May 21, 2021

Daily Market Commentary

Canadian Headlines

• Canadian officials escalated efforts to cool the nation’s booming housing market, moving ahead with tighter mortgage qualification rules after the central bank issued a fresh warning against buyers taking on too much debt. Prime Minister Justin Trudeau’s government set a new benchmark interest rate on Thursday afternoon to determine whether people can qualify for mortgages that are insured by Canada’s housing agency. The move matches an April decision by the nation’s banking regulator to do the same for uninsured mortgages. The regulator — the Office of the Superintendent of Financial Institutions — announced earlier Thursday it would implement its new rules June 1. Those steps coincided with a stern warning from Bank of Canada Governor Tiff Macklem in the morning cautioning that Canadians should neither assume interest rates will remain at historic lows nor expect recent sharp gains in home prices to continue.

World Headlines

• European equities gained on Friday as investors mulled the prospect of an economic rebound, with major nations starting to relax lockdowns, against stocks trading near record highs. The Stoxx Europe 600 Index added 0.5% by 11:23 a.m. in London, with more cyclical sectors such as automakers and travel outperforming. Richemont, the maker of Cartier jewelry and IWC timepieces, surged as much as 6.4% after sales topped estimates. European stocks are ending another volatile week as investors mull inflation and valuation risks against the prospect of a speedy economic recovery amid an easing of lockdowns in some countries. In recent days, Italy has proposed phasing out a national curfew and France has reopened restaurants for outdoor dining. The Stoxx 600 is up about 10% this year, led higher by industries seen as more sensitive to the economic recovery, such as banks, automakers and miners.
• U.S. futures rose with stocks on Friday as investor optimism got a boost from strong economic readings and earnings reports. Oil climbed. Contracts on key U.S. benchmarks signaled more equity gains after Thursday’s rebound. Foot Locker Inc. advanced in premarket trading after its quarterly results beat forecasts. Treasury yields were little changed, as was the dollar. Gold hovered around the highest level in more than four months. Bitcoin steadied after a volatile cryptocurrency slump this week. The global economic revival, the risk of a significant pickup in inflation and Covid-19 flareups in some parts of the world continue to shape market moves. Stocks have been volatile this week, with speculative ardor cooling as minutes from the latest Federal Reserve meeting flagged the possibility of a debate at some point on scaling back stimulus measures. Still, better-than-forecast jobless claims data on Thursday buoyed sentiment.
• Asian stocks rose, set to cap a weekly gain, as a recovery in the technology sector helped lift shares in Japan and Taiwan. Chipmakers TSMC and Samsung Electronics were among the biggest boosts to the MSCI Asia Pacific Index, lifted by a tech-driven rebound in the U.S. overnight. A drop in U.S. initial jobless claims shifted investor focus back to prospects for a global economic recovery. A gauge of Asian tech stocks was poised for a weekly gain of over 2.5%, clawing back a sizable chunk of its 5.9% slide last week amid fears of inflation sparked by rising commodities prices.
• Brent crude headed for its biggest weekly drop since March as a potential end to years-long sanctions raised the prospects of Iran ramping up supplies. Futures in London rose near $66 a barrel on Friday, but they remained on track for a 4.1% weekly decline. Benchmark prices climbed as the dollar fell, and prices found technical support at their late-April lows. While Brent topped $70 on Tuesday, the market has dramatically repriced as a deal to lift restrictions on Iran’s oil exports appeared to move closer.
• Gold headed for a third straight weekly gain as the dollar continued to trend down, with investors weighing signs of inflation and economic recovery. Traders mostly shrugged off concerns over Federal Reserve minutes Wednesday that showed some policy makers are open to talking about tapering bond purchases, focusing instead on the U.S. central bank’s accommodative stance. Meanwhile, applications for U.S. state unemployment insurance fell last week to a fresh pandemic low, signaling steady improvement in the job market as remaining business restrictions are lifted. Bullion is trading near the highest level in more than four months amid rising inflation expectations, static Treasury yields and concerns over the resurgence of coronavirus cases in some countries. Holdings in exchange-traded funds backed by the precious metal have resumed an uptrend. On Friday, it edged lower as the dollar strengthened slightly.
• Leaders of the Group of 20 nations were set to pledge unity in the battle against the coronavirus pandemic and prevent future outbreaks. Germany said it had broken the third wave of the pandemic as restaurant terraces opened, while France revised a total case count lower. Moderna said it’s considering making Covid-19 vaccines in Asia. India said a deadly fungal infection considered a secondary ailment of the virus should be designated an epidemic. Singapore stepped up testing after finding 30 new cases, the latest tally in a recent increase. Thailand extended a state of emergency by two months while Australia accelerated its vaccination drive.
• The Biden administration on Thursday issued an executive order aimed at using regulation to limit the threat of climate change to U.S. companies, investors and the financial system, a big step toward bringing the nation in line with the rest of its allies on the issue. The action, however, is more about intention than actual rule-making and it foreshadows a long, technical process that the administration and regulators are feeling their way into, and one in which the White House lacks the power to get what it wants simply through executive fiat. It’s also a process that will provoke resistance from fossil-fuel industries and those in Congress who are warning against regulatory overreach. The move represents an early element of the new administration’s efforts to reduce greenhouse-gas emissions by 50% by 2030, compared to 2005 levels, and make the U.S. a global leader on climate. Under President Joe Biden, the U.S. has rejoined the 2015 Paris Agreement on climate change after his predecessor, Donald Trump, withdrew from the accord.
• Deere & Co., the largest maker of agricultural machinery, boosted its full-year fiscal outlook as surging crop prices and the broader upswing in commodities boosted consumer demand for new equipment. The Moline, Illinois-based company forecast 2021 net income of between $5.3 billion to $5.7 billion, up from a prior range of $4.6 billion to $5 billion, according to a statement on Friday. The company attributed the increase to healthy worldwide demand for farm and construction equipment. The company raised its forecast despite warnings that it will get more difficult to secure parts and components from key suppliers.
• The turbulence in the commodity complex this week looks like a much-needed cooldown, if signals from the $6.3 trillion U.S. ETF industry are anything to go by. With an American economic revival underway, the frenzy for raw materials now accounts for more than half of the 20 best-performing exchange-traded products this year. That’s a rare degree of outperformance for the inflation-sensitive sector. Even after Wednesday’s big swoon, investors have allocated $2.6 billion this month to track everything from lumber and corn to oil as consumer activity picks up, construction surges and supply-chain bottlenecks intensify. Small wonder that issuers are chasing the trend. On Thursday, Aberdeen Standard Investments filed for two broad commodity ETFs and an industrial metals fund. Earlier this week, Tidal ETF Trust filed for the SonicShares Global Shipping ETF, a chunk of which will be allocated to companies transporting commodities in bulk.
• JD Logistics Inc., the delivery arm of e-commerce giant JD.com Inc., has raised about HK$24.6 billion ($3.2 billion) after pricing its Hong Kong initial public offering near the bottom of a marketed range, according to people with knowledge of the matter. The warehousing and shipping company has priced 609.2 million shares at HK$40.36 each, the people said, asking not to be identified as the information is private. It had marketed the shares at HK$39.36 to HK$43.36 apiece. An external representative for the company didn’t immediately respond to a request for comment. The JD.com unit’s debut next week will be closely watched as a gauge of investor demand in Hong Kong’s IPO market, which has cooled because of concerns over rising inflation and weakness in global stocks. It is the second-largest listing in the city this year, after short video company Kuaishou Technology’s $6.2 billion float in February.
• Shanghai United Imaging Healthcare Co., a medical imaging and radiotherapy equipment maker, is weighing a Hong Kong initial public offering that could raise at least $1 billion, according to people familiar with the matter. The company is working with advisers on the prospective listing and is considering going public as soon as later this year, the people said, asked not to be identified as the matter is private. The Shanghai-based firm hired Citic Securities Co. and China International Capital Corp. at the end of last year to prepare for a potential domestic listing on China’s Nasdaq-like STAR board. In April, China’s securities regulator issuedtighter rules for STAR board IPOs, in a bid to stem the tide of firms rushing to satisfy investors’ appetite for technology-related listings.
• Jubilant Palestinians poured into the battle-scarred streets of the Gaza Strip, and the blare of air raid sirens fell silent over Israel after the Israeli military and the Hamas group halted their 11-day conflict on Friday. Loudspeakers across the isolated Palestinian enclave blared “Allahu Akbar,” or “God is Great,” and fighters fired into the air in celebration as a 2 a.m. truce brokered by Egypt went into effect, putting an end to devastating Israeli airstrikes and artillery fire that had pounded the territory relentlessly, killing at least 243 people, many of them civilians. Footage broadcast by Arab networks including Al-Jazeera showed large gatherings of people chanting, honking horns and launching fireworks. Israelis went about their business Friday morning without needing to run for cover from Gaza rocket fire that sowed chaos and killed 12 people, all but one a civilian.
• The U.S. called for a global minimum corporate tax of at least 15%, less than the 21% rate it has proposed for the overseas earnings of U.S. businesses — a level that some nations had argued was excessive. The contrast between the new proposal, released by the Treasury Department Thursday, and the higher rate the Biden administration is seeking to be applied to American companies underscores the difficulty of international talks being led by the Organization for Economic Cooperation and Development. Countries including Ireland have used low business taxes as a key economic development strategy. Negotiators are aiming for a deal this summer.
• Elon Musk spoke warmly of Russia during a Kremlin-sponsored event for students, praising its history of achievements in space and expressing openness to one day building a Tesla Inc. factory in the country. The Tesla chief executive officer took questions for roughly 45 minutes at the invitation of Dmitry Peskov, the Kremlin’s spokesman. Topics the eccentric billionaire covered ranged from his hiring practices to artificial intelligence and the future of human consciousness. “I think we’re close to establishing a Tesla presence in Russia, and I think that would be great,” Musk said Friday. “Over time, we will look to have factories in other parts of the world, potentially Russia at some point.”
• The number of U.K. cases of a worrying coronavirus variant from India more than doubled for a second week as authorities also monitor a new mutation of the virus, adding fresh doubt to U.K. plans to fully unlock the economy. Health officials have now detected 3,424 cases of the B1.617.2 variant first identified in India, Public Health England said Thursday in a statement. That’s up from 1,313 last week, and 520 a week earlier. They’re also investigating a separate variant with an “unusual mutation profile”, with 49 cases logged so far — mainly in Yorkshire, northeast England. Scientists at PHE say there is currently no evidence to suggest vaccines will be less effective in protecting people against severe illness from the India variant, but believe it could be more transmissible than the fast-spreading Kent variant that led to the country’s third lockdown in January.
• A U.S. proposal for a global minimum corporate tax of at least 15% met with an enthusiastic reception in Europe, bringing the world closer to a deal on sweeping changes to how much multinationals pay, and to which governments. “This is really a big progress,” German Finance Minister Olaf Scholz said as he arrived for a meeting with European counterparts in Lisbon, minutes after his French counterpart had also offered a positive reaction. “We will really have the chance that in this summer this deal and agreement that we were working for so long can happen.”
• Alpha Services and Holdings SA, the parent company of Greece’s Alpha Bank, is planning a capital increase as it speeds up efforts to clean up the bank’s balance sheet and increase lending under the European Union recovery program. The Athens-based lender “has engaged JP Morgan and Goldman Sachs Bank Europe SE to explore the possibility of raising growth capital of approximately 0.8 billion euros ($1 billion),” Alpha said in a statement Friday. The goal is is to take advantage of positive market conditions and strengthen the bank’s business, while preserving value for shareholders, according to the statement.
• China is set to extend its dominance in the global oil market as planned tax adjustments spark a chain reaction, prompting processors to boost crude imports and raise refinery run rates. From mid-June, the top crude importer will introduce a levy on inbound flows of three oil-related items — bitumen mix, light-cycle oil, and mixed aromatics — that are often used to make low-quality fuels or processed in refineries. Faced with the prospect of costlier products, Chinese buyers are on the hunt for barrels of suitable crudes as replacements.
• China Resources Holdings Co. is weighing a Hong Kong initial public offering for its supermarket business CR Vanguard that could raise as much as $2 billion, according to people familiar with the matter. The state-owned conglomerate has held initial talks with potential advisers on the share sale plan, which could happen as soon as next year, the people said, who asked not to be identified as the discussions are private. China Resources Holdings is also looking to raise funds this year for the supermarket chain before the public offering, the people said. The size of the pre-IPO fundraising could be about $300 million to $400 million, according to one of the people.
• UniCredit SpA shocked investors with a decision to skip a coupon payment on $3.6 billion of hybrid bonds due later this month, eroding confidence in the Italian bank after it had earlier indicated it planned to honor the commitment. The Milan-based lender will avoid paying out around 30 million euros ($36.7 million) on the quarterly coupon due May 25 because it reported a net loss for last year, one of the conditions under which it can miss obligations on the 2.98 billion-euros of notes, according to a statement emailed to Bloomberg.
• With U.S. home prices rocketing higher, the average loan size within newly produced mortgage bonds is moving higher, too. And whenever homeowners find themselves with incentive to refinance, the higher the balance on their mortgage, the more likely they are to do so. One example of this trend can be seen by comparing Fannie Mae majors pools. The 30-year 2.50% MA4019 majors, which was issued in April 2020 and sported an average loan size of $323,000 versus the most recent Fannie Mae 30-year 2.5% MA4326 majors, which has an average loan size of $351,000. That’s a 9% increase in just one year. While the pools have weighted-average-coupons of 3.42% and 3.26%, respectively — so neither has incentive to refinance at this time — should rates move lower again their prepayment speeds could jump quickly.
• Commerce Secretary Gina Raimondo said the Biden administration is exploring how to help semiconductor producers and buyers share supply chain information to alleviate the global chip supply crisis, and urged Congress to swiftly pass legislation to fund domestic production. “There’s a lack of transparency right now in the supply chain,” Raimondo said in a call with reporters Thursday following a day of meetings with companies. “We are trying to figure out what role the government can and should play in increasing that information sharing and forecasting so we can alleviate the short-term crunch.” Raimondo convened executives from the biggest chipmakers, automakers and technology giants as a global semiconductor shortage weighs on those industries. The summit drew so much interest that it had to be split into two separate sessions, people familiar with the planning said.

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” — Robert G. Allen

*All sources from Bloomberg unless otherwise specified