May 20th, 2020

Daily Market Commentary

Canadian Headlines

• Canadian equities rose after Monday’s Victoria Day Holiday closure while U.S. stocks fell for the first time in four sessions after reports circulated that Moderna Inc.’s vaccine study, which was credited in part for Monday’s rally, didn’t produce enough critical data to assess its success. The S&P/TSX Composite Index gained 1.7%, with 10 of eleven sectors rising. Health-care shares rallied while real estate also posted a strong session. Information technology was the only laggard. Oil gained in a day of choppy trading as investors weighed supply cuts and a demand rebound against an ominous economic outlook from the Federal Reserve.
• Canadian and Alaskan crude that normally travels to the U.S. West Coast is finding a market in China, where demand is almost back to pre-pandemic levels. The Sofia became the second oil tanker in less than a month to ship Alaskan oil to Qingdao, China, when it left Valdez over the weekend, data compiled by Bloomberg show. At about the same time, the Maria Princess left Vancouver also bound for Qingdao, becoming at least the third oil tanker to sail from British Columbia for China this year. Draft readings indicate the ships were full when they departed.

World Headlines

• European equities rose, reversing an earlier decline to track U.S. futures higher, as investors assessed slowing infection rates and shrugged off doubts about a U.S. vaccine’s progress. The Stoxx 600 Index was up 0.3% by 11:43 a.m. London time. The benchmark was down as much as 0.8% earlier after reports highlighted the preliminary nature of Moderna Inc.’s experimental coronavirus vaccine. Defensives such as utilities, tech and health-care shares led gains, while cyclicals including miners and industrial shares reversed losses. Europe’s equity rebound from mid-March lows has stumbled in May amid bleak economic and earnings reports, while concern is growing about a trade war have also soured sentiment. Still, easing restrictions and stimulus measures have tempered the pessimism.
• U.S. equity futures extended gains on Wednesday and European stocks turned higher as investors weighed positive signals on the outlook for markets against fresh outbreaks of the coronavirus. Treasuries and the dollar dipped. Contracts on the S&P 500 and Nasdaq 100 indexes rose further in the European morning, with traders looking beyond Tuesday’s reports that questioned progress in Moderna Inc.’s coronavirus vaccine.
• Elsewhere, equity benchmarks in Japan and India saw the bulk of gains in a mixed Asian session, with Shanghai and Hong Kong in the red. In Japan, Tokyo Stock Exchange was among stocks which surged amid speculation that it may be a contender to join the Nikkei 225 equity index. South Africa’s rand soared as much as 2% against the dollar, with the country’s central bank seen slashing its policy rate to a record low on Thursday to bolster the economy.
• Oil rose for a fifth day as investors weighed signs the market is rebalancing against what’s still a precarious economic outlook. Futures in New York for July delivery gained to above $32 a barrel. A report that a virus vaccine study didn’t produce enough critical data to assess its success added some caution to markets, which have been buoyed by a rebound in demand and sharp reductions in supply. Data in the U.S. and Europe pointed to declining stockpiles. The oil market is in much better shape than it was a month ago as output cuts have kicked in and pockets of demand have emerged. There was no repeat of April’s plunge below zero when the West Texas Intermediate contract rolled over, with the June futures trading at a premium to July before they expired, suggesting concerns the U.S. would run out of storage have eased.
• Gold climbed for a second day as optimism over a coronavirus vaccine ebbed, boosting demand for havens. Silver hit the highest in nearly three months. Investors are seeking safety, following a wave of dismal economic outlooks, as they try to gauge the effect of a gradual easing of virus lockdowns. Reports late Tuesday questioning Moderna Inc.’s coronavirus vaccine added to concerns, after riskier assets had started the week on the front foot amid hopes for a Covid-19 antidote. Net inflows into exchange-traded funds backed by silver topped 18.5 million ounces over Monday and Tuesday, heading for the best week since March, according to Bloomberg data.
• Blackstone Group Inc. is seeking to renegotiate the terms of its planned 1.3 billion-euro ($1.4 billion) offer for Dutch lender NIBC Holding NV, people with knowledge of the matter said. The buyout firm aims to secure a lower price after the coronavirus pandemic affected the bank’s business prospects, according to the people, who asked not to be identified because the information is private. Blackstone is still interested in acquiring NIBC and isn’t currently planning to walk away from the proposed purchase, the people said. Blackstone agreed in February to acquire NIBC, whose biggest investors are private equity firm JC Flowers & Co. and Dutch family office Reggeborgh Invest BV. NIBC and its major shareholders would only consider entering negotiations on potential new terms after Blackstone files offer documents for approval with the Dutch financial regulator, which were due Tuesday, one of the people said.
• Brazil reported a record day for infections, making it the world’s fastest-growing virus hot spot, and President Donald Trump is considering a ban on Brazilians traveling to the U.S. Russia added the fewest cases since the start of the month and recoveries outpaced new infections for the first time. Chinese doctors are seeing the virus manifest differently in its new cluster of cases, suggesting that the pathogen may be changing and complicating efforts to stamp it out. Millions were evacuated in India and Bangladesh before the biggest cyclone in two decades, hampering efforts to curb the outbreak. Trump said the U.S.’s 1.5 million cases were a “badge of honor” for the country’s testing efforts. Republicans are pushing for the World Health Organization’s director-general and China’s ambassador to the U.S. to testifybefore the House virus oversight subcommittee.
• Britain sold bonds with an average yield below zero for the first time, sharpening a debate on negative rates hours before testimony from the head of the Bank of England. The U.K. Debt Management Office raised 3.75 billion pounds（$4.6 billion) by tapping existing bonds maturing in 2023. While the yield at minus 0.003% is little surprise to market watchers — given that the existing bonds were already trading at roughly the same level — what makes the auction precarious is the timing. That’s because if Governor Andrew Bailey repeats his opposition to negative interest rates when testifying before Parliament’s Treasury Select Committee Wednesday at 2:30 p.m. in London, buyers could see the value of their gilt holdings plummet.
• President Donald Trump delivered a pair of personal and political gestures this week that seized on his core voters’ mistrust of international institutions and skepticism of science, heightened amid the coronavirus pandemic. Late Monday, the president threatened to withdraw from the World Health Organization, escalating his accusation it’s beholden to China. The move came hours after he revealed he was taking an anti-malaria drug, hydroxychloroquine, to protect himself from coronavirus — an unproven therapy the president has promoted despite outcry from the medical community. While Trump said he’s taking the drug out of concern he may be exposed to people infected by the virus in his job, both gestures were in line with sentiment among Republicans. As the pandemic ravages the economy, the president has increasingly resorted to brazen appeals to the slice of voters who represent his most avid supporters.
• ByteDance Ltd.’s valuation has risen at least a third to more than $100 billion in recent private share transactions, people familiar with the matter said, reflecting expectations the owner of video phenom TikTok will keep pulling in advertisers despite the Covid-19 pandemic. Stock in the world’s most valuable startup has changed hands recently at a price that suggests its value has risen more than 33% from about $75 billion during a major round of funding two years ago, the people said, requesting not to be named because the issue isn’t public. Some of those transactions valued the Chinese company at as much as $140 billion, one person said. The trades are private transactions and may not fully reflect broader investor expectations.
• Dow Inc. has activated its local emergency center in Michigan and “is implementing its flood preparedness plan which includes the safe shutdown of operating units on site,” the company said after two dams failed upstream of its Midland, Michigan, headquarters. Michigan Governor Gretchen Whitmer, who is already managing a public health crisis in one of the states that has been hard hit by Covid-19, announced an emergency declaration in response to the dam collapse. She told people to evacuate the area around Midland, urging those in the flooding zones to get to a shelter.
• Treasury Secretary Steven Mnuchin said he plans to use all of the $500 billion that Congress provided to help the economy through direct lending from his agency and by backstopping Federal Reserve lending programs. Mnuchin said he has pledged to use $195 billion of those funds so far, and will use the rest after determining how best to deploy the money to help losses associated with the coronavirus pandemic.
• Amazon.com Inc. faces a crucial test on Wednesday with the release of its first original big-budget video game. The reception from homebound gamers will signal whether the company can become a force in a $159-billion global industry dominated by the likes of Microsoft Corp. and Activision Blizzard Inc. Crucible is a free-to-play PC game in which teams hunt down opponents and creatures on a distant planet. Amazon plans to start selling another game in August. Called New World, it will put players on a mysterious island where they will battle one another and hunt. The company is also working on The Lord of The Rings game and some unannounced projects. Crucible will make money by selling in-game items as well as seasonal battle passes. New World should fetch $40 for a standard edition, and $50 for a deluxe edition, including additional in-game items and a digital art book.
• Britain’s flagship job support program may have dulled the economic pain of the coronavirus crisis, but it is storing up a future problem for Prime Minister Boris Johnson: with many employees furloughed, businesses haven’t got enough staff to prepare for Brexit. “We can’t contact many of the people we need to,” said Jon Swallow, co-founder of Jordon Freight Ltd., based at Felixstowe, Britain’s largest container port. “The people currently dealing with the paperwork, the systems, they’re on furlough.” Swallow’s experience highlights a major challenge for the U.K. as the relationship with its largest trading partner faces a disruptive overhaul at the same time as a severe recession triggered by the pandemic. At the end of the year, about half of Britain’s imports and exports will require new customs documentation and processes due to its departure from the European Union, extra work for which firms are ill-prepared.
• Turkey secured a fresh source of foreign exchange from Qatar, leaning again on the gas-rich Gulf nation that’s consistently come to the rescue as part of an alliance born after a coup attempt against President Recep Tayyip Erdogan. Turkish and Qatari central banks are tripling the limit of their existing swap deal to $15 billion to facilitate “bilateral trade in respective local currencies and to support the financial stability of the two countries,” according to a statement Wednesday. The lira briefly swung to a gain after the announcement, before erasing its advance to edge lower against the dollar.
• One of the U.K.’s top universities is moving all face-to-face lectures online for the coming academic year because social distancing measures will probably remain in place for the foreseeable future. Cambridge University, which traces its history back more than 800 years, said that it may be possible to host smaller groups in person, as long as they conform to requirements around social distancing.
• China denounced a rare message from Secretary of State Michael Pompeo to Taiwan’s president as “wrong and very dangerous,” as tensions between the two sides flared anew over U.S. overtures toward the democratically ruled island. The Ministry of National Defense said in a statement Wednesday that the military would “take all necessary measures to firmly safeguard” China’s sovereignty, while the country’s foreign ministry separately threatened retaliation. The warnings came after Pompeo broke with past U.S. practice Tuesday and issued a statement congratulating Tsai Ing-wen ahead of her inauguration to a second term as Taiwan’s president.
• The Bank of Thailand cut its benchmark interest rate to a fresh record low and said it was ready to use additional policy tools if needed with the economy expected to shrink further. By a 4-3 vote, the central bank lowered the policy rate Wednesday by 25 basis points to 0.5%, its third cut this year. All but three of 24 economists in a Bloomberg survey correctly predicted the decision, with the others expecting no change. The central bank “looks ready to use other, albeit unspecified tools, which implies other measures aside from policy easing, especially as the room for lower rates is declining,” said Mitul Kotecha, a senior emerging markets strategist at TD Securities in Singapore.
• Only 2,900 foreign visitors entered Japan the month of April, a drop of more than 99.9% versus the year earlier, as the extent to which the coronavirus pandemic has frozen a once-booming tourism sector became clear. The drop was the largest on records dating back to 1964, the Japan National Tourism Organization said. Japan on April 3 expanded entry restrictions to 73 countries, and now bars everyone except citizens from entering if they arrive from one of 100 nations. Just 3,900 Japanese left for abroad, with the government strongly discouraging travel to almost all parts of the world.
• Target Corp. fell 1% in early trading amid concerns over its weakening profitability as more of its sales are coming from lower-margin food and household essentials, rather than the cheap-chic apparel and home decor it’s famous for. Gross margins narrowed in the first quarter to 25.1%, missing the average analyst estimate and well below the 29.6% turned in the same quarter a year ago. Other discounters like Walmart Inc. face the same concerns, but apparel makes up a bigger slice of Target’s total revenue than it does for Walmart. Target Chief Executive Officer Brian Cornell made clear in a call with reporters that he can’t get a read on the U.S. consumer — another worrying sign for the retailer.
• Chinese doctors are seeing the coronavirus manifest differently among patients in its new cluster of cases in the northeast region compared to the original outbreak in Wuhan, suggesting that the pathogen may be changing in unknown ways and complicating efforts to stamp it out. Patients found in the northern provinces of Jilin and Heilongjiang appear to carry the virus for a longer period of time and take longer to test negative, Qiu Haibo, one of China’s top critical care doctors, told state television on Tuesday. Patients in the northeast also appear to be taking longer than the one to two weeks observed in Wuhan to develop symptoms after infection, and this delayed onset is making it harder for authorities to catch cases before they spread, said Qiu, who is now in the northern region treating patients.
• Halliburton Co. is reducing its dividend by 75% as part of a cost-cutting effort to help weather a slump in the energy industry. The Houston-based oilfield-services company said in a statement Wednesday that its second-quarter dividend will be 4.5 cents a share on the company’s common stock. That compares with the 18-cent dividend last quarter. The move comes as shale explorers have slashed U.S. oil drilling to the lowest level in more than a decade as they struggle to navigate a historic market crash that has pushed several into bankruptcy. Oil prices have plummeted by about half since the start of the year as much of the world remains shut down in an effort to stop the spread of the coronavirus, obliterating demand for fuel.
• Johnson & Johnson’s decision to phase out the talc-based version of its iconic baby powder may signal the company is moving out of litigation-defense mode over allegations the product causes cancer and preparing for a global settlement of almost 20,000 pending claims. The move, characterized by J&J officials Tuesday as a “commercial decision,” allows the world’s largest maker of health-care products to create a deadline for future claims that the powder causes ovarian cancer and mesothelioma, legal experts say. J&J may be weary after six years of litigation with people who claim asbestos in its talc — or simply the mineral itself –- caused the two types of cancer. Plaintiffs say the company knew of the product’s cancer risks by the early 1970s and failed to warn consumers. A California jury asked in 2018 whether it could force J&J to put a warning on the product.

*All sources from Bloomberg unless otherwise specified