May 27, 2021
Daily Market Commentary
- Canadian equities gained for a second session to a record high. The S&P/TSX Composite Index gained 0.9%, with all eleven sectors rising. Health care and energy led the charge. U.S. Commerce Secretary Gina Raimondo said she wants to find a “long-term solution” to Washington’s long-running dispute with Canada over lumber, the cost of which has soared to records.
- Toronto-Dominion Bank is benefiting from its sizable presence in the U.S., where the waning Covid-19 crisis allowed the company to release $173 million in set-asides for loans that never ended up souring. Fiscal second-quarter profit in Toronto-Dominion’s U.S. retail-banking business rose more than four-fold to $1.05 billion, helped by the release in provisions for credit losses. Overall profit topped analysts’ estimates. Toronto-Dominion has been the most cautious among Canada’s banks in setting aside capital to cushion itself from loan losses, and the company has hinted that it may put some of that money to work on expanding its U.S. footprint. The bank released a total of C$377 million ($312 million) in provisions for loan losses. Analysts estimated it would set aside C$457.8 million.
- Royal Bank of Canada is getting a lift from its capital-markets business, fueled by surging equity markets and record merger activity in its home market. Fiscal second-quarter net income from Royal Bank’s capital-markets unit rose 10-fold to C$1.07 billion ($885 million), helped by investment banking. Overall profit topped analysts’ estimates. Royal Bank has been one of the more conservative banks in terms of setting aside capital to protect itself against potential loan losses. The lender’s common equity tier 1 capital ratio was the second-highest of Canada’s six largest banks at the end of the first quarter. The bank set released C$96 million in loan-loss provisions in the second quarter. Analysts estimated C$275.6 million in set-asides.
- Canadian Imperial Bank of Commerce is starting to shake off the pandemic doldrums as the country’s hot housing market helped its domestic business revive revenue growth. CIBC’s Canadian personal and business banking unit snapped a streak of four straight quarterly year-over-year revenue declines, boosting sales 0.3% in the fiscal second quarter. Overall profit topped analysts’ estimates. With Canada’s vaccination campaign finally picking up steam, CIBC reduced the amount it set aside to protect against credit losses last quarter. Provisions for credit losses totaled C$32 million ($26 million) last quarter. Analysts estimated C$245.4 million in provisions, on average.
- BHP Group is in talks with Nutrien Ltd. about a potential partnership in its massive Canadian potash venture as the world’s biggest mining company moves closer to a final decision on the project. The pair are discussing multiple options, including Nutrien becoming the operator and selling the potash through its existing channels, or the Canadian company taking a stake in the Jansen mine, according to people familiar with the matter. There is no guarantee the talks will lead to a deal, said the people, who asked not to be identified as the discussions are private. A deal would offset BHP’s financial and operational risk, said Gavin Wendt, founding director and senior resource analyst at Mine Life Pty. “It’s a large-capex project and BHP is new to the potash space. It makes sense for it therefore to utilize Nutrien’s industry knowledge, where it is the world’s biggest fertilizer distributor.”
- European stocks were steady on Thursday, remaining in a lull just shy of record levels, as inflation worries tempered economic optimism. The Stoxx Europe 600 Index added less than 0.1% at 10:43 a.m. in London, signaling a fourth day of trading without a clear direction. Miners rallied with base metals, while carmakers declined. Retreating crude oil weighed on energy stocks. With worries that faster inflation will force an earlier end to stimulus measures offsetting Europe’s progress in overcoming the pandemic, its equities are headed for a second month of gains below 2%. While European Central Bank officials have publicly opposed a slowdown in bond purchases, two events featuring more hawkish governing council members will be in focus today.
- American equity-index futures declined on Thursday ahead of key data on the world’s biggest economy. Treasury yields were steady and the dollar slipped. Contracts on the S&P 500 and Nasdaq 100 dropped after the underlying indexes gained on Wednesday. Data on jobs, growth and personal consumption later Thursday will help investors piece together a picture of the economy amid concerns about inflation pressures and prospects for monetary stimulus. Global equities have pushed higher in May amid volatile trading as investors swung from worries that higher inflation poses a threat to loose monetary policy to optimism about the economic recovery. Federal Reserve officials have hinted that they may start discussions on reducing bond purchases in upcoming meetings if the economy powers ahead, a move that could push yields higher and damp demand for riskier assets.
- Japanese stocks fell, halting a five-day gain, as the possibility that pandemic restrictions will be extended deepened concerns over the nation’s ability to host the Olympics and quicken an economic recovery. Chemical-related companies and banks were the biggest drags on the Topix, as some investors took advantage of a lull in the market’s longest rally in almost 10 weeks to reduce positions. SoftBank Group Corp. and Shin-Etsu Chemical Co. helped pull down the Nikkei 225 Stock Average. The Tokyo Metropolitan Government is considering asking the central government to extend a coronavirus state of emergency in the capital that’s due to expire May 31, public broadcaster NHK reported Wednesday. The Asahi newspaper urged Prime Minister Yoshihide Suga in an editorial to call off the Tokyo Olympics, which are scheduled to start July 23.
- Oil fell below $66 a barrel amid concern the market could encounter additional Iranian barrels if sanctions on the Persian Gulf producer are lifted. West Texas Intermediate futures declined, with prices having traded within a $10 a barrel range since March. Talks between Iran and world powers are underway in Vienna to revive a nuclear accord, traders are awaiting detail on the negotiations, including sticking points, and the timing of any revival in official flows. The drop in prices on Thursday came despite more evidence that the recovery in U.S. oil consumption is gathering pace as the pandemic fades. American drivers continue to travel almost as many miles on interstates as they did in 2019, while stockpiles of crude and gasoline fell last week. JPMorgan Chase & Co. expects prices to hit $80 by the end of the year, analysts including Natasha Kaneva wrote in a note.
- Gold steadied near the highest in more than four months as investors weighed slightly more hawkish tones from central bank officials. Federal Reserve policy maker Randal Quarles said on Wednesday that it will be important for the bank to begin discussing in coming months plans to reduce bond purchases if the economy continues to power ahead coming out of the pandemic. Meanwhile, South Korea followed in the footsteps of New Zealand and Canada to flag a potential interest-rate increase. The central bank comments come as gold has erased its 2021 losses amid signs of rising inflation and a potentially uneven economic recovery. Fed officials have pushed back against the threat that a spike in price pressures will prove lasting, while reassuring investors on the central bank’s accommodative stance.
- President Joe Biden said he ordered the U.S. intelligence community to “redouble” its effort to determine the origin of the coronavirus, including whether it possibly came from a Chinese lab accident. Melbourne will lock down as a cluster of cases continues to grow. U.K. Health Secretary Matt Hancock said the spread of the variant first identified in India means it’s too early to say whether the next stage of the reopening of England’s economy can go ahead as planned on June 21. Sanofi and GlaxoSmithKline Plc are starting phase 3 trials of their Covid-19 vaccine candidate to determine the efficacy against the original strain of Covid-19 as well as the variant first detected in South Africa. China’s Sinopharm released details of its vaccine trials in a study published in a prestigious U.S. medical journal, the first time detailed findings from a late-stage trial of a Chinese shot have appeared in the scientific literature.
- U.S. Trade Representative Katherine Tai and China’s Vice Premier Liu He had a “candid” first conversation as the two sides try to resolve some of their differences on trade. The trade chiefs spoke Thursday morning in Beijing, China’s Ministry of Commerce said in a statement, and “conducted candid, pragmatic and constructive exchanges in an attitude of equality and mutual respect.” In a separate statement, the USTR said “Ambassador Tai discussed the guiding principles of the Biden-Harris administration’s worker-centered trade policy and her ongoing review of the U.S.-China trade relationship, while also raising issues of concern.”
- Foxconn Technology Group is in talks to buy a stake in Malaysian technology firm Dagang NeXchange Bhd., according to people familiar with the matter, after losing to it in bidding for a semiconductor company. The main assembler of Apple Inc.’s iPhones could take a minority stake in DNeX and help to expand the business of its chipmaker SilTerra Malaysia Sdn., one of the people said, asking not to be identified as the matter is private. DNeX landed the winning offer in the sale of SilTerra in February, outbidding Foxconn. Talks are ongoing and could fall apart, and there is no certainty that a deal will materialize, the people said. A representative for DNeX said the company is always open to discussion with strategic partners and investors, but that it cannot comment on any specific discussion. A Foxconn representative declined to comment.
- Paytm, India’s leading digital payments provider, is aiming toraise about 218 billion rupees ($3 billion) in an initial public offering late this year, according to a person familiar with the deal, in what could be the country’s largest debut ever. The startup, backed by investors including Berkshire Hathaway Inc., SoftBank Group Corp. and Ant Group Co., plans to list in India around November and its offering could coincide with the Diwali festival season, said the person, asking not to be named because the details are private. Paytm, formally called One97 Communications Ltd., is targeting a valuation of around $25 billion to $30 billion. Banks shortlisted to run the Paytm offering include Morgan Stanley, Citigroup Inc. and JPMorgan Chase & Co., with Morgan Stanley the leading contender, the person said. The process is expected to get rolling in late June or early July. JPMorgan declined to comment; the other banks did not respond to requests for comment.
- UniCredit SpA carried out a $2 billion bond sale that saw robust demand, helping the Italian lender move on from the furore this week over an unpaid interest on subordinated debt that threatened to dent investor confidence. The Milan-based bank priced the two-part offering of senior notes after pulling in a more than $8 billion of demand from about 200 investors, according to a statement published Wednesday. The strong order book helped the bank cut the initial spread offered by 25 basis points. The bonds sold on Wednesday were in a senior preferred format, much less risky than the complex, deeply subordinated CASHES bonds. Still, the outcome suggests that many institutional investors are willing to look beyond the surprise decision not to disburse the coupon on so-called CASHES bonds and the ensuing confusion over an accidental transfer of some funds by Euroclear.
- Abu Dhabi’s state oil firm raised $1.64 billion through a stock and bond sale to institutional investors as the emirate continues to leverage energy assets to generate funds. The capital of the United Arab Emirates, contains almost all the OPEC member’s hydrocarbon reserves. The government, along with others in the region such as Saudi Arabia and Oman, is seeking to use money from energy assets to build new industries and diversify the economy. Both deals were completed on Wednesday and saw “significant demand” from regional and international investors, Adnoc said. They came a day after Abu Dhabi’s government raised $2 billion through seven-year bonds, attracting almost $7 billion in demand.
- The Department of Justice is investigating the market-rattling meltdown of Bill Hwang’s Archegos Capital Management in March, a debacle that left big banks in Europe, Asia and the U.S. nursing more than $10 billion in losses. Federal prosecutors in Manhattan sent requests for information to at least some of the banks that dealt with the firm, according to people with knowledge of the matter, who asked not to be identified discussing the confidential probe. It’s unclear what potential violations or entities authorities are examining. Banks raced to sell off Archegos’ holdings in March after the family office made massive, highly leveraged bets on companies including ViacomCBS Inc. and was unable to meet margin calls as the positions soured. The episode contributed to losses for banks including Credit Suisse Group AG, Nomura Holdings Inc. and Morgan Stanley that had helped to finance the wagers through prime brokerage units, which lend money to hedge funds and other private investment firms.
- Hedge funds often measure their investments in minutes, not decades; but for Anchorage Capital Group, its long-held stake in Metro-Goldwyn-Mayer Studios Inc. is proving that patience can also be profitable. The New York-based money manager stands to make roughly $2 billion on its investment in the film and TV producer, one that began almost 11 years ago with MGM in bankruptcy court. Amazon.com Inc. agreed to buy the company for $8.45 billion Wednesday, a price that includes just under $2 billion in debt. The deal is in many ways a vindication for Kevin Ulrich, the former Goldman Sachs Group Inc. trader who co-founded Anchorage in 2003 and was part of a group of distressed debt investors that took control of MGM as it went through the restructuring process. In recent years the stake looked to be an albatross for the fund, one that came with significant drama in its own right.
- Goldman Sachs Group Inc. has emerged as one of SoftBank Group Corp.’s biggest lenders, with Masayoshi Son’s company borrowing over $5 billion from the New York-based firm. Goldman Sachs was SoftBank’s fourth-largest lender in the year ended March 31, extending 593.2 billion yen ($5.4 billion) in loans, the Tokyo-based company said in a statement on Thursday. The bank wasn’t included in the list in the previous period.
- President Joe Biden called Wednesday for a deeper U.S. intelligence investigation into the origins of Covid-19, giving new life to claims that the coronavirus escaped a Chinese lab. After more than a year hunting for the pandemic’s mysterious origins before the first cluster was found at a Wuhan food market, it’s unclear what new resources American spies may bring to the search. Biden’s order also reopens a rift with Beijing, which has impeded previous international investigations and punished foreign governments for suggesting it has something to hide. In a surprise statement, Biden announced that the U.S. intelligence community had delivered a report to him earlier this month on the virus’s origins. The document acknowledged divisions over whether the virus was naturally transmitted from animals to humans — the prevailing theory of scientists — or whether it leaked from the Wuhan Institute of Virology, a claim popular with Republicans that hasn’t been ruled out by experts.
- HSBC Holdings Plc exited its U.S. domestic mass market retail banking business, agreeing to sell 90 branches, as Europe’s biggest lender looks to focus on wealthy clients and steer billions of dollars in capital towards Asia. The London-based bank will retain a network of 20 to 25 locations that will be transformed into international wealth centers, according to a statement. It’s closing 35 to 40 other branches. The bank expects a pretax cost of $100 million from the transactions. The move is part of a larger plan by HSBC to invest more in Asia, where it’s focused on banking the region’s wealthy, as the lender also looks at exiting businesses in Europe. The bank has announced it will cut about 35,000 jobs globally to boost profitability after years of struggling with rock-bottom interest rates.
- Hong Kong’s legislature approved a sweeping, Beijing-drafted overhaul of the city’s elections, dramatically curtailing the opposition’s ability to participate in government on the same day that authorities banned a massive pro-democracy vigil. The Legislative Council voted 40-2 to approve measures Thursday creating a review committee to vet candidates for elected office and ensure they’re “patriots.” All candidates must also be approved by national security officials in the Hong Kong police force to determine whether they can be trusted to uphold local laws and “respect” the ruling Communist Party. The bill’s passage marks the culmination of Beijing’s efforts to take control of how the former British colony chooses its leaders, giving it a veto over candidates for office following historic and sometimes violent unrest in 2019. It effectively ends China’s only experiment with open elections, a vestige of the democratic system implemented during last years of colonial rule.
- Acorns Grow Inc. plans to go public through a merger with a blank-check company in a deal that values the digital savings and investing app at about $2.2 billion, according to people familiar with the matter. The Irvine, Calif.-based financial-tech company is expected to announce a combination with Pioneer Merger Corp., a special-purpose acquisition company affiliated with the hedge funds Falcon Edge Capital and Patriot Global Management, as soon as Thursday, the people said. As part of the transaction and a related private placement involving funds managed by BlackRock Inc., Wellington Management Co. and other investors, more than $450 million in proceeds will flow to Acorns’s balance sheet, the people said. Acorns automatically invests small contributions from users into baskets of stocks and bonds. It counts more than 4 million subscribers, most of whom pay $1 a month for the service, though Acorns also offers $3-a-month and $5-a-month options for additional features such as bank accounts or retirement plans. As of May, Acorns had $4.74 billion in assets under management, according to a recent regulatory filing.
- Best Buy Co. boosted its full-year sales forecast after revenue soared in the quarter, fueled by what it deemed “extraordinarily high” demand for its electronics that has continued even as the pandemic wanes. The shares rose in premarket trading. Best Buy said it now sees company-wide comparable sales rising between 3% and 6% this fiscal year. It had earlier expected them to land somewhere between a 2% decline and a 1% gain. U.S. same-store sales surged 38% in the quarter, topping the estimate compiled by Bloomberg. The company also raised its expectations for gross profit, which should approximately match last year’s rate after earlier expecting that measure to narrow. Chief Financial Officer Matt Bilunas said the year “has clearly started out much stronger than we originally anticipated,” with momentum carrying into the current quarter.
- After years of unhappy reliance on Comcast Corp. and other carriers, Pleasant Grove, on Utah’s Wasatch Front, is turning to a new broadband option: a municipally owned company called Utopia Fiber. The choice follows a pandemic year that showed just how much households need fast, reliable internet connections for jobs, schooling, and medical care. To reach homes that lack good service, or have none at all, President Joe Biden has proposed funding networks such as Utopia Fiber that are run by cities and nonprofits. That’s not sitting well with Comcast, AT&T, Verizon Communications, and other dominant carriers, which don’t like the prospect of facing subsidized competitors. Pleasant Grove shows why established carriers might be vulnerable. With 38,000 residents, it’s nestled between the Wasatch Range and the Great Salt Lake Basin, just south of Salt Lake City. When it asked residents about their broadband, almost two-thirds of respondents said they wouldn’t recommend their cable service. Almost 90% wanted the city to pursue broadband alternatives.
- Doug Dachille is leaving American International Group Inc., the insurer that runs nearly $350 billion. The chief investment officer’s exit is effective June 30, according to a regulatory filing which didn’t name his replacement. He joined in 2015 when AIG acquired his firm, First Principles Capital Management. Dachille is leaving after overhauling AIG’s portfolio during a period of tumult in the industry. He scaled back on expensive hedge fund holdings while scouting fresh ways to seek yield in a low interest rate environment. He was recruitedto the insurer by former Chief Executive Officer Peter Hancock, who previously worked with Dachille at JPMorgan Chase & Co. to build the derivatives business.
- Jeff Gennette, the chairman and chief executive officer ofMacy’s Inc., knows people are talking about his big bet on New York City. And that they might even think he’s out of his mind. This month, Gennette said he’s still committed to building a multi-billion-dollar skyscraper atop the company’s Herald Square flagship — plans that city officials, developers and the retail industry thought the pandemic might force him to scrap. He also said Macy’s would invest $235 million in the area surrounding the store. The projects, as Gennette envisions them, will convert a thoroughfare marked by unpleasant transit hubs and 99-cent pizza shops into a gleaming, pedestrian-friendly, urban oasis dedicated to American style and consumption.
- Pipeline operators who fail to report cybersecurity attacks to the Department of Homeland Security could face fines of $7,000 a day or more under regulations being released Thursday in response to the ransomware attack that temporarily paralyzed the nation’s biggest fuel pipeline. The so-called security directive being issued by Homeland Security will be followed in the near future by an additional set of rules for pipeline operators, according to senior department officials who asked not to be identified. In addition to requiring pipeline owners to report incidents, Thursday’s security directive to companies that operate about 100 critical pipelines would stipulate that a designated representative be available around the clock as the point of contact, one of the officials said during a background briefing with reporters.
“The stock market is filled with individuals who know the price of everything, but the value of nothing.” – Phillip Fisher
*All sources from Bloomberg unless otherwise specified