May 26, 2021

Daily Market Commentary

Canadian Headlines

• Canadian shares rose to a record after a comeback in information technology and cannabis stocks. The S&P/TSX Composite Index rose 0.2%, with eight of 11 sectors higher. The U.S. moved to set up a dispute-settlement panel to review Canada’s dairy quotas, which Washington alleges undermine the ability of American dairy exporters to sell a wide range of products to Canadian consumers.
• Bank of Montreal’s fiscal second-quarter earnings beat estimates as the waning Covid-19 crisis allowed the lender to set aside less for souring loans and gave a lift to the company’s personal and commercial banking businesses. In Bank of Montreal’s U.S. personal and commercial banking unit, profit rose 60%, and in Canada it more than doubled, driven by higher loan income and lower expenses. Vaccination progress in the U.S. and Canada is signaling that the pandemic may end without an expected deluge of souring loans. Bank of Montreal set aside C$60 million ($50 million) in provisions for credit losses last quarter. That compares with C$1.12 billion in provisions a year earlier and is less than analysts’ C$219 million average estimate for set-asides.
• Justin Trudeau is beginning to sketch out a plan to reopen the U.S. border, but Canadians don’t appear keen to rush it. And when travel does resume, they overwhelmingly agree proof of vaccination should be mandatory. Nearly half of respondents in an Angus Reid Institute poll released Wednesday said the world’s longest undefended frontier should remain closed until at least September. More than three quarters said they would support a vaccine passport. Canada’s border with the U.S. has been closed to most non-essential traffic for more than a year to limit the spread of Covid-19. But with the Liberal government’s vaccine campaign accelerating, Trudeau is facing calls from business groups and the main opposition Conservatives for a concrete reopening plan.

World Headlines

• European stocks hovered near a record as gains in travel shares were tempered by a drop in banks. The Stoxx Europe 600 Index was up less than 0.1% as of 11:18 a.m. in London, almost wiping out an earlier gain of 0.4% as Swedish lenders slid on the prospect of a new tax. Banks were the worst performers, dragged by Svenska Handelsbanken AB, SEB AB and Swedbank AB. European equities are hovering near a record high at the end of a volatile month, when investors moved between fears that faster inflation will spur reduced stimulus, and optimism over the economic recovery. The Stoxx 600 has regained steam in recent sessions, helped by reassuring comments from the Federal Reserve and the European Central Bank.
• American equity futures rose on Wednesday as more central-bank officials joined the chorus predicting that inflationary pressures are transitory, soothing new concerns raised by the latest U.S. economic data. Contracts on the S&P 500 and Nasdaq 100 signaled stocks could move higher today following a drop in U.S. benchmarks Tuesday after home-sale and consumer confidence data suggested rising prices are taking a toll. Treasuries trimmed Tuesday’s rally and the dollar was steady, with attention now turning to tomorrow’s jobs data for more clues on the outlook for the economy. Signs of quickening inflation are giving investors pause for thought as they consider the outlook for the exceptional stimulus buoying markets. Still, central bankers around the globe are playing down the risk of rising prices. The question is how long the Fed and other central banks can keep stimulative monetary policy in place if economic data continue to show price pressures.
• Asian stocks rose for a fifth day, with the regional benchmark on course for its longest winning run in over a month, as a weaker dollar added to the appeal of local assets. The MSCI Asia Pacific Index climbed above its 50-day moving average on Wednesday, a sign that the region’s stocks have steadily recovered from a slump in early May. Recent comments from Fed officials that current price gains are temporary also helped ease concerns about rising inflation. The Bloomberg Dollar Spot Index fell as much as 0.2% in its third day of declines before paring some losses. The gauge is hovering near its year-to-date low. A weaker greenback tends to be beneficial for Asian shares if it signals higher risk appetite and is seen as a positive for growth in the region’s emerging economies, many of which rely on imports priced in dollars.
• Oil held steady as investors weighed signs of an improving demand outlook in some regions against the prospect of more crude supply flowing from Iran. Futures in New York traded near $66 a barrel, little changed for a second day. An industry report showed lower U.S. inventories ahead of the summer driving season. Meanwhile China is poised to buy more cheaper crude from Russia, its appetite growing as the nation leads an uneven Asian recovery in consumption. World powers are conducting their fifth round of talks to revive a nuclear agreement with Iran that could pave the way for a lifting of sanctions. That may unleash a flood of Iranian barrels stashed on tankers at sea.
• Gold notched a fresh four-month high as another Federal Reserve official talked down prospects for inflation, piling pressure on Treasury yields. Signs of inflation would “prove to be largely transitory,” Fed Vice Chair Richard Clarida said in a Yahoo! Finance interview. That echoed a number of recent dovish comments from the U.S. central bank, and sent the yield on 10-year notes to the lowest in two weeks. On Wednesday gold edged higher after breaching the psychological barrier at $1,900 an ounce, which may have triggered technical buying.
• The European Union attacked AstraZeneca Plc’s vaccine supply “failure” and demanded an urgent order for millions more doses in the latest round of a bitter legal dispute over alleged broken promises by the drugmaker. In the U.K., Prime Minister Boris Johnson’s government was forced to backtrack over its attempt to restrict travel to coronavirus hotspots in England where the so-called Indian variant is spreading. Hong Kong may donate vaccines to countries more in need of them as local demand for Pfizer Inc.-BioNTech SE’s shots ebbs. Taiwan blamed China’s intervention for a missed vaccine deal with the pharma partners.
• Chinese gaming giant NetEase Inc.’s music streaming arm has filed for an initial public offering in Hong Kong as the Tencent Holdings Ltd. rival ratchets up competition in online content. The Hangzhou-based firm has submitted a listing application for Cloud Village Inc. to the Hong Kong stock exchange, according to a filing on Wednesday. Cloud Village holds NetEase’s music streaming platform in China and also operates streaming and advertising through the platform. The filing didn’t provide details of the share sale. An IPO of the music unit could raise about $1 billion, according to a person familiar with the matter, who asked not to be identified as the information is private. Jiemian and IFR reported the size of the offering earlier Wednesday. A representative for NetEase declined to comment.
• The biggest shareholder in Nordea Bank Abp offloaded another chunk of its stake as it moves ahead with a planned exit from the Nordic region’s largest bank. Sampo Oyj sold 162 million shares in Nordea to institutional investors for 8.50 euros each, equivalent to 4% of the bank, reducing its holding to 11.9%, it said on Wednesday. The sale brought in gross proceeds of almost 1.4 billion euros ($1.7 billion). The divestment has been on the cards since November, though Sampo only made clear last week it was intending to sell the entire holding, due in part to a Finnish tax quirk. As a result, Sampo will offload all its shares in the bank within 12 months of its stake dropping below 10%.
• JPMorgan Chase & Co. stopped running a public bond sale mid-way through the marketing process after it was unable to source sufficient demand at a particular price, according to people familiar with the matter. The bank, along with BNP Paribas SA, was mandated to sell a 75 million-euro ($92 million) deal for automotive component manufacturer Adler Pelzer Holding GmbH earlier this month. But when the transaction priced, Adler named only BNP Paribas as the bookrunner. This unusual development in the capital market shows that there are limits to what investors are willing to pay despite their hunger for yield. The deal, which will be added to Adler’s existing 350 million euro bond, took weeks to get off the ground because investors were overwhelmed by the record amount of junk bond sales and passed on an offering that would be small and too potentially illiquid to trade.
• Bitcoin’s explosive moves are stoking the volatility of U.S. stock futures in haywire trading days, according to Singapore’s DBS Group Holdings Ltd. In a study that concludes the world’s biggest token is no longer a fringe asset class, DBS’s Chief Economist Taimur Baig and Macro Strategist Chang Wei Liangwrote that S&P 500 contracts tend to register bigger swings after Bitcoin spiked up or down by 10% in the span of an hour. They analyzed four such trading days — Dec. 28, Jan. 4, Jan. 29 and May 19 — as examples of extreme Bitcoin volatility, and compared the relationship to S&P 500 futures. The study showed Bitcoin and the S&P 500 are more positively correlated following a large crypto move, registering as 0.26 versus 0.19 in normal conditions.
• A global agreement that could reshape the tax landscape for the biggest corporations is approaching a crucial first stage as the Group of Seven nations hone in on an accord that might feature both a minimum rate and encompass digital giants. If finance ministers due to meet virtually on Friday and in person next week can find enough common ground, that could pave the way for a wider consensus to form within the Group of 20, building a foundation for the worldwide agreement that is in negotiators’ sights.
• India evacuated more than 2 million people as a powerful storm hit the east coast on Wednesday, causing extensive damage at a time when the nation is battling the world’s worst outbreak of Covid-19. Cyclone Yaas destroyed more than 300,000 houses in West Bengal and affected 10 million people, the state’s Chief Minister Mamata Banerjee told reporters. River embankments have been breached, damaging some crops and fisheries and livestock farms, she said. The state has evacuated about 1.5 million people to safer areas. Neighboring Odisha has moved more than 500,000 people to relief centers where authorities have asked people to maintain social distancing to check the spread of the coronavirus. News agencies reported that several boats, shops and houses were damaged in the state and scores of trees were uprooted.
• India may need to borrow more for a second straight year to compensate its states for their revenue loss due to a shortfall in a nationwide consumption tax collection, according to people with knowledge of the matter. The additional borrowing requirement is estimated at 1.58 trillion rupees ($21.7 billion) in the fiscal year started April 1, said the people, who asked not to be identified citing rules. A panel on goods and services tax will meet on Friday to discuss compensation to states, among other issues.
• Covid-19 isn’t the only danger at the Tokyo Olympics. Climate change is adding another risk as intense heat and high humidity threaten the health and performance of athletes, according to a U.K.-based association. Athletes are increasingly being asked to compete in environments that are becoming “too hostile” for the human body, the British Association for Sustainable Sport (BASIS) said in a report released Wednesday titled “Rings of Fire: How Heat Could Impact the 2021 Tokyo Olympics.” The impact is likely to be felt this summer in Japan, which has experienced record-breaking heat waves in recent years. Tokyo’s mean temperature has climbed by 2.86 degrees Celsius since 1900, more than three times as fast as the world’s average, the report said.
• Euroclear mistakenly credited some UniCredit SpAbondholders with coupon payments after the bank decided to skip the installment, causing investor confusion and unease for the lender. The European firm, which specializes in the settlement of securities transactions, is now seeking to reverse the credits, according to a statement on Wednesday. It said no actual payments were made because of the “internal processing error” and that the credits were blocked until confirmed as final. The emergence of the mistaken credits added a fresh — and confusing — twist to a decision by new UniCredit SpA Chief Executive Officer Andrea Orcel not to pay a debt coupon of about 30 million euros ($37 million) due later this week on the grounds that the bank made a loss last year. Just days later, it emerged that some holders were receiving the payments.
• JPMorgan Chase & Co., Bank of America Corp. and their largest rivals are preparing to tell lawmakers they’ve stepped up efforts to bank under-served communities, ahead of scrutiny into their lending to Americans facing hard times during the pandemic. “We took steps to make sure those in need, including those without access to traditional banking services, received each round of stimulus payments quickly,” JPMorgan Chief Executive Officer Jamie Dimon said. The bank also delayed payments and extended forbearance options on mortgage and other accounts, and funded more than 400,000 loans to small businesses, according to remarks prepared for his appearance alongside other banking CEOs before Congress on Wednesday and Thursday.
• Fewer homeowners are looking to refinance and mortgage securities investors are likely to benefit. The Mortgage Bankers Association refinance applications index dropped 7.2% in the latest report, its largest weekly decrease in three months. Looking ahead to next week’s prepayment speed report for May, consensus is looking for mortgage refinancings to drop for a second month in a row. The 30-year mortgage rate has risen back to 3%, putting a quick halt to the recent move higher in a refinance index that had increased five out of the six weeks prior to this latest release. The index is at its lowest since April 16 and down 19% for the year.
• Uber Technologies Inc. plans to formally recognize a trade union in the U.K. that will give drivers increased powers to collectively bargain while also preserving the company’s worker model. The ride-hailing giant is set to strike a deal that will allow Uber’s 70,000 drivers in the country to organize and collectively bargain under the GMB labor group, according to people familiar with the discussions. The deal, which could be announced as soon as Wednesday, will let drivers retain the ability to choose where and when they work, people said, asking not to be identified because the deal isn’t finalized.
• Investors are pouring a record amount of money into young companies trying to transform U.S. health care at an accelerating pace. Spurred by the pandemic, private funding for health-care companies has reached new highs every quarter since Covid-19 emerged. Investors steered a record $6.7 billion to U.S. digital health startups in the first three months of 2021, according to venture firm and researcher Rock Health. In 2011, Rock Health tracked $1.1 billion invested in digital health for the entire year. The flood of money is getting attention from new corners. JPMorgan Chase & Co. last week announced a new business with a $250 million investment arm to transform employer health coverage. Young startups have closed giant deals like the $500 million that online pharmacy Ro, founded in 2017, raised in March. And venture-backed health companies are reaching the public markets: Upstart insurer Bright Health Group, founded in 2015, filed for an initial public offering last week.
• Cruise operator Carnival is wrapping up a cross-border leveraged loan sale that will roughly cut its borrowing costs in half by refinancing a loan it took out at the depths of the pandemic. It’s already the busiest May for high-yield sales on record, and at least another three offerings in syndication may take the total even higher.
• China’s yuan advanced to a three-year high in onshore markets as the central bank signaled that it’s comfortable with a recent rally by setting a strong daily reference rate. The currency gained as much as 0.3% to 6.3913 per dollar in onshore markets, the highest since June 2018, while rising 0.4% offshore. The People’s Bank of China set its fixing at 6.4099 per dollar, in line with the average estimate in a Bloomberg survey of traders and analysts. The reference rate helped dispel concerns that the PBOC will seek to slow a yuan rally that has made the currency the best performer in Asia this year. Traders are closely watching the central bank after recent mixed messages from officials over whether the currency should keep appreciating to contain rising imported commodity costs.

“Invest for the long haul. Don’t get too greedy and don’t get too scared.” — Shelby M.C. Davis

*All sources from Bloomberg unless otherwise specified