March 6th, 2020

Daily Market Commentary

Canadian Headlines

• After slashing interest rates by half a percentage point on Wednesday, Poloz defended the Bank of Canada’s from the criticism its most aggressive move in more than a decade may fuel already dangerously high household debt levels, while doing little to solve the underlying problems associated with the spread of the coronavirus. The governor, who steps down in June after seven years at the helm of the Ottawa-based bank, acknowledged monetary policy can’t address supply chain disruptions. But he said it can prop up sentiment, helping to prevent a temporary crisis turning into a more long-lasting slowdown.
• The current climate for energy investments in the country and the global market for liquefied natural gas are a far cry from October 2018, when a Royal Dutch Shell Plc-led group announced plans to build a massive LNG terminal on British Columbia’s coast and Prime Minister Justin Trudeau hailed the project as “a vote of confidence” in Canada. The latest sign of disenchantment came this week as a C$9 billion ($6.7 billion) LNG project in Quebec lost a large potential investor, which the Canadian Broadcasting Corp. identified as Warren Buffett’s Berkshire Hathaway Inc. That follows announcements last year that Chevron Corp. is planning to sell its 50% stake in an LNG project in British Columbia, and its partner in the venture is seeking to trim its stake as well.
• Justin Trudeau’s industry minister said Canada won’t be strong-armed into a decision on restricting a Chinese technology giant’s access to next-generation wireless networks. The comments by Navdeep Bains come on the heels of a push by a group of U.S. senators seeking to remove a preferred investment status for countries that allow for the installation of Huawei Technologies Co. equipment in their 5G networks. The Trump administration is pushing allies for an outright ban. “We will make sure that we proceed in a manner that’s in our national interest,” Bains told the Canadian Broadcasting Corp. on Thursday evening. “We won’t get bullied by any other jurisdictions.” Canada is the last member of the so-called Five Eyes network of English-speaking nations that share intelligence to make a call on Huawei. Australia and New Zealand followed the U.S. lead in banning it, but Boris Johnson’s government opted for a mixed approach in the U.K., allowing the Chinese company access to non-sensitive parts of its wireless network.
• A cancelled oil sands project has prompted national soul-searching over whether Canada can position itself as both a major oil and gas producer and a global climate leader. Teck Resources Ltd. took nearly a billion-dollar loss when it abandoned the Frontier oil sands mine in Alberta last week rather than continue to navigate fraught political and regulatory hurdles. Its CEO, Don Lindsay, said in a letter that the company found itself “at the nexus of much broader issues that need to be resolved.” Prime Minister Justin Trudeau’s five years in office have been dominated by spending and new programs meant to strike the perfect balance between energy growth and climate leadership. But oil and gas companies say Canada, the world’s fourth largest oil producer, is struggling to navigate the global transition toward low-carbon fuels.

World Headlines

• European stocks tumbled again on Friday, reversing what was left of this week’s rebound and hitting a new 2020 low, as more companies warned about the impact of the coronavirus on their revenue outlook. The Stoxx Europe 600 Index was down 3.7% at 10:35 a.m. in London, hitting a level not since mid-August 2019, and now down 15% since a record high hit on Feb. 19. A number of sectors in Europe including travel and leisure and banks have slipped into bear market territory after falling more than 20% from recent peaks.
• U.S. stock-index futures declined amid renewed concern that the coronavirus outbreak will derail economic growth globally. March contracts on the S&P 500 Index dropped 1.1% as of 8:54 a.m. in London, after rising as much as 0.7%. Futures on the Nasdaq 100 Index lost 1.2%, erasing an advance of as much as 0.9%, while those on the Dow Jones Industrial Average dropped 1%.
• The latest leg of the sell-off kicked off in Asia, where stocks from Tokyo and Sydney to Hong Kong and Seoul slumped more than 2% while the yen rallied to a fresh six-month high. Oil slid to around $44 per barrel in New York, while gold jumped. The dollar weakened against its major peers.
• Oil extended losses as Russia resisted pressure from its OPEC allies to make deeper production cuts, preferring instead to wait until June to decide. Brent fell as much as 5.9% in London to its lowest level since July 2017, extending Thursday’s slide. OPEC and its allies are set to meet in Vienna Friday, following Thursday’s ministerial meeting in which the cartel agreed to a supply reduction of 1.5 million barrels a day. Russia, however, wasn’t present at that gathering and wants to maintain current output cuts until June.
• Gold jumped to a fresh seven-year high as investors tried to assess an expanding global health crisis. Bullion is headed for the biggest weekly gain since 2009, driven by a collapse in bond yields and concerns about the scale of the coronavirus outbreak. Gold rose as much as 1.1% to $1,690 an ounce, the highest since January 2013. Separately, platinum and palladium surged on Friday after Anglo American Platinum Ltd. declared force majeure and cut its production forecasts. Platinum jumped as much as 4.3%, the most since August.
• JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon underwent emergency heart surgery, temporarily handing control of the largest U.S. bank to his lieutenants just as a potential pandemic rattles the global financial system. Dimon felt chest pain before work Thursday and went to a hospital, checking himself in, according to a person with direct knowledge of the matter. It may have saved his life: He was diagnosed with acute aortic dissection, a serious condition involving a tear in the large blood vessel branching off the heart.
• U.S. national security officials are recommending that President Donald Trump block Infineon Technologies AG’s proposed acquisition of Cypress Semiconductor Corp., according to people familiar with the matter. The officials are concerned that Infineon’s $8.7 billion deal for the American chipmaker poses a risk to national security, said three people familiar with the matter. Infineon, a German semiconductor maker with substantial Chinese revenue, has tried to negotiate an agreement with the government that would let the takeover proceed, but hasn’t been able to reach a deal, one of the people said. All of the people asked not to be named discussing a national security matter.
• The U.K. market watchdog wants big British public companies to disclose more about their exposure to climate risks — or tell investors why they can’t. The proposal from the Financial Conduct Authority is part of a growing effort by policy makers and money managers to confront how companies will manage the shift to a lower carbon economy. The voluntary program could cover 480 issuers with a combined market value of 2.3 trillion pounds ($3 trillion), which is about 60% of the main market at the London Stock Exchange, the FCA said. All companies in the FTSE 100 index would be captured, along with many smaller firms that opted for a premium listing.
• The Air Force has largely abandoned a planned upgrade of its aging B-2 bombers after spending almost $2 billion because Northrop Grumman Corp. couldn’t provide the software expertise needed to complete it on time and within budget, according to the Pentagon’s chief weapons buyer. The project to make the 1990s-era planes better able to evade the improving air defenses of China, Russia and Iran was running almost three years late, and its projected cost had risen by $285 million to $3 billion last year, according to the Air Force’s latest Selected Acquisition Report on the program. Northrop, which built the B-2, “didn’t have the right talent to deliver the right capability at the right time” so the Air Force reduced the program’s scale this year, Ellen Lord, the undersecretary of defense for acquisition and sustainment, told a small group of reporters on Wednesday.
• China’s top commodity buyers are applying for tariff waivers on U.S. imports, paving the way for a potential resurgence of American cargoes as the world’s biggest market for raw materials tries meet its trade commitments. Global giants including oil refiner Sinopec and food conglomerate Cofco Corp., as well as smaller independent players and importers, have applied for or already received such concessions, said people with knowledge of the situation, who asked not to be identified due to company policy. China introduced the expanded waiver program last month as it needs to turbocharge imports of U.S. commodities to meet commitments under the first phase of a trade deal. It agreed to raise energy and farm goods purchases by the end of next year by $52 billion and $32 billion, respectively, from 2017 levels.
• Russia resisted pressure from its OPEC allies to make deeper production cuts, pushing the cartel’s high-stakes diplomatic gamble to the brink of failure and sending prices plunging. Energy Minister Alexander Novak arrived from Moscow on Friday morning and told fellow ministers that he favoured maintaining the group’s supply reduction at current levels until June, when they could again consider deeper cuts, according to a person familiar with the matter. Ministers from the Organization of Petroleum Exporting Countries told Russia on Thursday that if it doesn’t join them in cutting oil output by another 1.5 million barrels a day to offset the impact of the coronavirus, then the cartel could abandon its reductions altogether. Hours later, the group raised pressure on Moscow again, emerging from an informal meeting at the Saudi delegation’s hotel with a proposal to extend the curbs for even longer than initially suggested.
• The number of coronavirus cases globally approached 100,000 as more infections were reported in the U.S., Germany, France and South Korea. A meeting of senior European Union diplomats was canceled. The rally in bonds gathered steam. Thirty-year Treasury yields plunged below 1.5% for the first time and yields on the 10-year fell to a record. European stocks hit a fresh low for the year and U.S. futures pointed to another day of losses.
• China’s 10-year sovereign bond yield fell to the lowest since 2002, joining a global rally of government debt as concern mounts that the coronavirus outbreak will derail economic growth this year. The yield on the country’s most-active notes due in a decade fell six basis points to 2.625%, breaking below its nadir of 2.6401% set in August 2016. Friday’s move comes amid rising bets that the People’s Bank of China will slash borrowing costs soon — after already reducing some policy rates last month — along with global central banks as the virus spreads at a faster pace across continents. Volatility in the equity market has also helped add momentum to the ascent of onshore bonds.
• Treasury yields plummeted to record lows Friday as concern about the global economic and financial impact of the coronavirus spurred demand for havens and traders amped up bets on further central bank easing this month. “What we are seeing is symptomatic of not enough positive yielding, defensive assets within global fixed income,” said John Taylor, a money manager at AllianceBernstein. “Central banks are doing everything they can to provide stimulus, which can add fuel to the flames of the bond rally.” The moves came as stocks around the world plunged and futures pointed to another day of losses in U.S. equities. The number of coronavirus cases globally approached 100,000, as more infections were reported in the U.S., Germany and South Korea. Singapore warned of a global pandemic and Britain’s chief scientific adviser said a vaccine could take as long as 18 months to develop.
• Telefonica SA is considering a possible carve-out of its submarine cable assets from the towers that comprise the rest of infrastructure unit Telxius Telecom SA, according to people familiar with the matter. The Spanish phone carrier is discussing the possible split with potential investors and advisers, according to the people, who requested anonymity because the discussions are private. The move would help simplify the valuation of the unit, and help it reflect the higher multiples tower assets tend to carry compared to cable, one of the people said. Telefonica would have to decide if it wanted to keep or sell the newly-separated division, the person said.
• General Motors Co. has made close to $50 billion in adjusted net income over the past five years, while Tesla Inc. has lost close to $5 billion. Yet investors believe Elon Musk’s carmaker is the stock to own on the assumption that he has a nearly unassailable lead on all challengers when it comes to electric cars. On Wednesday, GM Chief Executive Officer Mary Barra and the team from her skunk works in GM’s Technical Center north of Detroit made a case that they can catch up to and maybe even pass Tesla in the race to electrification. GM thinks it has a killer app in a battery platform that reduces the use cobalt, one of the more expensive elements needed to store energy, and has a Lego-like structure that can be shrunk down or expanded double as the chassis for anything from a compact Chevrolet Bolt hatchback to a 1,000-horsepowerHummer pickup.

*All sources from Bloomberg unless otherwise specified