May 25, 2021

Daily Market Commentary

Canadian Headlines

• The so-called financed emissions from British-headquartered banks and asset managers, as well as the U.K. arms of international banks such as Credit Suisse Group and JPMorgan Chase, totaled 805 million tons of CO2 in 2019, almost double the nation’s annual carbon emissions, according to the report, published Tuesday. The analysis, which Greenpeace and WWF say is the first comprehensive account of emissions stemming from financial activity in the U.K., shows the CO2 emissions from the City of London to be greater than those from countries including Canada. It’s through their loan books and investment portfolios that banks and asset managers are major contributors to global warming

World Headlines

• European stocks rose on Tuesday as comments from the Federal Reserve eased worries about inflation, boosting tech shares, while a real estate deal also lifted sentiment. The Stoxx Europe 600 Index was up 0.4% as of 11:33 a.m. London time. Germany’s DAX Index and the Swiss Market Index rallied to fresh records as the markets reopened after a holiday. The DAX’s gains were helped by a 15% jump in property firm Deutsche Wohnen SE after rival Vonovia SE agreed to buy it for 19 billion euros ($23 billion). Equities have been volatile in May, whipsawing between investor worries about faster inflation and a Covid-19 resurgence in parts of Asia. Stocks are rising after Fed officials reiterated they expect transitory rather than lasting price pressures from the U.S. economic rebound. Also helping ease concerns of overheating are China’s increased efforts to combat soaring commodity prices.
• U.S. equity futures rose Tuesday along with European stocks after Federal Reserve officials played down the risk of persistent inflation. A gauge of dollar strength against a basket of peers headed for the lowest level since January. The Fed comments aided sentiment, as officials reiterated they expect transitory rather than lasting price pressures from the U.S. economic rebound. Treasury yields ticked lower. Emerging-market stocks climbed as China’s CSI 300 gauge surged more than 3% following Beijing’s efforts to talk down raw material costs.
• Asian stocks rose, on course for their longest streak in five weeks, as technology shares rebounded after U.S. Federal Reserve officials tried to soothe concerns about inflation. Communication services, which include China’s Tencent and Japan’s Nintendo, was the best-performing sector in Asia on Tuesday, followed by information technology. Asia’s gain mirrored Wall Street’s performance on Monday, when comments by Fed officials aided sentiment for growth stocks. The Fed’s Lael Brainard, Raphael Bostic and James Bullard said price gains resulted from bottlenecks and supply shortages should prove temporary. The U.S. 10-year Treasury yield retreated to 1.6% on Monday.
• Oil snapped two days of gains as investors weighed talks of higher Iranian supply against the prospect of a continued recovery in demand. West Texas Intermediate futures dropped below $66 a barrel Tuesday after climbing more than 6% in the previous two sessions. Talks between Iran and world powers will continue in Vienna this week to resolve outstanding issues on a nuclear accord, which may pave the way for the removal of U.S. sanctions on crude flows from the Persian Gulf nation.
• Gold continued to hover near the highest in more than four months as investors weighed comments by Federal Reserve officials who tried to soothe concerns about inflation. The metal was little changed on Tuesday, while the dollar sank to the lowest since January amid broadly improved sentiment in markets. Talking about inflation, Fed officials Lael Brainard, Raphael Bostic and James Bullard said price gains seen as the economy reopens should prove temporary. Gold is close to erasing this year’s decline as investors turn more bullish on the metal, with holdings in bullion-backed exchange-traded funds rising in recent weeks. While market-based measures of inflation expectations have eased lately, traders remain cautious about price pressures, which if sustained could push central bankers to tighten monetary policy.
• Riding a rising stock price, a splashy new model intro and a friendly presidential visit, new Ford Motor Co. Chief Executive Officer Jim Farley faces his biggest test yet: Explaining his strategy for making the 118-year-old automaker relevant in the electric age. Farley on Wednesday convenes the company’s long-awaited Capital Markets Day, where investors and analysts hope he details a vision for embracing an all-electric future that rivals the audacious goal that General Motors Co.CEO Mary Barra set out. She pledged to ditch the internal combustion engines by the middle of the next decade. The stakes could not be higher. Consultant KPMG recently predicted that one or two of the world’s top automakers will fail to navigate the transition to electric vehicles and cease to exist. Ford has an image as an EV laggard, trailing GM and Tesla Inc.
• Amazon.com Inc. is poised to announce an acquisition of the Metro-Goldwyn-Mayer movie studio as soon as Tuesday, according to a person familiar with the matter, marking the e-commerce giant’s biggest push yet into Hollywood. Amazon is in talks to pay almost $9 billion for the business, said the person, who asked not to be identified because the deliberations are private. The discussions — first reported last week — could still fall apart, and it’s possible that the price or timing changes. The agreement would bring a vast library of movies and shows to Amazon, which operates the Prime Video streaming service. MGM’s catalog includes the James Bond, Pink Panther, RoboCop and Rocky franchises, as well as films such as “The Silence of the Lambs.”
• German residential property firm Vonovia SE agreed to acquire rival Deutsche Wohnen SE for about 19 billion euros ($23 billion) in the biggest-ever takeover in European real estate, a deal that risks further stoking tensions over affordable housing. The takeover, the year’s biggest in Europe, would reshape Germany’s property industry. The country’s two largest residential landlords control more than 500,000 apartments and risk raising further concerns about the market power of big property owners. German landlords have faced intense public pressure over the past few years over rising prices, particularly in Berlin. Activists in the nation’s capital have targeted Deutsche Wohnen in particular with a referendum that’s seeking to force the city to buy out large apartment owners.
• Backed by the U.S., European Union leaders moved to impose new sanctions on Belarus over the forced landing of a Ryanair Holdings Plc jet and the arrest of a dissident journalist. “This is an attack on democracy, this is an attack on freedom of expression and this is an attack on European sovereignty,” Ursula von der Leyen, head of the European Commission, told reporters. She mentioned additional sanctions “on individuals that are involved in the hijacking but this time also on businesses and entities that are financing this regime.” Calling the incident “a direct affront to international norms,” U.S. President Joe Biden welcomed the EU decision. In a statement, he said he’s asked advisers “to develop appropriate options to hold accountable those responsible.” National Security Adviser Jake Sullivan spoke by phone with exiled Belarusian opposition leader Sviatlana Tsikhanouskaya Monday.
• The U.S. State Department said Americans should avoid traveling to Japan, where a state of emergency in several cities has fueled doubts about Tokyo’s plans to host the Olympics in less than two months. Malaysia’s daily rise in coronavirus cases is following an exponential trend, Health Director-General Noor Hisham Abdullah warned. The infections could “trigger a vertical surge” and the country must prepare for the worst, he said, as Malaysia overtakes India in per capita daily cases. Hong Kong said employers, companies and mall owners could offer incentives for people to get vaccinations, as the government seeks to encourage inoculations by a reluctant populace. China is offering to arrange vaccine shipments to Taiwan and may consider sending medical experts, according to a Xinhua report.
• Bitcoin traded lower on Tuesday as prices pulled back from a double-digit percentage rally, stoked by Elon Musk’s effort to bolster the token’s green credentials on Twitter. The largest digital currency slipped 4% to trade at $37,500 as of 6:21 a.m. in New York, following a 16% jump on Monday. The wider Bloomberg Galaxy Crypto Index and tokens including Ether also dropped. The Tesla Inc. billionaire has roiled the token’s price this month, triggering a selloff by criticizing its energy profile and suspending Bitcoin payments. Heightened regulatory rhetoric on cryptocurrencies from China also pressured the sector.
• Bowery Farming Inc., the indoor-agriculture company whose name is derived from the Dutch farms that once thrived in Manhattan, raised $300 million in a funding round that sets its value at $2.3 billion. The C series funding was led by Fidelity Management & Research Co. and included investment from celebrities like singer Justin Timberlake, actor Natalie Portman and chef Jose Andres. It brings the total raised by the company to $472 million, according to a statement. Other participants include GV, which is the investment arm of Alphabet Inc., General Catalyst and Temasek. New York-based Bowery has rapidly expanded its brick-and-mortar presence, with its 13 types of leafy greens and greens currently sold in 850 stores that include retailers such as Safeway, Walmart and Whole Foods Market. E-commerce sales have quadrupled since January 2020, the grower said.
• President Joe Biden is set to meet privately Tuesday with the family of George Floyd one year after his death, with negotiators working on policing legislation in Congress still stuck on how to hold law enforcement officers accountable for excessive use of force. The three central players in the discussions — Democratic Senator Cory Bookerof New Jersey, GOP Senator Tim Scott of South Carolina and Democratic Representative Karen Bass of California — all say they are making progress, though an agreement could yet be weeks away. Biden surprised lawmakers when he urged them in his April 28 address to Congress to finish work on the legislation by the anniversary of Floyd’s death at the hands of a White Minneapolis police officer, according to an aide familiar with the negotiations. But with the talks at a crucial juncture, the White House hasn’t applied pressure to meet a hard deadline.
• European Union leaders are poised for a wrangle over how to distribute the burden of the EU’s plan to stem climate change. The bloc’s heads of government will discuss how to calculate national emissions-reduction targets outside the EU carbon market at the second day of a summit that began on Monday in Brussels. With emissions prices surging to records, they will also debate an idea considered by the European Commission to extend carbon trading to heating and transport, an initiative under fire from some lawmakers, industry and consumer organizations. “There will be very substantive discussions today, particularly in terms of the wider issue of effort sharing among member states as we seek to devise the mechanisms by which we will achieve even more ambitious targets in relation to climate change from now right up until 2030,” Irish Prime Minister Micheal Martin said before the talks on Tuesday.
• Shares in Poland’s largest utility rose on news that talks between Polish and Czech leaders were progressing, boding well for a deal to resolve a court case threatening to idle a strategic power plant. PGE SA jumped as much as 4.7% on Tuesday after Polish Prime Minister Mateusz Morawiecki said the two countries were on the cusp of a settlement, and pared gains when Czech Premier Andrej Babis said that his country wouldn’t withdraw the lawsuit yet as talks continue. The case poses a big risk for Poland, the European Union’s most coal-dependent country, as it threatens power supplies to 3 million households. It may also further sour relations with Brussels at a time Warsaw is desperate for more funds from the bloc to finance its green revolution.
• A Dutch court verdict against Royal Dutch Shell Plc will determine whether it has a legal responsibility for climate change, in a case that will be watched by Big Oil executives globally. A panel of judges in a lower court in The Hague will rule on Wednesday in a case being followed closely by environmental campaigners too. While the verdict is only legally binding in the Netherlands, it’s set to be scrutinized as a new area of litigation and may guide deliberations by judges elsewhere. Shell was sued by Milieudefensie, the Dutch arm of Friends of the Earth, whose lawyers spent two weeks in court earlier this year arguing that the company is violating human rights by extracting fossil fuels and undermining the Paris Agreement’s aim of limiting temperature increases to less than 1.5 degrees Celsius.
• A powerful cyclone is set to slam into India early on Wednesday, the second in less than two weeks, with authorities evacuating more than one million people at a time when the nation is facing the world’s worst outbreak of Covid-19. Cyclone Yaas, equivalent to a category 3 hurricane, will cause heavy rains in the eastern states of West Bengal and Odisha, with wind speeds as high as 185 kilometers (115 miles) per hour, according to the India Meteorological Department. Sea levels may increase four meters above regular tides and inundate low-lying areas, it said. West Bengal has so far shifted about 900,000 people to various relief centers, Mamata Banerjee, the state’s chief minister told reporters Tuesday. About 370,000 people, including state government officials, police, army officers, rehabilitation workers and volunteers, are working together to handle the situation, she said.
• Goldman Sachs Group Inc. received approval from Chinese regulators to set up a wealth management joint venture in the world’s second-largest economy to go after an asset pool it estimated will surpass $70 trillion by the end of this decade. Goldman Sachs Asset Management will hold 51% in the venture, while the wealth arm of Industrial & Commercial Bank of China Ltd., the world’s largest bank by assets, will own the remainder, the firms said on Tuesday. Financial groups are rushing to capitalize on the opening of China’s $54 trillion financial industry. Goldman, JPMorgan Chase & Co and UBS Group AGare adding staff and expanding their footprint in everything from investment banking to asset management. Most foreign financial institutions have identified wealth management as a prime focus with investable assets estimated to double over the next few years.
• The convulsions that rocked U.S. money markets in the early days of the pandemic are spurring a new push to overhaul the rules once and for all — if regulators and traders can agree on what’s broken and how to fix it. Some point to the cash-like funds that buy swaths of short-term corporate paper, and left companies in a hole when an investor exodus halted new purchases last year. Others say these funds are scapegoats, and the real problem lies with the banks that arrange these IOUs but can’t backstop them. Others, meanwhile, argue that money-market blowups are all but inevitable, and regulators simply need to prepare accordingly.
• Deutsche Bank AG is moving about a quarter of its corporate bank’s U.K. staff to offices in the European Union and Asia as it looks to reduce costs at the division. The changes will see about 100 jobs move to cities like Berlin, Dublin, Frankfurt and various cities across Asia, according to people familiar with the matter, who asked not to be identified discussing private matters. While some London-based staff can reapply for their jobs in the new locations, they will be required to take a pay cut. “We remain strongly committed to the U.K., which will continue to be an important center for our corporate bank as well as our other divisions,” Deutsche Bank, which employs more than 7,000 people in Britain, said in a statement. “It will continue to serve our many U.K. corporate bank customers and to provide services to our clients globally.”
• Morgan Stanley Chief Executive Officer James Gorman said he expects the U.S. Federal Reserve to begin tapering its bond buying toward the end of this year and start raising rates in early 2022, well ahead of market expectations. “My personal view is rates are likely to rise in the early part of next year, and not in 2023 which is currently the projection,” Gorman said at an online conference in Tokyo Tuesday. “The Federal Reserve will be driven by whatever their numbers tell them. I am just giving you my opinion.” Gorman said for now the Fed remains cautious and doesn’t think there will be long-term inflation pressure. Yet signs of inflation are rising, he said.
• Cargill Inc., the commodity superpower that’s the largest private U.S. company, is emerging as one of the biggest winners of the boom in global agricultural markets as it barrels toward its most profitable year ever in its 156-year run. The company made almost $4.3 billion in net income during the first nine months of its fiscal year, according to data released by the trading house to tap the bond market. That figure already surpasses its best ever total annual profit. Many in the market suspected that Cargill was performing well in the commodity boom, but this is the first time that actual data has become available. Cargill broke with a more than two-decade tradition in 2020 and stopped releasing its results publicly. It still shares financial results with its bankers and others. Ahead of a bond sale last week, the company opened its books to credit investors and credit rating agencies, disclosing the extent of its earnings.
• Tuesday morning’s home price index is forecast to show a big jump and it probably won’t be the last. The extreme scarcity of homes available for sale — a direct result of the collapse in housing starts over the last decade — suggests the current home price inflation may be sustainable. The S&P CoreLogic Case-Shiller home price index is expected to see a 12.5% rise compared to the same time last year. The latest report came in at 11.9%, the fastest increase since March 2014. Supply and demand matters, and 2010 to 2019 saw just 683,000 of new single-family homes built on an annualized basis, the lowest level of any decade since the 1950s. Considering that the U.S. population of about 330 million is far larger than it was in the 1950s, this has had consequences.
• Mexico is on a nationalistic campaign for energy independence and needs more fuel. To that end, its state-owned oil company Petroleos Mexicanos has struck a deal for full control of a Houston-area refinery it shares with Royal Dutch Shell Plc. Pemex, as the Mexican explorer is known, made an unsolicited bid for Shell’s 50% stake in the facility in Deer Park, Texas, and agreed to pay $596 million, according to a statement Monday. The transaction will be fully financed by the Mexican government and is scheduled to close during the fourth quarter. Shell will retain control of an adjacent chemical plant. Mexican President Andres Manuel Lopez Obrador, known as AMLO, needs to fulfill campaign promises to restore the country’s self-sufficiency in energy. He’s risen to power partly through his criticism of free-market economic policies that he says ransacked the country’s oil riches. AMLO has placed Pemex at the heart of Mexico’s energy revival, and has promised no gas price hikes for consumers in the meantime.
• Senate Republicans are planning to make a new overture to President Joe Biden on infrastructure spending, and said they’ll continue trying this week to strike a bipartisan deal after rejecting the White House’s latest counteroffer of $1.7 trillion as too costly. Mississippi Senator Roger Wicker said that the GOP would be willing to spend $1 trillion over eight years — a figure well above what they said past. He said Republicans are “fleshing out the numbers” and hopes to have “a sensible offer” by the end of the week.

“Formal education will make you a living; self-education will make you a fortune.” — Jim Rohn

*All sources from Bloomberg unless otherwise specified