May 17, 2021

Daily Market Commentary

Canadian Headlines

• KKR & Co. has agreed to buy sustainability consultancy ERM Group Inc. at a time when the business world is paying ever-closer attention to green issues amid pressure from investors. The private equity firm has acquired a majority stake in ERM from Canada’s Omers Private Equity and Alberta Investment Management Corp., according to a statement Monday confirming an earlier Bloomberg News report. ERM’s management team and partners will remain minority investors. Financial details were not disclosed. The deal values ERM at about $2.7 billion, including debt, people familiar with the matter said, asking not to be identified discussing confidential information. ERM advises companies in industries from mining to manufacturing on the environmental and social impact of their operations. The group employs more than 5,500 people in over 40 countries. It generated net revenue of $792 million in 2020, 9% more than the previous year.

World Headlines

• European stocks were undecided on Monday as lingering worries over inflation cloud reopening hopes, and energy stocks weigh. The Stoxx Europe 600 Index was down less than 0.2% as of 10:51 a.m. London time, with the leisure and industrial sectors also leading losses. The Stoxx Travel Index fell 1.2% as Sodexo SA declined after a broker downgrade, while Bayer AG dropped 2.2% after losing a second appeal of the three jury verdicts finding that the company’s Roundup weed killer causes cancer. European stocks retreated from a record level last week as worries over rising inflation and pricey valuations weighed on the tech sector.
• U.S. equity futures slipped with most stocks on Monday as investors weighed risks to the outlook including inflation and a spike in Covid-19 cases in parts of the world. Contracts on the Nasdaq 100 Index declined following Friday’s rebound. Discovery Inc. shares jumped 16% in premarket trading on a deal to merge media assets with AT&T Inc. Treasuries were little changed while gold climbed to the highest in more than three months. Bitcoin steadied after Elon Musk said Tesla Inc. hasn’t sold from its holdings of the token.
• There seems to little respite in store for Asian stocks, which are being buffeted by a virus resurgence and global investor angst over inflation. The MSCI Asia Pacific Index slumped 3.2% last week and is down 2.7% so far in May, on track for its worst monthly performance since March 2020 — when markets took the biggest hit from the pandemic. The regional benchmark is also trailing MSCI’s broadest measure of global equities for a fourth straight month, and market watchers are citing several reasons why this underperformance may continue.
• Oil was steady as a demand recovery in key regions raised optimism about rising fuel consumption, despite a Covid-19 flare-up in parts of Asia. Futures in New York traded near $65 a barrel while Brent was just under $69 in London. Chinese refiners have churned through record volumes of crude so far this year, but Indian fuel demand continued to weaken in the first half of May. It underscores the uneven rebound that has slowed crude’s rally. The U.S. and China, along with parts of Europe, are recovering strongly from the pandemic as vaccinations accelerate. Brent’s nearest monthly contract’s premium over the next has started widening again in a bullish backwardation structure, signaling a tightening market.
• Gold climbed to the highest in more than three months as bond yields dropped and U.S. retail stalled, while parts of Asia grappled with a spike in coronavirus cases. The yield on 10-year Treasuries extended declines following a report Friday that showed retail sales were essentially unchanged in April, missing expectations for a 1% gain. Federal Reserve Bank of Cleveland President Loretta Mester played down signals from data that she warned will be volatile as the economy reopens and stated that the U.S. central bank’s policy is in a good place right now.
• Sanofi and GlaxoSmithKline Plc reported positive results from a mid-stage study, offering optimism their delayed Covid-19 vaccine could be cleared by the end of the year. U.K. Prime Minister Boris Johnson said the next step out of lockdown must be taken “with a heavy dose of caution” as more coronavirus restrictions are lifted on Monday. India has scaled up inoculations for its 1.3 billion population and Taiwan will ban entry to foreigners. Thailand’s daily Covid cases surged to a record.
• President Joe Biden’s prospects for passing a major infrastructure bill through Congress with bipartisan support — seen unlikely in the wake of his Democrat-only pandemic-relief package in March — are now rising, though disagreements over funding could still scupper a deal. Senate Republicans are set to deliver a revised offer of a package that includes roads, public transportation and airports to the White House as early as Monday. During last year’s presidential campaign, Biden enshrined the aspiration of restoring bipartisanship to American governance. The newfound opening, however, clouds the outlook for the rest of his economic vision: a sweeping expansion of the federal government in providing support to millions of lower-income Americans, financed by higher taxes on companies and the wealthy.
• For JPMorgan Chase & Co., it’s another step toward post-pandemic normal, but for the U.S. financial industry it’s a bellwether. The nation’s largest bank, which often sets norms for the financial world, reopened offices to employees across the U.S. on Monday. The move includes locations in Ohio, Texas and Arizona that — unlike the bank’s New York headquarters — had been left at least partially shut in the wake of pandemic lockdowns. It’s all part of the firm’s plan to call back its entire U.S. workforce, at least on rotations, in early July. In recent days, a growing number of state and federal authorities have eased pandemic restrictions and set dates for reopening office buildings and businesses in the weeks ahead. Their pressure on employers mean JPMorgan’s reopening will probably be watched closely by major financial firms, which in turn may adjust plans depending on how it goes.
• AT&T Inc. agreed to spin off its media operations in a deal with Discovery Inc. that will create a new entertainment company, merging assets ranging from CNN and HBO to HGTV and the Food Network. AT&T will receive $43 billion in cash, debt securities and debt retention, with AT&T shareholders getting stock representing 71% of the new company, the companies said in a statement Monday. Discovery Chief Executive Officer David Zaslav is to lead the new entity. The plan, first reported by Bloomberg News, would combine Discovery’s reality-TV empire with AT&T’s vast media holdings, creating a formidable competitor to Netflix Inc. and Walt Disney Co. It marks a retreat for AT&T’s entertainment-industry ambitions after years of working to assemble telecom and media assets under one roof. AT&T gained some of the biggest brands in entertainment through its $85 billion acquisition of Time Warner Inc., completed in 2018.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the 28th straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $486.3 million in the week ended May 14, compared with gains of $325.2 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $25.2 billion.
• Ryanair Holdings Plc posted a record annual loss, while saying it’s likely to break even this year as vaccination programs allow a gradual easing of coronavirus travel curbs. Bookings have increased significantly in recent weeks, pointing to a strong recovery in the second half, although forward visibility remains “close to zero,” the Irish company said in a statement Monday. That’s made it impossible to provide more meaningful financial guidance. Europe’s biggest discount carrier is counting on lockdown-weary travelers flocking to the beach as U.K. curbs ease, starting with Portugal. Even if the revival transpires, Ryanair reiterated that traffic will remain at the lower end of an 80 million to 120 million passenger range for the year ending next March. Clusters of a more transmissible variant of Covid-19 that’s fed an Indian outbreak also pose fresh risks for the U.K. plan.
• Masaru Tange says the strategy that turned his company into one of Japan’s best-performing stocks may be surprising: He buys smaller firms and boosts their workers’ pay. Tange’s Shift Inc., a software tester, acquires other businesses near the bottom of the industry supply chain and raises their engineers’ salaries. He says he’s able to do this and still charge competitive prices by cutting out layers of companies that serve as middlemen in the outsourcing process. And having more workers leads to higher sales.
• China’s central bank injected medium-term cash into the financial system, in an effort to keep borrowing costs stable as China’s economy continues its recovery from the virus pandemic. The People’s Bank of China added 100 billion yuan ($15.5 billion) of one-year funds with its medium-term lending facility on Monday, matching the amount coming due in a move that was expected by analysts. The authorities kept the interest rate unchanged at 2.95%. By rolling over the maturing funds, the operation is also seen to be supportive of the nation’s liquidity-sensitive stocks and also bonds. The cost on China’s 10-year note was little changed Monday. In the money market, the seven-day repurchase rate rose 19 basis points to 2.19%, near its daily average level over the past year. It recently hit a four-month low.
• The European Union agreed to avoid escalating its dispute with the U.S. over metal tariffs, sparing iconic products such as bourbon whiskey and Harley Davidson motorbikes from a doubling of EU duties next month. At issue is a high-profile disagreement that started in 2018 when former U.S. President Donald Trump imposed duties on steel and aluminum from Europe, Asia and elsewhere citing risks to national security. The EU has since retaliated and tariffs on a range of American products were set to jump to 50% on June 1. Under the agreement with the Biden administration, the EU will refrain from increasing those tariffs and both sides will engage in a dialog about overcapacity in the steel industry, according to a tweet from EU Commissioner Valdis Dombrovskis. Negotiators on both sides of the Atlantic are working to eventually remove the tariffs but are not yet ready to do so, officials have said.
• Israel intensified its attacks on high-ranking militant commanders in the Hamas-ruled Gaza Strip, as well as the group’s network of underground tunnels, rebuffing international pleas to halt its onslaught. The Israeli military reported that a top commander in Islamic Jihad, Gaza’s second-largest militant group, had been killed in the heavy aerial and artillery attacks on Monday, which Israel characterized as strikes on terrorist infrastructure and weapons storage locations. Hamas continued to rain rocket fire on civilian targets in Israel as the fighting entered its second week. Israeli Prime Minister Benjamin Netanyahu vowed on Sunday that Israel would continue to pummel the isolated Palestinian enclave, where about 200 people have been killed since hostilities began last Monday. Gaza health officials say more than 50 children are among the dead.
• Microsoft Corp. conducted an investigation into co-founder Bill Gates’s involvement with an employee almost two decades ago after it was informed in 2019 of his attempt to start a romantic relationship with that person. The board reviewed the matter and held a “thorough investigation” with the help of an external law firm, the software giant said. It didn’t reach a conclusion to the probe because Gates had stepped down before it was completed, Microsoft said. “Microsoft received a concern in the latter half of 2019 that Bill Gates sought to initiate an intimate relationship with a company employee in the year 2000,” Microsoft said in a statement. “A committee of the Board reviewed the concern, aided by an outside law firm, to conduct a thorough investigation. Throughout the investigation, Microsoft provided extensive support to the employee who raised the concern.”
• North America’s sawmills can’t keep up with demand, which has sent wood prices on a meteoric rise. Don’t expect new mills to start popping up though. Executives in the cyclical business of sawing logs into lumber said they are content to rake in cash while lumber prices are sky-high and aren’t racing out to build new mills, which can cost hundreds of millions dollars and take two years to build from the ground up. In doing so they are breaking with conventional wisdom in the commodities business, which states that the cure for high prices is high prices. Usually when prices for raw materials rise, refineries and smelters ramp up, farmers plant larger crops, wells are drilled, mines dug. New supplies flood into the market and prices retreat.
• It’s not just the outlandish returns that some Bitcoiners are bragging about these days. There’s also the yield. At a time when interest rates on conventional bank deposits are pinned to the floor—often below 0.5%— financial technology companies are offering to pay owners of Bitcoin and other cryptocurrencies annual percentage yields of 2% to 6% and sometimes more. You can deposit your coins with a few taps on one of their smartphone apps. What’s the catch? There are several, actually. In addition to the risk you’re already taking in owning crypto, the earnings are paid in cryptocurrencies, too. Token prices could easily fall in value as sharply as they’ve risen in the past year, wiping out whatever yield advantage you’re getting, if you are comparing it to what you could have made investing dollars. And you’re essentially lending companies your crypto without many of the protections that come with a bank account, such as coverage from the Federal Deposit Insurance Corporation.
• Clarivate agreed to acquire ProQuest, a global software, data and analytics provider to academic, research and national institutions for $5.3 billion, including refinancing of ProQuest debt. The payment includes about $4 billion in cash and $1.3 billion in equity. Clarivate has secured a backstop consisting of a $4 billion fully committed bridge facility from Citi and Goldman Sachs & Co. LLC.
• Another collapse of the government mortgage giants Fannie Mae and Freddie Mac wouldn’t cost the taxpayers a dime, at least according to Federal Housing Finance Agency Director Mark Calabria. While his opinion may be debatable, the fact that their lending practices have become more conservative is not. The Mortgage Bankers Association’s conventional index — which tracks credit availability for the programs that cater to the higher-credit buyers usually served by Fannie and Freddie — shows it’s 25% below its trailing five-year average. This reduction was put into overdrive by the pandemic, but it was already heading down after hitting a half-decade peak in November 2019. In addition, last month saw the average debt-to-income ratio for borrowers pooled into newer Fannie and Freddie-guaranteed mortgages at 33.7%, the lowest in at least half a decade, according to Bloomberg’s Collateral Performance Research data. This suggests leverage among new mortgage borrowers has dropped, which means the risk to lend to them has done so as well.
• A severe cyclonic storm is set to slam India’s west coast, home to major refineries and ports, prompting authorities already grappling with a savage second virus wave to evacuate people and patients to safer areas. Cyclone Tauktae, equivalent of a category 3 hurricane, will hit the Gujarat state on Monday evening, with wind speed seen surging as high as 185 kilometers (115 miles) per hour, according to the India Meteorological Department. The “extremely severe cyclonic storm,” which was about 160 kilometers away from the financial hub of Mumbai on Monday morning, may bring heavy rainfall to the affected regions, damage houses and disrupt electricity supply, it said.
• Emerging-market investors are turning more selective as last year’s everything rally splinters under the weight of higher inflation expectations. Exposure to U.S. growth and the impact from higher commodity prices are some of the criteria used by money managers from JPMorgan Asset Management to State Street Corp. Mexico, South Africa and Taiwan rank among the top choices as firms pare back their bullish bets for developing-nation assets, according to recent surveys.
• Ship congestion outside the busiest U.S. gateway for trade with Asia showed glimmers of easing as port officials race to clear a backlog of arriving cargo before peak season begins in about three months. A total of 19 container ships were anchored waiting for entry into Los Angeles and Long Beach, California, as of Sunday, compared with 21 a week earlier, according to officials who monitor marine traffic in San Pedro Bay. The bottleneck has persisted since November, peaking around 40 vessels in early February. Another 18 container carriers are scheduled to arrive over the next three days, with nine of those expected to drop anchor and join the queue.

“The four most dangerous words in investing are: ‘this time is different”.” — Sir John Templeton

*All sources from Bloomberg unless otherwise specified