March 10th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian markets were battered on all fronts as the collapse in oil sent shockwaves through a country with one of the biggest exposures to the commodity among the Group of Seven. The S&P/TSX Composite Index plunged 10.3%, wiping out $218 billion in market value in the biggest one-day drop since 1987. The loonie also slumped and government bond yields plunged to fresh record lows as investor pessimism deepened for an economy that barely eked out any growth in the fourth quarter and is already grappling with the coronavirus. Oil and gas stocks plummeted with Meg Energy Corp. tumbling 56%, Cenovus Energy Inc. dropping 52% and Crescent Point Energy Corp. slipping 43%. Only one stock was in the green — Dollarama Inc., which gained 1.7%.
• Canadian Finance Minister Bill Morneau said he plans a targeted response to the fallout from the coronavirus and plunging oil prices, laying out a cautious approach to any fiscal stimulus plan to boost the economy. In an Ottawa press conference and interview with BNN Bloomberg, Morneau said the government is planning to take measures to fund the health system, as well as steps to help individuals and businesses impacted directly by recent events, some of which will be announced this week. Yet he downplayed the need to use a coming budget as a vehicle for a major spending or tax package.

World Headlines

• The Stoxx Europe 600 Index jumped alongside contracts on the three main American gauges, though few benchmarks came close to recovering their historic losses from Monday. The twin worries of a price war in the oil market and worsening coronavirus outbreak remain front and center for investors.
• U.S. stock index futures surged more than 4% Tuesday, pointing to a rebound on Wall Street, after President Donald Trump said he will seek a payroll tax cut and “very substantial relief” for industries that have been hit by the coronavirus outbreak. A day after spending most of the overnight session pinned to an exchange-enforced band that barred further selling, equity contracts drifted toward levels that would prevent them from further gains. The March S&P 500 contract reached 2,877.75, just below the 2,897 “limit-up” boundary set by the Chicago Mercantile Exchange. Should it reach that level, rules would keep it from rising more, though it could continue trading at or below it. Early in the session investors watched as S&P 500 futures briefly slipped to 20% below their high — signaling a bear market — only for them to reverse after President Donald Trump said his administration will discuss a possible payroll tax cut with Congress, and that there will be “major” economic announcements Tuesday. Treasury Secretary Steven Mnuchin rejected comparisons with the financial crisis.
• Equities rose across Asia, with those in Japan closing in the green after earlier sliding more than 4%. Brent crude futures rallied more than 8% after crashing on Monday. The yen slid alongside the Swiss franc. Ten-year Treasury yields retraced more than half of yesterday’s drop.
• Oil pared some of Tuesday’s rebound as Saudi Arabia and Russia announced large supply boosts, escalating the country’s price feud even as the coronavirus squeezes demand. Brent futures traded near $35 a barrel in London, shedding about $1.50 in the minutes after Saudi Aramco said it will provide customers with 12.3 million barrels a day in April, exceeding the kingdom’s maximum rate of production. Russia could add about 500,000 barrels a day in the near future, said Energy Minister Alexander Novak. Yet Brent remained 4% higher on the day, bouncing after losing a quarter of its value on Monday — the biggest plunge since the 1991 Gulf War — after the pact between Riyadh and Moscow to manage supplies collapsed in acrimony.
• Gold declined as the dollar strengthened and global equities rallied following the biggest rout since the 2008 financial crisis. While gold has pulled back from the peak above $1,700 an ounce reached early Monday, it’s still near the highest level in more than seven years. Holdings in bullion-backed exchange-traded funds jumped to a fresh record on Monday. Palladium dropped for a second day, with Citigroup seeing China’s consumption falling this year even if there is a recovery in the second half.
• Saudi Arabia escalated its oil price war with Russia on Tuesday, with its state-owned company pledging to supply a record 12.3 million barrels a day next month, a massive production hike to flood the market. The output increase — more than 25% up from last month — puts Aramco supply above its maximum sustainable capacity, indicating that the kingdom is even tapping its strategic inventories to dump as much crude, as quickly as possible, on the market. In February, Saudi Arabia produced about 9.7 million barrels a day.
• Italy has become the first country to attempt a nationwide lockdown to stop the spread of the highly infectious coronavirus. The death toll from the virus, which is on the cusp of turning into a pandemic, is edging toward 500. Italy’s prime minister has called this the country’s “darkest hour,” inviting comparisons to the U.K. during World War II. The effects, both psychological and economic, could be devastating as the government struggles to contain the damage. “We need to change our habits right now,” Prime Minister Giuseppe Conte said at an unscheduled news conference Monday evening. He ordered the nation to “stay at home” as he explained that “we are forced to impose sacrifices.”
• Blackstone Group Inc. is in exclusive talks to take property developer Soho China Ltd. private in a $4 billion deal, according to a Reuters report, citing two unidentified people familiar with the matter. The transaction would be one of Blackstone’s biggest bets yet on the world’s second-largest economy. Blackstone’s co-founder Stephen A. Schwarzman said in an interview last week that the private equity giant sees buyout opportunities increasing as the coronavirus outbreak spooks financial markets and hurts company valuations across the world. Talks with Hong Kong-listed Soho China began in early February, and Blackstone has offered HK$6 ($0.77) a share to take the company private, according to Reuters. Shares in Soho China jumped 38% Tuesday before being halted from trade.
• Infineon Technologies AG’s $8.7 billion acquisition of Cypress Semiconductor Corp. was approved by the Committee on Foreign Investment in the United States, a small step forward for deals in an industry where regulatory and security concerns have stalled consolidation. Shares of both companies surged. “CFIUS has completed its review of Cypress’s previously announced merger transaction with Infineon Technologies AG and determined that there are no unresolved national security concerns,” Cypress said in a statement Monday. Infineon, based in Munich, also confirmed the approval.
• Henkel AG, the German shampoo maker, and buyout firm KKR & Co. are among a small group of suitors proceeding to the second round of bidding for Coty Inc.’s professional hair and nail products business, people familiar with the matter said. Advent International and a separate consortium of Cinven and the Abu Dhabi Investment Authority weren’t chosen to advance to the next round after they submitted initial offers last week, the people said. Private equity firms Bain Capital and Clayton Dubilier & Rice dropped out of the race, according to the people, who asked not to be identified as the information is private.
• Foresight Energy LP filed for bankruptcy protection after it was unable to turn a profit on coal mining anymore as power generators switched to cleaner and cheaper fuels. The company, founded by the late billionaire Christopher Cline, is among a wave of U.S. miners to file for Chapter 11 in recent years, including Murray Energy Corp., which owns a controlling stake and whose owner Robert Murray is an outspoken supporter of President Donald Trump. The company listed between $1 billion to $10 billion in assets and liabilities in the same range in Chapter 11 documents filed in U.S. Bankruptcy Court for the Eastern District of Missouri.
• The travel, energy, manufacturing and consumer product industries are pressing the Trump administration and Congress to take decisive action to contain the economic damage from the coronavirus and plunging oil prices. Business lobbies are pushing a range of proposals such as extending unemployment insurance, broadening business entertainment tax breaks and offering tax credits to employers of quarantined workers, according to representatives interviewed by Bloomberg News. Many of the ideas are in a preliminary state as President Donald Trump’s advisers weigh their options.
• Chinese President Xi Jinping visited the coronavirus epicenter of Wuhan for the first time since the disease emerged, a trip intended to project confidence that his government has managed to stem its spread domestically. Xi arrived Tuesday morning in the capital of Hubei province, the official Xinhua News Agency said. He visited Huoshenshan Hospital, one of the two dedicated facilities built specially to treat virus patients. Photos published by state media showed Xi wearing a mask while speaking to patients via video conference and addressing medical staff outside the hospital. Wuhan, where the disease first emerged in December, has been quarantined since Jan. 23, in what some people see as a heavy-handed approach following earlier failures to act quickly enough to stem the spread. Xi’s visit comes after a steady drop in infections, with just 19 new cases Tuesday, and a slight easingof restrictions within Hubei to allow some people to travel within the province.
• Indian oil refiners are readying for more cheap crude following the collapse of the OPEC+ alliance after they recently snapped up unwanted barrels originally destined for China amid the virus-led demand slump. Oil buyers will be “spoiled for choice,” R. Ramachandran, the refineries director of India’s Bharat Petroleum Corp. said in an interview, after OPEC+ abandoned output cuts following a breakdown in relations between Saudi Arabia and Russia. The supply of high-sulfur crude, which has tightened after U.S. sanctions on Iran and Venezuela, will become more readily available, he said. Saudi Arabia has slashed pricing for its crude and UBS Group AG estimates the kingdom may boost output next month by more than 10% from March to 11 million barrels a day. While many refiners across Asia have recently cut processing rates due to shrinking consumption on the coronavirus, the outbreak has allowed Indian buyers to purchase cheap and rare cargoes.
• Indian energy tycoon Mukesh Ambani is no longer Asia’s richest man, relinquishing the title to Jack Ma after oil prices collapsed along with global stocks. The rout, exacerbated by mounting fears that the spread of the novel coronavirus will thrust the world into a recession, erased $5.8 billion from Ambani’s net worth on Monday and pushed him to No. 2 on the list of Asia’s richest people, according to the Bloomberg Billionaires Index. Ma, the Alibaba Group Holding Ltd. founder who ceded the No. 1 ranking in mid-2018, is back on top with a $44.5 billion fortune, about $2.6 billion more than Ambani.
• Cathay Pacific Airways Ltd. had much to look forward to this time last year as it approached the end of a lengthy cost-cutting program to make it leaner and more competitive. Today, not only is Hong Kong’s flag carrier tightening its belt even more, it’s got a new chief executive, unhappy staff and a home market decimated by protests and disease. The airline has lost about $1.5 billion in market value over the past year, battered initially by the U.S.-China trade war, then social unrest in Hong Kong and now the coronavirus outbreak. Investors will get a better sense of how bad things have become on Wednesday when Cathay releases its 2019 financial results and likely offers an update on business conditions.
• Bank of East Asia Ltd., the Hong Kong lender that has been besieged by activist investor Paul Singer’s Elliott Management Corp., is considering options including a sale of insurance assets as part of its strategic review, according to people familiar with the matter. BEA could seek more than $1 billion from a sale of assets including its life and general insurance as well as its pension fund business in Hong Kong, the people said, asking not to be identified because the deliberations are private. A deal for the life insurance assets could include a so-called bancassurance partnership, in which an insurer typically pays an upfront amount for exclusive rights to sell its products at bank branches, the people said.
• A California county’s ban on public gatherings exceeding 1,000 people threatens to disrupt National Hockey League and Major League Soccergames in the coming weeks, likely the first time that the coronavirus will impact events in the major U.S. sports leagues. Santa Clara County on Monday announced that its public health officer issued a mandatory ban on gatherings with more than 1,000 people in an attempt to protect the community from the spread of the virus. It’s set to take effect on Wednesday and last for three weeks. Hockey’s San Jose Sharks, who play in the county’s biggest city, have three home games in that span, starting with a March 19 game against the Montreal Canadiens. Soccer’s San Jose Earthquakes play at home once.

*All sources from Bloomberg unless otherwise specified