March 12th, 2020

Daily Market Commentary

Canadian Headlines

• Canada’s stock market has gone from a bull market to bear in just 14 trading days, wiping out C$454.2 billion ($330.6 billion) in value on the escalating spread of the coronavirus and plunging oil prices. The S&P/TSX Composite Index slumped 20% from its Feb. 20 closing peak, putting it in a bear market, after riding the bull wave for almost four years. Now, stocks have buckled under concern that the virus and a new downturn in the oil sector will hammer the economy. The benchmark nosedived 4.6% Wednesday.
• Canada appears on the brink of recession as the economy takes a double hit from the coronavirus and tanking oil prices, ramping up pressure on Prime Minister Justin Trudeau’s government to deliver a fiscal stimulus package. Bank of Nova Scotia, the country’s third-largest lender, became the first major Canadian bank to forecast the country will fall into a mild recession this year unless the government moves ahead with a fiscal stimulus plan. Similar near-recession calls could follow as forecasts are revised down in the face of rapidly deteriorating conditions. The downgrades come as Trudeau’s government takes a cautious approach to dealing with the slowdown, promising just C$1.1 billion ($800 million) in new funding to respond to the pandemic. In the absence of a significantly larger package, the rapid rise in coronavirus cases globally, sharp fall in oil prices and increasing volatility in financial markets will trigger an economic contraction, Jean-Francois Perrault, chief economist at Scotiabank, said Wednesday.
• Bombardier Inc. replaced the chief executive officer who orchestrated its breakup and appointed one of its former managers to lead a smaller company focused solely on business jets. Alain Bellemare, an outsider who was hired five years ago by the founding family to turn Bombardier around, will be succeeded by Eric Martel, the CEO of Canada’s biggest electric utility, Hydro-Quebec. Martel will take over April 6, Bombardier said in a statement. “Eric is the right leader at the right time for Bombardier, as the company is completing its turnaround plan and focusing on growing its leading business aviation franchise,” chairman Pierre Beaudoin, a former CEO and the grandson of the company’s founder, said in the statement.
• Officials in Canada’s finance department are reworking budget forecasts to reflect a quickly deteriorating economic outlook with less than three weeks to go before Finance Minister Bill Morneau delivers his fiscal plan. Private-sector economists, whose forecasts are used as the basis for the finance department’s projections, are being asked to submit updated numbers by Friday, according to people familiar with the situation who spoke on condition they not be identified. The finance department bases its growth and revenue forecasts on surveys of economists from Canadian banks and other institutions. The revised numbers will show a much worse fiscal picture than the one Morneau would have envisioned only a few weeks ago.

World Headlines

• European stocks plummeted after U.S. President Donald Trump’s speech restricting travel from the region did little to reassure jittery investors seeking a coordinated response to the economic fallout from the coronavirus. The Stoxx Europe 600 Index tumbled as much as 7.1% to its lowest level since the aftermath of the 2016 Brexit vote. The benchmark fell deeper into into bear territory as market pessimism overshadowed anticipation over easing measures likely to be announced by the European Central Bank later today.
• U.S. index futures slid as Trump late Wednesday announced a sweeping 30-day ban on travel from Europe excluding the U.K., with the Department of Homeland Security later clarifying that the restriction applies generally to foreigners who’ve been in Europe within 14 days. Futures on the tech-heavy Nasdaq Index dropped as much as 5% overnight, triggering a limit-down level that doesn’t allow them to fall too much in a particular session.
• The Topix index closed at its lowest level since November 2016, as remarks from President Donald Trump served only to further damp investor sentiment. Continued worries over the economic fallout from the coronavirus have Japan’s benchmark stock measure down by almost 23% year-to-date. The gauge fell into bear market territory on Monday and at the current pace is set for its worst annual performance since 2008 during the global financial crisis. The Nikkei 225 Stock Average closed below 19,000, while volatility on the blue chip gauge spiked to 51, its highest level since 2011.
• Oil slumped further after President Donald Trump said the U.S. would restrict travel from Europe for the next 30 days in an attempt to contain the coronavirus, pummeling fuel demand. Futures in London fell as much as 7% with the market’s structure continuing to collapse. Trump also called on Congress to pass some tax relief measures immediately, but stopped short of offering a detailed economic rescue package. His briefing on Wednesday failed to soothe broader markets, with the global stock rout deepening. Crude has lost around a quarter of its value this week as the pandemic savages the demand outlook, while Russia, Saudi Arabia and other Middle East nations jostle to raise production and fight for market share. Producing nations are offering unprecedented discounts and the oil market’s structure has plummeted to its weakest since 2015.
• Gold held its ground as the disruption to the global economy from the coronavirus pandemic intensified, with President Donald Trump restricting travel from Europe to the U.S. Investors shunned risk assets from equities to industrial commodities. Palladium tanked. Bullion steadied after an early advance, with U.S. equity futures sharply lower as Trump’s Oval Office address failed to reassure the markets. On Wednesday, gold fell as some investors were likely prompted to sell the metal to cover margin calls with the Dow Jones Industrial Average collapsing into a bear market, ending a historic bull run.
• President Donald Trump said he will significantly restrict travel from Europe to the U.S. for the next 30 days, the most far-reaching measure yet in the administration’s efforts to combat the spread of coronavirus. Trump, speaking Wednesday evening from the Oval Office, said the restrictions, which won’t apply to the U.K., will go into effect Friday at midnight. He blamed the European Union for not curbing travel from China in the early days of the outbreak, and credited his own measures with having limited the number of cases in the U.S.
• RBC Capital Markets has taken its first stab at accounting for the impact of the coronavirus in its expectations for U.S. stocks, paring back its targets as a result. The S&P 500 is now expected to end the year at 3,279, versus a prior forecast of 3,400, according to strategist Lori Calvasina. Full-year earnings per share will be $165, she predicted, from a prior $174. She is also shifting to neutral on growth-versus-value, from a prior bias toward value, upgrading health care to overweight from market-weight and downgrading financials to market-weight from overweight. Calvasina isn’t the only strategist reassessing in light of the coronavirus-induced market meltdown. Credit Suisse Group AG’s Jonathan Golub lowered hisyear-end target to 3,300 from 3,600; Goldman Sachs Group Inc.’s David Kostin cut his to 3,200 and called for an end to the bull market. Societe Generale SA’s Sophie Huynh now has hers at 3,500 — but sees the lion’s share of the rally later in the year after the gauge languishes for some time due to the current uncertainty.
• OMV AG is starting to sell about 2 billion euros ($2.3 billion) worth of assets to help finance a historical shift to petrochemicals. The Austrian energy company announced the divestment program for the next 22 months as it signed the $4.68 billion purchase of a stake in Borealis AG. It will start with its 51% stake of pipeline operator Gas Connect Austria AG and its German filling stations, the company said in statements. The asset sales should bring down OMV’s debt level, which will increase from the Borealis purchase. About 700 million euros of cost cuts until 2025 will also help fund the deal, the company said. OMV is also reviewing its planned organic investments for this year, cutting capex by 200 million euros.
• The shortage of T-bills is about to get a whole lot worse. All along, Wall Street has been bracing for a record decline in second-quarter net issuance as the Treasury cuts supply in response to tax season and the Federal Reserve buys bills to boost reserves. But now, supply is set to get squeezed even more as the Covid-19 scare causes demand for Treasuries to soar. Money market funds in particular are rushing to lock in rates before they reach 0%, prompting strategists at JPMorgan Chase & Co. to say demand could outstrip supply by over $1 trillion next quarter.
• Italy, the U.K. and Australia were among the latest governments to add to a fast-rising global tally of government stimulus to counter economic damage from the coronavirus outbreak. U.S. President Donald Trump outlined a package of measures Wednesday in Washington, and Indonesia took further steps to support businesses and consumers with tax relief. About $130 billion in budget support has been pledged or is under consideration by governments around the world. Some have allocated new money for cash handouts and medical care, while several are planning targeted measures like tax breaks and loan support.
• Anbang Insurance Group Co.’s sale of a $5.8 billion portfolio of U.S. luxury hotels to South Korea’s Mirae Asset Global Investments Co. is at risk of collapsing, according to people with knowledge of the matter. After a lender group led by Goldman Sachs Group Inc. failed to garner sufficient investor demand for roughly $4 billion in commercial mortgage-backed securities to finance the transaction, talks shifted to the provision of a similar amount in bridge financing in an attempt to keep the deal alive, the people said, asking not to be identified because the talks are private.
• Vladimir Putin changed his mind and backed a plan to allow him to run for two more presidential terms because of the current turbulent period in the world, his spokesman said, in the Kremlin’s first public explanation of a move that would let him rule until 2036. “The situation in the world has become less stable,” spokesman Dmitry Peskovtold a conference call Thursday. He cited the coronavirus pandemic, the risks of “global recession,” numerous “acute regional conflicts” and western sanctions as among the factors that led to Putin’s decision. “In these difficult years, the stability of the authorities, the firmness and consistency of government have huge significance,” he told reporters. “In such hard years, some countries have taken decisions to allow the incumbent president to remain on his path into the future.”
• Berkeley Group Holdings Plc has delayed boosting returns to shareholders until it has more clarity on the coronavirus outbreak’s impact on the U.K. economy. The British homebuilder told investors earlier this year that it would increase returns by about 455 million pounds ($580 million) over the next two years through share buybacks and dividends. Berkeley will now revert to a previous plan to pay a 125 million-pound dividend this month and return another 140 million pounds by the end of September, according to a company statement on Thursday.
• India’s central bank will auction $2 billion worth of dollar-rupee swap contracts to curb the local currency’s drop. “Flight to safety has led to spike in volatility across all asset classes, with several emerging market currencies experiencing downside pressures,” the Reserve Bank of India said in a statement Thursday. “Mismatches in U.S. dollar liquidity have become accentuated across the world.” India’s currency has weakened almost 3% this month, the worst performance among major Asian peers, as the coronavirus outbreak and oil-price crash threatens to worsen an already decelerating economy. The rupee is just 0.4% away from an all-time low.
• The Bank of Japan will likely expand its stimulus measures at its meeting next week as it seeks to limit the blow from the coronavirus outbreak and reassure volatile markets, according to people familiar with the matter. The central bank is likely to show a more aggressive stance on buying assets such as exchange-traded funds, the people said. Whether the BOJ will raise its 6 trillion yen ($58 billion) ETF-purchasing target remains unclear and could depend on the severity of market conditions at the time of the meeting, they added.
• While corporate-debt markets shut down for issuers in the U.S. and Europe for a stretch in February, with investors spooked by the economic hit from the coronavirus, China had its busiest month on record. Optimism about Chinese policy makers providing abundant liquidity and spending has helped support the country’s $4.5 trillion corporate-debt market. (It also explains the recent outperformance of Chinese stocks compared with global peers.) But leveraged borrowers, particularly in the private sector, face the same pressures that propelled two record years of defaults in 2018 and 2019.
• India’s top builder has met a keenly watched debt deadline, even as it grapples with a real estate downturn and more borrowings coming due this year. Lodha Developers International Ltd. said it has repaid $324 million of bonds maturing Friday. Scrutiny had piled onto the company in recent months after a rating downgrade deeper into junk territory. Any stumble could have led to one of India’s largest offshore bond defaults. Lodha, which is building the Trump Tower in Mumbai, is hardly alone in facing an increasingly harsh environment. The country’s slowing economy has dragged down property market demand. On top of that, a lingering shadow banking crisis has made it hard for both home buyers and developers to get money.
• Bitcoin slumped through $6,000 on Thursday, leading a rout of cryptocurrencies amid a wider global risk asset sell-off over the intensifying coronavirus crisis. The largest digital currency at one point tumbled as low as $5,705.31, though the move eased slightly and it recovered to trade at $5,932.33 at 7:02 a.m. in New York, according to Bloomberg pricing. The wider Bloomberg Galaxy Crypto Index tumbled 27%, with Ether, XRP and Litecoin also plunging.
• President Donald Trump’s 30-day ban on Europeans traveling to the U.S. delivers a hammer blow to airlines, already facing $113 billion in lost revenue worldwide this year because of the coronavirus. Foreign nationals who’ve spent two weeks in Europe, excluding the U.K., won’t be permitted to enter the U.S. from midnight Friday, Trump said late Wednesday from the White House. Minutes later, his administration told American citizens to reconsider all foreign travel. Flight restrictions are cascading around the globe as the pandemic threatens to overrun more countries. Shares of Air France-KLM, one of the European airline groups worst hit by the U.S. action, fell Thursday the most since 2002. The industry as a whole has lost more than $92 billion in market value so far this year, based on the Bloomberg World Airline Index.
• The biggest exchange-traded ESG funds in the U.S. are posting similar-sized losses as the Standard & Poor’s 500 Index since the market slump began Feb. 19 on concerns about the economic impact from the coronavirus outbreak and the oil-price war between Russia and Saudi Arabia. The $1.7 billion iShares ESG MSCI USA Leaders ETF (SUSL) fell 18.5% in the past 15 trading sessions; the $1.6 billion iShares MSCI KLD 400 Social ETF (DSI) dropped 19.2%; and the $1.6 billion Xtrackers MSCI USA ESG Leaders Equity ETF (USSG) slumped 18.9%. The S&P 500 declined 19% in the same period
• Under duress from a viral pandemic and plummeting oil prices, corporate America is facing its most severe test since the 2008 crisis. A swath of the nation’s biggest names is maxing out credit lines, grabbing cash before it can disappear. Behind the scenes, some CEOs and their finance chiefs are calling bankers this week to ask for liquidity. And throughout the day Wednesday, word leaked out on company after company pulling from existing facilities. First it was long-embattled Boeing Co. drawing down a $13.8 billion term loan, then it was travel-and-leisure empires Hilton Worldwide Holdings Inc. and Wynn Resorts Ltd. leaning harder on credit facilities totaling more than $2.5 billion. Private-equity titans Blackstone Group Inc. and Carlyle Group Inc. advised some of the businesses they control to consider similar measures to prevent potential shortfalls.
• Steinhoff International Holdings NV is delaying the potential sale of its European retail arm Pepco Group amid heightened market volatility and the illness of the unit’s chief executive officer, people with knowledge of the matter said. Pepco Group CEO Andy Bond, who made his name in U.K. retail circles turning around the Asda supermarket chain, is taking a leave of absence for medical reasons unrelated to coronavirus, according to the people. Steinhoff, which had been considering a sale or listing of Pepco, plans to delay the process until later this year, the people said, asking not to be identified because the information is private.

*All sources from Bloomberg unless otherwise specified