March 16, 2021

Daily Market Commentary

Canadian Headlines

• Empire Company Limited has signed an agreement to purchase 51% of Longo’s, a family-built network of specialty grocery stores in the GTA of Ontario, and the Grocery Gateway e-commerce business. The acquisition price of $357 million is based on an enterprise value of $700 million. and is expected to be accretive to earnings per share in the first full fiscal year after closing. The transaction immediately adds two banners to Empire’s grocery store and e-commerce businesses in Ontario, and 36 Longo’s locations will join Empire’s store network in Ontario. Grocery Gateway, which serves 70,000 customers, will continue as a stand-alone business. Empire will continue to invest in the growth of Grocery Gateway’s customer base, while seeking efficiencies through collaboration with its own Voila online business. Longo’s will continue to be led by President and CEO, Anthony Longo, and his team. Although managed separately, Longo’s will benefit from Empire’s infrastructure and capabilities, in areas like Sourcing, Logistics and Real Estate. The Longo family has also expressed their intentions to remain as long-term shareholders of Longo’s.
• Public opinion of China is becoming entrenched at a record low in Canada, with Beijing’s use of arbitrary detention and treatment of its minority Muslim population resonating strongly in a new poll. More than three quarters of respondents in an Angus Reid Institute survey released Tuesday said relations can’t improve while China holds two Canadians on national security charges. It locked the pair up within days of the 2018 arrest of a top Huawei Technologies Co. executive in Vancouver on a U.S. extradition request. A similar proportion of Canadians said they believe the Chinese government’s actions against Uighur Muslims constitute genocide. Lawmakers in the House of Commons unanimously backed a non-binding motion on the issue last month, increasing pressure on Prime Minister Justin Trudeau’s government to take a harder line with its second-largest trading partner on human rights.
• Venture firm Inovia Capital raised $450 million to invest in startups that are ready to scale up, the latest sign of a maturing Canadian industry that produced the biggest technology IPO in Toronto Stock Exchange history last year. For its second growth fund in about two years, Montreal-based Inovia attracted investors including Toronto’s Northleaf Capital Partners and Caisse de Depot et Placement du Quebec and Investissement Quebec in its home province. That brings capital under management to $1.5 billion at the firm, which started out in 2007 and counts Twitter Inc. Chairman Patrick Pichette among its partners. The global pandemic has intensified consumers’ and companies’ reliance on technology, sparking a boom in tech valuations. In September, Canadian payments company Nuvei Corp. raised a record $805 million for a tech company in its initial public offering in Toronto. The company’s now worth C$11.4 billion ($9.1 billion).

World Headlines

• European equities gained as investors focused on the prospects of an economic recovery despite a number of countries halting the use of AstraZeneca Plc’s Covid-19 vaccine shot. The Stoxx Europe 600 Index was up 0.4% at 8:02 a.m. in London, as traders also awaited an update from the Federal Reserve. Retailers and auto shares led gains, while banks also outperformed, paced by a 1.6% rise in Credit Suisse Group AG after it said its investment banking unit is benefiting from strong capital markets issuance and trading performance. Travel and leisure shares edged higher.
• Nasdaq 100 futures climbed alongside European stocks on Tuesday as optimism in the global economic recovery outweighed turmoil in vaccine rollouts. Nasdaq contracts rose 0.4%, while futures on the S&P 500 were little changed following the gauge’s record close on Monday. Markets saw modest gains in Japan and China, where investors were watching for a possible broader crackdown on the internet sector. Treasury yields were steady ahead of the Federal Reserve’s policy statement on Wednesday. Oil retreated for a third day, while the dollar was little changed. With the global economy increasingly on a path out of the pandemic, focus turns to the Fed’s communications on Wednesday, which will include fresh economic and interest-rate projections. Reflation trades stand to benefit if the central bank maintains a hands-off approach to the recent rise in yields. Bets on a faster economic recovery have already helped push one market gauge of inflation to its highest level since 2008, and a renewed climb in yields could spur the rotation from growth to value stocks.
• A technology sector rally boosted Asian stocks higher, following a rebound in the Nasdaq 100 amid a retreat in U.S. Treasury yields. Internet giants Meituan and Xiaomi were among the biggest contributors to the MSCI Asia Pacific Index, while healthcare stocks gained the most as a group. The rotation into economically sensitive firms took a pause, with Hong Kong insurer AIA Group and Japanese automaker Toyota Motor being the big drags on the benchmark. Mainland Chinese stocks whipsawed between gains and losses to end as Asia’s best-performing market. Stock gauges in Australia, South Korea, Hong Kong and Japan rose more than 0.5%.
• Oil retreated for a third day to trade below $65 a barrel, with a firmer dollar capping prices. West Texas Intermediate fell 1.5%, while Brent also dropped. On Monday, WTI’s nearest timespread slipped into a bearish contango structure, signaling a short-term oversupply, though the rest of the curve remains in a bullish backwardation. The dollar held a two-day gain that made crude more expensive for holders of other currencies. Oil’s been on a strong run as supply cuts from OPEC and its allies tighten the market and expectations grow for a rebound in travel over the northern hemisphere’s summer. But there are mixed signs emerging as Iranian oil flows heavily to China and the pace of coronavirus vaccinations remains uneven across the globe.
• Gold held a two-day advance as investors bet on the Federal Reserve reaffirming its dovish stance at its meeting this week. Fed Chair Jerome Powell could find himself in a tough spot defending his ultra-easy monetary policy outlook amid a quickening economic recovery that’s ignited fears of inflation. Bullion lost its sparkle this year on bets for global growth and as Treasury yields surged, though has been supported since last week as the dollar eased from recent highs. Powell gently cautioned the bond market this month that the Fed is keenly watching the jump higher in long-term interest rates, but stopped well short of trying to rein them in. Officials are expected to upgrade their quarterly forecasts for growth and unemployment on Wednesday. In December, they projected holding rates near zero through the end of 2023.
• Iron ore futures ticked higher as Goldman Sachs Group Inc. predicted robust prices will remain in the short-term on a global recovery in steel demand. Ongoing demand, including from China’s infrastructure and property sectors, coupled with strong mill margins should limit the sustainability of any sell-off in the next few months, Goldman analysts including Paul Young wrote in a note. The bank upgraded its forecast for 2021 to $135 a ton from $120, though said it expects a 30% drop in prices by year-end.
• Huawei Technologies Co. will begin charging mobile giants like Apple Inc. a “reasonable” fee for access to its trove of wireless 5G patents, potentially creating a lucrative revenue source by showcasing its global lead in next-generation networking. The owner of the world’s largest portfolio of 5G patents will negotiate rates and potential cross-licensing with the iPhone maker and Samsung Electronics Co., Chief Legal Officer Song Liuping said. It aims to get paid despite U.S. efforts to block its network gear and shut it out of the supply chain, but promised to charge lower rates than rivals like Qualcomm Inc., Ericsson AB and Nokia Oyj. Huawei should rake in about $1.2 billion to $1.3 billion in patent and licensing fees between 2019 and 2021, executives said without specifying which of those stemmed from 5G. It’s capping per-phone royalties at $2.50, according to Jason Ding, head of Huawei’s intellectual property department.
• President Joe Biden’s next big economic package helped set off a heated debate among Republicans over whether to participate in the return of lawmakers’ dedicated-spending projects, known as earmarks, a tussle that could be key to its success. After muscling his $1.9 trillion pandemic-relief bill through Congress without a single Republican vote, Biden is hoping to bring GOP members aboard an infrastructure package set to be a core part of his longer-term economic plan, estimated at trillions of dollars. Speeding a complex, multi-year initiative through Capitol Hill will be largely impossible without the GOP, due to Senate rules. To make negotiations easier, Democrats rescinded a 2011 ban on so-called spending earmarks. If Republicans decide to amend party rules in coming weeks and follow suit, it could be a good sign Biden’s bill gets done.
• Visa Inc. is postponing plans to boost the fees U.S. merchants pay when consumers use credit cards online, pushing back the changes another year to April 2022 because of the pandemic. “Visa is committed to maintaining stability in our payments system and will not make any future rate changes in the U.S. for another year while the economy recovers,” the company said in an emailed statement. Retailers have been asking the network in recent months to delay hikes in so-called interchange fees, hoping to avoid a jump in costs for accepting cards at a time when consumers are especially reliant on online shopping. Mastercard Inc. previously said that it too will change its fees. The companies’ plans have drawn attention from Senator Dick Durbin, the Illinois Democrat who previously helped limit fees on debit-card transactions.
• European health ministers will discuss the future of AstraZeneca Plc’s Covid-19 vaccine after a growing number of countries suspended its use to examine side effects, potentially throwing the region’s already slow inoculation campaign further off track. The ministers will gather virtually on Tuesday to discuss their response, ahead of the latest findings by the European Medicines Agency, the regional drugs regulator, which plans to decide on the next steps on Thursday. At stake is the future of one main building block of Europe’s vaccine push, where AstraZeneca was due to account for about a fifth of all doses in the second quarter.
• Purdue Pharma LP has floated a settlement plan calling for members of the billionaire Sackler family to pay more than $4.2 billion to help resolve the thousands of lawsuits that drove the maker of OxyContin opioid painkillers into bankruptcy. Court papers filed late Monday by Purdue detailed a Chapter 11 reorganization plan calling for the drugmaker to hand over the company’s assets to trusts for the benefit of states, cities and counties suing to recoup billions spent dealing with the U.S. opioid crisis. Combined with the cash payment by the Sacklers — the company’s current owners — the plan may be worth more than $10 billion, according to court filings. In exchange for the company and the cash, slated to be paid out over nine years, Purdue and the Sacklers would be legally insulated from existing and future opioid lawsuits. Some states, cities and counties that sued the drugmaker oppose the proposal.
• RWE AG expects earnings to decline this year after the German utility’s renewable plants in Texas suffered outages during one of the worst energy crises in U.S. history. Germany’s biggest electricity producer sees adjusted earnings before interest, taxes, depreciation and amortization in a range of 2.65 billion euros ($3.16 billion) to 3.05 billion euros this year. That compares with a gain of 7.2% to 3.2 billion euros last year.
• Prime Minister Boris Johnson will redirect British foreign policy toward the Indo-Pacific region as he sets out a sweeping overhaul of the U.K.’s international priorities after Brexit. The premier will publish a 100-page blueprint for diplomacy and defense, which his officials are billing as the most wide ranging re-evaluation of the U.K.’s place in the world since the end of the Cold War. In the plan, Johnson will outline a new more activist approach to international relations on issues such as climate change and democracy as he makes clear he regards the Indo-Pacific as increasingly the geopolitical center of the world, especially with the growing clout of China. Johnson intends to visit India at the end of April on his first trip overseas since Britain left the European Union trade and market regime.
• China Mobile Ltd. is considering an A-share listing after the country’s largest wireless carrier was removed from the New York Stock Exchange under a Donald Trump-era investment ban, according to people familiar with the matter. The state-owned firm has discussed the potential offering with advisers as it looks for new avenues to fund its 5G network development, said the people, who asked not to be identified as the discussions are private. Deliberations are at an early stage and China Mobile hasn’t decided the size and timeline of the listing, the people said.
• Credit Suisse Group AG said it recorded its best start to a year in a decade before the implosion of Greensill Capital this month pushed it into the deepest crisis since Chief Executive Officer Thomas Gottstein took over. Revenue at the securities unit rose more than 50% in the first two months and pretax income for the group was the best in a decade, the Swiss lender said Tuesday. The bank warned it may have to take a charge on business related to Greensill Capital, including a loan it extended before the firm filed for insolvency. Gottstein is seeking to calm investors after the bank’s decision to freeze $10 billion of funds it ran with Greensill sent shockwaves across the globe. The CEO, who’s already had to contend with a series of missteps and losses in his first year at the helm, is facing questions about controls and risk management, not least because he ordered a review of the funds just last year that subsequently failed to prevent their collapse.
• As rising government bond yields stir up angst on financial markets, one person who sounds unfazed is U.S. Treasury Secretary Janet Yellen. Her own go-to measure of debt costs is headed in the opposite direction. Interest payments on the national debt fell last year, to $345 billion or 1.6% of gross domestic product. They’re on track to shrink further in 2021 — even after all the pandemic spending, plus a debt-market selloff that’s taken 10-year Treasury yields to the highest in more than 12 months. That’s because the government is rolling over bonds it sold years or decades ago, when its borrowing costs were higher. It would take Treasury yields averaging about 2.5% across all maturities — well above where they are now — to turn that trend around, according to calculations by Bloomberg Intelligence. Even then, U.S. debt service costs would be comfortably lower than they’ve been in the recent past.
• China’s top leader warned that Beijing will go after so-called “platform” companies that have amassed data and market power, a sign that the months-long crackdown on the country’s internet sector is only just beginning. President Xi Jinping on Monday chaired a meeting of the communist party’s top financial advisory and coordination committee, ordering regulators to step up oversight of internet companies, crack down on monopolies, promote fair competition and prevent the disorderly expansion of capital, according to state broadcaster CCTV. Internet companies need to enhance data security and financial activities need to come under regulatory supervision, CCTV also reported.
• In 2020, a record number of U.S. restaurants closed their doors for good. In 2021, the industry’s survivors see an unprecedented opportunity. Cash-strapped landlords are offering more concessions than ever to fill space, while the vaccine-led promise of a return to normal life — and a new round of government stimulus — is expected to unleash a wave of pent-up demand for dining out. That sets the stage for a spate of restaurant openings heading into next year. It’s a very uneven landscape. If the bulk of the estimated 91,000 restaurants and bars that closed in 2020 were small, family-owned establishments, many of those that are now rushing to set up are chains or Covid-era conveniences like ghost kitchens. Not only does this signal a rapid acceleration of a decades-long trend of local eateries giving way to corporate-backed enterprises, but it highlights, once again, how the pandemic has exacerbated the inequality that marks nearly every facet of the U.S. economy: Strong, deep-pocketed businesses are thriving while the weaker are struggling to survive.
• Electric Last Mile Inc., the plug-in delivery van startup that’s in the process of merging with blank check company Forum Merger III Corp., said it has 45,000 pre-orders and will start production at the former Hummer plant in Indiana in the third quarter. The company is trying to get a jump on competitors who plan to sell electric vans into the booming market for e-commerce. A growing number of startups and established automakers are racing to sell plug-in delivery vehicles to the likes of Fedex Corp., Amazon.com Inc. and the U.S. Postal Service, who need more trucks but want to reduce their carbon emissions.
• The Federal Open Market Committee will announce its intentions Wednesday afternoon, and history suggests that today will be a good one for mortgage bond performance. One could almost consider the day before an FOMC announcement as a sort of gift for mortgage bond investors. Using as our proxy the Fannie Mae 30-year current coupon spread over a blend of 5- and 10-year Treasury yields — a popular valuation metric — over the past five years the spread has tightened 61% of the time on a day such as today, compared to a 50% chance during the period as a whole. Besides the better chance of the Fannie Mae 30-year current coupon spread tightening, the Bloomberg Barclays U.S. MBS index excess return versus Treasuries has shown outsized performance on the day prior to the FOMC announcement. While the average day over the last half decade shows little change to that metric, the one before the FOMC announcement averages a gain of 2 basis points. The day of the FOMC announcement? It loses one basis point.
• Boeing Co. is scrutinizing the flight-deck windows of some of its 787 Dreamliners as the beleaguered planemaker expands its search for potential manufacturing flaws that have delayed deliveries of its marquee jetliner, according to people briefed on the matter. Chicago-based Boeing has been testing the cockpit windows in a limited batch of aircraft after learning a supplier modified its production process, two of the people said, asking not to be identified because the matter is sensitive. Boeing wants to ensure the windows still meet its requirements after the change, but the testing isn’t expected to affect March deliveries, one of the people said. The emergence of yet another potential glitch comes as Boeing’s mechanics and engineers work furiously to try and restart 787 Dreamliner deliveries by the end of this month, in line with what executives promised during a January earnings call. The U.S. manufacturer hasn’t handed over any of the jets since October after discovering more of the tiny dimples in the inner lining where the carbon-fiber fuselage barrels are fused to form the jet’s frame. New issues with the plane could pose problems for shipments beyond this month, making it more difficult for Boeing to meet its delivery target for the year.

“The greatest lesson in life is to know that even fools are right sometimes.“ – Winston Churchill

*All sources from Bloomberg unless otherwise specified