March 17th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian stocks plunged almost 10% in another day of wild trading as new measures to curb the spread of the coronavirus only intensified concerns the economy is heading into a recession. Prime Minister Justin Trudeau said the government will restrict the entry of all non-residents into Canada except Americans, while U.S. President Donald Trump urged social distancing, and schools and restaurant services across North America are shutting down to fight the pandemic. The S&P/TSX Composite Index dropped 9.9% to the lowest level since February, 2016, bringing its losses to 31% from the Feb. 20 peak. U.S. stocks plunged the most since 1987 after Trump warned the economic disruption from the virus could last into summer.
• Canadian policymakers are escalating their efforts to backstop the nation’s financial system and ensure banks have plenty of room to continue lending through the coronavirus crisis. In separate statements on Monday, the federal government and Bank of Canada said they planned to purchase billions of mortgages and mortgage-backed securities to inject liquidity into the financial system. The moves are the latest in a series of measures by financial authorities, the government and the Bank of Canada to ensure global market turmoil doesn’t result in a seizing up of the flow of credit to companies and households.

World Headlines

• European stocks struggled for direction on Tuesday, swinging between gains and losses as investors remained reluctant to back risk assets on worries about the impact of the coronavirus, while travel shares slid another leg lower. The Stoxx 600 Europe 600 Index dropped 0.3% as of 11:15 a.m. in London, after rising as much as 3.1% and falling as much as 3.3%. Regulators in France, Italy and Belgium banned short selling in some stocks for Tuesday’s session, aiming to curb the recent plunge in equities. Despite the restrictions, and government and monetary easing measures, European equities are now trading near their lowest level in almost seven years, with travel and leisure shares down more than 50% in the past month. That sector was again the worst performer on Tuesday, falling about 9%.
• U.S. equity futures advanced and European stocks fluctuated as investors struggled to find their feet after the biggest plunge on Wall Street since 1987. The dollar jumped, while Treasuries retreated with gold. Contracts on the S&P 500 and Nasdaq 100 indexes at one point rose by their daily limits after the biggest market loss since the Black Monday crash, though they went on to swing from gains to losses and back again through the European morning.
• Equities in Asia endured a similarly volatile session. The yield on 10-year Treasuries rose after plummeting almost a quarter percentage point Monday. In the latest attempts to stem the spread of the virus, Hong Kong was set to issue its second-highest travel alert for residents and extend quarantine measures for people coming from abroad. The Philippines became the first country to shut its financial markets, though it aims to reopen Thursday.
• Oil erased gains as the shutdown of swaths of the global economy triggered a meltdown in fuel demand. Futures in London traded little changed after earlier rising as much as 4%, as measures by governments to restrict travel hammered fuel consumption and led to the biggest daily decline in U.S. gasoline prices since 2005. A gauge of crude’s volatility jumped to the highest in data going back to 2007.
• Gold declined as investors rush to raise cash to cover losses in other markets amid a surge in volatility across assets, with global leaders striking a pessimistic tone over the likely economic impact of the coronavirus outbreak. In a sign of the wild swings seen in markets during the health crisis, U.S. equity futures reached their limit-up following their biggest drop since 1987. President Donald Trump has warned of a possible recession and that the economic disruption from the virus could last into summer. Asia-Pacific shares ranged from a further decline in South Korea to gains elsewhere. A wave of global central bank stimulus and a pledge from the leaders of the Group of Seven to do whatever is necessary to ensure a globally coordinated response has failed to quell investor concerns about the economic hit from the coronavirus.
• With equities in free fall despite a historic dose of Federal Reserve stimulus, frazzled investors are searching for anything to put a floor under the the S&P 500. It’s not much, but many are pointing to 2,351 — the Christmas Eve 2018 low reached before the benchmark began a run that added $9 trillion through mid-February. The index suffered its biggest rout since 1987’s Black Monday and close at 2,386.13, about 1.5% above the Dec. 24 intraday low. Efforts by central bankers to shore up funding markets did little to support equities as investors clamor for government spending to offset the rising threat of an economic recession. President Donald Trump said the impact of the virus could last well into summer and said it may contract growth.
• Curium Pharma, the private equity-owned medical supplies firm, is deferring a sale of the company due to the coronavirus-induced market volatility. The French company notified the remaining bidders Tuesday of its decision, it said in an emailed statement. Curium said its board will reassess the situation and its strategic options “in due course.” A sale of Curium, one of the most hotly contested deals in Europe this year, was initially expected to fetch at least $3 billion, Bloomberg News reported earlier. Curium had asked Nordic Capital, Bain Capital and CVC Capital Partners to submit final bids on Monday, people familiar with the matter said. As market conditions deteriorated, some suitors decided to offer less than they had in the earlier round. That prompted owner CapVest Ltd. to pull the process after it couldn’t achieve the value it was seeking, the people said, asking not to be identified because the information is private.
• President Donald Trump now sees the risk of a U.S. recession due to the coronavirus, warning on Monday “this is a bad one.” His frankness, which contradicted his previous optimism and the view of Treasury Secretary Steven Mnuchin one day earlier that the nation could skirt this fate, rattled investors, with stocks closing 12% lower for their steepest losses since 1987. Forecasts for the U.S. vary wildly, with some guessing economic activity could decline by as much as 5% or even 10% in the second quarter. An even harder question is how long the slowdown will last: a short, sharp shock or something lingering or nasty.
• Boeing Co. has asked White House and Congressional officials for short-term aid for itself, suppliers and airlines as the outlook for the travel industry worsens by the day because of the coronavirus outbreak, said people familiar with the matter. The U.S. planemaker is seeking to avoid layoffs and damage to hundreds of smaller companies that make parts and systems for its aircraft, said the people, who asked not to be named because the talks are private. Boeing has also been buffeted by the grounding of its best-selling 737 Max, which awaits regulatory clearance to resume flights after two deadly crashes. Boeing, European rival Airbus SE and a constellation of suppliers are navigating the sharpest industry downturn since at least the 9/11 terrorist attacks as nations close borders and airlines ground fleets of aircraft. Airbus on Tuesday said it would pause production and assembly at French and Spanish plants for the next four days to put in place health measures, including cleaning and self-distancing.
• It is said that liquidity is a coward, it disappears at the first sign of trouble. What happened in Treasuries last week was one example of this, as problems in one small corner of the bond market helped spark a liquidity crisis in another that lead to a $5 trillion Federal Reserve promise to calm markets. As coronavirus cases spiked around the world and unprecedented travel restrictions multiplied, investors rushed to Treasuries — the default risk-free asset. But even the Treasury market has a hierarchy of liquidity — so they rushed to futures first rather than cash bonds, driving spreads between the two much wider.
• Signs of stress flared once again in funding markets as the premium for getting dollars against the euro exploded to its highest since 2011 amid concerns over liquidity. The three-month cross currency basis for euro-dollar, a proxy for how expensive it is to get the greenback, traded as wide as -128.5 basis points, while for dollar-yen it held near the widest level on record touched Monday. That suggests investors are still struggling to get their hands on dollars despite injections of cash into markets in recent days by policy makers.
• Regulators in France, Italy and Belgium banned short selling in some stocks for Tuesday’s session, aiming to curtail the plunge in equity markets driven by the coronavirus outbreak. France’s AMF halted such trades in 92 stocks, while Italy’s Consob blocked the transactions in shares of 20 companies and Belgium’s FSMA imposed a similar restriction. Spain went further, telling market participants late Monday they couldn’t bet on share declines for a month, and French Finance Minister Bruno Le Maire said he would like to see that rule extended Europe-wide.
• China’s economy will contract in the current quarter, according to the most recent forecasts of economists, after the reaction to the coronavirus outbreak shut down economic activity. The outlook is also worsening as other countries follow China with quarantines and lockdowns. Data out Monday showed an across-the-board slump in manufacturing, retail sales and investment in January and February, with all the numbers hitting historic lows. That slump prompted at least seven banks and other analysts to start forecasting a contraction in the current three-month period. Most cut their outlook for the year.
• The world’s central banks are starting to deploy a crisis-era lesson that it’s best to take out insurance against a recession than worry about running out of ammunition. The Federal Reserve led a domino of central bank actions this week by slashing its benchmark interest rate a full percentage point to near zero and promising to boost its bond holdings, among other measures. That was followed the world over as monetary authorities from Sweden to Japan and Australia to South Korea all took steps, many in emergency meetings. Among the actions: rate cuts, more asset purchases, market interventions, and new programs to keep banks lending and companies afloat.
• Regulators are preparing for the likelihood that trillions of dollars of financial-market activity may soon move from high-tech exchanges and corporate offices to homes across America. The web of financial regulations set up after the 2008 financial crisis sought to leave banks better prepared to weather a downturn and bring transparency to derivatives markets. But one thing lawmakers and regulators didn’t anticipate was social distancing in response to a pandemic. The Commodity Futures Trading Commission is preparing a blitz of short-term regulatory relief that officials hope will allow derivatives markets to continue operating smoothly even if participants are ordered to work from home, according to CFTC officials familiar with the plans.
• Relief is on the way for banks in France, Italy and Germany, as the region’s biggest economies resort to crisis-era tools to limit the damage from coronavirus. French President Emmanuel Macron, invoking a state of war, said the country will guarantee as much as 300 billion euros ($335 billion) of bank loans to companies — almost a third of the total — and provide repayment support. The moves follow similar actions in Italy, which approved a package of guarantees and funds on Monday that will leverage about 340 billion euros in financing. Germany is promising 550 billion euros of emergency loans through a state-backed lender that rivals Deutsche Bank AG in size.
• Bank of America Corp. and UBS Group AG are among banks that Geely Automobile Holdings Ltd. has selected for its proposed merger with Swedish affiliate Volvo Cars, paving the way to create China’s first global carmaker. Geely is discussing different deal structures with the advisers, while Volvo is working with HSBC Holdings Plc on the potential transaction, said the people, asking not to be identified because the matter is private. Volatility in global markets, sparked by the novel coronavirus outbreak, could lead to delays, although the overall plans to combine remain unaffected, they said.
• Private equity firm Nordic Capital has reached a deal to acquire U.K. eye-treatment provider SpaMedica, according to people familiar with the matter. Nordic Capital signed an agreement this past weekend to buy SpaMedica from U.K. mid-market investment firm CBPE Capital, the people said. The transaction values SpaMedica at around 300 million pounds ($370 million), according to the people, who asked not to be identified as the matter is private. CBPE Capital accelerated the sale process, choosing a buyer more quickly than expected due to concerns that fallout from the coronavirus outbreak could hamper a deal, one of the people said. Nordic is making the purchase as an add-on acquisition for Ober Scharrer Group, a German ophthalmology outpatient chain that it owns, another person said.
• Narrow victories by Joe Biden in Tuesday’s primaries would effectively end the Democratic presidential nomination fight, making it nearly impossible for Bernie Sanders to capture the delegates needed. Three states, Arizona, Florida and Illinois will hold votes on Tuesday despite concerns about voters and poll workers becoming infected with the coronavirus. Ohio was scheduled to have a primary as well, but back-and-forth court action late Monday ended with the voting being delayed. Ohio Governor Mike DeWine had asked a court to delay his state’s primary to June 2, and two people in their 60s sued, saying they shouldn’t have to choose between their health and voting. But Franklin County Common Pleas Judge Richard Frye said it would be a “terrible precedent” for a court to step in at the last minute to rewrite the election code.

*All sources from Bloomberg unless otherwise specified