March  3, 2021

Daily Market Commentary

Canadian Headlines

• Canadian equities gained for a second day as materials and consumer staples stocks advanced. The S&P/TSX Composite index rose 0.7% in Toronto, extending this week’s gain to 2%. Materials were the best performing sector, with gold miners rebounding as the price of gold snapped a five-day losing streak. However, Bank of Montreal’s investment bank is building up its capabilities to help clients establish blank-check companies as the Canadian firm seeks to play a bigger role in the fast-growing trend. Meanwhile, industrials were the worst performing sector.
• Few countries have done as much to cater to the millennial generation’s desire for downtown living as Canada, where gleaming new apartment towers crowd city skylines and once-languishing neighborhoods have been reshaped by an influx of young people. The country’s three largest metropolitan areas  — Toronto, Montreal and Vancouver — built more apartment units per capita than almost every other large North American city over the past decade. But the Covid-19 pandemic and its attendant remote-work revolution now have urbanites leaving in record numbers, emptying condo towers and sending rents tumbling for thousands of mom-and-pop investors who took part in the boom. The fallout may extend far beyond the third-wave coffee shops and craft breweries that sprouted up in these areas; with a record 9% of the economy tied up in residential real estate, Canada can’t afford to let its densification play end. So its wily developers are shifting to the suburbs, betting young people unable to pay up for detached homes may embrace larger condos if they come with a bit of the boho fun they’ve gotten used to downtown. It’s a move that stands to transform both suburban towns as well as the cities left behind.
• The average price of a home sold in Toronto breached C$1 million for the first time in February, with gains accelerating in the suburbs around Canada’s largest city. Prices in the Toronto region shot up 14.9% from the year before to C$1.05 million ($830,000) as bidding wars broke out on properties that came up for sale, according to a release today from the Toronto Regional Real Estate Board. It’s the second Canadian city to join the million-dollar club after Vancouver. The Covid-19 pandemic caused an unexpected boom in demand for housing, with the ubiquity of remote work spurring demand for larger homes even as record low mortgage rates increased people’s ability to pay for them. In Toronto, a stay-at-home order is still in effect and demand for upgraded living space appears to be growing. Ground-level homes in the suburbs were the drivers of February’s price gains. Detached homes in the 905 area code, which surrounds the city of Toronto, rose 27.8% to C$1.3 million.
• Canadian Western Bank is reaping the rewards from moving beyond its roots in the country’s ailing oil heartland. Chief Executive Officer Chris Fowler is starting to see a payoff from years of transforming Canadian Western from an Alberta-focused commercial lender into a more geographically diversified, full-service bank targeting business owners. The Edmonton-based bank’s fiscal first-quarter earnings topped analysts’ estimates, helped by loan growth in Ontario and earnings from businesses that the bank has worked to bulk up, such as wealth management.
• Stelco Holdings Inc.’s top boss sees a “historic” rebound ahead that’ll drive a surge in steel demand that the already bullish executive didn’t anticipate back in February. “I was optimistic two weeks ago, but what I learned the last couple weeks is the extent of the end market demand,” Stelco Chief Executive Officer Alan Kestenbaum said Tuesday in a phone interview. “It’s there, and I think we’re going to see a historic rebound here as people get out and start living again.” It’s a more exuberant tone for the CEO of the Hamilton, Ontario-based steelmaker, who was already upbeat about demand during the company’s Feb. 18 earnings call. Kestenbaum credits his revised outlook to better visibility on upcoming U.S. car sales and a pickup in oil drilling.

World Headlines

• European stocks extended the week’s gains on Wednesday morning, with cyclical sectors leading the advance as the focus turned away from rising bond yields and toward an economic reopening. The Stoxx Europe 600 Index rose 0.8% as of 9:08 a.m. in London. U.K. equities outperformed other major benchmarks, rising as much as 1.3% after the country’s government extended furlough pay for workers, ahead of its spring budget announcement where it’s expected to reveal additional support for businesses. Across the region, economically sensitive industries including automotive, banking and travel & leisure led gains among sectors. Equities in Europe had a bumpy start to 2021, with a vaccination-driven rally peaking in mid-February as year-end earnings cast doubt on the speed of economic recovery. Since then, spiking yields in U.S. treasuries and German bunds have additionally eaten into investors’ appetite for stocks, particularly weighing on so-called bond-proxy haven sectors.
• Stocks rose with U.S. equity futures on Wednesday as concerns over valuations eased and the focus turned back to the stimulus-fueled recovery from the pandemic. Treasury yields jumped. U.S. equity futures rebounded from Tuesday’s losses and the dollar edged up. Shares outperformed in Hong Kong and China and climbed in Australia, where data showed the economy maintained its rapid recovery in the final three months of 2020. Oil recovered after a three-day fall.
• Asia stocks rose, with the Hang Seng Index leading gains among regional equity benchmarks, as shares of Macau casino operators and heavyweight Tencent Holdings climbed. Hong Kong’s gauge jumped 2.7%, the most since Jan. 19. Tencent contributed the most to its advance, as well as to that of the MSCI Asia Pacific Index. Sea Ltd., which is backed by Tencent, said it expects e-commerce revenue to double in 2021. Galaxy Entertainment jumped 7.7%, the most on the Hang Seng index, after Macau decided to allow people to enter casino floors without having to show a negative Covid-19 test result. Sands China also rose more than 5%.
• Oil climbed ahead of a crucial OPEC+ meeting, as the alliance was expected to agree a coordinated increase in output as the pandemic’s impact on the market recedes. Brent futures rose 1.5% after three consecutive days of losses for the first time since December. The widespread view among the Organization of Petroleum Exporting Countries and its allies is that the oil market can absorb extra barrels, according to people familiar with the matter. Oil has staged a powerful rally this year, driven by significant OPEC+ curbs — including unilateral cuts by Saudi Arabia — and a vaccine-aided rebound in demand. That strength has paved the way for the alliance to unleash some barrels, with OPEC Secretary-General Mohammad Barkindo saying on Tuesday that both the wider economic outlook and oil-market fundamentals continue to improve. The group could return the bulk of the 1.5 million barrel-a-day hike that’s up for debate.
• Gold resumed declines back toward an eight-month low as rising U.S. Treasury yields and focus on an economic recovery dented the metal’s allure. Bullion has tumbled this year on bets for a post-pandemic rebound and as bond yields climbed, though a sharp jump in yields last week also hurt gold as traders began to price in earlier interest-rate hikes. Federal Reserve Governor Lael Brainard said Tuesday that the economy remains far from goals for employment and inflation, reiterating the dovish message of other officials. With interest in gold receding, investors have sold metal from exchange-traded funds in recent weeks, pushing holdings to the lowest since early July. The funds were a major driver of bullion’s rally to a record in August, so protracted outflows present a major headwind for prices.
• AstraZeneca Plc’s and Pfizer Inc.’s vaccines protected the elderly against Covid-19 after a single dose in a new study that validates giving both shots to older people and spacing out immunization doses. Another vaccine developed by India’s Bharat Biotech International Ltd. showed 81% efficacy in an interim clinical trial. Chancellor Angela Merkel backed a relaxation of coronavirus restrictions despite a stubbornly high infection rate, acknowledging that many Germans are weary of curbs on daily life. U.S. President Joe Biden said that the U.S. may have enough vaccine for every adult American by the end of May. He said he hopes the nation can return to normal a year from now.
• Las Vegas Sands Corp., the world’s largest casino operator by market value, agreed to sell its properties in Las Vegas to Apollo Global Management Inc. and Vici Properties Inc. for $6.25 billion, refocusing the company on its successful Asian resorts and other potential opportunities in the U.S. Apollo will run the properties, which will be owned by Vici, a real estate investment trust, the companies said in a statement Wednesday. The Venetian, Palazzo and related convention facilities in Vegas contributed less than 15% of the company’s revenue in 2019, before the coronavirus pandemic hit. Sands signaled last year that it no longer viewed Las Vegas, its home turf, as a priority when it tapped advisers to solicit interest in the properties. The company has identified over $5 billion in capital spending plans at its resorts over the next five years, most of it focused on Macau and Singapore, which generated 85% of its revenue in 2019.
• Bond traders have been saying for years that liquidity is there in the world’s biggest bond market, except when you really need it. Last week’s startling gyrations in U.S. Treasury yields may offer fresh backing for that mantra, and prompt another bout of soul-searching in a $21 trillion market that forms the bedrock of global finance. While stocks are prone to sudden swings, such episodes are supposed to be few and far between in a government-debt market that sets the benchmark risk-free rate for much of the world. Yet jarring moves occur periodically in Treasuries, forming a bit of a mystery as no two events have been the same. Some point to heightened bank regulations in the wake of the 2008 financial crisis. Scrutiny over liquidity shortfalls intensified in October 2014 when a 12-minute crash and rebound in yields happened with no apparent trigger. Panic selling during the pandemic-fueled chaos a year ago, exacerbated when hedge funds’ leveraged wagers blew up, brought the issue to the fore again.
• Wall Street banks are seeking new legal protections to help avoid a repeat of Citigroup Inc.’s accidental $900 million payment to Revlon Inc. lenders. After last month’s surprise court ruling that let certain Revlon creditors keep $500 million of the mistaken transfer, banks began inserting new language into loan deals that would require investors to return the money if such an error occurred again. The provisions, which were in the works before the decision, aim to strengthen the hand of administrative agents that oversee interest distributions and repayment schedules. At least four leveraged loan issuers came to market with deals that included “Revlon clawback language” in credit documents in recent weeks. Banks including Citigroup, Barclays Plc and Jefferies Financial Group Inc. have led offerings with the provisions, according to people with knowledge of the matter who asked not to be identified discussing private transactions. The exact wording can vary, but they generally grant the agent bank the “sole” power to determine when a lender payment is a mistake and set procedures to recoup the funds, according to Xtract Research.
• Samsung Electronics Co. revealed additional details about its plans to build a cutting-edge semiconductor facility in the U.S. in a filing with the Texas government, making the disclosure as the Biden administration vows to make the security of the U.S. chip supply a national priority. The South Korean company plans to invest about $17 billion in its Project Silicon Silver and create about 1,800 jobs over the first ten years, according to an economic impact study prepared by a local consultant. Some $5.1 billion would go into buildings and property improvements, while $9.9 billion would be spent on machinery and equipment. The filing with the Texas comptroller warned the chips project is “highly competitive.” Samsung is evaluating alternatives sites in Arizona and New York, as well as in Korea.
• Twice in the last week, the U.S. announced new sanctions against Russia and Saudi Arabia over what it called human rights abuses. Twice, critics said President Joe Biden pulled his punches. Financial markets and rights groups were unimpressed by Biden’s move Tuesday to sanction senior Russian law enforcement officials over the poisoning and imprisonment of opposition leader Alexey Navalny. That followed similar criticism when Biden declined to target Saudi Arabia’s crown prince after releasing an intelligence report accusing him of approving the murder of Washington Post columnist Jamal Khashoggi. U.S. lawmakers from both parties also knocked the Biden administration last week after it held off on sanctions against German entities involved in the construction of the Nord Stream 2 gas pipeline from Russia, despite arguing that the project undermines European security.
• European Central Bank policy makers see no need for drastic action to combat rising bond yields, believing the risk to the economy is manageable with verbal interventions and the flexibility of their asset-purchase program, according to officials familiar with internal discussions. While multiple Governing Council members have spoken out to say that higher yields may be unwarranted and could undermine the euro zone as it struggles with extended pandemic lockdowns, there is no sense of panic, the officials said. A step such as expanding the overall size of their 1.85 trillion-euro ($2.24 trillion) emergency bond-buying program is currently unnecessary, they said. They didn’t say whether the pace of purchases has been stepped up in recent days, using the much-touted flexibility of the tool.
• Rishi Sunak will extend furlough payments to U.K. workers until the end of September, protecting millions of people whose jobs were suspended during the coronavirus pandemic until after restrictions are set to be lifted. With the nation mired in a third lockdown, the government will keep paying 80% of wages for those in the program through the end of June, the Treasury said in a statement. That allowance will decline over the following three months. Assistance to the self-employed will be extended so more people are eligible for financial support.
• After shortchanging renewable energy developers for years to the point where it owes billions of dollars in unpaid subsidies, the Chinese government is now proposing that those companies may have to cancel part of the debt if they want to keep building new projects. Under a draft plan by the country’s National Energy Administration, provinces would auction off grid capacity for new wind and solar projects, with at least one third of the contracts going to developers who were prepared to give up money owed to them by the government, according to people familiar with the proposal. The winning bidders would get a guaranteed rate for their power. The NEA is seeking opinions on the plan and it remains subject to change, said the people, who asked not to be identified because it isn’t public. The NEA didn’t respond to a faxed request for comment.
• Consumers in the world’s largest economies amassed $2.9 trillion in extra savings during Covid-related lockdowns, a vast cash hoard that creates the potential for a powerful recovery from the pandemic recession. Households in the U.S., China, U.K., Japan and the biggest euro-area nations socked money away when forced by the coronavirus to stay home and out of the shops, according to estimates by Bloomberg Economics. They are likely continuing to do so as restrictions remain and governments dole out stimulus. Half that total — $1.5 trillion and growing — is in the U.S. alone, the data show. That’s at least double the average annual growth of gross domestic product witnessed in the last expansion and equivalent to the annual output of South Korea.
• President Joe Biden delivered welcome news to Americans that Covid-19 vaccines will be widely available two months sooner than expected but his message included a sobering reality: The pandemic isn’t near an end. He stepped in front of cameras at the White House on Tuesday to announce new breakthroughs: The authorization of a third vaccine, the acceleration of its delivery, a fast track for vaccinating teachers and reopening schools, and a partnership between two pharmaceutical giants.
• MetLife Inc. is exploring the sale of some European assets as the U.S. life insurance giant seeks to streamline it global business, people familiar with the matter said. New York-based MetLife is working with an adviser to explore options for units in Greece, Poland and the Ukraine, the people said, asking not to be identified discussing confidential information. The businesses could be valued at more than 500 million euros ($603 million), the people said. Any sale would likely attract rival insurers, one of the people said. Deliberations are ongoing, and there’s no certainty they will result in any transaction, according to the people. A representative for MetLife declined to comment.
• Deloitte PLT agreed to a 324-million ringgit ($80 million) settlement with the Malaysian government to resolve all claims related to the firm’s audit of 1MDB and its former unit SRC International between 2011-2014. The payout is the largest 1MDB-related settlement by an audit firm in Southeast Asia, the Finance Ministry said in a statement Wednesday. It comes less than a week after a local lender agreed to a 2.83-billion ringgit settlement over its involvement in transactions related to the state investment company. “This marks another success in the Malaysian government’s continuing recovery efforts against parties involved in 1MDB, SRC and its related entities,” Finance Minister Tengku Zafrul Abdul Aziz said in the statement.

“Nothing is easier than spending the public money. It does not appear to belong to anybody.“ – Calvin Coolidge

*All sources from Bloomberg unless otherwise specified