May 1st, 2020

Daily Market Commentary

Canadian Headlines

  • Canadian equities retreated Thursday after a four-day surge while U.S. stocks slumped amid dire economic warnings and more dismal data. The S&P/TSX Composite Index fell 2.9%, the most since April 21. Energy and materials led all eleven sectors lower. For the month of April, the index closed higher by more than 10%, the most since 2009. The initial shock of the coronavirus shutdown has eased. Now comes an equally hard part for thousands of business owners: figuring out their next move as Canada crawls toward reopening its economy. Oil climbed for the second day as global production cuts deepened and signs of a recovery in physical markets emerged. Gold futures fell for a fifth straight session after European Central Bank moves to stem the impact of virus weren’t as aggressive as some traders had anticipated. Canada’s budget deficit will mushroom to C$252.1 billion($181 billion) in 2020-21 on Covid-19 spending and plummeting oil prices, according to estimates from the Parliamentary Budget Officer.
  • Prime Minister Justin Trudeau’s government is ready to name a new leader at the Bank of Canada, according to people familiar with the matter, ending weeks of speculation about its choice. Finance Minister Bill Morneau is scheduled to make the announcement Friday morning, the people said on condition they not be identified because they weren’t authorized to discuss the matter. The timing of the government’s release could change, the sources added, without revealing who has been selected. Governor Stephen Poloz’s term ends June 2. Poloz’s top deputy, Carolyn Wilkins, who has played a key role in the central bank’s response to the crisis, was one of two finalists for the job, according to the other people familiar with the selection process who spoke to Bloomberg News last week. While the second name has yet to emerge in public, BlackRock Inc.’s Jean Boivin is no longer in contention.
  • Like many companies around the globe, Canadian apparel giant Gildan Activewear Inc. pivoted to making hard-to-find personal protective equipment during the pandemic. It’s now considering making the temporary business permanent. Montreal-based Gildan, which usually makes T-shirts, underwear and other basic garments, said April 8 it would start producing non-medical face masks and isolation gowns at its idle Honduras factories to help respond to shortages. Three weeks later, orders keep coming in, and the manufacturer sees opportunities supplying North American customers that have long relied on Asian imports.
  • The initial shock of the coronavirus shutdown has eased. Now comes an equally hard part for thousands of business owners: figuring out their next move as Canada crawls toward reopening its economy. More than 76,000 companies applied for the Trudeau government’s 75% wage subsidy in three days, accessing a program that has promised more than C$70 billion ($50 billion) in aid. Businesses have received billions in interest-free loans backed by the government, and some will get help paying their rent. But before they restart, companies face another unprecedented exercise. Even with all that government help, they must assess how much of their activity will resume and how many people they can afford to bring back.

World Headlines

  • In Europe, most European markets were closed for a holiday, except the U.K. and Denmark. The U.K.’s FTSE 100 Index dropped 2.1%, dragged lower by energy and mining shares. The vast majority of stocks were in the red. The volume of trading on the Stoxx Europe 600 Index was about half the 30-day average.
  • U.S. equity futures sank as investors began May pondering dreary corporate news and the persistent economic turmoil caused by the coronavirus. The dollar rose with Treasuries as a risk-off mood prevailed on what is a holiday in many major markets. Contracts on the Nasdaq 100 index led the declines, with futures on the S&P 500 and Dow Jones Industrial Average also falling in the wake of sobering comments from Inc. and Apple Inc. about the pandemic’s impact. Shares of both slipped in the pre-market. Treasuries climbed while gold fell, heading for its worst week since mid-March. The dollar was on track for its first increase since last week versus major peers.
  • Japanese stocks had their biggest slump in a month after cloudy earnings announcements from global technology giants and high U.S. unemployment claims amid the coronavirus pandemic. All industry groups fell, with electronics and auto makers dragging on the Topix index the most, while the Nikkei 225 Stock Average dipped back below 20,000.
  • Oil headed for its first weekly gain in a month as global production cuts start to lift physical markets and demand shows tentative signs of recovery. Futures in New York traded above $18 a barrel and are up 9% this week. OPEC+ is officially starting its unprecedented 9.7 million barrels a day of output reductions from Friday. The price of real crude is reacting to the curbs, with key grades from the Caspian to the North Sea trending higher in recent days. There are also signals that the peak of the demand destruction may have passed. U.S. government data showed gasoline consumption rose by the most in almost a year last week, while rush-hour traffic in some of the biggest cities in China has recovered to pre-virus levels.
  • Gold headed for its largest weekly decline since mid-March as European nations offered cautious signals they’ve passed through the peak of the coronavirus outbreak and as U.S. cases rose at the slowest pace this month. Base metals declined. U.K. Prime Minister Boris Johnson said the country was through the worst of the outbreak and pledged to deliver plans to lift the lockdown, while Italy, France and Germany all also outlined proposals to gradually ease restrictions. The European Central Bank stepped up its response to the coronavirus crisis by cutting funding costs for banks, but refrained from boosting its bond-buying program.
  • Exxon Mobil Corp. posted its first quarterly loss in at least 32 years amid the economic and industrial devastation wrought by the Covid-19 contagion. The worst may be yet to come. The world’s largest oil explorer aside from Saudi Aramco reported a $610 million loss on Friday. The result is just a precursor of even starker figures to come because the earnings period ended on March 31 — three weeks before crude prices tumbled into negative territory for the first time in history.
  • U.K. manufacturing contracted more than expected and households paid down credit as the coronavirus pandemic spread. IHS Markit’s April Purchasing Managers Index fell to the weakest reading since the series began in 1992 and below an initial flash reading published last month. Every sub-index declined from March — including output, new orders and employment — as a nationwide lockdown shuttered businesses and brought activity to a standstill.
  • Prime Minister Boris Johnson pledged a “comprehensive plan” to lift the lockdown that has crippled the economy, as he declared the U.K. has now passed the peak of the coronavirus outbreak. In his first press conference since recovering from Covid-19, Johnson promised to set out details next week on how businesses can get back to work, suggesting that people will be encouraged to wear face masks as the restrictions are lifted.
  • The euro-area economy could shrink as much as 12% this year and fail to return to its pre-coronavirus size until the end of 2022, according to the European Central Bank. In a range of scenarios published on Friday, a day after it announced more measures to help banks fund companies and households, the ECB predicted an uncertain recovery from the crisis. Gross domestic product might rebound by only 4-6% next year. The report is the latest to show how early predictions of a strong rebound in the second half of the year have given way to uncertainty over the timing of the recovery, as countries plot different paths to ease lockdowns.
  • Apple Inc. reported quarterly revenue that grew 1%, but didn’t provide a forecast for the first time in more than a decade, sparking concern that performance will suffer later this year. The shares fell 2.6% in extended trading. Chief Executive Officer Tim Cook said Apple experienced a “very depressed” period in late March and early April, in the depths of the Covid-19 pandemic, but saw a “pickup” in the second half of this month. The company raised its dividend and expanded a share buyback plan by $50 billion.
  • The coronavirus outbreak may last for two years and won’t be controlled until about two-thirds of the world’s population is immune, a group of experts said in a report. Russia had another surge in new cases a day after Prime Minister Mikhail Mishustin said he had tested positive. Moderna Inc., which is developing experimental vaccines, said it had entered an agreement aimed at manufacturing a billion doses a year. Inc. told staff who can work from home that they can do so until at least October, Reuters reported. Hubei province, the epicenter of China’s outbreak, will lower its emergency response, while Japanese Prime Minister Shinzo Abe said he would probably extend the emergency by about a month. Singapore outlined a plan to expand healthcare facilities for foreign workers as cases jumped.
  • Inc. Chief Executive Officer Jeff Bezos normally uses the company’s earnings report to extol the virtues of Alexa or the benefits of Prime. On Thursday, he told investors to hold on tight as his company navigates “the hardest time we’ve ever faced.” The largest U.S. online retailer saw profit shrink and said it may incur a loss in the current quarter as it boosts spending to keep logistics operations running smoothly during the coronavirus pandemic. “Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit,” Bezos said Thursday in a statement reporting Amazon’s results. “But these aren’t normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on Covid-related expenses getting products to customers and keeping employees safe.”
  • President Donald Trump is exploring blocking a government retirement fund from investing in Chinese equities considered a national security risk, a person familiar with the internal deliberations said. The Thrift Savings Plan — the federal government’s retirement savings fund — is scheduled to transfer roughly $50 billion of its international fund to mirror an MSCI All Country World Index, which captures emerging markets, including China. The Federal Retirement Thrift Investment Board overseeing the fund made a decision in 2017 that the money should be moved by mid-2020. Opponents of the transfer in recent weeks have engaged in a last-minute effort to stop it.
  • The length of almost two football fields, the cargo ship Jupiter Spirit arrived in Los Angeles’ harbor on April 24 after an almost three-week journey from Japan, ready to unload its cargo of about 2,000 Nissan Armada SUVs, Rogue crossovers and Infiniti sedans in a quick, half-day operation. But when the ship, operated by Nissan Motor Co.’s freight arm, got about a mile offshore, its captain was ordered to drop anchor. And there the ship remained for almost a week — a floating symbol of an unprecedented logjam as nearby storage lots covering hundreds of acres overflowed with vehicles that Americans suddenly have little desire to purchase. There are gluts of all shapes and kinds forming in the U.S. nowadays, a testament to the scope of the economic pain the coronavirus is inflicting. Slaughterhouses are killing and tossing out thousands of pigs a day, dairy farmers are pouring away milk, oil sellers were paying buyers to take barrels off their hands last week, and now, brand-new cars are being left adrift at sea for days.
  • Ryanair Holdings Plc will cut 3,000 jobs and said it will challenge some 30 billion euros ($33 billion) in state aid being doled out to keep its European competitors afloat during the coronavirus pandemic. The Irish discount carrier on Friday added to a mounting employment tollthat includes 12,000 cuts at British Airways and 5,000 at SAS AB. The reductions represent about 15% of Ryanair’s workforce, and would include pilots and cabin crew. The remaining staff will take a 20% pay cut, Chief Executive Officer Michael O’Leary said in an interview with Bloomberg TV. O’Leary expects demand to bounce back slowly, while warning that government bailouts of airlines will spur ticket discounts, worsening the effects of weak demand on pricing and industry profit.
  • Royal Bank of Scotland Group Plc is the latest bank to book a hefty charge as the coronavirus pandemic hits borrowers’ health and finances. The bank set aside 802 million pounds ($1 billion) for soured loans, almost 10 times the charge it booked a year ago. RBS’s rivals Barclays Plc and Lloyds Banking Group Plc booked bigger impairments this week as the industry braces for a surge in struggling borrowers. “Although the outlook remains extremely uncertain, we approach the crisis from a position of strength, with confidence in our balance sheet and focus on our strategic priorities.” Chief Executive Officer Alison Rose said in a statement on Friday.
  • With meat-processing workers falling victim to the coronavirus—resulting in shuttered plants and supply problems—Americans are starting to see poorly stocked aisles where once beef and pork were plentiful. At the same time, the link between industrial meat production and deadly human viruses has become more widely understood. The global crisis, in other words, is turning into a big opportunity for the plant-based protein sector. Beyond Meat, one of the bigger names in food technology, saw its shares jump 49% last month. Meanwhile, venture capitalists have been pouring money into smaller companies, some focused on lab-grown meat analogues as well as plant-based substitutes. In mid-April, U.S. sales of these products were double that of the same period last year.
  • The coronavirus pandemic has turned a routine European Union review of restrictions on imported steel into something with much higher stakes as EU-based producers push for greater protection. The spotlight is on EU import curbs introduced almost two years ago to prevent a controversial 25% U.S. levy on foreign steel from diverting global shipments to the European market and flooding it. The European “safeguard” measures involve a 25% tariff on EU imports of 26 types of steel ranging from stainless hot-rolled and cold-rolled sheets to rebars and railway material when the shipments exceed a three-year average.
  • Tokyo inflation plunged into negative territory for the first time since 2017 as collapsing oil prices and the coronavirus dealt heavy blows to the Bank of Japan’s long fight to prevent deflation’s return. Consumer prices in the capital excluding fresh food, a leading indicator of national trends, fell 0.1% in April from a year earlier, slowing a half percentage point from March, data from the ministry of internal affairs showed Friday. Economists had predicted positive inflation of 0.1%. Lower prices for gasoline, hotels and overseas travel weighed on the index
  • Chevron Corp. is slashing capital spending for the second time in five weeks, accelerating supply curbs and warning that profits will suffer as the oil-industry spiral deepens. Full-year spending will be as much as 13% lower than previously planned, the world’s No. 3 oil explorer by market value said in a statement Friday. Chevron also plans to shut down as much as 400,000 barrels of daily output and retire 60% of the drilling rigs it has under lease. The measures come after Chief Executive Officer Mike Wirth first took drastic steps to conserve cash and slow output growth as the Covid-19 outbreak paralyzed economies and swelled a worldwide supply glut.
  • The coronavirus shutdown left Los Angeles public schools with a problem: 100,000 students, or nearly one in six, lacked the computer equipment and internet connections needed for online instruction as classrooms shut. “Many of our families are struggling to make ends meet and cannot afford to do this on their own,” Superintendent Austin Beutner said in a March 23 message to the schools community. “But their children deserve the same opportunity those in more affluent communities have.” A growing number of politicians of both parties in Washington are coming to agree. The Covid-19 crisis, by laying bare the so-called “digital divide” at school systems and communities across the country, may achieve what years of lobbying by interest groups has failed to deliver: significant new federal funding to narrow the gap.
  • Moderna Inc., one of the leaders among U.S. companies developing experimental vaccines against the coronavirus, entered a pact with Lonza Group AG aimed at manufacturing 1 billion doses a year. The companies announced a global agreement under which the Swiss chemical and pharmaceutical company will ramp up output of the proposed vaccine, which is based on a novel technology that relies on genetic material called mRNA. They expect the first batches to be produced in the U.S. in July. The agreement is one of several partnerships being struck between drugmakers as they rush to bring protection against Covid-19 to the market. On Thursday, AstraZeneca Plc announced an agreement to make an experimental coronavirus vaccine developed by the University of Oxford, eyeing production capacity for 100 million doses by the end of the year.
  • Gilead Sciences Inc. may spend $1 billion on its breakthrough new treatment for Covid-19 this year alone, Chief Executive Officer Daniel O’Day said. How much revenue — if any — the company expects to generate is another matter. Details from a U.S. government study and a separate trial conducted by the company itself suggest remdesivir may become the first medication approved to treat the novel coronavirus, which has sickened 3.2 million people worldwide and killed 233,000. Gilead is still in the early stages of developing and getting approvals for the medication to treat the pathogen, which first emerged in China less than six months ago. The company has pledged to donate 1.5 million vials of the drug, its entire current supply, while O’Day said it is working with other major pharmaceutical companies to boost production of the medication, which must be given intravenously. The unprecedented pace and nature of the operation has left investors and the analysts who scrutinize corporate performance scrambling to understand what the business will ultimately look like.

*All sources from Bloomberg unless otherwise specified