March 13th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian stocks suffered a stunning 12% drop, the largest in eight decades, as investors size up the likelihood of a global recession because of the coronavirus pandemic. The S&P/TSX Composite Index had its biggest one-day decline since May 1940, according to data compiled by Bloomberg. The 230 companies in the benchmark collectively lost at least C$265 billion ($190 billion) in market value. Trading on the Toronto Stock Exchange was halted minutes after the market opened as a wave of selling tripped the circuit-breaker rule. The spread of a global pandemic that has killed more than 4,700 people has shocked financial markets and forced policy makers into emergency measures. The Federal Reserve said it is prepared to inject a total of $5 trillion into funding markets over the next month.
• Canadian policy makers are stepping up efforts to bolster confidence in the nation’s economy, including the central bank sending cash into funding markets and suggestions from Justin Trudeau’s government that fiscal stimulus could soon follow. The Bank of Canada said Thursday after the closing bell that it plans to inject billions of dollars into markets to shore up stability, just eight days after it slashed interest rates by half a percentage point. Two hours later, Finance Minister Bill Morneau held an impromptu news conference to underscore the government’s urgency in dealing with the fallout from the coronavirus pandemic.
• Canadian Prime Minister Justin Trudeau will remain in isolation for 14 days after his wife tested positive for coronavirus. Trudeau himself is in good health and isn’t exhibiting any symptoms, his office said in a statement. Nor is he planning to be tested. The prime minister’s office announced earlier Thursday that Trudeau was in self-isolation and working from home while his wife, Sophie Gregoire Trudeau, awaited the results of a Covid-19 test. “As a precautionary measure and following the advice of doctors, he will be in isolation for a planned period of 14 days,” Trudeau’s office said, adding his wife’s symptoms are mild and she is feeling well. “The Prime Minister will continue to fully assume his duties and will address Canadians tomorrow.”
• Husky Energy Inc., a major Canadian oil-sands producer, cut its spending plan for the year by C$1 billion ($720 million) as the spread of the coronavirus and a flood of new oil supplies from Saudi Arabia hammer crude prices. The company is joining a parade of North American energy producers, including oil-sands peer Cenovus Energy Inc. and shale drillers Apache Corp. and Occidental Petroleum Corp., in slashing its spending plans as the plunge in crude prices makes some output unprofitable. Husky’s spending reduction includes C$900 million in lower capital spending and C$100 million in cost cuts, the Calgary-based company said Thursday. The midpoint of the new capital-spending forecast represents a 27% reduction from the company’s original plan. Husky also reduced its production outlook for the year to a range of 275,000 to 300,000 barrels a day, roughly a 5% cut at the range’s midpoint.

World Headlines

• European equities rose the most since May 2010 in a volatile final session of the market’s worst week since the global financial crisis. Concerns around the economic impact of the coronavirus and the disappointing response from policymakers kept investors on edge. The Stoxx 600 Index rose 5.7% at 11:12 a.m. London time, recovering some ground after Thursday’s 11% slump and rising from the lowest since 2013. Commodities-related sectors led the gains, with all industry groups advancing. Among notable movers, Roche Holding AG jumped 8.7% after the Swiss drugmaker won approval from the U.S. government for a highly automated coronavirus test.
• U.S. equity futures jumped with European stocks, helping stabilize markets following the worst Wall Street session since 1987. Treasuries slipped while the dollar edged higher. Contracts on the S&P 500 and Nasdaq 100 indexes reversed earlier declines and gradually rebounded to hit their upper trading curbs. With investors worried that emergency fiscal and monetary packages will fall short of staving off a global recession, markets remained exceptionally volatile. Investors said there’s less liquidity in the U.S. Treasury market, where 10-year notes swung from earlier gains to losses. Sovereign bonds sank across Europe for a second day amid criticism of European Central Bank measures to address the virus. Oil pushed higher and the dollar advanced.
• Global equities are heading for their worst week since 2008 as investors price in a severely weaker economic outlook due to the coronavirus pandemic. They’re doubting the efficacy of policy responses as cases continue to grow across the world and restrictions on people and businesses crush sentiment. The Bank of Japan on Friday followed an earlier move from the Federal Reserve to inject liquidity, and later offered to buy $1.9 billion of bonds in an unscheduled operation.
• The oil market is headed for its largest weekly collapse since 2008 as a bitter price war erupted between OPEC and its allies, and demand cratered from the coronavirus outbreak. Futures in New York are down 21% this week, more than any other period since the financial crisis. Stockpiles may grow by the most on record in April as Saudi Arabia and Russia race to increase production, according to Goldman Sachs, as the market’s structure returned to a super-contango, indicating a big glut. The warning signs on the demand side continued to grow as gasolineprices fell by almost a quarter on Thursday as President Donald Trump issued a travel ban from Europe.
• Chancellor Angela Merkel’s government signaled it will deploy all available means to help German companies and workers cope with the deepening impact of the coronavirus. The goal is to make sure firms in Europe’s biggest economy have sufficient liquidity to help them get through the crisis unleashed by the outbreak, the finance and economy ministries said in a joint statement. Finance Minister Olaf Scholz said there will be no limit to the money available.
• All of Wall Street’s eyes are on Washington again, but only Federal Reserve Chairman Jerome Powell is catching its gaze. With few encouraging signs of a comprehensive fiscal policy response from the U.S. government to the coronavirus, investors are looking to the central bank to fill the vacuum by supporting the economy and keeping markets functioning. It unleashed a trillion dollars on Thursday, but failed to halt the stock market rout. That has investors clamoring for the Fed’s Open Market Committee to slash interest rates back to zero next Wednesday — or sooner
• The global death toll from the coronavirus outbreak rose to 5,056 and cases topped 135,000 after another surge in Iran. U.S. House Speaker Nancy Pelosi said she’s near an agreement with the Trump administration on a bill to mitigate the impact from the virus. The outbreak could result in 50 million jobs lost in the tourism industry globally, according to an estimate from the World Travel and Tourism Council. China’s central bank said it would pump in $79 billion to bolster the economy as Asian central banks moved to calm markets. Roche Holding AG advanced after saying it won emergency approval in the U.S. for a highly automated coronavirus test, potentially speeding up the ability to diagnose patients by a factor of 10.
• Bond ETFs are highlighting signs of liquidity stress in broader markets, with cash prices trading at persistent and deep discounts to the value of the underlying assets. The $31 billion iShares iBoxx $ Investment Grade Corporate Bond ETF closed at a discount of 3.3% to its net asset value on March 11, the largest such divergence since 2008, according to data compiled by Bloomberg. Meanwhile, the $23 billion iShares 20+ Year Treasury Bond fund’s price has dropped 5% below its net-asset value, the most ever. And even the U.S. municipal market is feeling the squeeze: The VanEck Vectors High Yield Municipal Index ETF traded at a record 8.3% discount on Wednesday.
• Investments in U.S.-listed commodity exchange traded funds more than doubled last week for the 12th straight week of inflows. Energy ETFs led the inflows. Precious metals ETFs had the second biggest change from the previous week. Net inflows to ETFs that focus on commodities totaled $2.79b in the week ended March 12, including the effect of leveraged funds, compared with $1.21b the prior week
• A Chinese foreign ministry official pushed a conspiracy theory the U.S. army may have had a role in spreading the virus, highlighting growing tensions between the world’s biggest economies as both governments seek to deflect blame for the outbreak. “It might be US army who brought the epidemic to Wuhan,” Zhao Lijian, a foreign ministry spokesman, said in a tweet. “Be transparent! Make public your data! US owe us an explanation!” He later followed up with another tweet urging his 284,000 followers to share an article arguing that the virus originated in the U.S. It was posted on a website promoting conspiracy theories, including articles lambasting the “Vaccine Deep State” and questioning whether Osama bin Laden ever existed.
• After the second fatal crash of a Boeing Co. 737 Max jetliner, most of the world’s aviation regulators rushed to ground the jet while the U.S., where it was built, waited for data. The U.S. Federal Aviation Administration took three days and ended up being the last to end flights on Boeing’s best-selling jetliner, a year ago Friday. The delay, and subsequent revelations about what went wrong with oversight of the plane’s design and certification, raised questions about the judgment of an agency accustomed to international deference. The reverberations threaten to complicate the jet’s return to service and could portend long-term implications for the industry.
• Sweden’s Riksbank has decided to lend up to 500 billion kronor ($51 billion) to the country’s banks in an effort to maintain the supply of credit to Swedish companies. The measure “should be regarded as a form of insurance that enables Swedish companies –- particularly small and medium-sized enterprises –- to feelsecure that the credit supply will not fail,” said Governor Stefan Ingves. The loans will be granted at a variable interest rate equivalent to the Riksbank’s repo rate, at present 0%, and will have a maturity of two years, according to a statement on Friday. The central bank also says it’s ready to take further measures, even between ordinary monetary policy meetings.
• A Berlin private equity conference last month that attracts thousands of financiers — including billionaire buyout heavyweights Leon Black and Stephen Schwarzman — was also attended by a person who has since tested positive for the coronavirus, people familiar with the matter said. An employee of 17Capital tested positive after returning from the SuperReturn International event, which ran from Feb. 25 to 28, according to the people. It wasn’t immediately clear when the ailment was contracted, and some people can be infected for days without knowing it. The individual wasn’t showing symptoms while at the conference, one person said, asking not to be identified because the information is private. London-based 17Capital said a “small number” of staff are working from home in self-isolation as a result of the incident.
• With time slipping away and negotiations disrupted by the coronavirus, Britain and the European Union are far apart on key issues they need to resolve if they are to strike a trade agreement by the year-end. On Friday, the EU reiterated its key demands for a level competitive playing field, reciprocal access to U.K. fishing waters and a role for the European Court of Justice in a draft of the agreement it wants to reach with the EU. Prime Minister Boris Johnson has already ruled out any ECJ jurisdiction and vowed to take back control of British waters. The U.K. had planned to produce its own draft trade agreement ahead of next week’s talks. That document is likely to be far more limited in scope because Johnson is seeking a limited deal on goods trade similar to the one Canada reached with the EU.
• The People’s Bank of China cut the amount of cash that banks have to set aside as reserves, injecting funds into the world’s second-largest economy at a time when global policy makers are racing to head off the negative impact of the coronavirus outbreak. The PBOC offered discounts to banks’ reserve ratios by a half or 1 percentage point from their original level, the PBOC said on its website on Friday. Joint-stock banks will get an additional reduction of 1 percentage point and together the cuts will release 550 billion yuan ($79 billion) of liquidity, the statement said. China’s economy has been hit hard by the spread of the virus and the associated quarantine measures since January, which shut down much economic and daily activity. The Chinese central bank is joining a swathe of global central banks in easing policy, with the European Central Bank, the Fed and the Bank of Japan all acting in recent days to steady markets and their economies.
• Oil’s historic price crash is presenting an uncomfortable dilemma to China’s energy majors: follow market signals to cut drilling, or heed President Xi Jinping’s orders to boost output. While China’s main influence on global oil is as the world’s largest importer, it also produces 3.8 million barrels a day, more crude than all but two of OPEC’s individual members. The last time crude slumped this low, in 2016, China’s response was to cut spending at old and expensive fields, and output slumped. That may not be an option this time, after trade tensions with the U.S. prompted Xi in 2018 to order an increase in domestic exploration and production to safeguard the country’s energy security. The longer the price collapse lasts, the more the government’s push for energy sufficiency will be tested, with state-owned firms like PetroChina Co., Sinopec Corp. and Cnooc Ltd. caught in the middle.
• Roche Holding AG won emergency approval from the U.S. government for a highly automated coronavirus test, potentially speeding up tenfold the ability to test patients. The U.S. Food and Drug Administration granted an “emergency use authorization” to the test, which runs on Roche’s cobas 6800/8800systems. The tool also is available in Europe and countries that accept its CE marking for medical devices, Roche said. The 8800 version is capable of testing 4,128 patients a day, and the 6800 can test as many as 1,440, the Basel, Switzerland-based company said. Roche shares climbed as much as 4.9% early Friday, leading the Stoxx Europe 600 Index.
• Investors made their biggest dash for cash in history over the week that broke the bull market. They channeled $137 billion into cash-like assets and a record $14 billion into government bonds in the five days through March 11, according to Bank of America Corp. research citing EPFR Global data. Gold got its second-biggest inflow ever at $3 billion. As the coronavirus outbreak is met with policy impotence from Europe to America, money managers are liquidating en masse. The losers include investment-grade and high-yield bonds and those of developing nations. Even before Black Thursday, investors yanked an unprecedented $34 billion out of these risk assets in total in the week through Wednesday.
• Apple Inc. rose 5.4% in pre-market trading after an upgrade at Wells Fargo Securities, which wrote that it was positive on the iPhone maker’s valuation following a recent drop in the stock price. While it is “admittedly difficult (impossible) to gauge the fundamental impact Apple may realize from the COVID-19 outbreak,” this issue “will eventually ease/recover,” the firm wrote. In the meantime, shares “offer a compelling risk/reward for long-term patient investors.” Shares of Apple have slumped 24% from a record close last month, putting the stock into bear-market territory, with the selling largely driven by coronavirus concerns. On Thursday, shares dropped nearly 10% in their biggest one-day decline since January 2019. Thus far this week, the stock is down 14% and on track for its biggest one-week percentage loss since October 2008.
• Companies whose computers make the Bitcoin network operational are facing deep cuts to profits. With Bitcoin’s price down almost 40% this month to $5,350, so-called miners whose computers provide a third of all the power for the network, have gone into the red, said Chris Bendiksen, head of research at digital-asset manager CoinShares. The decline couldn’t have come at a worse time. In May, rewards in the form of new coins issued to miners will automatically drop in half, further exacerbating losses unless the price rallies. For years now, such regularly scheduled Bitcoin halvenings, or halvings, have been looked forward to. Many investors have claimed that the cryptocurrency rallies right before and after them, so the miners would stay afloat. So far this year, these expectations have proved false.

*All sources from Bloomberg unless otherwise specified