President Donald Trump and criticism of the company’s response to the protests against police violence. In a letter to Chairman William Lauder that was reviewed by Bloomberg News, more than 100 employees and staff asked for the removal of Ronald Lauder over his political donations and concerns about his impact on race relations within the company.
• Fears of deflation justified the European Central Bank’s decision to ramp up its emergency bond-buying program, according to policy maker Pablo Hernandez de Cos. “Deflationary risks have increased and that’s one of the reasons the European Central Bank is taking the action it is taking — to ensure that risk doesn’t materialize,” the Governing Council member and Bank of Spain head said in a Bloomberg News interview in Madrid. “I’m among those who think that this crisis is essentially disinflationary, in the sense that some of the problems we had with low inflation are accumulating.”
• Bentley Motors Ltd. plans to slash as many as 1,000 jobs in the U.K., about a quarter of its workforce, to cut costs and contain the fallout of the coronavirus crisis after years of weak profitability. The move adds to 2,000 other British auto-industry job cuts announced this week, while European car, truck and parts makers have set plans to eliminate almost 50,000 positions since the start of the Covid-19 outbreak, according to a Bloomberg News tally. Volkswagen AG-owned Bentley intends to reduce headcount through voluntary measures but “cannot rule out future compulsory redundancies,” the Crewe-based manufacturer said in a statement on Friday. Car distributor Lookers Plc and Aston Martin Lagonda Global Holdings Plc said Thursday they will cut about 1,500 and 500 employees respectively.
• European Union Chief Negotiator Michel Barnier accused the U.K. of backtracking on commitments it made when it left the bloc as he warned this week’s talks over their future relationship had made no progress. “There has been no significant progress since the start of these talks,” Barnier told reporters in Brussels on Friday after the conclusion of the final week of negotiations before Prime Minister Boris Johnson meets top EU officials. “In all areas, the U.K. continues to backtrack on the commitments is had undertaken in the political declaration.”
• Europe’s monetary and fiscal titans are finally moving in lockstep as a wave of German stimulus buttressing additional central-bank easing heralds the prospect of a new era of policy coordination in the region. Those measures to aid the economic pickup from the coronavirus crisis, announced within half a day of each other in Berlin and Frankfurt, followed a groundbreaking shift toward creating a European recovery fund in Brussels supported by joint borrowing.
• For all the debate of the future of Hong Kong, investors for now anyway are clamoring for the city’s currency. The pegged Hong Kong dollar climbed to the strong end of its permitted trading band late Thursday U.S. time, prompting intervention by the de facto central bank. Another round occurred Friday during Asian trade. While concern about looming national-security legislation has spurred speculation about capital outflows, demand for the local currency has risen as investors seek a slice of highly sought share sales in Hong Kong by Chinese tech firms. The schism underscores the discordant views on how Hong Kong will fare amid rising U.S.-China tensions. Beijing is keen to sustain the former British colony’s role as global financial center, mainland capital has flooded into the local stock market and Chinese firms have lined up to list there. Meanwhile, some locals are hedging against an uncertain political future by amassing foreign exchange and looking at avenues for emigration.
• Lingerie chain Victoria’s Secret U.K. arm is appointing an administrator to help overhaul its business, amid plunging sales across the retail sector. The unit of Ohio-based L Brands Inc., which operates 25 stores in the country, will appoint Deloitte to renegotiate leases or sell the stores, Stuart Burgdoerfer, the unit’s interim chief executive officer, said in an emailed statement on Friday. Victoria’s Secret U.K., which reported 127 million pounnds ($160 million) of revenues in the last financial year, about 1% of the total for L Brands, is represented by law firm Linklaters, according to a court filing.
• The new jobless benefits program for gig-economy workers now represents 36% of all unemployment insurance claims processed during the coronavirus pandemic, far surpassing initial projections even without reflecting data from 15 states plus the District of Columbia. The latest Labor Department figures released Thursday, covering the week ending May 16, show 10.7 million continuing claims for Pandemic Unemployment Assistance, a program Congress created through a virus-relief law to extend unemployment compensation to freelancers and other workers not typically eligible for regular coverage.
• OPEC+ is set to extend production cuts to prop up the oil market after a breakthrough in high-stakes negotiations, with the alliance meeting on Saturday to sign off on the deal. After almost a week of wrangling, the group’s leaders Russia and Saudi Arabia clinched a tentative deal with holdout member Iraq, according to a delegate. The pair were pushing Baghdad to stop shirking its share of cuts and to compensate for past failings. The Organization of Petroleum Exporting Countries will meet by video conference on Saturday at 1 p.m. London time, followed by a conference with their OPEC+ allies two hours later, delegates said. The agreement, once ratified, will extend the record OPEC+ production curbs for another month until the end of July, instead of easing them as previously planned.
• Aging offshore oil wells that once brought market prominence to Europe, the U.S. Gulf and Brazil are increasingly money losers that companies want shut down amid low oil prices and a struggling global economy. But the effort won’t be cheap. The cost worldwide: An estimated $104.5 billion by 2030, according to Wood Mackenzie Ltd. At least 23 platforms a year could be retired in the North Sea alone, Rystad Energy Inc. reported in May, while the national oil company in Brazil has said it’s planning to spend $6 billion to retire 18 platforms, pipelines and other infrastructure by 2025.

*All sources from Bloomberg unless otherwise specified