June 9th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian equities rose Monday while U.S. stocks climbed, with the S&P 500 erasing its losses for 2020, as easing lockdowns bolstered economic optimism. The S&P/TSX Composite Index advanced 0.8% to its highest since March 6. Nine of 11 sectors rose, with health care and real estate stocks leading the way while consumer staples lagged. Ontario is moving to the next phase of reopening its economy after months of Covid-19 restrictions, but its financial capital is being excluded.
• Sun Life Financial Inc. is looking for deals where others may fear to tread. The Canadian life insurer is seeking bank partnerships in Hong Kong, investments in riskier private credit and tuck-in real estate purchases — all areas facing heightened uncertainty. Despite geopolitical tensions, market volatility and the impacts of the coronavirus pandemic, Sun Life’s top executives are still on the hunt for acquisitions. “We came into Covid-19 with a pipeline of conversations underway, and those conversations continue,” Chief Executive Officer Dean Connor said in a video interview. “We’re continuing to be actively out there talking to people about what’s possible.”
• Bombardier Inc. is facing the boot from Canada’s main index as it slides toward irrelevance for equity investors. The manufacturer’s share price has been below C$1 since early March, potentially making it ineligible to stay in the S&P/TSX Composite Index and in turn the S&P/TSX 60 Index of large companies. To be included in the composite, a company must have a minimum volume-weighted average price of C$1 over the previous three months, as well as over the last 10 trading days of the month prior to the index provider’s quarterly review, according to S&P Dow Jones index methodology. For Bombardier, that average price is now sitting at about 53 Canadian cents for the three months leading up to June.

World Headlines

• European stocks fell for a second day as a recent rotation toward cyclicals reversed. The Stoxx Europe 600 Index dropped 1.3% as of 10:55 a.m. in London. Banks, autos and insurers, among the biggest gainers since mid-May, all fell more than 3%, while more defensive sectors outperformed. Investors are assessing the extent of the market’s rebound against still-weak economic reports, with German exports data for April coming in worse than expected. After rallying to a three-month high last week amid a strong policy response and optimism as economies start to reopen, European stocks are losing steam ahead of a Federal Reserve meeting today. The Euro Stoxx 50 Index fell below the 200-day moving average after testing the level, while its relative strength index dropped below 70, the threshold that signals equities are overbought.
• U.S. equity futures and European stocks fell on worries that the blistering rally in risk assets has overshot the economic recovery. Treasuries advanced with gold and the yen. Declines in the U.S. premarket were broad, ranging from cruise lines to oil drillers. The dollar rose against a basket of currencies for the first time in nine days.
• With gains in Asia’s stock markets since their March lows closing in on $5.6 trillion — according to calculations by Bloomberg — investors are beginning to voice concerns the rebound is stretched. The MSCI Asia Pacific Index climbed for a seventh day Tuesday, its longest winning streak in more than two years. The Asian benchmark has now retraced more than two thirds of its coronavirus-induced declines, in a 33% rally that is its the best run over an equivalent time-frame since 2009, according to data compiled by Bloomberg.
• Oil dropped below $38 a barrel in New York as risky assets declined and Saudi Arabia said it would cease extra voluntary production cuts by the end of this month. Futures reversed an earlier gain to trade as much as 2.3% lower. The slide mirrored a retreat in equity markets, while Saudi Arabia said Monday that additional supply cuts, which amounted to about 1.2 million barrels a day and included contributions from allies in the Persian Gulf, wouldn’t continue beyond June.
• Gold rebounded above $1,700 an ounce as the global risk rally took a breather before a Federal Reserve meeting. Momentum stalled in risk assets on Tuesday, and the dollar strengthened for the first time in nine sessions, as investors weighed fresh outlooks on the economic recovery. World Bank forecasts suggest that over 90% of economies will experience a recession this year, more than at the height of the Great Depression.
• The Trump administration has expressed little concern over climate change as it pursues its goal of American dominance in the energy market. Federal judges say it should be concerned. At least six times since President Donald Trump took office, courts have rebuked the Interior Department for selling drilling rights or advancing oil projects without adequately considering the consequences to a warming planet. The decisions have jeopardized high-stakes oil development plans across more than a million acres of federal land.
• As many as 25,000 U.S. stores could close permanently this year after the coronavirus pandemic devastated an industry where many mall-based retailers were already struggling. The number would shatter the record set in 2019, when more than 9,800 stores closed their doors for good, according to a report from retail and tech data firm Coresight Research. Most of the closures are expected to occur in malls, with department stores and clothing shops predicted to be among the hardest hit.
• As a sense of euphoria sweeps through global equity markets propelling stocks to regain $21 trillion in value from a March low, the asset class is looking increasingly frothy. While stock luminaries who had advocated for a bull zone look like winners in hindsight, the debate goes on about whether the rally is a bear market bounce, doomed to end. Asia ended the day up but off the session’s high, while equities in Europe slipped in early trade, with the Stoxx Europe 600 falling as much as 1.6%. It’s a similar picture for the U.S. market as S&P 500 futures were down 0.9%.
• Taiwan Semiconductor Manufacturing Co. has secured government subsidies for its envisioned $12 billion chip plant in Arizona, moving closer toward finalizing a facility designed to allay national security concerns and shift high-tech manufacturing to America. TSMC, the main chipmaker to Apple Inc. and Huawei Technologies Co., has picked a site for the future plant and both federal and state governments have agreed to help make up for the higher cost of fabricating semiconductors in the U.S., Chairman Mark Liu told reporters Tuesday. Negotiations continue over the specifics of those incentives, he said without elaborating or identifying the site’s location. The decision to situate a plant in Arizona came after White House officials warned about the threat inherent in having much of the world’s electronics made outside of the U.S. TSMC had negotiated a deal with the administration to create American jobs and produce sensitive components domestically for national security reasons. It announced the project just before Washington leveled new restrictions on the sale of chips to Huawei, seeking to contain one of TSMC’s largest customers.
• Tesla Inc. shares are at an all-time high. Hertz Global Holdings Inc.’s are well above where they were before the company went bankrupt. But no stock in the automotive sector is a better indication of equity-market exuberance than Nikola Corp. The aspiring battery-electric and hydrogen fuel-cell truck maker debuted on the Nasdaq last week following a reverse merger with a blank-check company headed by a former General Motors Co. executive and board director. It’s forecasting zero revenue for 2020 and its first $1 billion year won’t be until 2023.
• Auto sales platform Vroom Inc. expanded its U.S. initial public offering and priced it above the marketed range to raise $468 million. The company, whose backers include L Catterton, General Catalyst Partnersand T. Rowe Price Associates Inc., sold 21.25 million shares for $22 each on Monday, according to a statement confirming a report by Bloomberg. Vroom earlier marketed 18.75 million shares for $18 to $20 each, according to its filings with the U.S. Securities and Exchange Commission.
• Apple Inc. is preparing to announce a shift to its own main processors in Mac computers, replacing chips from Intel Corp., as early as this month at its annual developer conference, according to people familiar with the plans. The company is holding WWDC the week of June 22. Unveiling the initiative, codenamed Kalamata, at the event would give outside developers time to adjust before new Macs roll out in 2021, the people said. Since the hardware transition is still months away, the timing of the announcement could change, they added, while asking not to be identified discussing private plans.
• France unveiled an aerospace rescue plan to bolster European planemaker Airbus SE and its financially-strapped suppliers with measures aimed at preventing massive job losses and underpinning aircraft orders. The sweeping aid package laid out Tuesday by Finance Minister Bruno Le Maire, worth about 15 billion euros ($17 billion), provides investment, payroll subsidies and credit guarantees to cushion the damage wrought by the coronavirus pandemic.
• Prime Minister Boris Johnson will talk his cabinet through his plans for easing the U.K.’s lockdown on Tuesday after officials reported the lowest number of daily deaths since restrictions were imposed. The prime minister said last month that non-essential retailers would be able to reopen on June 15 if the threat of the virus continued to recede, and Health Secretary Matt Hancock said Monday’s positive data means the government can press on with its plans. “Coronavirus is in retreat across the land,” Hancock told the House of Commons as he reported 55 fatalities, the lowest daily number since March 22. “Those downward trends mean that we can proceed with our plans, but we do so putting caution and safety first.”
• Cathay Pacific Airways Ltd. became the latest global carrier to receive a lifeline to get through the coronavirus pandemic, with the chairman saying its plan to raise HK$39 billion ($5 billion) from the Hong Kong government and shareholders was necessary to avoid collapse. The beleaguered airline will sell HK$19.5 billion of preference shares along with HK$1.95 billion of warrants to the government. It also proposed a rights issue, reported earlier Tuesday by Bloomberg News, to raise about HK$11.7 billion. The plans are subject to shareholder approval at an extraordinary general meeting around July 13. A government-connected entity called Aviation 2020 Ltd. also is extending a HK$7.8 billion bridge loan, the carrier said. The government will own 6.08% of Cathay through Aviation 2020 after the deal and have two observers on its board. The airline will cut executives’ salaries and offer more unpaid leave to its workers, and job cuts are possible.
• Chesapeake Energy Corp. is preparing a potential bankruptcy filing that could hand control of one of the leading lights of the U.S. shale revolution to senior lenders, according to people with knowledge of the matter. The dwindling options for a powerhouse that once rivaled Exxon Mobil Corp.for title of king of American natural gas comes after Chief Executive Officer Doug Lawler’s 7-year effort to untangle the financial and legal legacies of Chesapeake’s late founder, Aubrey McClendon. Lawler’s denouement, in turn, would signal the deep peril facing a shale industry largely built according to McClendon’s blueprint for Chesapeake: amassing incredible debts to pursue aggressive drilling programs that ultimately unearthed too little treasure to reward investors.
• Macy’s Inc. surged as much as 17% in early trading after announcing it has reopened 450 stores in some capacity and expects to exit the second quarter with a “clean inventory position.” This shows the U.S. department store chain may be bouncing back faster than expected from the Covid-19 outbreak that upended the retail world this year. As expected, the company posted a steep revenue decline, with net sales plunging 45% to $3 billion in the quarter ended May 2 amid U.S. lockdown measures that shuttered the company’s stores. Excluding some items, the company’s net loss was $630 million.
• Huawei Technologies Co. owns the most patents on next-generation 5G technology, ensuring the Chinese company will get paid despite Trump administration efforts to erase it from the supply chain, according to a new study. The study by two research firms identified the inventions most closely connected to the 5G standards and found that six companies owned more than 80% — Huawei, Samsung Electronics Co., LG Electronics Inc., Nokia Oyj, Ericsson AB and Qualcomm Inc., the only U.S.-based company in the group. That may be awkward for President Donald Trump, whose administration has launched a global effort to shut out Huawei, accusing the Chinese company of being a security threat. The administration has launched a number of salvos, including a banned the sale of any silicon made with U.S. know-how that is hurting the Chinese company’s aspirations to grow in cutting-edge fields.
• Tiffany & Co. said it remains committed to a sale to LVMH, following reports that the French luxury giant’s $16 billion deal for the jeweler was threatened by the effects of the coronavirus and U.S. social unrest. As the company seeks to bounce back from recent sales setbacks, “I am excited we will be taking that journey with LVMH by our side,” Chief Executive Officer Alessandro Bogliolo said in a statement. The jeweler said it has entered into amendments to its global revolving credit facility to maintain financial flexibility. It said it’s unable to provide a financial outlook for the rest of the year. Greater debt flexibility amid the stress of the pandemic could help ensure that the sale to LVMH comes to fruition. Tiffany’s leverage ratio had been a cause for concern among LVMH executives who have reevaluated the deal amid the new economic landscape, CNBC reported earlier this month. It also reported that LVMH is looking to cut the proposed price, citing people familiar with the matter.

*All sources from Bloomberg unless otherwise specified