June 8, 2021

Daily Market Commentary

Canadian Headlines

• Canadian equities were relatively flat Monday as traders prep for economic data and corporate conferences. The S&P/TSX Composite Index rose 0.03%, with 7 of 11 sectors gaining. Trillium Therapeutics Inc. and Aurora Cannabis Inc. led health care stocks higher. Meanwhile, consumer discretionary retreated, led by seadoo-maker BRP Inc. which fell 4.3%. Lightspeed POS Inc., a software company catering to the retail and hospitality industries that has emerged as one of Canada’s large tech successes, will spend $925 million on two acquisitions to beef up its e-commerce offerings.
• As Manhattan slowly springs to life again, with Wall Street’s biggest firms pushing traders and bankers back into the office, the scene some 350 miles to the northwest, where North America’s No. 2 financial center lies, is vastly different. Toronto’s Bay Street is quiet, laid low by successive waves of Covid-19. Union Station, normally one of the continent’s busiest commuter hubs, is largely deserted, even in rush hour. It will get busier as the crisis eases but the financial district, most here agree, has undergone a change that is likely permanent. Unlike on Wall Street, where the likes of JPMorgan Chase & Co.’s Jamie Dimonand Goldman Sachs Group Inc’s David Solomon talk excitedly about filling offices back up, top Bay Street executives seem to be in no hurry to end remote work. If anything, they rave about how surprisingly efficient and profitable the arrangement has been. And some acknowledge that their employees have little desire to return to the office five days a week.
• Prime Minister Justin Trudeau is preparing to ease Canada’s border restrictions for travelers who have been fully vaccinated against Covid-19, according to people familiar with the discussions. The government is crafting plans to loosen the current 14-day isolation period for border-crossers who’ve had two vaccine doses, said the people, speaking on condition they not be identified. Travelers entering Canada would still be tested for the virus and may be required to quarantine for a shorter period. The plan is expected be announced within days, though the timing could shift, according to the people. It isn’t clear when the changes would be implemented or whether Canada will open up its borders to non-U.S. travelers at the same time.
• A surge in mortgage borrowing is pushing consumer debt loads higher in Canada despite falling credit card use, as households plow more money into their homes while spending less on everything else. New mortgage borrowing rose 41% in the first quarter compared to the same period in 2020, when the pandemic began, according to a release Tuesday from consumer credit reporting firm Equifax Inc. The average limit on new mortgages — the amount for which borrowers were approved — jumped more than 20% to C$326,930 ($270,490). The increase in the number and size of mortgages Canadians are taking out drove the country’s outstanding consumer debts to nearly C$2.1 trillion ($1.7 trillion), despite a drop in credit card balances to their lowest point in six years, Equifax said.

World Headlines

• European stocks rose, poised for a third session at a record, as travel and tech shares led gains and mixed economic indications signaled room for further recovery without overheating. The Stoxx Europe 600 Index was up 0.3% as of 10:46 a.m. in London. Gains in travel and leisure, technology and mining shares were tempered by weakness in carmakers, indicating a recent rotation into cyclicals is on pause. Reports today showed the euro-area recession was shallower than expected in the first quarter, while a gauge of expectations in Germany missed estimates. The region’s equities are up in June, on course for a fifth straight month of gains and setting fresh all-time highs, as rapid vaccination progress puts economic normalization within reach. Still, traders are keeping a wary eye on inflation, which, if excessive, could bring loose monetary policy to an early end.
• Treasuries rose with the U.S. dollar as investors debated the impact of resurgent inflation on monetary policy. U.S. index futures witnessed wild swings as several major websites went offline. The 10-year yield fell back to 1.55% area with focus turning toward Thursday’s consumer-price data that may offer clues on how far the Federal Reserve can postpone a tapering of stimulus. Futures on the S&P 500 were steady, after a sharp drop in the wake of Internet outages. Nasdaq 100 contracts rebounded. Etsy Inc. fell in premarket trading on plans to sell convertible senior notes. The recovery in the world’s largest economy and the Fed’s continued dovish stance are supporting a risk-on environment, even as gains are punctuated by worries over inflation, high valuations and disparities in global vaccine rollouts. Forecasts for deepening price pressures have underpinned volatility this week as traders await clues to when the U.S. central bank will begin discussions on a tighter policy.
• Asian equities dipped as losses in China and the technology sector held sway in a market searching for fresh clues. Alibaba and TSMC were the biggest drags on the MSCI Asia Pacific Index, while Japanese drugmakers Eisai and Daiichi Sankyo cushioned the downside. The regional benchmark was on track for its fifth straight daily move of 0.2% or less. Stocks globally have mainly treaded water over the past two months. Investors are trying to gauge the downsides from potentially higher inflation and interest rates against the upsides of economic reopenings and continued massive government stimulus.
• Oil fell for a second session after a rally that saw prices hit $70 a barrel in New York for the first time since October 2018 faltered. Futures dropped back below $69 a barrel on Tuesday. That mirrored wider markets where the dollar rose and U.S. equity futures pared gains as the recent surge in various assets brought on inflation concerns. Still, in the oil market there’s confidence in the demand outlook with accelerating vaccinations allowing people to travel more. The Middle Eastern Dubai benchmark is trading in its strongest backwardation — a market structure that indicates supply tightness — in almost a year.
• Gold held gains as investors awaited a key U.S. inflation report due later this week for clues on when the Federal Reserve may begin to talk about tapering its asset purchases. Bullion steadied on Tuesday after rising 1.5% over the past two days as traders assessed a smaller-than-expected gain in U.S. payrolls as well as comments from Treasury Secretary Janet Yellen saying that higher interest rates would be a “plus” for America and the Fed, which weighed on the dollar.
• Copper inched higher in London as investors assessed signs of a demand pickup in China amid mine supply risks in South America. The spot Chinese copper market has moved into a premium from a discount last month, a sign of recovering physical demand. Supply issues are also in focus pending the outcome of Peru’s presidential election, and wage talks in key producer Chile raise concerns over supply disruptions in the short term. Copper, which has risen 28% this year, has wavered around $10,000 a ton in the past month amid the global economic recovery and uncertain policy environment. The jitters around when central bank monetary tightening will take place helped drive a decline for metals last week.
• India’s daily cases dropped below 100,000 for the first time in two months, and Prime Minister Narendra Modi vowed to speed up the hard-hit nation’s inoculation drive. Canada is set to relax quarantine rules for vaccinated travelers as pressure mounts on the government. Britain’s plan to ease a lockdown could be delayed by two weeks, the Times of London reported. Early evidence suggests that the delta variant first discovered in India — and now also dominant in England and Scotland — carries a higher risk of hospitalization. U.S. President Joe Biden and U.K. Prime Minister Boris Johnson will rally the Group of Seven behind a plan to make more shots available to low-income countries.
• KKR & Co.’s Independence Energy and Contango Oil & Gas Co. agreed to combine in an all-stock deal, giving the new business an equity value of $4.8 billion. The deal expands the combined firm’s oil and gas footprint, with assets in key shale basins from the Eagle Ford to the Permian, according to a statement on Tuesday. Upon completion, Independence shareholders will own approximately 76 percent of the combined company. KKR and Contango are doubling down on investing in exploration and production companies as many in the sector seek to recover from years of poor returns amid the shale boom and bust. The combination will allow the merged company to reach greater scale, boost access to capital and drive down the cost of production, people familiar with the matter told Bloomberg.
• Amazon.com Inc. is offering six-month prescriptions starting at $6 for medications for common ailments, the company’s latest effort to entice more people to buy drugs online rather than at a pharmacy or supermarket. Most insurance companies don’t cover six-month prescriptions, so the offering targets both the uninsured and those who are insured but still pay cash due to high out-of-pocket prescription costs associated with their plans. Amazon has been trying to make headway in the $360 billion U.S. prescription drug market since acquiring online pharmacy PillPack in 2018, threatening industry incumbents CVS Health Corp. and Walgreens Boots Alliance Inc. PillPack targeted consumers who take multiple medications, simplifying their regimen by sending the drugs in daily packets.
• Tesla Inc. has parted ways with Jerome Guillen, a 10-year veteran who most recently served as president of heavy trucking and was one of four top executives running the company alongside Chief Executive Officer Elon Musk. Guillen left the company June 3, according to a regulatory filing. He was a top lieutenant to Musk and played a key role in ramping up Model 3 production in 2018. The executive previously served as president of Tesla’s automotive business and was named head of heavy trucking in March. Tesla rose 1.7% to $615.39 as of 5 a.m. Tuesday in New York. The stock rallied in premarket trading after China’s Passenger Car Association said deliveries rebounded in May.
• Inflation jumped to the highest level since 2016 in May, fueling expectations that the Bank of Russia will move more aggressively to raise interest rates Friday. Consumer-price growth accelerated to 6% in May from a year ago, with prices for both food and non-food goods driving the increase, according to data from the Federal Statistics Service. That is above the 5.8% forecast in a Bloomberg survey and well beyond the central bank’s 4% target. Together with recent data showing the economy recovering faster than expected from the impact of Covid-19, the acceleration in price growth could push Bank of Russia Governor Elvira Nabiullina to deliver another big rate increase at this week’s policy meeting. The central bank already raised rates by 75 basis points this year and warned of more hikes to come.
• Cable giant Liberty Global Plc is raising new debt to pay itself a dividend after the approval of a blockbuster deal to combine its U.K. operations with Telefonica SA’s O2 unit. Liberty’s wholly-owned Virgin Media Ireland division, which was not part of that merger, is now seeking a 900 million-euro ($1.1 billion) loan to finance a shareholder payout, according to people familiar with the matter, who asked not to be identified discussing private information. Telefonica and Liberty Global won approval last month to merge their U.K. businesses to create a 31.4 billion-pound ($44.4 billion) giant that will dominate British phone markets. When Liberty announced the plan to combine its Virgin Media network with O2 last year, it said it expected to receive about 800 million pounds by recapitalizing the Irish unit.
• Joe Biden invited his opposite number in Ukraine to visit the White House this summer — part of efforts to reassure the eastern European country before the U.S. president meets Vladimir Putin in Geneva next week. Tensions between Ukraine and Russia — high since Putin annexed Crimea in 2014 and fomented a war nearby — spiked in April as the Kremlin stationed tens of thousands of troops on its neighbor’s border and raised the threat of an invasion. The fear in Kyiv is that Biden is prepared to make concessions to Putin to win cooperation on issues such as nuclear non-proliferation. In the run-up tothe summit, the U.S. all but abandoned efforts to halt Russia’s construction of an undersea natural-gas pipeline to Europe that could deprive Ukraine of vital transit revenue.
• Bitcoin’s meteoric rise has minted scores of crypto millionaires and U.S. investors are taking the lion’s share of riches. American traders locked in $4.1 billion in profits trading Bitcoin last year, three times more than the next highest country, according to estimates from Chainalysis. The New York-based research firm published a report ranking the top 25 countries with the biggest realized gains. Whether it’s the belief that crypto can be an inflation hedge against rampant central-bank money printing or the simple desire to make a quick buck from the famously volatile asset, crypto has captivated retail and professional traders around the world.
• Chinese regulators have instructed major creditors of China Evergrande Group to conduct a fresh round of stress tests on their exposure to the world’s most indebted developer, according to people familiar with the matter. Authorities led by the Financial Stability and Development Committee, China’s top financial regulator, recently told lenders including Industrial & Commercial Bank of China Ltd. to assess the potential hit to their capital and liquidity should Evergrande run into trouble, the people said, asking not to be identified discussing a private matter. It’s unclear whether the results will lead to any official action. While it’s not the first time regulators have required banks to report their Evergrande exposure, the directive suggests concerns about the company’s financial health have become serious enough to once again reach the upper levels of China’s government.
• Alibaba Group Holding Ltd.’s cloud division has pledged $1 billion to support startups in Asia, marking one of its largest outlays since the tech giant pledged to boost spending and move past a bruising antitrust investigation at home. The $1 billion will be the initial funding for Project AsiaForward, which aims to nurture 100,000 developers and tech startups over the next three years, Alibaba said in a statement Tuesday. The company aims to build a million-strong talent pool by providing training for developers, as well as connecting entrepreneurs with venture capital and other opportunities. Jack Ma’s e-commerce titan said last month it will invest all incremental profits into areas like technology and e-commerce, after Chinese antitrust regulators imposed a record $2.8 billion fine that drove the firm to its first quarterly loss in nine years. Chinese tech giants from Alibaba to Tencent Holdings Ltd. and Meituan have all pledged to dramatically boost spending, as Beijing’s crackdown on the industry forces companies to find new growth drivers.
• Democratic congressional leaders face a narrowing path to move forward on President Joe Biden’s $4 trillion economic agenda without Republican support as negotiations with the GOP are at risk of stalling. Biden is scheduled to talk again with the main Republican negotiator on the infrastructure portion of his plan, Senator Shelley Moore Capito of West Virginia, on Tuesday, the day before he leaves on a scheduled week-long trip to Europe to meet with other world leaders. After several rounds of discussions the two sides remain far apart and Capito said she won’t be bringing a new counteroffer to the table. Senate Majority Leader Chuck Schumer and House Speaker Nancy Pelosi, working with the slimmest of margins in the House and Senate, had been striving to pass Biden’s jobs and infrastructure proposal before Congress leaves for an August recess. But time is rapidly running out for putting together and passing a bill by that deadline. And Democrats, including Schumer, have been wary of getting bogged down in months of negotiations, as they were in 2009 on the Affordable Care Act.
• Apollo Global Management Inc. has agreed to buy a majority interest in gas transportation company Total Operations and Production Services LLC. The private equity firm has reached a deal with current owner Black Bay Energy Capital to take a majority stake in the company, Apollo said in a statement. The deal values the company, known as TOPS, at less than $1 billion, according to a person familiar with the matter who asked not to be identified because the terms weren’t public. TOPS, led by Chief Executive Officer L.D. Green, provides contract gas compression services in the Permian Basin, including gas drive compression rental and sales and gas/lift injection, with a focus on electric driven compression systems.
• Bridgetown 2 Holdings Ltd., the blank-check company backed by billionaires Richard Li and Peter Thiel, is in advanced talks to merge with Singapore’s online real estate firm PropertyGuru Pte, according to people with knowledge of the matter. The special purpose acquisition company has been in discussions with PropertyGuru on the potential deal, which could be announced as soon as next month, said the people, who asked not to be identified as the information is private. A transaction could value the combined firm at as much as $2 billion, the people said.
• Over six and a half years, a BlackRock Inc. commodity fund never came close to $1 billion in assets. Yet over two days in late May, the ETF more than doubled to $2 billion — and it’s already added another $120 million in June. The iShares GSCI Commodity Dynamic Roll Strategy exchange-traded fund (ticker COMT) is one of many raw-materials products enjoying a boom as investors ride an economic recovery from the coronavirus. Funds tracking specific sectors including energy, industrials and precious metals have long experienced hot money flows like this. Now demand for broad-based commodity funds is surging to an unprecedented degree this year amid the global economic re-opening, with $7.3 billion of allocations to take assets to $17 billion overall.
• Several of the world’s most prominent billionaires paid minimal to no federal income tax in some years, ProPublica reported on Tuesday, citing confidential Internal Revenue Service records it had reviewed. The world’s wealthiest individual, Amazon CEO Jeff Bezos, did not pay any federal income tax in 2007 and 2011. Tesla CEO Elon Musk managed to do the same in 2018. Bloomberg LP founder Michael Bloomberg and investors Carl Icahn & George Soros were also shown to have paid minimal rates of federal income tax in recent years. Between 2014 and 2018, Warren Buffett’s wealth is reported to have risen by as much as $24.3 billion and he reported paying $23.7 million in taxes, according to the data ProPublica reviewed, a true tax rate of 0.1%.
• President Joe Biden released a multi-pronged strategy to secure critical supply chains in products ranging from medicines to microchips, and is also weighing a potential trade probe that could result in U.S. tariffs on certain magnet imports, officials said. The administration will establish a supply-chain disruptions task force to address near-term bottlenecks that can affect the economic recovery. Secretary of Commerce Gina Raimondo, together with her transportation and agriculture counterparts Pete Buttigieg and Tom Vilsack, will lead the team that will focus on supply-demand mismatches in areas like homebuilding and construction, semiconductors, transportation, agriculture and food, administration officials told reporters.
• Clean energy giants are finding a shortage of workers with the skills needed to support their ambitious growth plans. The renewables jobs market is heating up and candidates with the right abilities are becoming harder to find, according to Miguel Stilwell, chief executive officer at Portuguese clean-energy firm EDP Renovaveis SA. The company is one of the world’s top installers of green power and plans to hire 1,300 employees over the next two years. “There’s a war over talent globally,” Stilwell said in an interview on May 28. “The renewable sector, given the massive amount of growth that is expected, doesn’t have enough people.”

“The big money is not in the buying and selling, but in the waiting.” – Charlie Munger

*All sources from Bloomberg unless otherwise specified