May 16th, 2019

Daily Market Commentary

• NEWS
• Canadian Headlines
  • China confirmed it has formally arrested two Canadians detained since December, in cases that have further strained tensions between the countries. Michael Kovrig, who works for the International Crisis Group, and entrepreneur Michael Spavor “were arrested in accordance with the law,” Chinese Foreign Ministry spokesman Lu Kang told regular news briefing Thursday in Beijing. Kovrig was arrested on suspicion of spying on state secrets for foreign entities and other intelligence crimes, while Spavor was held on suspicion of stealing state secrets to foreign entities, Lu said.
  • President Donald Trump pardoned former media tycoon Conrad Black on Wednesday, formally forgiving the Hollinger International Inc. founder of a conviction for mail fraud and obstruction of justice. Black, 74, who served three and a half years in prison after a federal jury found that he illegally diverted money that belonged to stockholders to himself, founded a company that at one time owned some of the world’s most best-known newspapers, including the Chicago Sun-Times, The Daily Telegraph and the Jerusalem Post.
  • Robots are taking over farms faster than anyone saw coming. The first fully autonomous farm equipment is becoming commercially available, which means machines will be able to completely take over a multitude of tasks. Tractors will drive with no farmer in the cab, and specialized equipment will be able to spray, plant, plow and weed cropland. And it’s all happening well before many analysts had predicted thanks to small startups in Canada and Australia. While industry leaders Deere & Co. and CNH Industrial NV haven’t said when they’ll release similar offerings, Saskatchewan’s Dot Technology Corp. has already sold some so-called power platforms for fully mechanized spring planting. In Australia, SwarmFarm Robotics is leasing weed-killing robots that can also do tasks like mow and spread. The companies say their machines are smaller and smarter than the gigantic machinery they aim to replace.

   

• World Headlines
  • European stocks resumed their decline Thursday as investors remained skeptical over the outlook for international trading relations. Luxury stocks weighed on the consumer sector as Burberry Group Plc’s full-year results left analysts wanting, and a benchmark tracking auto shares pared Wednesday’s jump that followed news of a delay to the imposition of tariffs on vehicles and parts entering the U.S. The White House targeting Chinese telecommunications equipment firm Huawei Technologies Co.’s access to American markets and suppliers dealt the latest blow to market sentiment.
  • U.S. equity futures turned higher on Thursday and Treasuries erased a gain as trade headlines continued to whipsaw global markets. European stocks also reversed a drop, while the region’s bonds held their advance. A rally in chemicals and mining companies helped pull the Stoxx Europe 600 into the green, Contracts on all three of the main U.S. benchmarks advanced as traders digested President Donald Trump’s moves to curb Huawei Technologies’ access to the American market. Earlier equities fell in Tokyo and slumped in Seoul, while gauges in Hong Kong and China climbed. Treasuries were steady.
  • It’s only been about two weeks since President Donald Trump upended trade talks between the U.S. and China, sending global markets into a tailspin, but there have been cracks emerging in Asia markets long before that. After racing out to a hot 8.2% start through the first two months of the year, the benchmark MSCI Asia Pacific Index has struggled to follow up on those gains, even as hopes remained high for a trade deal before the renewal of hostilities this month. That rally is quickly fading into memory as the index’s 0.5% advance Wednesday was its best one-day performance in six weeks, and hasn’t seen a gain of 1 percentage point or more since the start of April. As our Bloomberg Markets Live Blog notes, there have been six drops of 0.5% or more in that same period, hinting at the bigger swings to the downside to come as the index trended downward.
  • Oil climbed for a third day — the longest run of gains in three weeks — as falling U.S. gasoline stockpiles supported the demand outlook and simmering tensions in the Middle East kept investors on edge. Futures in New York rose as much as 1.1% after adding 1.6% over the previous two sessions. American gasoline inventories dropped by 1.12 million barrels last week, more than three times as much as forecast, official data showed Wednesday. In the Persian Gulf, Saudi Arabia restarted its main cross-country oil pipeline after a drone attack by Iran-backed rebels, while the U.S. ordered all non-emergency staff to leave Iraq due to an “increased threat stream.”
  • Precious metals held steady as investors see some potential relief from the U.S. on tougher auto tariffs even as Washington continues to intensify trade tensions with China. The White House on Wednesday initiated a two-pronged assault on China: barring companies deemed a national security threat from selling to the U.S., and threatening to blacklist Huawei Technologies Co. from buying essential components. The fallout from that move could have implications for critical 5G wireless networks across the world with a knock-on impact on global growth as a result.
  • The pound headed for the longest losing streak against the euro since the turn of the century as rising U.K. political risks fanned concern about the nation’s ability to achieve an orderly Brexit. Sterling fell for the ninth day against Europe’s single currency, with Prime Minister Theresa May facing renewed calls from party colleagues to step down just as she prepares to take her Brexit deal to Parliament again. It dropped for the fifth day to a three-month low versus the dollar as global investor sentiment was weakened amid an escalating U.S.-China trade conflict.
  • New York denied a key permit for a $1 billion Williams Cos. shale gas pipeline, dealing a critical blow to a project that would shuttle fuel to customers in New York City and Long Island. The New York State Department of Environmental Conservation said Wednesday that the pipeline would result in water quality violations, including those caused by kicking up hazardous metals and disturbing seabed habitats. The denial was “without prejudice,” meaning the company can reapply. Williams said in a separate statement that the DEC had raised “a minor technical issue” with the application, which it will resubmit quickly.
  • Walmart Inc. reported first-quarter sales in line with what analysts had been expecting, but concerns are growing that Chinese tariffs could soon force the retailer to raise its famously low prices or sacrifice its bottom line. Comparable sales for Walmart stores in the U.S. rose 3.4% last quarter — its best for the period in nine years — matching analysts’ estimates. Average ticket, or how much each shopper spent, drove the gain more than increased transactions for the fifth straight quarter. Sam’s Club’s same-store sales fell short of estimates, dragged down by reduced tobacco sales.
  • The U.S. housing slowdown is turning out to be a gift to apartment landlords. After all, those people who aren’t buying still need somewhere to live. Data from Zillow released Thursday shows that home-price appreciation continued to slow in April from a year earlier, driven in part by softening West Coast metros like San Jose and Seattle. The company also reported the first nationwide monthly price dip in more than seven years — albeit just 0.1%. At the same time, rent growth accelerated, climbing by 2.6% on an annual basis, after a lull in 2018.
  • Investors in India are bracing for an extreme event risk next week: Prime Minister Narendra Modi failing to retain power. The optimistic tone for the nation’s assets has fizzled out as the trade impasse combines with concern about Modi’s ability to repeat his landslide 2014 victory amid a resurgent opposition, farm distress and a job crisis. A result that upsets the market’s base case view — the ruling party winning with a slim majority — could lead to an adverse reaction, analysts say. The currency, Asia’s top performer in March, has fallen 1.6% to 70.34 since President Donald Trump’s tweets rekindled the trade spat with China earlier this month. The S&P BSE Sensex Tuesday halted a nine-session losing streak, avoiding the longest-ever stretch of losses, only to decline again on Wednesday as sentiment remains fragile.
  • The Trump administration is pulling out the big guns in its push to slow China’s rise, with potentially devastating consequences for the rest of the world. The White House on Wednesday initiated a two-pronged assault on China: barring companies deemed a national security threat from selling to the U.S., and threatening to blacklist Huawei Technologies Co. from buying essential components. If it follows through, the move could cripple China’s largest technology company, depress the business of American chip giants from Qualcomm Inc. to Micron Technology Inc., and potentially disrupt the rollout of critical 5G wireless networks around the world.
  • Electric vehicles may be less prone to catch fire than gas guzzlers, but recent blazes involving Tesla Inc. and NIO Inc. cars in Greater China are prompting the industry to take steps to alleviate concerns from potential customers in the sector’s biggest market. Worries heightened after reports emerged of a fire involving a Tesla in a Hong Kong parking lot. Weeks earlier, a video on Chinese social media platforms showed a Tesla bursting into flames in a Shanghai garage. Separately, NIO said last month that one of its ES8 vehicles caught fire in the northwestern city of Xi’an while being repaired.
  • Citigroup Inc., Royal Bank of Scotland Group Plc and JPMorgan Chase & Co. are among five banks that agreed to pay European Union fines totaling 1.07 billion euros ($1.2 billion) for colluding on foreign-exchange trading strategies. Citigroup was hit hardest with a 310.8 million-euro penalty, followed by fines of 249.2 million euros and 228.8 million euros for RBS and JPMorgan, the European Commission said in a statement on Thursday. Barclays Plc was fined 210.3 million euros and Mitsubishi UFJ Financial Group Inc. must pay nearly 70 million euros as part of the settlement with the EU’s antitrust regulator.
  • Nestle SA has entered exclusive talks to sell its skincare business to a group led by EQT Partners for 10.2 billion Swiss francs ($10.1 billion) in what would be one of the biggest private-equity deals this year. The discussions with the consortium, which is co-led by the Abu Dhabi Investment Authority, are moving ahead as the world’s largest food company wraps up a hotly contested sale process for its Cetaphil moisturizers and Proactiv acne treatments. The unit had 2018 revenue of 2.8 billion francs.
  • Colfax agreed to sell its Air and Gas Handling business (also known as Howden) to KPS Capital Partners for an enterprise value of $1.8 billion including $1.66 billion in cash and $140 million in assumed liabilities and minority interest. Air & Gas Handling unit had about $90 million of segment operating profit & $200 million of adjusted EBITDA in 12 months ended March 29
  • President Donald Trump will give the EU and Japan 180 days to agree to a deal that would “limit or restrict” imports into the U.S. of automobiles and their parts in return for delaying new auto tariffs, according to a draft executive order seen by Bloomberg. According to the order, which people familiar with the matter say Trump is expected to sign this week, the administration has determined that imports of cars into the U.S. present a threat to national security because they have hurt domestic producers and their ability to invest in new technologies. Shares of BMW AG surged as much as 5% Wednesday, while Japanese automakers were traded slightly lower in Tokyo. Korean automakers including Kia Motors Corp. advanced in early trading.
  • The owners of the Ritz-Carlton New York, Central Park are exploring a sale after receiving interest from at least two buyers, according to people familiar with the matter. Owners Westbrook Partners LLC and Korea Investment Corp are in discussions with Qatar’s Katara Hospitality and Trinity White City Ventures about a potential sale of the 259-key hotel, said the people, who declined to be named because the talks are private. The would-be buyers have sought opinions from appraisers and other service providers, the people said.
  • Arkema SA agreed to buy a U.S.-based supplier of mining-additives from Golden Gate Capital for $570 million as part of Chief Executive Officer Thierry Le Henaff’s drive to expand in higher-margin specialty chemicals. Purchasing ArrMaz Custom Chemicals Inc. will add a portfolio of defoamers and other so-called surfactants also used in road construction and agrochemicals generating annual sales of $290 million, the Colombes, France-based company said in a statement on Thursday, confirming an earlier report by Bloomberg. The price equates to 10.8 times ArrMaz’s earnings before interest, taxes, depreciation and amortization.
  • Cisco Systems Inc. rallied in pre-market trading Thursday after the company reported third-quarter results that beat expectations and gave a bullish outlook for the current quarter. The guidance was seen as particularly reassuring to analysts, who noted that it came against the backdrop of a trade dispute between the U.S. and China. Bloomberg Intelligence wrote that it “suggests product momentum remains healthy despite the tepid geopolitical backdrop.” At least four firms raised their price targets, although the response to the quarter was not entirely enthusiastic, with analysts noting concerns over valuation and orders growth.
  • Mexico’s state oil company is set to receive added tax breaks to help the company reverse long-term production declines and reduce its debts, according to its chief executive officer. The country’s Finance Ministry is seeking a new tax strategy for Petroleos Mexicanos starting next year that will provide an “important reduction” in the company’s contributions, Octavio Romero said in an interview, declining to give an estimate for the savings. The gradual cuts, to be spread over five years, would complement incremental tax breaks announced in February that were worth 90 billion pesos ($4.72 billion) over six years. He said the new tax regime will be announced in “the coming days.”

*All sources from Bloomberg unless otherwise specified