June 8th, 2020

Daily Market Commentary

Canadian Headlines

• Shopify Inc. may be hogging all the headlines but there are other tech companies keeping the rebound going on Canada’s stock market this year. Shopify’s near 90% surge this year has put it in the No. 1 spot on the S&P/TSX Composite Index but Kinaxis Inc. and Real Matters Inc. are close behind, up 70% and 67% respectively — making them the third and fourth largest gainers. Hydrogen fuel cell company Ballard Power Systems Inc. is second with a 75% gain. These tech stars may not have a catchy acronym like FAANG in the U.S., BAT in Asia or even WAAAX in Australia but investors have flocked to these names due to their stronger growth outlook compared with other sectors during the coronavirus pandemic.

World Headlines

• European equities fell as investors contemplated whether the rally has gone too far after three weeks of gains that were fueled by the optimism over a stronger policy response to the crisis. The Stoxx Europe 600 Index retreated 0.8% led by insurance and personal and household goods stocks. At the same time, oil shares surged as Brent rose after OPEC and its allies agreed to extend historic output curbs by an extra month. European stocks jumped the most in two months last week after the European Central Bank doubled down on its bond-buying program, supporting investor confidence in the region’s assets. The likes of Eaton Vance and Morgan Stanley have become constructive on European equities in recent weeks as the region stepped up its economic and policy response to the crisis, fueling a rotation into value and cyclical shares.
• U.S. equity futures advanced, while Treasuries slipped with the dollar as investors decided the global rally in risk assets has more to run. Futures pointed to gains at the open, which would put the S&P 500 on the cusp of wiping out its 2020 losses. The dollar fell against a basket of its peers and headed for the longest losing streak since 2011.
• Oil rose toward $43 a barrel in London after OPEC and its allies agreed to extend historic output curbs by an extra month. Brent futures added as much as 2.6% and are heading for their longest run of gains since February. The extension is a victory for Saudi Arabia and Russia, which were deadlocked in a brutal price war just two months ago. OPEC+’s de-facto leaders showed their commitment to shore up oil markets globally, and even cajoled Iraq, Nigeria and other laggards to fulfill their promises to reduce production. Following the new deal, Saudi Arabia pressed on by increasing some crude prices by the most in at least two decades. The hikes erased almost all of the discounts the kingdom made during its brief price war with Russia, with the steepest increases hitting July exports to Asia.
• Gold steadied after the biggest slump in seven weeks, with better-than-expected U.S. jobs numbers boosting optimism about a recovery and calling into question demand for haven assets. Bullion had tumbled in last week’s final session as America’s labor market defied forecasts for a Depression-style surge in unemployment amid the pandemic. A broad gauge of payrolls rose 2.5 million in May, trouncing forecasts for a sharp decline. The jobless rate fell. Investors’ focus this week will be on the Federal Reserve’s two-day policy-setting meeting ending Wednesday, when Chairman Jerome Powell is expected to repeat that the central bank will deploy its full suite of liquidity backstops — even if there is little need for some at the moment.
• Iron ore futures surged above $100 a ton after Brazil’s Vale SA was ordered to suspend operations that account for about a 10th of its output after workers contracted Covid-19, boosting concerns surging cases will disrupt other mines in the top shipper after Australia. The ruction is the latest supply shock to hit the global market over the past 18 months, following a dam burst at a Vale mine in 2019 that roiled prices as well as weather-related disruptions this year. Iron ore could hold above $100 for the next two months, Morgan Stanley said, although it cautioned that a surplus and lower prices were still expected in the final quarter. Higher prices will benefit Australian majors BHP Group, Rio Tinto Group and Fortescue Metals Group Ltd.
• Worldwide infections from the coronavirus surpassed 7 million, a little more than a week after reaching 6 million cases. The global pandemic is hitting such milestones faster as hot spots including Brazil and India drive a daily increase of more than 100,000 cases. New Zealand said it will remove social distancing measures, leading the way among the largest nations in moving past containment rules, after reporting zero active cases for the first time since the pandemic began. Sweden’s prime minister was forced to defend his Covid-19 strategy after opposition parties mounted a scathing attack on his government. AstraZeneca Plc has approached rival Gilead Sciences Inc. about a potential merger, which would bring together two drugmakers behind the industry’s most prominent responses to the Covid-19 pandemic.
• Sembcorp Marine Ltd. will raise S$2.1 billion ($1.5 billion) by selling new shares after a global plunge in oil prices curbed new orders for the world’s second-biggest maker of offshore rigs. The Singapore-based company will sell 10.46 billion new shares to existing holders for S$0.20 apiece as part of the 5-for-1 offer, the company said in a statement to the city-state’s stock exchange Monday. Parent Sembcorp Industries Ltd. will participate and plans to distribute its holding in the unit to its shareholders after the sale. Sembcorp Marine expects to report losses for a third year in 2020 as a drop in crude prices prompted oil majors to cut investment and delay offshore projects. The coronavirus outbreak also forced Singapore’s shipyards to reduce production due to a partial, two-month lockdown that eased on June 1.
• PG&E Corporation today announced that it has entered into a definitive agreement with a select number of investors, including affiliates of Appaloosa, Third Point LLC, Zimmer Partners and Fidelity Management & Research Company, LLC, that have agreed to purchase an aggregate of $3.25 billion in common stock of PG&E, expected to be issued in a private placement upon PG&E’s emergence from Chapter 11.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week, ending 15 weeks of outflows that reached $23.2 billion. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $1.87 billion in the week ended June 5, compared with losses of $593.5 million in the previous week, according to data compiled by Bloomberg. This was the biggest weekly inflow since Jan. 17. So far this year, outflows have totalled $16.9 billion.
• American auto demand is coming back faster than expected and quickly clearing trucks from dealer lots, spurring Ford Motor Co. to crank up production of its highly profitable F-150 pickup in Michigan this week. The ramp up has some workers on edge, despite the extra money they stand to earn from the overtime and extra Saturday shifts Ford is adding at its Dearborn, Michigan, truck factory. The local union has already filed a grievance calling for the company to do more to protect workers from Covid-19. “People will be working in close proximity for more hours per week,” said Gary Walkowicz, a recently retired United Auto Workers official who helped lead the grievance at Ford’s truck plant last month. “You saw what happened in the meatpacking plants where people are crowded together. You’ve had large outbreaks and people are dying.”
• Morgan Stanley strategists added a bet on a steeper Treasury yield curve, seeing the potential for a “regime shift” in the wake of a rapidly improving U.S. economy. “In the blink of an eye, that seems about how quickly the economic narrative has tilted in favor of a V-shaped recovery versus a slow and prolonged one,” Guneet Dhingra, head of U.S. interest-rates strategy in New York, wrote in a June 5 note. History suggests that, after a period when 30-year yields led longer-dated rates higher, it’s time for 10-year rates to become the key driver, he wrote. The bank added a bet on the spread between three-year and 10-year yields widening to their existing so-called steepener trade call — a wager on five-year, 30-year spreads. That’s after the unexpected surge in U.S. payrolls in May.
• The U.K. is pressing ahead with a two-week quarantine on international arrivals, a move British Airways and other carriers say will devastate tourism and wreck any chance the summer holiday season could spark a recovery from a virus-induced slump. BA, along with EasyJet Plc and Ryanair Holdings Plc, have threatened to sue the government over the policy, which takes effect Monday, saying the restrictions will be ineffective at curtailing Covid-19 while threatening to destroy thousands of jobs. The airlines fear the move will make lockdown-weary customers put off bookings just as carriers add capacity. “Even those people who would have thought about going away on holiday in July or August are now holding off from making bookings since nobody really knows how long the rules will last,” said John Strickland, director of JLS Consulting in London, who has held senior positions at BA and KLM. “Being locked down at home for two weeks after a holiday is something that a lot of people can’t really afford to do.”
• Ericsson AB will need to write down assets related to its business in China, resulting in a 1 billion-krona ($109 million) hit to the Swedish telecom giant, the company said in a statement on Monday. The company is seeking to expand in China as the country’s three major mobile operators invest large amounts in building mobile networks based on the next generation of wireless technology, and it has won business from all of them. The nation’s largest carrier, China Mobile, reported a 549% gain in 5G subscribers in April from January. China’s other two major operators, China Telecom and China Unicom, last year agreed to build a joint nationwide 5G network. Changes to specifications for the shared network meant that products that Ericsson was slated to deliver could no longer be used, said Peter Olofsson, a spokesman for the company.
• Surging demand for Hong Kong dollars means the city may more than double sales of the local currency to protect its peg to the greenback. That’s according to Carie Li, an economist at OCBC Wing Hang Bank Ltd., who predicts intervention from the Hong Kong Monetary Authority will reach HK$80 billion ($10.3 billion) by the end of the year. The pegged currency remains near the strongest it’s technically allowed to trade, even after the city’s de facto central bank sold about $4.5 billion worth of local dollars since April. Hong Kong’s dollar has been supported by stubbornly-high local borrowing costs relative to rates on the greenback, making it an attractive carry trade target. Local liquidity has been tight since the HKMA drained Hong Kong dollars in previous years, while a rash of mega-listings by Chinese tech companies is boosting demand for the currency.
• Saudi Arabia’s steep hikes to its crude prices for July have shocked some Asian refiners even as the region leads a rebound in global energy consumption following coronavirus lockdowns. Aramco’s price boost for its flagship Arab Light crude to Asia — which accounts for more than half of Saudi oil sales — was the biggest in at least 20 years, exceeding the most bullish expectations in a Bloomberg survey. However, two refiners are still seeking to buy their regular volumes because of the lack of alternative options, while another processor is weighing whether to replace some cargoes from the kingdom with floating storage or arbitrage supplies, according to people familiar with the matter.
• Car sales in China rose for the first time in almost a year last month, evidence that the world’s largest auto market is rebounding from the coronavirus crisis and the trade war with the U.S. Retail sales of cars, SUVs and multiple-purpose vehicles increased 1.9% from a year earlier to 1.64 million units in May, the China Passenger Car Association said Monday. That’s the first gain since June 2019.
• President Donald Trump is seeking to tie Joe Biden to activists’ calls to “defund the police” in an attempt to paint his likely 2020 opponent as weak on crime and vilify Democrats pushing for police reform, even though Biden hasn’t embraced the slogan. Two weeks of protests over the death of a black man in Minneapolis police custody have Trump on the defensive and are giving Democrats an opening to pursue curbs on law enforcement supported by their diverse base. But Trump is trying to turn the defunding demands into a political liability for Biden and grab the support of voters alarmed by scenes of protests, along with law enforcement groups that have been traditionally popular in the U.S.
• Mexico President Andres Manuel Lopez Obrador plans to nominate Jesus Seade Kuri, the economist who handled trade talks with the U.S. and Canada, as director-general of the World Trade Organization, according to a person familiar with the plan. The announcement may be made as soon as Monday, according to the person, who asked not to be named because the information isn’t public yet. Seade is currently the undersecretary of foreign relations for North America and had previously taught in universities in Hong Kong and China. The plan was earlier reported by newspaper El Universal.

*All sources from Bloomberg unless otherwise specified