June 1, 2021

Daily Market Commentary

Canadian Headlines

• Canadian equity markets gave up their earlier gains on Monday as marijuana and consumer stocks underperformed. The S&P/TSX Composite index fell -0.6%, reversing the earlier gain of as much as 0.3%. The decline marks the first drop for the index in five trading sessions. Cronos, Organigram were the worst performers among pot stocks. Dye & Durham was the best stock, surging 18% after a shareholder group led by its management offered to buy out the company and take it private. Meanwhile, Canada’s economic recovery likely forged ahead in the first quarter, with an expanding export sector and red-hot housing market bringing total output to the cusp of its pre-pandemic level.
• Bank of Nova Scotia’s recent investments in its Canadian business are paying off as lending helped fiscal second-quarter profit top analysts’ estimates. Profit in Scotiabank’s Canadian banking unit rose 94% to C$927 million ($769 million) in the three months through April, helped by mortgages and business loans. Canada’s biggest banks have dramatically reduced or even released some of their provisions for potentially souring loans, and Scotiabank was no exception. The lender set aside C$496 million in provisions for credit losses. Analysts estimated C$710.2 million in set-asides.
• Canada’s highest-earning families were the biggest beneficiaries of Prime Minister Justin Trudeau’s pandemic aid, potentially opening his government to criticism that its programs were wasteful. The top 20% of income-earning families received an average of C$6,728 ($5,577) from emergency Covid-19 assistance programs, according to data provided to Bloomberg by Statistics Canada. The lowest-earning households got C$4,097 in aid, on average. All told, the bottom 20% of earners got just 14% of the C$95.2 billion in direct government transfers related to Covid-19 last year, data from the statistical agency show. The numbers may fuel concerns that Canada’s pandemic support — among the world’s most generous, and financed with hundreds of billions in new debt — was indiscriminate as officials funneled cash to dozens of different groups, and ended up being hoarded in bank accounts.

World Headlines

• European equities rallied the most in almost two weeks as cyclical sectors led gains on optimism that reopenings across the region this summer will boost economic activity. The Stoxx Europe 600 Index was up 1% as of 11:37 a.m. London time, reclaiming a record level after Monday’s pause. The German DAX index also hit an all-time high, while Italy’s FTSE MIB Index recouped its pandemic-induced losses to rise to a level last seen in 2008. France’s CAC 40 jumped to its highest peak since September 2000. All 20 sector gauges​​​​​ rose, with those for miners, carmakers and energy firms at the top. Sentiment was buoyed by a report the European Union plans to lift all quarantine requirements starting in July using a digital passport indicating vaccination status.
• Stocks rose with U.S. equity futures, and commodities including oil jumped, as a string of positive economic readings spurred optimism in the recovery from the pandemic. Up next, U.S. manufacturing data for May will provide further clues on the state of the recovery. S&P 500 and Nasdaq 100 futures rose following a U.S. holiday, while Treasuries dropped and the dollar was steady. Global stocks are starting the new month near record highs, underpinned by the recovery from the health crisis and ample liquidity. Still, the jump in commodities prices is stoking concerns that rising price pressures could prompt central banks to withdraw support earlier than anticipated. Traders are awaiting key American jobs data later in the week to help assess the path of the rebound.
• Asian stocks rose in a volatile trading day, with gains in consumer-discretionary and energy shares offsetting falls in the health-care and consumer-staple sectors. The MSCI Asia Pacific Index climbed 0.3% as of 6:04 p.m. in Singapore. The CSI 300 Index ended the day up 0.2% after falling as much as 1.2% as concern among foreign investors eased about Beijing’s move to slow the yuan’s rally.
• U.S. crude futures climbed to the highest in more than 2 1/2 years after the OPEC+ alliance forecast a tightening global market, while international efforts to revive a nuclear deal with Iran were yet to reach a breakthrough. West Texas Intermediate rose as much as 3.2% from Friday’s close to $68.42 a barrel, while global benchmark Brent topped $70, a level it has failed to hold for a sustained period since 2019. The oil glut built up during the coronavirus pandemic has almost gone and stockpiles will slide rapidly in the second half of the year, according to an assessment of the market from an OPEC+ committee. The coalition is expected to ratify a scheduled output increase for July when it meets later on Tuesday.
• Gold held onto its biggest monthly gain since July as investors awaited fresh data on the U.S. economy to feed the debate about inflation. Bullion wiped out losses made earlier this year with a 7.8% advance over May amid signs of accelerating inflation. Patchy economic data has also lifted gold, boosting expectations central banks will put off rate hikes. Key data this week include U.S. jobs figures on Friday, following a surprisingly poor reading last month that highlighted potential headwinds to economic recovery. The Bloomberg Dollar Index is threatening to fall to its lowest since 2014 after a second monthly decline in May.
• The World Health Organization announced a plan to name coronavirus variants using the Greek alphabet, aiming to make it easier for the general public to discuss them. Germany cut its risk level to “high” from “very high” in a further sign that the pandemic is loosening its grip on Europe’s largest economy. Bank of America Corp. plans to bring all staff in Hong Kong and mainland China back to the office by the end of June, making it one of the first global lenders in the Asian financial hub to push for a full return. Japan is still preparing to hold next month’s Olympics with some spectators present, even as experts warn it will be difficult to stage the games unless the pace of infections slows, according to media reports.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the 30th straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $1.74 billion in the week ended May 28, compared with gains of $1.03 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $27.9 billion.
• KKR & Co. and Clayton Dubilier & Rice LLC struck a deal to take Cloudera Inc. private in an all-cash deal valuing the company at about $5.3 billion, opening a new chapter for a once high-flying enterprise software firm that struggled to sustain growth against larger rivals. The private equity giants agreed to buy out the software firm at $16 a share, or a 24% premium to its previous close, Cloudera said in a statement on Tuesday. Entities related to Carl Icahn’s Icahn Group, which holds about 18% of the outstanding shares, have agreed to vote in favor of the deal, the company said. Cloudera — which counts the activist investor as its largest shareholder — has explored a potential sale since mid-2020 after receiving takeover interest, Bloomberg News has reported. The startup has seen revenue growth plunge to single digits over the past year from more than 80% two years ago, hurt in part by competition from larger rivals Amazon.com Inc., Alphabet Inc. and Microsoft Corp. in its field of cloud software products.
• President Joe Biden on Tuesday plans to announce steps to increase the number of federal contracts awarded to small, disadvantaged businesses, one of several measures designed to address a racial-wealth gap. Biden aims to increase spending with those businesses by 50%, or an additional $100 billion in contracts over five years, according to an administration official who spoke on condition of anonymity. Many businesses classified as small and disadvantaged are owned by people of color. Biden will discuss the new programs — which also include a home-appraisal initiative — during a Tuesday visit to Tulsa, Oklahoma, to mark the 100-year anniversary of a race massacre that wiped out one of the nation’s most prosperous Black neighborhoods.
• AMC Entertainment Holdings Inc. extended last week’s rally and rose in premarket trading Tuesday on plans to sell stock to shareholder Mudrick Capital at a premium. The movie theater operator, which has become a poster child for retail traders, climbed 11% as of 7:05 a.m. to $28.90 after entering a purchase agreement with New York-based Mudrick to sell 8.5 million shares of Class A common stock for a total value of $230.5 million, or $27.12 apiece. The stock closed at $26.12 on Friday, after nearly tripling last month.
• Iran said it hopes it can revive the nuclear deal with world powers by August, when President Hassan Rouhani’s administration ends, and reach an agreement with the U.S. that would ease sanctions on its economy and oil exports. Ali Rabiei, spokesman for Iran’s government, said there were “no obstacles” in the way of negotiators in Vienna who are in their eighth week of talks to restore the beleaguered 2015 accord. Former U.S. President Donald Trump abandoned the deal three years ago and reimposed a raft of penalties on Iran, prompting it roll back its own compliance with enrichment and other curbs. Iranian officials had hoped that the landmark deal would be fully revived by June 18 presidential elections, after which Rouhani’s presidency will start to wind down. He’s widely expected to be succeeded by a hardliner who will be more hostile to the U.S. and the nuclear deal.
• Joe Biden wants to spend his way to a greener and more sustainable future for America. For now though, he’ll probably be financing it the old-fashioned way — with taxes and traditional bonds. None of the $21 trillion Treasuries market includes bonds linked to the funding of environmentally-friendly projects, despite a seemingly insatiable investor hunger for these new types of ethical assets. Germany, France and Italy have capitalized on it, and the U.K. and Canada are both planning debuts. In the U.S., municipalities have been selling record amounts of green bonds, but the world’s largest seller of debt is conspicuously absent. It’s more than a little ironic. Biden needs trillions of dollars and global investors are only too happy to pour cash into the world’s safest bonds. Such debt could be splashed on new power grids to avoid the kind of chaos seen in the Texan deep freeze this year, or electric-vehicle charging for the fleet of Tesla Inc. devotees. Yet officials haven’t publicly floated the idea of green Treasuries, with Treasury Secretary Janet Yellen saying private capital must fill most of the funding gap.
• The upward march in Polish inflation is fueling concern on the central bank’s interest-rate-setting body that could weaken its longstanding pledge to maintain record-low borrowing costs. Data Tuesday showed consumer-price growth hitting 4.8% in May, compared with a year earlier, the highest level in a decade. Polish authorities are increasingly worried that 5% inflation will trigger an adjustment in society’s expectations for future price growth and destabilize price stability for longer, according to three people familiar with the thinking of the central bank and government officials, who asked not to be named because they weren’t authorized to speak on the subject.
• Gasoline sales in India, the world’s biggest market for motorcycles and scooters, collapsed to the lowest level in a year as a devastating second wave of Covid-19 infections savaged consumption. Average daily sales in May declined by almost a fifth from the previous month as strict stay-at-home orders across large parts of the country crippled demand, according to people familiar with preliminary data from the country’s three biggest retailers. Overall, monthly sales were the lowest since May 2020. Oil demand across wide swathes of Asia has been hurt by resurgent coronavirus waves in recent months, clouding a generally positive global picture as sales in the U.S. and Europe pick up. The outbreak in India was particularly severe as hospitals were overwhelemed and many local administrations reinstated movement curbs. Despite the uneven pattern, crude prices have rallied, with global benchmark Brent set for the highest close in two years on Tuesday.
• Funds managed by Invesco Real Estate are backing Mynd Management to spend as much as $5 billion, including debt, purchasing about 20,000 single-family rental homes in the U.S. in the next three years. The partnership marks a “significant moment” for the single-family rental industry, Doug Brien, chief executive officer and co-founder of Mynd, said in an interview. More than half of the country’s multifamily properties are owned by institutional investors compared with an estimated ownership of 2% to 3% of single-family rentals, a gap that he expects to narrow in time. “As traditional commercial real estate investors that invested in multifamily as their key strategy have moved into single-family rental, we’re seeing the market flooded with institutional capital,” Brien said. He acknowledged that dynamic will make it more competitive for Mynd to find properties, but touted its data-driven technology as better enabling it to make offers across the U.S.
• The power grid serving nearly 20% of the U.S. population is about to throw a roadblock in President Joe Biden’s plan to decarbonize the electricity sector. PJM Interconnection LLC, which keeps the lights on for 65 million people from Chicago to Washington, D.C., is expected to clear a fleet of new natural gas plants– and even extend the lives of some coal plants — when it releases the results of its massive electricity auction Wednesday. That’s because Trump-era changes to the way the auction is structured give a leg up to fossil fuels, at the expense of zero-carbon sources such as nuclear, wind and solar.
• As China’s central bank pulls back from direct intervention in its currency market, officials are reverting to old tools to manage the yuan. The People’s Bank of China on Monday said the country’s lenders will need to hold more foreign currencies in reserve, a move that will reduce the supply of the dollar onshore. Officials have pulled on multiple levers to influence the yuan since October, when China cut the cost of shorting the currency to zero and removed a key factor used by banks to calculate the daily reference rate. The government has also relaxed capital curbs to allow more outflows and asked financial institutions to limit their offshore financing. The PBOC is seeking to curb speculation in the yuan without derailing a plan to liberalize the currency and promote its global usage. The removal of the threat of intervention, however, can fuel one-way bets in the exchange rate. With the yuan at a three-year high against the dollar and the drivers for its recent outperformance remaining in place, the PBOC will be under pressure to take further steps to slow the pace of gains. The currency is also near the strongest since 2016 versus a basket of trading partners.
• Inflation in the euro area climbed to the highest level in more than two years after economies across the region started to lift coronavirus restrictions and rebounding demand aggravated supply bottlenecks. Consumer prices rose an annual 2% in May, more than economists predicted, with energy the biggest gainer from a year ago when the region was in full lockdown. Germany, Spain and Italy — three of the four largest euro-zone economies — all reported increases.
• Americans are shedding their masks, buying concert tickets and booking vacations like it’s 2019. But there’s one thing that’s doesn’t appear to be going anywhere as the pandemic fades: remote work. Companies from Vanguard Group Inc. to Ford Motor Co. are permanently adopting “hybrid” work schedules where employees spend some of the week at home and the rest at an office. Forecasting the implications of these long-term work shifts on the U.S. economy is no small task. Enter Nicholas Bloom, a Stanford University economist who started researching the economic impact of remote work years ago and has become a de-facto “working-from-home” expert during the pandemic, with his findings featured in dozens of publications. Bloom, who is also co-director of the Productivity, Innovation and Entrepreneurship program at the National Bureau of Economic Research, has spent the last year surveying tens of thousands of U.S. firms and employees about their post-pandemic work arrangements.

“You can’t predict, but you can prepare.” – Howard Marks

*All sources from Bloomberg unless otherwise specified