October 21st, 2020
Daily Market Commentary
- Canada’s Suncor Energy Inc. is exploring the sale of a handful of oil and gas fields in the North Sea, according to people with knowledge of the matter. Suncor is studying divesting the 30,000-barrel-a-day Golden Eagle Area on the U.K. side of the sea, the people said. Its 26.69% stake could be valued at about $400 million, one of them said. It’s also interested in selling smaller assets on the Norwegian side, valued at an estimated $100 million, another person said. After a slow start to the year as the coronavirus crisis disrupted plans across the industry, asset-sale activity in the North Sea has picked up in the second half. Exxon Mobil Corp. has begun a process to divest its U.K. fields and Eni SpA is seeking to sell a production vessel in Norway. Chrysaor Holdings Ltd. this month bought independent oil explorer Premier Oil Plc in a reverse takeover. Suncor hasn’t started a formal sales process, but is engaging with potential buyers that have shown interest in the fields, one of the people said.
- Canadian lawmakers are weighing whether to create a special committee to investigate potential misuse of Covid-19 spending, prompting Prime Minister Justin Trudeau to threaten a snap election. Parliament will vote Wednesday on a motion introduced by the main opposition Conservative Party to investigate a number of spending decisions, including a C$900 million ($686 million) student-grant contract to a charity with ties to the prime minister’s family. That scandal was a contributing factor to the downfall of his government’s first finance minister this summer. Trudeau, whose Liberals are short of a majority, warned the move could force the dissolution of the legislature.
- European stocks fell for a third day amid mixed earnings reports, with the U.K.’s FTSE 100 being hit by sterling strength after the European Union’s chief Brexit negotiator said an agreement was within reach. The Stoxx Europe 600 Index was down 1% as of 9:35 a.m. in London. Construction led sector losses as Assa Abloy AB and Vinci SA declined after third-quarter updates, while telecoms outperformed as Ericsson rallied on better-than-estimated profit. Health-care shares also lagged behind. European equities, stuck in a narrow range since early June, are facing a volatile end to the year from rising Covid-19 cases to Brexit and the U.S. election and stimulus talks. The FTSE 100 slipped 1.3% as the pound gained on positive comments from Michel Barnier, the EU’s chief Brexit negotiator.
- Treasuries dropped alongside the dollar amid speculation that Washington lawmakers have made some progress on a stimulus package to be financed by trillion-dollar borrowing. The U.S. 10-year yield broke above 0.8% to a four-month high and European bonds followed suit after Democrat House Speaker Nancy Pelosi expressed hopefor political compromise on a stimulus bill this week. Outside of debt markets, the picture was more mixed. S&P 500 futures swung between losses and gains. Netflix Inc. tumbled in pre-market trading after missing subscriber estimates. Tesla Inc. edged up before earnings later Wednesday.
- Japanese stocks rose following positive remarks from U.S. House Speaker Nancy Pelosi on the possibility of reaching an agreement with the Trump administration on a stimulus package. Auto and electronics makers were the biggest boosts to the benchmark Topix index. The value of trading volume on the first section of the Tokyo Stock Exchange remained below 2 trillion yen ($19 billion) for an eighth-straight session. Speaking to reporters after a call with Treasury Secretary Steven Mnuchin, Pelosi said she’s hopeful for a stimulus agreement this week, which would be crucial to getting a bill passed by the Nov. 3 election. Any deal still faces a threat from Senate Republicans who oppose a package as large as the $2.2 trillion being sought by her. The final presidential debate between President Trump and Joe Biden will be held on Thursday
- Oil dropped after an industry report pointed to a surprise increase in American crude stockpiles, countering optimism over a potential U.S. stimulus agreement. The American Petroleum Institute reported crude inventories climbed by almost 600,000 barrels, according to people familiar with the data. That contrasts with a stockpile decline forecast in a Bloomberg survey, before official data later on Wednesday. Brent crude futures were 1.6% lower on Wednesday, reversing all of the previous session’s gains that were driven by hopes of the American economic stimulus. A resurgent coronavirus and expanding Libyan supply are pushing oil lower. While China is supporting demand, there are signs of weakening consumption in Western Europe. OPEC+ is also warning of a precarious market outlook. The coalition of producers will have to decide next month if it sticks with plans to raise production in January, or heeds industry warnings about an imminent glut if they do so.
- Gold advanced to a one-week high as the dollar weakened amid optimism that U.S. lawmakers may clinch a pre-election spending deal to bolster the economy. Silver also climbed. House Speaker Nancy Pelosi told reporters she was hopeful of agreeing on a compromise package this week after speaking with Treasury Secretary Steven Mnuchin. While she signaled that differences remain, her comments kept pressure on the dollar, aiding bullion.
- Copper extended its advance toward $7,000 a ton as supply disruptions continue in Chile and optimism around a U.S. stimulus package bolsters sentiment, while hurting the dollar. Copper has rallied about 60% since its low in mid-March as global supply tightened. Production is expected to decline for a second year amid pandemic-driven disruptions, while China’s demand and output has proved resilient. The Asian economy’s continued recovery from the coronavirus has it on track to be the world’s only growth engine this year.
- In August of 1994, trading was halted for 40 minutes on the Nasdaq after a squirrel chewed through a power line and the exchange’s backup power system failed to kick in. Today, the technology that underpins billions of dollars in daily trades has never been more advanced, meaning winning margins can be measured in milliseconds. But even with millions spent on hardened systems, backups, and upgrades, outages still happen. Markets hit the trifecta this month, with exchanges on three continents around the world going down; Euronext NV was the latest, following the Mexican Bourse and Tokyo Stock Exchange. The Paris-listed operator, which will handle 25% of all European stock trading after it completes its $5 billion purchase of Borsa Italiana, shuttered markets for three hours on Monday morning. It was the biggest outage to hit the exchange operator in two years.
- The latest merger between two U.S. shale producers is dealing with an unusual family dynamic that has raised concerns about a potential conflict of interest. Pioneer Natural Resources Co. said Tuesday it agreed to buy rival Parsley Energy Inc. for $4.5 billion in stock. Pioneer is run by Scott Sheffield while his son Bryan is Parsley’s founder and chairman. Pioneer Chief Financial Officer Richard Dealy told analysts and investors on a conference call the two Sheffields were intentionally kept out of takeover talks, which were led by the lead independent directors of both companies.
- Contrary to popular belief, more people headed to the New York metro region than moved out during the Covid-19 era, according to an analysis of cell-phone data. A study of migration in the 30 largest U.S. metro areas during the pandemic showed the most popular cities for relocations from March to September were Tampa, Florida; Phoenix — and the New York City area, according to data from Orbital Insight, a California-based company that tracks the movement of goods and people. Miami and Orlando rounded out the top five. “New York remains desirable for all the same reasons it ever was — the nexus of culture and commerce with a higher density of jobs-per-block than most other places in the world,” said Matt Larriva, vice president of research and data analytics at FCP, a real estate firm that studies Orbital Insight data to gain a deeper understanding of domestic migration.
- Investments in U.S.-listed fixed income exchange traded funds declined 24% last week for the fourth straight week of inflows. Broad bond-market ETFs led the inflows. Corporate bond ETFs had the biggest change from the previous week. Net inflows to ETFs totaled $4.37b in the week ended Oct. 20, including the effect of leveraged funds, compared with $5.75b the prior week
- AutoNation Inc. rode a recovering auto market and its own internal cost-cutting moves to post record profit in the third quarter, beating analyst estimates for both adjusted earnings and revenue. The nation’s largest auto dealer chain said it made $2.38 a share in adjusted profit, beating a consensus forecast of 10 analysts for $1.65 a share — almost double what it earned a year earlier. Pandemic-weary car buyers returned to showrooms to find a lean selection of vehicles but low financing rates, which enabled AutoNation to boost prices. The company also reduced staff and marketing costs to improve profitability, Chairman and Chief Executive Officer Mike Jackson said in an interview.
- President Donald Trump has some ground to make up in the final campaign debate Thursday against Democrat Joe Biden after a widely panned performance in a face-off days before he tested positive for coronavirus and ended up in the hospital. But rather than spend much time preparing, Trump has been angrily complaining at daily rallies that the deck is stacked against him. He claims the moderator, NBC’s Kristen Welker, won’t treat him fairly, that the topics aren’t to his liking and that a decision to mute the microphones at times when the other candidate is speaking is unfair. Trump’s campaign is looking for a way to draw new support — or depress the vote for Biden. The former vice president, meanwhile, needs to do no harm at the debate to keep voters on his side and ward off a round of last-minute Democratic panic.
- U.S. inspectors found quality-control problems at an Eli Lilly & Co. plant used to help produce its Covid-19 antibody therapy, posing a potential obstacle to the company’s goal of producing 1 million doses by year-end. Cathay Pacific Airways Ltd. will cut about 5,300 jobs as part of a restructuring at the carrier triggered by the pandemic’s hit to travel. Europe’s outbreak continued to spread. Germany, Greece and the Netherlands hit daily case records, and Spain is weighing a curfew in Madrid. The U.K.’s budget deficit soared on pandemic spending. Amazon.com Inc. will let corporate employees work from home through June 2021, the latest company to push back re-opening offices as Covid-19 cases surge again across the U.S. Japanese movie goers defied the pandemic, setting a box-office record for a comic-book film.
- The U.K. welcomed European Union chief Brexit negotiator Michel Barnier’s remarks on the importance of the U.K.’s sovereignty, in a sign the two sides are ready to resume trade talks. “What’s at stake in these negotiations is not the sovereignty of one side or the other,” Barnier told the European Parliament. The EU’s principles in the talks “are fully compatible with the respect of British sovereignty, a legitimate concern of Boris Johnson’s government,” he said. The Frenchman said that despite Boris Johnson’s suspension of talks last week, a deal is within reach. He said the agreement must reflect a “balanced compromise” between the two sides.
- Netflix shares fell about 5% in premarket trading after the streaming service’s quarterly subscriber additions fell short of expectations, but analysts say the miss will prove insignificant longer-term. Most brokers are focusing on cash flow strength and opportunities to grow margins through original productions. BMO Capital gave Netflix a new Street-high price target, while RBC and Morgan Stanley were among others lifting objectives on a stock that’s already up more than 60% this year.
- Tesla Inc. is all but guaranteed to report a profit for the fifth consecutive quarter when it reports earnings Wednesday, but impressing the critics will take more work this time around. The electric-vehicle maker’s market value has soared more than 400% this year, thanks to strong deliveries that have been a bright spot in the midst of a global pandemic. The sharpest rally came before second-quarter results in July, when speculation bubbled that a fourth profitable quarter would vault Chief Executive Officer Elon Musk’s company into the S&P 500 Index. But S&P has yet to add Tesla despite that milestone, and the impact of regulatory credits on Tesla’s profits remains a big question.
- Mayor Lori Lightfoot on Wednesday will lay out how she plans to close the largest budget gap in Chicago’s history as Covid-19’s resurgence threatens to hobble the junk-rated city’s recovery in the years ahead. Spending cuts, increases to property taxes, pension obligation bonds and debt refinancings have all been under consideration to close the record $1.2 billion deficit for fiscal 2021 in the corporate fund, the main vehicle used to pay for services the city provides and other operating expenses. That comes after a nearly $800 million gap this year.
- Chinese technology companies including Huawei Technologies Co. have expressed strong concerns to local regulators about Nvidia Corp.’s proposed acquisition of Arm Ltd., people familiar with the matter said, potentially jeopardizing the $40 billion semiconductor deal. Several of the country’s most influential tech firms have been lobbying the State Administration for Market Regulation to either reject the transaction or impose conditions to ensure their access to Arm technology, the people said. Chief among their concerns is that Nvidia may force the British firm to cut off Chinese clients, they said, asking not to be identified discussing private deliberations.
- Iberdrola SA agreed to buy PNM Resources Inc. for $4.3 billion, pushing deeper into the U.S. power market as the Spanish utility strengthens its position as a global giant in an industry that’s being transformed. The deal — at $50.30 per PNM share and a 10% premium — valued PNM at $8.3 billion including debt. It’s Iberdrola’s eighth acquisition since the start of the coronavirus pandemic. The company bought Infigen Energy in Australia in September. It continues a strategy by Chief Executive Officer Ignacio Galan to grow beyond the Iberian peninsula and build a business with worldwide reach in power grids and renewables plants.
- Tullow Oil Plc received approval from the Ugandan government for the sale of a $575 million stake in an oil project to Total SE, sending the shares as much as 40% higher. The beleaguered explorer has been waiting since 2017 to close its divestment in the Lake Albert Development Project, an effort repeatedly stymied by tax disagreements. As it sought relief from lenders this year to avoid blowing through debt covenants, securing proceeds from the sale became key to restoring stability.
- Take all the physical assets owned by all the companies in the S&P 500, all the cars and office buildings and factories and merchandise, then sell them all at cost in one giant sale, and they would generate a net sum that doesn’t even come out to 20% of the index’s $28 trillion value. Much of what’s left comes from things you can’t see or count: algorithms and brands and lists. This is, in the broadest sense, a new phenomenon. Back in 1985, for instance, before Silicon Valley came to dominate the ranks of America’s biggest companies, tangible assets tended to be closer to half the market’s value. The shift picked up after the financial crisis of 2008 and is taking off anew during the Covid-19 lockdown, with the value of intangible-heavy companies like Google and Facebook soaring while smokestack stocks languish. All of which is a source of deep concern for those who worry about things like employment and inequality.
- Verizon Communications Inc. exceeded Wall Street profit estimates and raised its full-year earnings forecast, another sign that the company’s focus on mobile and broadband network services is helping it weather the Covid-19 pandemic. The largest U.S. wireless carrier raised its forecast for full-year profit growth to a range of flat to 2%, compared with the range of a 2% decline to a 2% rise that the company expected three months ago. Analysts were predicting a 1% drop in 2020 earnings per share, excluding some items. Verizon added 283,000 new monthly phone subscribers, missing the average estimate of 317,970 from analysts.
- Clayton Dubilier & Rice could collect about $14 billion for its largest buyout fund to date, surpassing its fundraising goal, according to people familiar with the matter. While the firm has reached its $13 billion target for its 11th flagship fund, it is still raising money for the new vehicle, the people added. Fundraising is expected to wrap up around year-end but could continue into early next year to accommodate investors aiming to make commitments in 2021, they said. Another $1 billion or so of commitments are expected for Clayton, Dubilier & Rice Fund XI LP before the fund closes, the people said. The firm has said it received the first commitment to the fund in early April and had raised nearly $12 billion by early last month, WSJ Pro Private Equity has reported.
- Google barely took a scratch from three European Union antitrust probes that lasted nearly a decade and cost it more than $9 billion euros. Regulators are still struggling with how to tackle anti-competitive behavior, a lesson the U.S. needs to learn. Three years ago, the EU blasted out a then-record-breaking fine together with an order for Google to stop favoring its own shopping ads. A year later Google got an even bigger penalty and a demand to stop pushing its search and web-browser apps onto Android mobile phones. The company was fined a third time last year and continues to face EU scrutiny. Margrethe Vestager, the EU’s antitrust chief, has said she regrets not being even bolder because tech firms like Google are increasingly able to squeeze into new markets and expand rapidly. Her newest plan is to draft rules to curb a big company’s ability to favor its own products and to arm regulators with new powers to move more swiftly to try to safeguard competition before it’s overwhelmed.
- Rising food costs are hitting emerging markets with a double whammy: driving millions into hunger, and thwarting central banks as they try to end the worst slump in decades. Global food prices have jumped nearly 8% since May as the pandemic disrupts supply lines and dry weather hits harvests. That faster inflation has forced policy makers from India to Mexico to ease up on monetary stimulus just when their economies need it most. Central bankers at first thought the coronavirus outbreak would have one silver lining: By causing a sharp drop in inflation, it would make room for “very expansive” policy, said Ernesto Revilla, Citigroup Inc.’s head of Latin American economics and former chief economist at Mexico’s Finance Ministry. It didn’t work out like that.
- Four years of trade wars, tweets and fights over emissions regulations under President Donald Trump have fractured the auto industry’s once-reliable unified front. Now, facing a potential Joe Biden presidency that promises more onerous policies on climate change and other issues, automakers are being urged to come together in defense of common interests. “The industry is more divided than I’ve seen it in my lifetime,” Representative Debbie Dingell, a Michigan Democrat who has endorsed Biden, said in an interview. “There’s competitive issues that drive that, but if they’re not together on those issues, they’re going to be in trouble.”
*All sources from Bloomberg unless otherwise specified