October 15th, 2020
Daily Market Commentary
- Canada’s main opposition party is cautioning the central bank against financing Justin Trudeau’s spending plans beyond immediate pandemic emergency measures, thrusting the Bank of Canada into a political firestorm. Lawmaker Pierre Poilievre, chief Conservative spokesman on finance issues, said the bank “should not be an ATM for Trudeau’s insatiable spending appetites.” He raised concerns about the long-term impacts of monetary expansion and urged Governor Tiff Macklem to steer clear of “ideological” debates. Since Covid-19 hit, the central bank has purchased C$168 billion ($128 billion) in government bonds, marking its first foray into what’s known as quantitative easing.
- Fiat Chrysler Automobiles NV reached a tentative agreement with more than 9,000 Canadian autoworkers late Wednesday evening, avoiding a strike at the eleventh hour. Unifor, which represents about 20,000 workers at Canada’s Big Threeautomakers, said the two sides had come to an accord less than 10 minutes before the midnight deadline. The union declined to release any details about the new contract ahead of a press conference scheduled for 10 a.m. Thursday. The deal came after roughly two weeks of negotiations that carried through the Canadian Thanksgiving long weekend. Most of the workers it covers are employed at Fiat Chrysler’s Windsor, Ontario assembly plant, which lies just across the river from Detroit, Michigan.
- Barrick Gold Corp. said it’s on track to meet its full-year production goal after third-quarter output edged up from the previous period. The world’s second-largest gold miner lowered its 2020 guidance in May to a range of 4.6 million to 5 million ounces because of a conflict with the government of Papua New Guinea over its Porgera mine. Barrick said it remains “on track” to achieve its full-year production as overall gold production climbed to 3.6 million ounces in the first nine months of 2020.
- European stocks fell the most in three weeks, with some of the region’s largest cities facing tighter restrictions as Covid-19 cases surge. The Stoxx Europe 600 Index slid 2.4% as of 10:47 a.m. in London, almost erasing all its gains for October. Autos and energy shares dropped the most. Investor sentiment took a further blow from a report that Londoners will face tighter curbs starting this weekend, while Paris is set for a curfew. The DAX Index and FTSE MIB Index were the worst hit among major markets, down 2.5% or more, as Germany and Italy reported record increases in cases. After starting October with strong gains, European equities have lost momentum as rising virus infections and an impasse in U.S. stimulus talks weigh on investor confidence. The Stoxx 600 is now below its 50- and 200-day moving averages. The earnings season kicking off, a Brexit showdown and a polarizing election in the U.S. may also trigger market moves in coming weeks.
- Stocks sank with U.S. futures as Europe’s biggest cities clamped down to curb the virus and hopes wilted for new stimulus from Washington. The dollar rose with Treasuries as a risk-off mood took hold. Nasdaq 100 futures were hit worst, sliding 1.6%. The largest losers in the pre-market included Tesla Inc., Moderna and DocuSign. With S&P 500 contracts also well down, U.S. stocks are facing a third declining session unless earnings from Morgan Stanley and Charles Schwab later on Thursday somehow manage to spark optimism.
- Japanese stocks fell Thursday as concerns that a U.S. stimulus bill won’t pass before next month’s election damped sentiment. Drug makers and telecom shares weighed on the Topix index, after U.S. Treasury Secretary Steven Mnuchin said passing the virus relief bill before the election “would be difficult.” U.S. shares closed lower on Wednesday and the yen gained against the dollar for a third day in four overnight.
- Oil dipped below $41 a barrel as the dollar gained and European stock markets slumped. Futures in New York dropped 1.4%, after rising on Wednesday. Equities slid in Europe after corporate earnings failed to re-ignite rallies and prospects wilted for new stimulus from Washington before the November election. Paris and London are also facing renewed clampdowns as virus cases rise. Oil-market sentiment had improved this week amid some positive signals on consumption from Asia. But the likelihood of drastic curbs on movement being reintroduced in some of Europe’s largest cities has fueled demand fears. London is set to face harsher measures from Friday night.
- Gold edged down as a new wave of virus restrictions in Europe hit sentiment, boosting the dollar, while chances of a pre-election stimulus in the U.S. looked slim. Spot gold fell 0.5% to $1,891.83 an ounce at 10:26 a.m. in London, after climbing 0.5% on Wednesday. The Bloomberg Dollar Spot Index rose 0.5%.
- European Central Bank officials see strong reasons to hold their nerve instead of rushing into expanding emergency stimulus despite a sharp slowdown in the economy and rise in coronavirus cases. While the surge in infections means new social restrictions and a hit to activity, there’s little appetite among most policy makers to expand bond buying again at this month’s meeting, people involved in deliberations said. They asked not to be named because the discussions are private. That reinforces the idea that December is the most likely month for a decision, partly because the Governing Council will receive new growth and inflation forecasts and have more time to evaluate the economic damage. The U.S. election will have taken place, and uncertainty over Europe’s fiscal stimulus package and Brexit may also have dissipated.
- The U.K. government imposed tougher curbs on London in a bid to contain a spike in new cases, while France set a curfew in Paris. European nations from Germany to Italy to the Czech Republic reported record increases in new infections. Singapore and Hong Kong will create a travel bubble that exempts people from both cities from quarantine, an agreement that will re-open links between Asia’s two premier financial hubs. The virus’s comeback in the U.S. has reached the vast majority of the country, with trends worsening in 46 states and the nation’s capital. India reported fewer than 70,000 cases for the fourth straight day, though daily infections are still higher than in the U.S.
- President Donald Trump’s refusal to hold a virtual town hall debate with Democratic nominee Joe Biden after his hospitalization for the coronavirus has created one of the stranger events of the 2020 campaign — two town halls, each featuring a candidate, before different audiences in different cities at the same time. The concurrent hourlong events — starting at 8 p.m. New York time with Trump on NBC and Biden on ABC — threaten to fracture television viewership, making it harder for the candidates to deliver their messages to a broad audience. Instead of sparring with each other over topics such as the coronavirus pandemic, the economy and health care, the town hall format typically gives the candidates a less contentious opportunity to lay out their positions, and engage one-on-one with voters about issues they care about.
- Even with the U.S. still reeling from the coronavirus pandemic, Washington fell short in delivering more stimulus before the election, whipsawed by President Donald Trump and hobbled by the diverging agendas of the top Republican and Democrat in Congress. Now, voters will help decide what happens next. House Speaker Nancy Pelosi, a self-proclaimed “master legislator,” entered the talks in July with a reputation for legislative acumen honed over years of consequential budget battles and in previous showdowns with Trump. She put in her bid for an even bigger pandemic rescue plan than the $2 trillion package passed in March. Unlike in March, when both parties rallied around the Cares Act as the virus prompted nationwide shutdowns, the Trump administration couldn’t side with Pelosi even if it wanted. Senate Majority Leader Mitch McConnell and many of his fellow Republicans resisted any stimulus of much more than $1 trillion, and especially the massive state and local aid sought by Democrats. Some in the GOP didn’t think the economy needed more aid.
- In a critical development in the global shift away from old benchmarks that was triggered by Libor’s shortcomings, interest-rate swaps on more than $80 trillion in notional debt will transition this weekend to a new rate for determining their value. While the switch to the secured overnight financing rate, or SOFR, is expected to boost longer-term liquidity in the new benchmark, it also is fueling concerns about unruly price action because it is expected to trigger the sale of swaps on tens of billions of dollars of debt. The reset, which will see SOFR replace the effective federal funds rate in calculations that value swaps, is part of a push to make SOFR a standard U.S. reference rate in debt and derivatives markets. SOFR is intended to replace dollar Libor, which still underpins hundreds of trillions of dollars of assets such as mortgages in the U.S. and syndicated loans in Asia. The big bang follows a smaller-scale pivot in Europe this July, a less-complicated switch that occurred without much impact on the market.
- CTP BV, a developer of industrial property in central and eastern Europe, has started discussions on a potential initial public offering that could take place next year, people with knowledge of the matter said. The company, whose biggest market is the Czech Republic, is in early-stage talks with potential advisers, according to the people. It is considering seeking a valuation of around 6 billion euros ($7 billion) in the offering, the people said, asking not to be identified because the information is private. Amsterdam is among possible listing venues being discussed by CTP, which could seek to sell shares as early as the first quarter of 2021, the people said.
- Norway’s sovereign wealth fund rose 412 billion kroner ($44 billion) in the third quarter as global stock markets continued to rally. The $1.2 trillion fund’s overall return was 4.3%, which was 3 basis points less than the benchmark set by the nation’s finance ministry. The positive run followed a negative return of 3.4% in the first half. The world’s largest wealth fund is set to increase its bets on U.S. equities, where tech firms are posting blistering returns amid optimism they’re best poised for the post-pandemic economy. Norway is also tapping the fund to ease the impact of Covid-19 on its citizens, and plans to make record withdrawals this year.
- Abu Dhabi government institutional investors are paying $2.1 billion for a stake in a natural gas pipelines unit run by Abu Dhabi National Oil Co. Abu Dhabi Pension Fund and holding company ADQ will take an indirect stake in the pipelines unit Adnoc set up earlier this year, the oil and gas company said in a statement. Adnoc is doing the transaction at the same price as a deal in June, when it agreed to sell a stake in the gas pipelines business to international investors and valued the business at $20.7 billion.
- Billionaire Robert Smith will pay about $140 million and acknowledge wrongdoing to end a four-year U.S. tax investigation involving assets held in offshore tax havens, people familiar with the matter said. Smith, chief executive officer of the private equity firm Vista Equity Partners, informed some executives and investors of the pending agreement on Wednesday, the people said. Smith, 57, is cooperating with related tax investigations as part of a deal in which he will admit misconduct but won’t be prosecuted, they said. The settlement, which doesn’t involve Vista, could be made public as early as Thursday, one person said. The settlement amount includes back taxes, penalties and interest, the people said.
- Millions of low-income Americans are locked into poverty thanks to U.S. tax policy, Federal Reserve Bank of Atlanta researchers say. About a quarter of lower-income workers effectively face marginal tax rates of more than 70% when adjusted for the loss of government benefits, a study led by Atlanta Fed Research Director David Altig found. That means for every $1,000 gained in income, $700 goes to the government in taxes or reduced spending. In some cases, there are no gains at all. Poorer families may rely on Medicaid insurance, welfare payments, food stamps, housing vouchers and tax credits that are based on family incomes. Small increases in wages can bring big losses of benefits, reinforcing a negative cycle in which workers aren’t rewarded if they improve their skills or pay.
- Russia’s crude producers are looking to cut 2021 drilling as the pandemic threatens the recovery of prices and global demand, according to one of the country’s top-three independent oil-service providers. The nation’s producers, which have reduced oil drilling by as much as one-third so far this year, may cut it by a further 20% in 2021, said Vitaly Dokunikhin, chief executive officer at Eriell Russia. Russia has made unprecedented output cuts this year under a deal with the Organization of Petroleum Exporting Countries that’s set to last through April 2022. Though that helped support crude prices, they are again under pressure as the coronavirus surges, and threatening oil drilling everywhere. OPEC and its allies are also debating whether to proceed with their plan to ease the curbs from January.
- The countdown has begun on whether banks will be ensnared in the Trump administration’s sanctions on Chinese and Hong Kong officials, singled out for contributing to a clampdown on political freedoms in the Asian hub. A U.S. report to Congress on Wednesday named 10 officials, including Hong Kong Chief Executive Carrie Lam and Xia Baolong, the head of China’s Hong Kong and Macao Affairs Office, over their role in implementing a new security law in the former British colony. The State Department list reinforced sanctions imposed in August under an executive order, which had included one additional name. Officials in the U.S. now have 60 days to identify banks that have business with those on the list, putting lenders at risk of being sanctioned. Banks operating in Hong Kong, including Citigroup Inc. as well as major Chinese lenders, have already been taking steps to ensure they are compliant with U.S. laws.
- Wells Fargo & Co. fired more than 100 employees suspected of improperly collecting coronavirus relief funds, according to a person with knowledge of the situation. The firm determined that the staffers defrauded the Small Business Administration “by making false representations in applying for coronavirus relief funds for themselves,” according to an internal memo reviewed by Bloomberg. The review focused on employees who tapped the Economic Injury Disaster Loan program, a key part of the government’s effort to prop up businesses during the pandemic. “We have terminated the employment of those individuals and will cooperate fully with law enforcement,” David Galloreese, Wells Fargo’s head of human resources, said in the memo. “These wrongful actions were personal actions, and do not involve our customers.”
- The world’s major economies poured money into the fight against the coronavirus slump, and now they’re edging toward what may be a more complex policy choice: when and how to turn off the spigots. Governments have pledged some $12 trillion in spending this year, the International Monetary Fund estimates. While the fund says it’s too early to cut off the support, it warns record debt levels will eventually pose a challenge for policy makers. The biggest economies are generally still in the spending camp, though budget deficits are forecast to start narrowing in 2021. Financial markets show no signs of balking, with borrowing costs at record lows almost everywhere. Yet, from some U.S. Republicans to sound-money advocates in Germany, debt concerns are starting to get voiced.
- A barrage of policy and economic shifts will temporarily put an end to the outperformance of technology stocks and instead lift laggards such as banking and auto shares, according to strategists at Goldman Sachs Group Inc., among a chorus of investors and strategists increasingly warning of an imminent shift in market leadership. Rising bond yields, the expectation of at least one Covid-19 vaccine approval this year and the potential of a so-called Blue Wave in November’s U.S. elections could lead to a reversal of fortunes for the sector that has been the biggest stock market winner of the pandemic so far, a team including Peter Oppenheimer wrote in a note Thursday. The strategists cut their recommendation on technology stocks to neutral and upgraded banking and auto shares to overweight. They also lowered their view on food, beverage and tobacco stocks to underweight.
- Walgreens Boots Alliance Inc. posted stronger-than-expected results in its fiscal fourth quarter, as the drugstore giant continued to deal with the effects of the Covid-19 pandemic. Adjusted earnings per share declined 28% from a year earlier to $1.02, though that was better than the 96 cents a share expected by Wall Street analysts. The company said it expects low single-digit growth in adjusted per-share earnings in fiscal 2021.
- Tiffany & Co. reported positive sales and earnings trends over the summer, countering LVMH’s argument that the jeweler’s business has been devasted by Covid-19 as the French luxury giant seeks to back out of a takeover agreement. The U.S. company’s global net sales in August and September “declined slightly” from the comparable period last year while operating earnings — including transaction expenses — rose by 25%, according to an unscheduled statement Thursday. The announcement comes ahead of LVMH’s third-quarter update due later Thursday. Tiffany and the Louis Vuitton owner are set to go to a trial in January after LVMH moved to back out of a $16 billion deal to buy Tiffany.
- Pound hedging costs are poised for a rally as traders now face a convergence of extraordinary political risks in early November. Expected sterling turbulence in three weeks’ time, based on option prices, has been creeping up due to U.S. election uncertainty, but now the market must also factor in the new unofficial deadline for U.K.-European Union trade talks. Implied volatility remains low compared with previous bouts of Brexit anxiety, suggesting there’s room to climb. The lack of panic is perhaps showing up most clearly in the realized volatility premium. That’s the difference between implied and realized pricing and is a measure of demand for insurance on sterling. The gauge is entering overpriced territory, yet is still below levels seen only month ago.
*All sources from Bloomberg unless otherwise specified