May 12, 2021

Daily Market Commentary

Canadian Headlines

• Canadian stocks pared some of their earlier losses on Tuesday, but still ended the session in the red amid a broader equity market selloff. The S&P/TSX Composite index fell 0.5% in Toronto with consumer discretionary and real estate stocks as the worst performers, while tech and health care were the best. Meanwhile, stock-market bull Brian Belski at BMO raised his year-end target for Canadian stocks and expects the S&P/TSX Composite Index to rise 5.9% over the next seven months. He now sees the TSX ending the year at 20,500 from his previous target of 19,500.
• Facing skyrocketing lumber prices at home, U.S. importers are driving competition for European wood, and winning. The frenzy comes on the heels of record American forest-products imports from Europe in 2020, when North American demand soared and caught sawmills off guard with low inventories. Lumber prices have reached new peaks on a near daily basis in recent weeks, quadrupling from just a year ago. The unprecedented rally has been spurred by low borrowing rates, an increased appetite for larger homes, and a frenzy of do-it-yourself renovations during the pandemic.
• Both the U.S. and Canada say they’re open to aligning regulations between the two countries to cut their governments’ greenhouse gas emissions. Slashing emissions is the goal of the new Greening Government Initiative, created by the Council on Environmental Quality and Canadian Treasury Board Secretariat. Some pathways could include switching to cleaner energy sources, moving to zero-emission vehicles, greening government procurement, and pursuing green and resilient infrastructure, CEQ said. Coordinating with Canada on regulations “can be an effective tool for accelerating national efforts to combat climate change and green our respective governments,” CEQ Chair Brenda Mallory told Bloomberg Law.

World Headlines

• European equities rose on Wednesday, as investors weighed another wave of robust earnings reports and a brightening economic outlook against the risks of surging prices and a widening coronavirus outbreak in Asia. The Stoxx Europe 600 Index climbed 0.2% as of 9:58 a.m. in London, as investors awaited inflation data and government debt sales in the U.S. later in the day. Miners including Rio Tinto Plc were among the biggest gainers with copper hitting a new high, while automakers fell amid a slew of warnings about chip shortages that could weigh on output. The U.K.’s FTSE 100 benchmark was up 0.5%. Bayer AG rose 3.3% after posting first-quarter earnings that beat estimates. Diageo Plc was also 3.3% up after the distiller said it expects at least 14% growth in operating profit this fiscal year and is restarting a share buyback program. Ambu A/S shares fell as much as 10%, after the company’s second-quarter revenue missed analyst estimates.
• U.S. equity-index futures weakened as investors awaited inflation figures to gauge the risk that price pressures will stifle a recovery in the world’s biggest economy. The tech-heavy Nasdaq 100 underperformed after dip buyers emerged Tuesday to narrow losses in the underlying gauge. European stocks rose, lifted by gains in miners and optimism about economic re-openings. Diageo Plc added 3.5% after forecasting earnings growth as sales at the world’s largest distiller recover on consumer demand. The dollar advanced with Treasuries. Debate over whether inflation will be persistent enough to force the Federal Reserve to tighten policy sooner than current guidance suggests comes as abundant stimulus has powered a rally in global equities, raising concerns valuations had become expensive. Consumer-price inflation is set to quicken, with the year-on-year comparison amplified by the shock of Covid-19 shutdowns in 2020.
• Asian stocks fell for a second day, hit by declines in chipmakers rattled by signs of a resurgence in global inflation as well as a massive slump in Taiwan stocks. The MSCI Asia Pacific Index extended its two-day drop to almost 3%, heading for its biggest such decline since Jan. 29. A sub gauge of information-technology firms including Taiwan Semiconductor Manufacturing and Samsung Electronics contributed most to the day’s share price losses. Taiwan stocks plunged the most in 14 months, narrowly missing a technical correction. Fears of a further tightening of coronavirus-linked restrictions added to pressure from the global tech sell-off in dragging shares like TSMC down. The Taiwan Stock Exchange Weighted Index lost as much as 8.6% in morning trading, in its worst intraday loss since 1969.
• Oil held gains after the International Energy Agency said a record glut built up last year is gone, while the shutdown of a key U.S. pipeline drove retail gasoline prices above $3 a gallon for the first time since 2014. West Texas Intermediate was little changed above $65 a barrel in New York. The IEA cut its oil demand forecasts in a monthly report as the coronavirus continues to hit India, but also said that surplus inventories are now just a small fraction of the levels seen when consumption collapsed last year. In the U.S., retail gasoline prices advanced as the ongoing outage on the Colonial Pipeline spurred panic-buying. The pipe’s operator said it will know late Wednesday whether it’s safe to restart the network.
• Gold declined as the dollar strengthened ahead of consumer prices data that will give the latest insight as to how warranted inflation fears are. Bullion has rallied in recent days amid a decline in real Treasury yields, driven by higher expectations for inflation as commodity prices surge across the board. U.S. CPI data released later will give an indication of whether these are feeding through to consumers. Investors will also be debating whether it’s simply a sign of improving overall demand, or risks becoming uncontrolled. “Gold is struggling a bit ahead of the CPI data as the market frets the bond market reaction to a stronger than expected pick up,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S. Its rejection at a key resistance at $1850 an ounce “has left it in consolidation mode with support at $1818 an ounce so far holding.”
• Copper extended its rally to trade near a record high, as supply risks and strengthening demand fuel a commodities boom that’s stoking concerns about inflation around the world. The gathering pace of a global recovery from the pandemic is pushing up the price of everything from copper to corn, with the Bloomberg Commodity Spot Index rising to a decade high. Goldman Sachs Group Inc. sees a “goldilocks scenario” forming for commodities as stronger growth combines with restrained wage pressures and a dovish Federal Reserve. Banks are forecasting much higher copper prices as demand outpaces supply. Oversea-Chinese Banking Corp. expects copper to top $12,000 a ton within the next 12 to 18 months, while Bank of America Corp. said that if scrap fails to plug the supply gap in the coming years, prices could move to $20,000 a ton.
• The more infectious coronavirus variant driving a catastrophic Covid-19 epidemic in India has been detected in 44 countries, as the Asian nation reported a record daily death count. Sinovac Biotech Ltd.’s vaccine is wiping out Covid-19 among health workers in Indonesia, an encouraging sign for developing countries reliant on the Chinese shot, which performed worse than western alternatives in clinical trials. The U.K. has reconsidered plans to buy one million doses of AstraZeneca Plc’s Covid-19 antibody treatment. England reported no deaths from the disease in its latest daily update.
• Inflation fears are fueling a political threat to President Joe Biden’s plans for vast new federal spending on infrastructure and social programs, adding to White House officials’ worries after a disappointing jobs report on Friday. Biden’s Republican opponents have begun seizing on rising prices, the slower-than-expected pace of hiring and even growing fuel shortages from a computer hack of Colonial Pipeline Co. to compare his administration with the “stagflation” era of former President Jimmy Carter. The specter of hours-long waits in lines to fill up with gas has only enhanced the parallel. The GOP criticism has helped put a spotlight on a monthly report on inflation due Wednesday. Another large year-over-year increase may fan anxiety in Biden’s own party and among lawmakers about his plans to spend some $4 trillion to remake the U.S. economy.
• Toyota Motor Corp. unveiled a 250 billion yen ($2.3 billion) share buyback and expects to return to pre-pandemic profitability in the current fiscal year as its ability to keep churning out vehicles amid a global shortage of automotive chips puts it in a prime position to capitalize on swiftly recovering demand for cars. The Japanese automaker forecast 2.5 trillion yen in operating profit for the 12 months that will end in March, compared with a 2.4 trillion yen profit in fiscal 2019, before the pandemic. Analysts were predicting, on average, an operating profit of 2.7 trillion yen. In a tumultuous period for the auto industry, Toyota quickly pulled ahead of the pack, straightening out its supply chain and ramping up production in order to meet rising demand for cars. The world’s No. 1 automaker now stands primed for the V-shaped Covid recovery eluding many of its peers, which are having to scale back because of the global chip shortage.
• Xiaomi Corp. and the U.S. government have reached an agreement to set aside a Trump administration blacklisting that could have restricted American investment in the Chinese smartphone maker. The Chinese smartphone giant had sued the government earlier this year, after the U.S. Defense Department under former President Donald Trump issued an order designating the firm as a Communist Chinese Military Company, which would have led to a de-listing from U.S. exchanges and deletion from global benchmark indexes. The U.S. Defense Department has now agreed that a final order vacating the designation “would be appropriate,” according to a filing to the U.S. courts Tuesday.
• Danone started the sale of its stake in China Mengniu Dairy Co., seeking $2 billion as the world’s largest yogurt maker tries to appease disgruntled shareholders. Danone will sell its 9.8% stake via an accelerated bookbuilding process, the company said in a statement Wednesday. The shares are being offered at HK$38.95 to HK$39.80 each. Earlier this year, Danone said that most of the proceeds would be used to fund share repurchases. Danone is close to hiring an external chief executive officer after the company ousted Emmanuel Faber. The incoming CEO will have to find ways to revive sales as virtually all of the company’s categories are suffering.
• LinkDoc Technology, a Beijing-based medical data company, is planning an initial public offering that could raise about $500 million as soon as this year, people with knowledge of the matter said. The Chinese firm is working with Bank of America Corp., China International Capital Corp. and Morgan Stanley on the proposed share sale, said the people, asking not to be identified as the information isn’t public. LinkDoc is still considering potential venues for the IPO including Hong Kong, the people said. Deliberations are ongoing and the fundraising size and timing may change, according to the people. A representative for LinkDoc could not immediately comment. Representatives for Bank of America, CICC and Morgan Stanley declined to comment.
• Colonial Pipeline Co. told federal officials it will know by late Wednesday whether it’s safe to restart gasoline and diesel flows that have been on hold since criminal hackers targeted the company last week. The promise comes as frustration grows among political leaders over scant details about when the biggest North American fuel pipeline will recover, while fuel shortages spread rapidly across the South and East. U.S. Energy Secretary Jennifer Granholm said that even if Colonial can restart on Wednesday, it’ll take days longer to “ramp up operations.” With a full restoration of the pipeline system potentially taking weeks, U.S. retail gasoline jumped to the politically sensitive level of $3 a gallon for the first time in six years. Facing increasing pressure, the White House announced several measures Tuesday to blunt the growing crisis that threatens to hobble the post-pandemic economic recovery. The Biden administration will give a House briefing on the cyberattack at 6 p.m. Washington time on Wednesday.
• The past few days in cryptocurrencies have been among the most striking yet: a token just days old hit a $45 billion market value, Dogecoin was used to pay for a space mission and Ether scaled new peaks. As day traders and Wall Street pros strive to make sense of it all, Yassine Elmandjra, crypto analyst at Cathie Wood’s Ark Investment Management LLC, is focused on what the sector represents for him: a new paradigm for transferring and preserving wealth, with Bitcoin and Ether at the vanguard. Crypto market value has already topped $2.5 trillion after explosive growth over the past year. Tokens outside of Bitcoin — which has pulled back from a record set in April — have driven the expansion recently. That rings alarm bells for some strategists, who fear that a wider embrace of the sector by retail traders is a sign of potentially unsustainable, stimulus-fueled froth.
• Amazon.com Inc. won its bid to topple a 250 million-euro ($303 million) tax bill in another blow to European Union competition chief Margrethe Vestager’s crackdown on preferential fiscal deals. Regulators failed to show that the U.S. online retailer was given special treatment by Luxembourg’s tax authority in violation of state-aid rules, the EU General Court ruled on Wednesday. Amazon’s victory follows last year’s landmark court defeat for the EU commissioner against Apple Inc., which contested a record 13 billion-euro tax order. The tech giants were both targeted as part of Vestager’s eight-year crusade against allegedly unfair treatment doled out by EU nations such as Luxembourg, Ireland and the Netherlands to attract some of the world’s leading firms.
• Airline operators in the U.K. were prepared to quickly ramp up flights to popular destinations in Greece and Spain. They got Portugal instead. Even as carriers quickly shift capacity to Lisbon and Faro in the Algarve, they’re pressing U.K. officials to add the two larger Mediterranean nations to the list of countries marked green in the traffic-light border system unveiled last week. Portugal is too small to single-handedly deliver a summer travel boom for airlines at risk of missing a second straight high season because of the coronavirus pandemic. The big prize would be Spain, the most popular holiday destination for Brits, who along with Germans make up the largest source of tourists in Europe. Carriers had bet heavily that Spain or at least its islands would be green-lit. They added almost 70,000 seats on flights headed there for the week of May 17, when U.K. borders will start to loosen, according to data from flight tracker OAG. From the U.K. to Greece, the schedule exploded by 1,600% week-to-week.
• U.S. national average retail gasoline prices have risen above $3 a gallon for the first time since 2014, after a cyberattack shut operations at Colonial Pipeline, the main supply link for the East Coast. The nation’s average retail price is now at $3.008 a gallon, according to motoring organization AAA. The pipeline’s shutdown has caused shortages at fuel stations around the Southeast. Gasoline above $3 a gallon is often considered a trigger point for politicians, who are likely to take the opportunity to further debate energy policy in Washington.
• Volkswagen AG plans to offer a highly automated version of the hippie-era microbus it’s reviving as an electric van as the carmaker commercializes self-driving technology along with startup Argo AI. VW is preparing an ID.Buzz with Level 4 autonomy — meaning the vehicle can drive itself under certain conditions — to be ready for commercial transport of people and goods for 2025. It’s testing Argo AI’s technology at six U.S. locations and will expand to a site in Munich this year to further refine the system. The ultimate development focus will be on densely populated urban areas that pose “high complexity for the technology, but also offer the basis for intensive use of mobility offerings,” said Christian Senger, the head of autonomous driving at VW’s van unit.
• The Dutch government has told a consortium of companies including Royal Dutch Shell Plc and Exxon Mobil Corp. that it will spend as much as 2.1 billion euros ($2.6 billion) in the coming years to put some of their carbon emissions underground. The project at the Port of Rotterdam could sequester about 2.5 million metric tons of carbon dioxide annually by storing it in depleted gas fields in the seabed. The four companies involved—Shell, Exxon, Air Liquide SA, and Air Products and Chemicals Inc.—will receive state backing for the plan, according to Sjaak Poppe, a spokesman for the port. Rotterdam port generated 22.4 million tons of carbon dioxide last year, about 14% of the country’s annual emissions. The carbon-capture project, known as Porthos, will trap pollution from the companies’ oil refineries and hydrogen production plants in a shared network. The gases will then be compressed and transported by pipes off the coast and pumped into a sandstone reservoir three kilometers below the seabed that once held natural gas.
• Fierce clashes between the Israeli military and rocket squads in the Hamas-ruled Gaza Strip spurred a concerted diplomatic push to end the most serious fighting to convulse the area since a 2014 war. Egypt, the United Nations and the U.S. appealed for de-escalation as relentless Israeli air raids and Palestinian rocket barrages sent the death toll climbing. Forty-eight Palestinians have been reported killed in Gaza and six people in Israel since the violence abruptly exploded late Monday. Three Palestinians have died in confrontations with Israeli security forces in the West Bank. The bombardments escalated sharply Tuesday evening as Hamas unleashed a massive volley of rockets at metropolitan Tel Aviv, Israel’s commercial heartland, and Israel’s south that overwhelmed missile defenses. Israeli Prime Minister Benjamin Netanyahu warned that “Hamas will pay a very heavy price for its aggression,” and a torrent of airstrikes followed, targeting military facilities, buildings used by the Islamic militant group, and key intelligence and military commanders.
• France aims to delay access to the European single market for U.K. financial firms until it considers that the British government is honoring its post-Brexit commitments on fishing rights, according to people familiar with the matter. French officials are looking to stall a regulatory cooperation agreement on finance as part of a broader effort to bring pressure to bear on the U.K., the people said, asking not to be named discussing private conversations. The non-binding Memorandum of Understanding would be a first step on future cooperation and pave the way to granting market access to U.K. firms further down the track. The French reluctance to let even that come into force shows how British hopes for access to European Union financial markets are fraught with politics.
• Wall Street will continue reaping rewards from its embrace of blank-check companies for a long time, even if the record-breaking boom in listings comes to an end. Investment banks have earned as much as $15 billion from underwriting and advisory work with special purpose acquisition companies since the start of last year, according to research firm Coalition Greenwich. At least $8 billion of that revenue hasn’t been booked yet and will show up in banks’ results over the next two years, the data show. One of the main reasons is that arrangers of blank-check IPOs in the U.S. get paid in chunks, with less than half of their typical 5.5% fee paid when a listing is completed. The rest is deferred until after the SPAC finds a target — which can take up to 24 months — and completes the merger.
• The red-hot U.S. housing market is giving an extra boost to the cheapest houses, including many in historically stagnant neighborhoods that have suffered from a lack of investment. It is pushing forward efforts to revive the local economies of Detroit, Cleveland, Youngstown, Ohio, and other areas where homes can sell for as little as a few thousand dollars but typically require a lot of work to fix up and can’t be financed with a mortgage. U.S. ZIP Codes where the median home cost less than $100,000 in early 2018 have had a 42% rise in prices in the three years since then, according to a CoreLogic Inc. analysis for The Wall Street Journal. That is about double the rise for ZIP Codes where the median was between $150,000 and $200,000, and triple the rise in locales with $300,000-plus price tags.
• After a stellar 2020, the record-breaking boom in clean-energy funds is rapidly giving way to a bust. Investors are yanking cash from the sector at the fastest pace in a year, while two of the biggest exchange-traded funds tracking the industry — the iShares Global Clean Energy ETF (ICLN) and Invesco Solar ETF (TAN) — have each tumbled at least 24% in 2021. Since the beginning of May, about $154 million has been pulled from clean-energy ETFs. Thank the pressure on big-tech stocks. Funds that have higher environmental, social and governance standards have long benefited from substantial stakes in giant growth companies. Now a post-pandemic economic recovery is triggering a rotation to cheaper shares, and the benefits are swiftly becoming drawbacks.
• The Pfizer Inc.-BioNTech SE Covid-19 vaccine is set to become the first shot used to protect 12-to-15-year-olds in the U.S. if advisers to the Centers for Disease Control and Prevention agree in a meeting Wednesday that it’s safe and effective for that age group. Company and CDC representatives will present scientific evidence to the panel, called the Advisory Committee on Immunization Practices, before its 15 voting members take a vote. CDC Director Rochelle Walensky must then sign off on the panel’s recommendation. The vaccine could be deployed to teens as soon as Thursday in a move that’s been long anticipated as paving the way for the mass vaccination of middle and high-school students before the next school year begins.
• Goldman Sachs analyst Stephen Grambling advised clients to “buy the dip” in shares of DraftKings after first-quarter revenue topped expectations fueled by a stronger-than-expected increase in monthly users and higher spending per users. Shares are down 39% from a March record and closed at a six-month low on Tuesday.
• The Federal Reserve’s quantitative easing program will pass the $2 trillion mark today for total mortgage bonds purchased, an astonishing rate of support that shows no signs of slowing. Since the central bank embarked on the current round of QE in March 2020, mortgage spreads have hit their tightest in a decade and housing prices are surging at a record pace. Yet, the bank is still buying a daily average of $6 billion of mortgage bonds. Despite stretched valuations and the fact that QE1 and QE3 halted the mortgage buying at $1.35 trillion and $1.4 trillion, respectively, Federal Reserve Governor Lael Brainard in a speech on Tuesday reminded investors that “uncertainty remains, and employment and inflation are far from our goals.”
• Moves by Apple Inc. and Google that make it harder for brands to track billions of consumers are creating a money-making opportunity for advertising companies that were hit hard by the pandemic. Google is phasing out third-party online tracking cookies and Apple is requiring app owners to ask for explicit permission to track users across other companies’ apps. The changes make it harder for companies to follow our every move online, so marketers are devising new ways for brands to find out what consumers are doing and pitch products to them. It won’t threaten the tech giants’ status as gatekeepers to billions of consumers, a role that’s only growing as more economic activity shifts online. Yet it’s an opportunity for ad agency groups such as WPP Plc, Omnicom Group Inc. and Publicis Groupe SA to reassert their relevance.
• Masayoshi Son is now in the history books for delivering the largest-ever quarterly profit for a Japanese company, but he’s still having a hard time getting the respect he thinks he deserves. SoftBank Group Corp. on Wednesday reported net income of 1.93 trillion yen ($17.7 billion) for the three months ended March 31, with essentially all of that coming from Son’s successful investment in the newly public Coupang Inc. That’s nearly twice the 1 trillion yen tally from the next highest Japanese company, Toshiba Corp. Yet even as Son prepared to deliver the widely anticipated record results, his stock price suffered the steepest two-day dive in eight months. His shares have dropped 14% from their peak in March. Investors are skittish about whether SoftBank will keep buying back its own stock and profiting from a global surge in technology shares.

“Superior investors make more money in good times than they give back in bad times.” — Howard Marks

*All sources from Bloomberg unless otherwise specified