May 7, 2021

Daily Market Commentary

Canadian Headlines

• Canadian equities closed lower Thursday amid a wave of corporate earnings. The S&P/TSX Composite Index fell 0.1%. Materials were a bright spot, while cannabis and tech retreated. Spot iron ore broke $200 a ton for the first time, while copper approached a record high as Chinese investors unleashed fresh demand following a three-day holiday.
• Flush with bailout funds, Air Canada called on the government of its home country to lay out a plan for reopening borders as vaccination progresses. Canada’s biggest air carrier is in a position to ramp up operations after reaching a deal for nearly C$5.9 billion ($4.8 billion) in debt and equity with the federal government last month. Chief Executive Officer Michael Rousseau said it’s now “essential” for officials to follow the U.S. in easing rules that have stopped most air travel. “Starting with replacing blanket restrictions with science-based testing and limited quarantine measures where appropriate, Canada can reopen and safely ease travel restrictions as vaccination programs roll out,” Rousseau said in a statement accompanying first quarter results that saw an 80% revenue decline from the same period in 2020. “We have seen elsewhere, notably in the U.S., that travel rebounds sharply as Covid-19 recedes and restrictions are lifted, and we fully expect this can be replicated in Canada,” Rousseau said.
• West Fraser Timber Co. plans to expand capacity at five of its lumber mills in the U.S. South as a home-building boom fuels lumber demand. The pandemic-fueled surge in home construction last year took North American sawmills by surprise, sending lumber prices to new records. U.S. futures this week hit $1,600 per 1,000 board feet for the first time, a four-fold increase from a year ago. While production has since ramped up, demand continues to outpace supplies as home-buying and renovations continue.
• Canadian Pacific Railway Ltd. gained regulatory approval to use a voting trust to buy Kansas City Southern, clearing a crucial milestone in their $25 billion merger agreement. Canadian National Railway Co.’s rival bid for the U.S. carrier remains alive, however, and whichever proposal Kansas City Southern ultimately chooses will face additional regulatory scrutiny. The Canadian Pacific voting arrangement is subject to modifications, such as barring the trustee from holding shares in the Calgary-based railroad, the U.S. Surface Transportation Board said in a ruling posted on its website Thursday. Canadian Pacific in March agreed to buy Kansas City Southern for cash and stock. Canadian National subsequently made a $30 billion cash-stock offer, which the U.S. railroad is considering. The proposal also would use a voting trust.

World Headlines

• European stocks advanced toward a record on Friday as positive earnings signaled a corporate recovery is underway. The Stoxx Europe 600 Index rose 0.4% as of 10:30 a.m. in London, with miners leading gains as base metals surged. Adidas AG boosted consumer companies, rallying 8.1% after lifting its 2021 sales forecasts. Siemens AG also rose after raising its revenue and profit guidance for the year, helping the DAX Index climb 1%. Europe’s main equity benchmark is rising at the end of a volatile week, which saw investors swing from worries of faster U.S. inflation and a Covid-19 resurgence in parts of Asia to confidence about domestic corporate profits. Further clues on the economic recovery may come from the key U.S. payrolls report due later today. After trading in a range since a record in mid-April, the Stoxx 600 has risen 1.3% this week.
• U.S. futures headed higher with stocks and commodities ahead of American jobs data that are expected to cap a series of strong economic reports this week. Copper soared to an all-time record on expectations that rebounding economies will spur a boom in global demand, and the Bloomberg Commodity Spot Index jumped to its highest level since 2011. Contracts on the S&P 500 Index advanced alongside shares in Europe and Asia. Treasuries and the dollar were little changed. Investors are focusing on strengthening growth in the world’s largest economies, shaking off concerns for now that a faster-than-expected rebound could spur excessive inflation. The Federal Reserve remains committed to near-zero interest rates to bring about a full recovery, though an announcement of a pullback in its heavy monthly bond purchases seems increasingly likely in the second half of this year.
• Asian stocks rose, heading for their first weekly gain since mid-April, as a rally in semiconductor-related shares helped offset a late sell-off in China. The MSCI Asia Pacific Index advanced for a second day. Chip-related stocks including TSMC and Tokyo Electron contributed heavily to the day’s gains, while game console developer Nintendo and Sony Group were among the biggest drags after the Kyoto-based studio warned of component shortages and announced a conservative profit outlook. China stocks slumped in the afternoon and notched their worst week since mid-March, as worries that the U.S. is maintaining investment limits in some Chinese companies outweighed better-than-expected growth in export data. Concerns the Biden administration will keep the investment bans imposed under former U.S. President Donald Trump add to investors’ worries of rising geopolitical tensions faced by China as Beijing halts its high-level economic dialogues with Australia.
• Oil headed for a second straight weekly advance as investors bet on rising energy demand amid a broader rally in commodities. West Texas Intermediate futures were steady on Friday. The U.S. benchmark is on track for a 1.7% gain this week and is set for its first back-to-back weekly increase since early March as vaccine-aided economic activity picks up in the U.S., Europe and China. Robust trade data from China highlighted the strength of the global economy. Though crude is up this week, there remain concerns about the demand recovery as coronavirus waves spread elsewhere, including in key crude importer India. While the Organization of Petroleum Exporting Countries and its allies are adding supply to the market, the group remains confident it will be able to absorb the extra production. U.S. payrolls data due later Friday will yield fresh insights into the rebound.
• Gold headed for the biggest weekly advance since December as the dollar fell and U.S. Treasuries steadied, with investors awaiting a key jobs report to gauge the strength of the economy. Bullion climbed to the highest since mid-February after several Federal Reserve officials played down concerns over inflation and pushed back on tapering talk. Traders will be looking to the upcoming non-farm payrolls numbers for clues on the economic recovery and how this would play into action taken by the Fed going forward. Economists predict the employment report will show the U.S. added about 1 million jobs in April.
• Copper soared to a fresh all-time high as optimism about a global rebound from the pandemic boosts commodities markets. The metal — an economic bellwether — is front and center in a rally that’s driven raw materials from lumber to iron ore to multiyear highs or records. Stimulus measures and vaccine rollouts are fueling prospects for a resurgence in demand that’s set to strain supply, while copper’s crucial role in the green-energy transition is expected to underpin longer-term gains. At the same time, a lack of mine investment may leave the market short of the supply needed to meet demand. Big banks and others including trader Trafigura Group have rolled out a list of lofty price targets that suggest there’s more room to run, with the latter predicting copper will hit $15,000 a ton in the coming decade.
• Pfizer Inc. and its partner BioNTech SE have asked U.S. regulators for full approval of their vaccine, a milestone in their effort to make the shot a sustainable revenue source that goes well beyond its current standing as an emergency product. Spain is backing a U.S. proposal to waive intellectual property rights for coronavirus vaccines, setting the stage for a tense debate when European Union leaders meet Friday. Spain’s position puts it at odds with the German government, which on Thursday said it opposed the idea. Japanese Prime Minister Yoshihide Suga extended a state of emergency that covers Tokyo and expanded it to two more regions hit by rising virus cases, in an attempt to stem infections ahead of the capital’s hosting of the Olympics in less than three months.
• President Joe Biden’s ambitious $400 billion plan to improve in-home care for the elderly and lift wages for millions of workers may be limited by states’ ability to opt out, based on early proposals from Congress. The leading legislative draft in discussion would channel the funds through the U.S. government health-insurance program Medicaid and tie the money to higher reimbursement rates and training for in-home workers, according to congressional aides familiar with the matter who declined to be identified because the deliberations are private. Funding through Medicaid, which already handles payments for most personal-care services for seniors and people with disabilities, is seen as the fastest and most direct way of getting the money out.
• China’s securities regulator is weighing tighter rules for companies seeking to list in Hong Kong or overseas, a move that could hit technology firms already smarting from months of clampdowns, according to people familiar with the matter. The China Securities Regulatory Commission is considering proposals that would require firms seeking initial public offerings outside mainland China to submit listing documents to ensure they’re compliant with local laws and regulations, the people said. The scrutiny would also seek to prevent any leaks of sensitive data that might be of national security interest, the people added, requesting they not be identified as the matter is private. The discussions are preliminary and could be subject to change.
• India has allowed bidders access to the financial data of Bharat Petroleum Corp. as the government moves ahead with plans to sell its entire stake in the country’s second-biggest state refiner, according to people familiar with the matter. The data room has been open since the last week of April and some bidders have held meetings with BPCL management, said one of the people, who asked not to be identified as the talks are private. Shares in BPCL erased losses in Mumbai after the Bloomberg News report, rising as much as 3% to their highest level since March 16. The government’s 53% stake in the refiner is valued at about 509 billion rupees ($6.9 billion) based on Friday’s closing price.
• JPMorgan Chase & Co. was warned by its compliance team over the “great risk” of corruption just days before it made the last of three transfers that totaled $875 million to a former Nigerian oil minister. The internal memo is set to be scrutinized in a London lawsuit brought by the West African nation. The U.S. bank is accused of ignoring red flags when it transferred funds between 2011 to 2013 from government accounts to Dan Etete, who had been convicted of money laundering.
• A large option bet on quicker rate-hikes by the Federal Reserve got bigger this week, even as officials pushed back against hawkish expectations. The wager — carrying a notional value of $40 billion — is focused on a possible surprise at the annual August symposium in Jackson Hole, which has been used in the past by central bankers to signal changes in monetary policy. The positions are now the third-biggest of any Eurodollar options. As it stands, Eurodollar futures — which are priced off three-month Libor — imply a bit less than five 25 basis point rate increases by September 2024. This option play, focused on contracts expiring the month after Jackson Hole, is looking for traders to add another two Fed hikes to those expectations.
• Blackstone Group Inc. funds have offered to buy St. Modwen Properties Plc as the private-equity giant chases a bigger slice of the U.K.’s red-hot warehouse market. The British developer said it’s likely to accept Blackstone’s indicative offer of about 1.2 billion pounds ($1.7 billion) should it be made firm, according to a statement Friday. St. Modwen stock jumped as much as 20% to 538 pence in early London trading, close to the offer price of 542 pence a share. Competition for warehouses across Europe has intensified as global investors including Goldman Sachs Group Inc., Cerberus Capital Management LP and GIC Pte bet on rising rental income fueled by demand from e-commerce retailers as the pandemic moved more shoppers online. That’s prompting rivals like Blackstone to turn to more complex deals including snapping up public companies as they look to build their warehouse portfolios.
• The dust hadn’t yet settled on Archegos Capital Management’s implosion, when hedge funds started shifting their bets toward banks that avoided getting hurt, hoping to keep leveraging up just like before. Good luck with that. For weeks behind the scenes, Wall Street’s giants have been autopsying failures at rivals including Credit Suisse Group AG and Nomura Holdings Inc., identifying risks that they plan to address by more thoroughly vetting hedge funds or imposing more onerous terms on their trades, according to people close to the discussions. No one wants to be the next to tell shareholders and regulators how they failed to heed the lessons of Archegos. Inside Bank of America Corp., which refused to do business with Archegos, Chief Executive Officer Brian Moynihan has been quizzing subordinates on what more is needed to protect the firm. The episode has hardened the resolve of Wells Fargo & Co. executives that low-risk margin lending is wiser, even if less profitable. UBS Group AG CEO Ralph Hamers has signaled that clients will have to hand over more information when borrowing.
• Housing Development Finance Corp. plans to raise as much as $17 billion in bonds after India’s largest mortgage financier posted a better-than-expected rise in fourth-quarter profit. The Mumbai-based shadow lender’s fourth-quarter net income rose 43% to 31.8 billion rupees ($432 million) as it set aside fewer provisions for bad loans, it said in a statement on Friday. That beat an average estimate of 29.2 billion rupees of 11 analysts surveyed by Bloomberg. While the virus has impacted HDFC less than its peers, India’s shadow lending sector has been significantly weakened since 2018 with the failure of a large infrastructure financier. A second deadly coronavirus wave has also led to local lockdowns, hurting businesses and jobs. The central bank announced a new round of measures this week to help lenders and businesses through the surge in infections.
• Japanese Prime Minister Yoshihide Suga extended a state of emergency that covers Tokyo and expanded it to two more regions hit by rising virus cases, in an attempt to stem infections ahead of the capital’s hosting of the Olympics in less than three months. The move announced Friday adds the industrial region of Aichi and the southern prefecture of Fukuoka to areas subject to restrictions. It also extends the state of emergency already in place for Tokyo, Osaka, Hyogo and Kyoto until the end of May. The expanded measure would cover about 40% of the economy and most major urban areas — increasing the risk of triggering a double-dip recession. A slow vaccine rollout has left the premier few tools to control the pace of infections, with the Olympics set to open July 23.
• Goldman Sachs Group Inc. and bond titan Pacific Investment Management Co. have a simple message for Treasuries traders fretting over inflation: Relax. The firms estimate that bond traders who are pricing in annual inflation approaching 3% over the next handful of years are overstating the pressures bubbling up as the U.S. economy rebounds from the pandemic. Add to that certain technical distortions in the way market-based inflation expectations are priced, and Goldman Sachs, for one, says the overshoot could be as large as 0.2-to-0.3 percentage point. That gap makes a difference with key market proxies of inflation expectations surging to the highest in more than a decade for shorter maturities.
• Spain backed a U.S. proposal to waive intellectual property rights for coronavirus vaccines, breaking ranks with Germany and complicating efforts by the European Union to form a common stance. “Intellectual property cannot be an obstacle to ending Covid-19 and to ensuring equitable and universal access to vaccines,” the Spanish government said in an informal policy paper circulated Thursday evening. Its view is that consensus must be “urgently found on the proposal for a temporary waiver.” Spain’s position sets the stage for a tense debate when EU leaders meet Friday evening to discuss their response to the pandemic. The country is at odds with Europe’s biggest economy as well as drugmakers, who warned that such a move will harm efforts to stem the pandemic.
• Texas lawmakers on Friday advanced broad changes to the state’s election laws that would bolster protections for poll watchers and criminalize sending unsolicited absentee ballot applications to voters. In an overnight session that was lengthened as Democrats offered more than 100 amendments, the state House’s substitute version of a bill (S.B. 7) touted by majority Republicans as a safeguard against voter fraud, passed a key vote, 81-64.
• The April prepayment speed report showed the pace that American homeowners are refinancing their mortgages fell to its slowest in over a year. Fannie Mae 30-year aggregate prepayment speeds dropped 21% from March to a conditional prepayment rate of 28.0, which means that should the current level hold, about 28% of the principal balance within those mortgage-backed securities will be prepaid annually. With homeowners able to refinance their mortgages at par and Fannie Mae 30-year mortgage bonds mostly trading at a premium, a slowdown in speeds can boost investor performance. The decrease was driven in part by a two-day decline in the number of available business days in April to 21 from 23 the previous month. This combined with an increase in 30-year mortgage rates from its record low of 2.65% seen on January 6, which has removed many homeowners from having incentive to refinance.
• Peloton shares rise as much as 7% premarket after the company reported 3Q revenue that beat estimates and said the recall of its treadmills would reduce sales by about $165 million in the current quarter. Shares have fallen about 30% since mid-April, when U.S. regulators warned consumers about injuries involving one of the company’s treadmills.
• Chat bot startup Ada Support Inc. said it has raised financing at a $1.2 billion valuation. The $130 million investment was led by Spark Capital, with participation from Tiger Global Management and existing investors including Bessemer Venture Partners, Accel and FirstMark Capital. Toronto-based Ada works with clients such as Facebook Inc. and Zoom Video Communications Inc. to help them interact more efficiently with users through automated chat boxes. Its bots rely on artificial intelligence to answer customers’ sales and service questions. The bots, for example, can help customers return packages or change flights.
• Mexico’s annual inflation accelerated far above the central bank’s target ceiling in April, keeping the door closed for interest rate cuts in the near future. Consumer prices in April increased 6.08% compared to a year earlier, up from 4.67% in March, the national statistics institute reported on its website Friday. The figure, which was boosted by fuel prices, topped the 6.02% median estimate in a Bloomberg survey. Economists have noted the print is especially high due to the figure’s comparison with last year’s deep plunge in prices while the pandemic raged.
• A potential World Trade Organization waiver of patent and trade secret protections for Covid-19 vaccines would leave pharmaceutical companies with limited legal avenues to recover costs. The U.S. on Wednesday expressed support for a temporary waiver, sending shares in several vaccine makers down the next day. The issue now faces thorny negotiations at the WTO, where several members, including Germany, have opposed efforts to skirt intellectual property rights. They say it would only complicate production and make companies less likely to respond in the future. The proposed waiver is intended to ramp up the production and export of vaccines and medicines to stem the pandemic’s surge in the developing world. It would let countries obtain know-how and forge compulsory licenses without facing blowback in the form of trade complaints and sanctions from other nations.
• Credit Suisse Group AG named Neil Hosie head of equities for Europe, Middle East and Africa, replacing Ryan Nelson who stepped down after the bank lost $5.5 billion in the collapse of Archegos Capital Management. Hosie will remain as head of equities for Asia Pacific, according to people familiar with the decision who asked not to be identified since the matter is private. He will relocate to London in due course, the people said. The Swiss firm emerged as the biggest loser among global investment banks as Archegos blew up in March, forcing it to raise about $2 billion in fresh funds from investors to shore up its finances. The debacle wiped out a year of profit and left investors nursing heavy losses and questioning the bank’s controls after a string of hits and writedowns.

“Know what you own, and know why you own it.” — Peter Lynch

*All sources from Bloomberg unless otherwise specified