November 17th, 2020

Daily Market Commentary

Canadian Headlines

1. Canadian equities rose Monday after Moderna Inc.’s vaccine was shown to be 94.5% effective in a preliminary analysis of a large late-stage clinical trial. The S&P/TSX Composite Index closed at the day’s high, advancing 1.3% to the highest since February 26. Energy, financials and real estate led the way, while tech and consumer staples were among laggards. Oil gained the most in a week amid signals a Covid-19 vaccine is highly effective. On the deal front, Endeavour Mining Corp., the acquisitive gold producer backed by Egyptian billionaire Naguib Sawiris, agreed to buy Teranga Gold Corp. in the latest deal to reshape the sector.
2. Omers Private Equity is weighing options for ERM Group Inc., including a potential sale that could value the sustainability consultancy at as much as $2.5 billion, people familiar with the matter said. The unit of Canada’s Ontario Municipal Employees Retirement System is speaking with potential advisers about strategic alternatives for the business, the people said, asking not to be identified discussing confidential information. Omers could start a sale process early next year, the people said. It acquired ERM for $1.7 billion including debt in 2015 from Charterhouse Capital Partners. Another Canadian fund, Alberta Investment Management Corp., also participated in the acquisition.

World Headlines

1. European stocks fell on Tuesday, after touching their highest since February in the previous session on the back of positive vaccine news, with declines among banks, healthcare and travel stocks weighing. Europe’s Stoxx 600 Index was down 0.5% at 11:16 a.m. London time. Dealmaking was in focus, with Spain’s Banco Bilbao Vizcaya Argentaria SAfalling more than 6% after confirming that it’s in talks to buy rival Banco de Sabadell SA, which extended Monday’s 25% jump. Airline operator International Consolidated Airlines Group SA declined 2.7% after reportedly agreeing to buy Globalia’s Air Europa. European stocks have been on tear in November, boosted by positive vaccine news from Pfizer Inc. and BioNTech SE last week, and from Moderna Inc. on Monday. While shares in companies which have benefited from the lockdowns have taken a leg lower, this year’s laggards, like banks, autos and travel stocks, have seen a boost. However, some investors remain cautious, given the rapid spread of infections.
2. A global stock rally powered by hopes that new Covid-19 vaccines will bolster economic growth paused on Tuesday as investors weighed the near-term spread of the virus. S&P 500 futures retreated a day after the underlying benchmark closed at an all-time high on news that Moderna Inc.’s vaccine was shown to be 94.5% effective. Contracts on the tech-heavy Nasdaq 100 outperformed. Tesla Inc. shares jumped more than 10% in pre-market trading after an announcement that Elon Musk’s carmaker will join the S&P 500 Index on Dec. 21.
3. Japanese stocks closed higher after swinging between gains and losses, as optimism that a coronavirus vaccine candidate may help control the global pandemic countered signs of overheating in the local market. Banks were the biggest boost to the Topix index amid the continued rotation into cheap economically sensitive stocks, while stay-at-home beneficiaries in the telecommunications group fell. The Nikkei 225 Stock Average closed above 26,000 yen for the first time since 1991, with its 14-day relative strength index flashing overbought signals for a seventh session.
4. Oil fluctuated near $41 a barrel as the dollar fell and traders weighed the potential for OPEC+ to delay a planned easing of output cuts. While headline prices have gained on the growing prospect of an effective Covid-19 vaccine in recent days, an OPEC+ panel said the group, which meets again on Tuesday, should consider holding off on easing bumper production curbs by three to six months. The producer alliance is wrestling with a bifurcated demand outlook. In Asia, where consumption has recovered strongly from Covid-19, refiners have been snapping up barrels from the Middle East, U.S. and Russia. The structure of Oman futures on the Dubai Mercantile Exchange has surged into a bullish backwardation — indicating tight supplies — in recent days, as strength in the region’s crude market has grown.
5. Gold was steady following a bumpy session on Monday as investors weighed the latest vaccine developments against the increasing pace of coronavirus infections in the U.S. and a weakening dollar. In the week’s opening session, Moderna Inc. said its Covid-19 vaccine was 94.5% effective in a preliminary analysis, triggering a sell-off in bullion before it ended little changed. The readout comes a week after a similar shot by Pfizer Inc. and BioNTech SE, which had spurred a deeper slide in gold. While bullion is still headed for the biggest annual gain in a decade as investors seek havens amid the health crisis, the rally has stalled recently amid the vaccine developments and uncertainty over further stimulus. President-elect Joe Biden’s call for Congress to pass a larger-scale package ran into headwinds, with downbeat comments from a senior Republican senator. Still, a surge in U.S. infections is raising questions about just how fast vaccines could bring the pandemic under control.
6. China’s yuan climbed to the strongest level in more than two years, fueled by optimism on the country’s economic recovery and its interest-rate premium over the rest of the world. The yuan jumped as much as 0.5% to 6.55 a dollar, surpassing the high it reached earlier this month when Joe Biden won the U.S. presidential election. The currency is set to climb for a fourth session, pushing a measure of its relative strength past a level that signals to some investors an asset is overbought. Apart from friendlier ties between Washington and Beijing, the currency is also climbing on bets the nation’s rebound from the pandemic is well on track. The premium that Chinese government bonds offer over American debt is near the highest on record, which attracts foreign inflows and supports the yuan. A weak dollar provides yet another boost.
7. Angela Merkel warned that the situation in Germany remains “very serious,” while expressing optimism that an economic recovery will gather pace once the pandemic is brought under control. Boris Johnson was advised to consider strengthening regional restrictions after England exits its second national lockdown next month. New cases surged in India’s capital of New Delhi, even as the country’s overall numbers dipped below 30,000 for the first time in four months. Moderna Inc.’s vaccine candidate has one-upped the shot from rival Pfizer Inc., appearing to be equally effective without the need to be stored at ultra-cold temperatures. Meanwhile, U.S. infections are still accelerating, and President-elect Joe Biden warned that further delays in the handoff from President Donald Trump risk increasing the death toll.
8. Tesla Inc., Elon Musk’s 17-year-old upstart carmaker, took a giant step toward blue-chip respectability on Monday, getting named to one of the world’s most famous stock indexes in an action that will greatly broaden its investor base. The announcement that Tesla will enter the S&P 500 on Dec. 21 follows months of speculation, and one temporary setback, after the stock failed to make the cut during the index’s quarterly rebalancing in early September. The anticipation has helped drive a nearly fivefold rally in the stock this year to almost $390 billion, making the electric vehicle pioneer the biggest company ever to be added to the gauge. It will also be one of the index’s most influential constituents with a weighting that falls around those of Berkshire Hathaway Inc., Johnson & Johnson and Procter & Gamble Co.
9. Russian online retailer Ozon Holdings Plc is seeking to raise more than $750 million in an initial public offering, according to people familiar with the matter. Ozon could be valued at $4.6 billion to $5.6 billion, one of the people said, asking not to be identified as the plans are still confidential. No final decisions have been made and the valuation, as well as the amount raised from the sale, could fluctuate, the person said. A spokeswoman from Ozon declined to comment. The company had applied earlier this month to list its American depositary shares in the U.S., hiring Goldman Sachs Group Inc. and Morgan Stanley along with five other banks to manage the sale. Ozon, like other e-commerce companies, has seen its revenue jump during pandemic lockdowns that shut shops worldwide. The company posted a 70% gain in sales in the first nine months of the year compared to the same period in 2019.
10. Walgreens Boots Alliance Inc., CVS Health Corp. and Rite Aid Corp. tumbled premarket Tuesday after Amazon.com Inc. revealed plans to start selling prescription drugs to Prime members in the U.S. Drug distributors also slumped in early market hours. The list of competitors for more traditional brick-and-mortar drug stores and distribution chains has been increasing as more consumers are going online to buy their medicines, especially during the pandemic. The shakeup follows more than two years of rumblings over the Internet giant’s plans following its roughly $1 billion purchase of PillPack in 2018. That same year Amazon also aligned itself with Berkshire Hathaway Inc., and JPMorgan Chase & Co. to form the Haven Healthcare venture to stem employer-health care spending, although turnover at the alliance has kept any major disruption to health-care companies at bay.
11. HSBC Holdings (HSBA.L) on Tuesday launched a tender offer to purchase a total of about $8.26 billion of notes of nine separates series. The bank offered to purchase its $2 billion of 4% senior unsecured notes due March 30, 2022, $1.54 billion of 2.95% notes due May 25, 2021, $638.1 million of 2.65% notes due Jan. 5, 2022, $417.5 million of 4.875% notes due Jan. 14, 2022, $978.5 million of 3.4% notes due March 8, 2021, $848.6 million of 5.1% notes due April 5, 2021, $755.2 million of floating-rate notes due Jan. 5, 2022, $570.3 million of floating-rate notes due May 25, 2021, and $511.5 million of floating-rate notes due March 8, 2021.
12. Delta Air Lines Inc. is sidestepping millions of dollars in U.S. tariffs on European jetliners by initially routing them far outside the country to such places as Amsterdam, Tokyo and El Salvador. The U.S. carrier has taken delivery of seven European-built Airbus SEplanes since President Donald Trump’s levies took effect in October 2019. Rather than flying them home as it had in the past, Delta has based the aircraft overseas. The decision, coupled with the definition of new planes in the tariff rules, has kept the jets from being considered imports even though some of them regularly enter the U.S. Avoiding the tariffs has saved Delta, Airbus’s biggest U.S. airline customer, precious cash while customs records show that rival carriers have been charged the duties. Every dollar counts for an industry struggling to cut costs amid a collapse in demand caused by the coronavirus pandemic. Like other major U.S. carriers, Delta has received billions of dollars in government aid while parking planes, reducing flights and trimming jobs as airlines steel themselves for a long slump.
13. Walmart Inc. sales surged past estimates as consumers continue to flock to the essential retailer for carts full of groceries, pharmacy items and at-home entertainment while the virus rages on. Shares rose. U.S. comparable sales at Walmart stores rose 6.4% when excluding fuel, beating estimates for a 3.8% rise, with online demand soaring. The sales gain didn’t come at the expense of margins, however: Walmart’s gross margin added 50 basis points as it reduced operating expenses and Covid-19-related costs.
14. One of the biggest challenges to delivering a promising coronavirus vaccine based on unprecedented technology to millions around the world just got easier. When Pfizer Inc. announced effective preliminary results for its vaccine candidate last week, the downside was that it must be stored at ultra-cold temperatures, posing significant logistical issues. But Moderna Inc. on Monday one-upped its rival, offering a vaccine based on the same technology that appears to be equally effective, but which also can be stored at regular refrigerated temperatures for up to a month. The difference is significant. Delivering normal vaccines to populations in the remotest regions from India to Africa is difficult enough just on supply and transport issues. The temperature factor introduces a more daunting hurdle, requiring countries to build storage and transportation networks that can maintain temperatures far colder than that required for frozen meat. The massive investment and coordination needed raised the likelihood that only rich nations would be guaranteed access.
15. Home Depot Inc. shares declined after the Atlanta-based home-improvement retailer reported higher costs and a plan to spend $1 billion to boost annual compensation for front-line hourly employees. While same-store revenue, a key gauge of performance for retailers, rose 24% in the quarter ended Nov. 1, that also brought higher expenses. Cost of sales, a measure of the company’s expenses to generate a sale, was up 24% from a year ago. Home Depot has broadly benefited amid the pandemic of 2020 as consumers divert spending that would have gone to travel and entertainment to improving their homes. With construction booming, it announced on Monday it would buy building products distributor HD Supply Holdings Inc., reuniting the two companies after they split apart more than a decade ago. Investors will listen for additional details in the company’s upcoming call with analysts on Tuesday morning.
16. The U.K. and European Union could strike a deal on their future trading and security relationship early next week as the two sides edge closer to agreement on the biggest sticking points. As talks continue in Brussels, officials are planning for the possibility of a breakthrough to be announced as soon as Monday, although no precise day has been settled on, people familiar with the discussions said. The pound climbed by as much as 0.4% against the dollar. They also warned that there was still the potential for the negotiations to collapse, with the two sides still some way apart on the familiar stumbling blocks that have plagued the talks since they started in March. Getting a deal will still need the U.K. to make big political decisions over whether it is prepared to compromise, particularly on the thorny topic of access to British fishing waters, an EU official said.
17. EasyJet Plc extended the terms of a government-backed loan in the U.K. to bolster liquidity as a new wave of coronavirus lockdowns crimps travel in Europe. Britain’s biggest discount airline posted a loss of 835 million pounds ($1.1 billion) for the year through September, within a range already announced, and said in a statement Tuesday that it will fly no more than 20% of its usual capacity in the three months through December. EasyJet is bracing for what carriers expect to be a brutal winter, with many markets still closed and a Covid-19 vaccine not yet distributed. The Luton, England-based firm had cash of 2.3 billion pounds as of Sept. 30 and said it will continue to review its liquidity, including further funding opportunities, while seeking to refinance all upcoming maturities.
18. Donald Trump is expected to issue a formal order drawing down U.S. troops in Afghanistan and Iraq to 2,500 in each country by Jan. 15, a U.S. defense official said, as the president works to deliver on his longtime pledge to exit from “endless wars.” U.S. Central Command has received an informal warning order, according to the official. The expected order, reported earlier Monday by CNN, would reduce troops from about 4,500 in Afghanistan and from about 3,000 in Iraq before Trump leaves office. Trump’s deadline would come five days before President-elect Joe Biden takes office. Pentagon officials didn’t immediately comment when asked about the drawdown.
19. Fund managers overseeing $526 billion are the most bullish they’ve been this year following the U.S. election outcome and progress on a vaccine, prompting a call from Bank of America Corp. strategists that it’s time to start selling risk assets. The monthly survey, conducted Nov. 6 through Nov. 12 saw investor optimism about stocks skyrocket, with allocation jumping to the highest level since January 2018. Cash holdings plunged to the lowest level since April 2015, while economic growth expectations surged to a 20-year high. Investors snapped up more volatile assets, such as small-caps, value, banks and emerging-market stocks, while shifting away from bonds and staples.
20. Barring a surprise on Capitol Hill, the Federal Reserve’s Board of Governors is about to get its most controversial and contentious new member in decades. The U.S. Senate is set to vote on a procedural motion Tuesday that would clear the way for a confirmation vote on President Donald Trump’s Fed nominee Judy Shelton. The second vote could come as soon as later on Tuesday. Shelton, 66, a former informal adviser to Trump, was long known for her advocacy of a return to the gold standard, ultra-hawkish views on inflation and opposition to federal deposit insurance. She provoked further controversy and opposition by abandoning those views and calling for interest-rate cuts to align herself with Trump as she emerged as a candidate for a Fed post.
21. President Donald Trump is rushing to leave his final mark on energy, financial and foreign policy while stalling the transition to President-elect Joe Biden — who warned that further delays in the handoff risk increasing the coronavirus death toll. The Pentagon told military commanders on Monday it would draw down U.S. deployments to Iraq and Afghanistan to about 2,500 troops in each country by the end of the year. The announcement followed administration moves to escalate tensions with Iran and China, offering the incoming president unenviable choices as he seeks to revive international accords struck under former President Barack Obama. Domestically, Trump is rushing to lease oil drilling rights in the Arctic National Wildlife Refuge before Biden takes office. And Senate Republicans are trying to push through a controversial nominee for the Federal Reserve board of governors, Judy Shelton, so that the new president won’t be able to fill the vacancy.
22. Chinese companies with shares traded in America would be required to use auditors overseen by U.S. regulators or face being kicked off exchanges under a plan being drafted by regulators, according to people familiar with the matter. The proposal, which is likely to be issued for public comment in December, would address the disparate treatment that applies to Chinese companies going public in the U.S. The firms have long been able to sell shares here, yet their auditors violate a key investor protection: China hasn’t allowed their work to be inspected. Auditor supervision has been overseen by a special watchdog — the Public Company Accounting Oversight Board — since the accounting scandals that took down Enron Corp. nearly 20 years ago. The Securities and Exchange Commission has taken different tacks to try to get China’s cooperation with the PCAOB, from suing its audit firms to get information on fraudulent companies, to negotiating with Chinese regulators and issuing public warnings to U.S. investors about the problem.
23. Bitcoin reached $17,000 for the first time since just after the burst of the cryptocurrency bubble almost three years ago. The largest digital coin, which has more than doubled this year, rose as much as 2.2% to $17,067 on Tuesday in New York trading. From an all-time high in December 2017 of nearly $20,000, Bitcoin tumbled to as low as $3,136 within a year.
24. Kohl’s Corp. reported sales that fell short of analysts’ expectations, illustrating the divide taking place between essential and non-essential retail right now. Same-store sales, a critical gauge of the sector’s performance, fell 13.3%, slightly worse than the estimate for a decline of 12.3% from Consensus Metrix. Net sales of $3.78 billion were also shy of expectations, showing the chain still struggling with the rapid changes of 2020 that have seen consumers retrench and buy less clothing.
25. Uber Technologies Inc. will invest $50 million to support minority and underserved communities, part of a broader commitment from U.S. companies to address inequity in access to banking and loans. Uber will earmark $25 million for the Keepers Fund, a vehicle sponsored by the National Bankers Association to support so-called minority depository institutions, and another $25 million in direct deposits with such entities, the company said Tuesday in a statement.  Since the killing of George Floyd prompted widespread protests of systemic racism, Twitter Inc., Netflix Inc., Bank of America Corp., and several other consumer and finance companies have pledged more than $1 billion to support loans and financial institutions that serve Black and minority communities. They and most of the other largest U.S. companies have also committed to fund advocacy groups such as the National Urban League and NAACP Legal Defense Fund, as well as set hiring targets for minority executives and employees.
26. Saudi Aramco kicked off a jumbo bond sale Tuesday to help fund a $75 billion dividend, returning to the debt markets for the first time since April of last year. The state energy firm is raising debt after slumping crude prices caused profit to fall by 45% in the third quarter. That’s left it unable to generate enough cash to fund investor payouts, almost all of which go to the Saudi Arabian government, which needs the money to plug a widening budget deficit and prop up a slumping economy. Aramco, the world’s biggest oil company, is selling tranches maturing in three, five, 10, 30 and 50 years, according to a person with knowledge of the matter. Initial spread guidance ranges from around 140 basis points above U.S. Treasuries on the shortest tranche, to plus 230 basis points for the 50-year portion, the person said.

*All sources from Bloomberg unless otherwise specified