October 26th, 2020

Daily Market Commentary

Canadian Headlines

  1. Cenovus Energy Inc. is getting more than just a rival Canadian oil producer with its acquisition of Husky Energy Inc. It’s also shoring up its defenses against an anti-oil sands movement that could get a boost if Joe Biden is elected as the next president of the U.S. Calgary-based Cenovus said Sunday morning it’s reached a C$3.8 billion ($2.9 billion) all-share deal to buy Husky, which is controlled by Hong Kong billionaire Li Ka-shing. Li and his CK Hutchison Holdings Ltd. will own about 27% of the combined firm if the deal goes through. Oil sands companies in Alberta sell their crude at a discount to West Texas Intermediate because export pipelines are usually too full to accept all the oil that producers want to ship. That discount can be steep at times — $20 a barrel or more — and is currently more than $10. The situation could get worse if Biden wins the Nov. 3 election and makes good on his promise to rescind the permit granted by President Donald Trump for the development of Keystone XL, the biggest of three major Canadian export pipelines under construction.
  2. Carlyle Group Inc. is nearing an agreement to acquire Siemens AG’s Flender mechanical drive unit for about 2 billion euros ($2.4 billion), according to people familiar with the matter. The U.S. buyout firm and the German engineering giant are finalizing terms of the deal, which could be announced as early as this week, the people said, who asked not to be identified because discussions are private. Carlyle outbid Canada’s Brookfield Asset Management Inc. in the end, the people said. Talks could still be delayed or fall apart. Representatives for Siemens, Carlyle and Brookfield declined to comment.

World Headlines

  1. European stocks started the week in the red, as a warning from SAP SE pulled Germany’s DAX Index to its lowest intraday level in three months, while further measures to fight the coronavirus hit investor sentiment. The Stoxx 600 Index was down 1% in early trading. Software maker SAP plummeted 21%, the steepest intraday drop since 1999, after cutting its revenue forecast for the full year and warning that it expects the coronavirus pandemic to hurt demand through “at least” the first half of 2021. The Stoxx 600 Technology Index fell 4.7%.
  2. U.S. futures dropped on signs that the pandemic is continuing to hurt business and doubts that Washington lawmakers will reach an economic stimulus package anytime soon. Investors sought protection in haven assets. Treasuries rose, sending yields on the 10-year lower. The dollar strengthened against most other major currencies, while gold was little changed. More broadly, investors remain focused on the prospect of a U.S. economic aid package, even as time runs out to finish a deal before the election. U.S. House Speaker Nancy Pelosi said the burden is on President Donald Trump to push forward on stimulus talks. Treasury Secretary Steven Mnuchin said there’s been significant progress, but blamed Pelosi for holding up an agreement.
  3. Japanese shares declined amid renewed worries over the spread of the coronavirus and as a U.S. stimulus deal remained elusive. Telecommunications and service-sector stocks weighed most heavily on the Topix. The World Health Organization’s director general said some countries in the northern hemisphere are facing a “dangerous moment” as U.S. coronavirus infections hit a record for the second day Sunday and France’s cases rose by more than 50,000. House Speaker Nancy Pelosi and White House Chief of Staff Mark Meadows accused each other of “moving the goalposts” on stimulus legislation in back-to-back Sunday interviews on CNN.
  4. Oil extended its slide to a second day on a cocktail of surging coronavirus cases in the U.S. and Europe, dwindling prospects for pre-election stimulus in Washington and a steady resumption of supply from Libya. Futures in New York fell 2.3% to drop below $39 a barrel. The U.S. reported record infections for a second straight day, while Italy approved a partial lockdown and Spain announced a national curfew. At the same time, stock markets fell as investors doubted that Washington lawmakers will reach an economic stimulus package anytime soon. The worsening demand outlook is coinciding with Libya’s push to almost doublecrude output, as it reopened its last major oil field. The nation’s production could top 1 million barrels a day within weeks.
  5. Gold declined to trade near $1,900 an ounce as investors weighed fading prospects for a U.S. stimulus deal, while the country reported record coronavirus infections for the second day in a row. House Speaker Nancy Pelosi said the chamber could pass a plan this week, though a deal with the White House remains elusive and the Republican-led Senate might not act before the election. Speculation about a package has helped Treasury yields rise in recent weeks, dulling bullion’s allure.
  6. Iron ore futures in China slumped to the lowest in more than three months amid angst over rising supply, moderating demand, and a fragile global economic recovery. Prices are under pressure as top producers lift output and exports, shifting the market back toward balance. While iron ore’s had a strong run in 2020 thanks to China’s state-spending on construction, demand in the longer term may be plateauing. Last week, stockpiles in China hit an eight-month high. Investors are also on watch as Communist Party officials flesh out priorities for the economy over the next half-decade at meetings this week in Beijing. For steel-watchers, there’ll be an eye on economic growth targets and goals for urbanization, and on how ambitions to radically reduce carbon emissions will affect heavy industry.
  7. Jack Ma’s Ant Group Co. raised more than $17 billion each from its Shanghai and Hong Kong listings in a record initial public offering. The fintech priced its Shanghai stock at 68.8 yuan ($10.27) a piece and its Hong Kong shares at HK$80 ($10.32) each. Ant will be valued at about $280 billion before the IPO, and will raise about $34.5 billion from Shanghai and Hong Kong before exercising its green shoe option, based on the filings. In the preliminary price consultation of its Shanghai IPO, institutional investors subscribed for over 76 billion shares, or over 284 times of the initial offline offering tranche, according to Ant’s A share offering announcement.
  8. The World Health Organization’s director general said some countries in the northern hemisphere are facing a “dangerous moment” as U.S. coronavirus infections hit a record for the second day and France’s cases rose by more than 50,000. AstraZeneca’s vaccine candidate produced a robust immune response in elderly people, the Financial Times reported. Johnson & Johnson said the first batches of its shot could be available in January. Both companies are resuming trials that had been paused due to safety concerns. U.K. Health Secretary Matt Hancock said his “central expectation” is there will be a vaccine to roll out in the first half of 2021. Europe took a step closer to lockdown-level measures, with leaders struggling to regain control of the spread while confronting growing opposition to restrictions. Australia’s Victoria state will dismantle most curbs and allow retailers to reopen.
  9. Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the fourth 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 $68.1 million in the week ended Oct. 23, compared with gains of $1.54 billion in the previous week, according to data compiled by Bloomberg. So far this year, outflows have totalled $12.6 billion.
  10. Bayer AG agreed to acquire U.S. biotech company Asklepios BioPharmaceutical Inc. for as much as $4 billion, bolstering its pharma division with experimental gene therapies before patents expire on some key drugs. The German chemicals giant will pay $2 billion upfront and another $2 billion in potential milestone payments in cash for closely held AskBio, a North Carolina-based company that’s developing gene therapies for ailments such as Parkinson’s disease and congestive heart failure. Bayer is expanding in the cutting-edge field of gene and cell therapies at a time when its blockbuster drugs age and the company’s crop-protection business reels from the pandemic’s impact on farm commodities after its purchase of Monsanto.
  11. Coca-Cola European Partners Plc agreed to buy Australian bottler Coca-Cola Amatil Ltd., creating a global producer of packaged beverages to better withstand a slowdown in the industry and the shift away from sugary drinks. The purchase values Sydney-based Coca-Cola Amatil at A$9.23 billion ($6.6 billion), a 19% premium to where its shares traded last week. The target’s board intends to unanimously recommend the offer. The A$12.75-per-share cash deal would double the European company’s potential market at a stroke, putting almost 300 million consumers within reach in the Southern Hemisphere, including the key developing nation of Indonesia.
  12. Allianz Capital Partners agreed to buy 75% of Galp Energia SGPS SA’s natural gas distribution unit for 368 million euros ($435 million), expanding in Portugal. Financial investors have been snapping up such assets in Europe on the promise of steady, long-term cash flows. Allianz and Canada Pension Plan Investment Board bought a stake in Gas Natural SDG SA’s Spanish distribution business in 2017. The latest acquisition implies an enterprise value for the Galp unit of about 1.2 billion euros, the Lisbon-based oil company said in a regulatory filing on Monday. The unit holds stakes in nine regional gas-distribution companies in Portugal and operates a network of more than 13,000 kilometers (8,000 miles).
  13. Any capital-gains tax increase resulting from a Democratic “Blue Wave” victory on Election Day is unlikely to have a big impact on stock prices, according to Goldman Sachs Group Inc. If Democrats sweep the White House, Senate and House on Nov. 3, one concern for investors has been the chance of an increased tax on capital gains and resulting headwinds for stocks. But while past capital-gains tax hikes have been associated with declines in equity prices and in total household equity allocations, Goldman said, the trend of net equity selling and declining stock prices around them has usually been brief. “History shows stock prices fall, equity allocations decline, and Momentum underperforms ahead of increases in the capital-gains tax rate,” strategists led by David Kostin wrote in an Oct. 23 note. “However, any potential equity selling will be short-lived and reversed in subsequent quarters.”
  14. China will impose unspecified sanctions on the defense unit of Boeing Co., Lockheed Martin Corp., and Raytheon Technologies Corp.after the U.S. approved $1.8 billion in arms sales to Taiwan last week. The sanctions will be imposed “in order to uphold national interests,” Chinese Foreign Ministry spokesman Zhao Lijian told reporters Monday in Beijing. “Boeing Defense” would be among those sanctioned, he said. The State Department last week approved $1.8 billion in new weapons for Taiwan and submitted the package to Congress for a final review. The submission comes two months after the U.S. and Taiwan completed the sale of 66 new model F-16 Block 70 aircraft from Lockheed, and as tensions between the two superpowers continue to escalate ahead of the American election.
  15. Blackstone Group Inc.’s private equity business raised $8 billion for a fund that aims to hold companies for longer periods than its typical investments. The firm’s second core private equity fund will be more than 70% larger than its first, which closed in 2016. Investments will focus on essential business services and companies with compelling intellectual property or content, Joe Baratta, Blackstone’s global head of private equity, said in an interview. The group’s previous long-term fund made investments that included music-rights company SESAC Holdings and Servpro Industries, a provider of cleaning and emergency restoration services. Blackstone, the world’s largest alternative-asset manager, has remained a fundraising machine even amid the uncertainty caused by the Covid-19 pandemic. It brought in $47.6 billion during the first half of the year, after a record $134.4 billion haul for all of 2019. The private equity industry bills itself as a safe custodian of investor cash in volatile times, pointing to its strength in the wake of the 2008 financial crisis.
  16. The digital-advertising market is showing signs of life just in time for the holiday season, typically the industry’s busiest, fueling optimism that tech giants like Facebook Inc. and Google notched steady third-quarter sales gains after a tumultuous summer. Snap Inc. set an upbeat tone last week when it reported advertising revenue far higher than analysts’ average estimates — suggesting that user growth generated by Covid-19 pandemic lockdowns is translating into a rebound in ad spending as brands chase consumer attention. “Snap seems to have made it to the other side of the pandemic earlier than thought,” wrote Youssef Squali, an analyst at Truist Securities. Reports this week from Facebook, Google, Twitter Inc. and Pinterest Inc. will give investors a chance to find out if that holds true for the rest of the industry. Earnings from Facebook, the world’s largest social network, will provide the first look at how an organized ad boycott in July impacted the industry more broadly. After two quarters of tepid growth, the results will also signal whether advertisers — many of them grappling with an economic slump and slower consumer demand — have returned in force to online platforms like Google, Facebook and Twitter.
  17. President Vladimir Putin offered new missile verification measures to NATO countries following the U.S. withdrawal from a Cold War-era treaty as Russia seeks to preserve the collapsing framework of nuclear arms control. Putin offered inspections in Kaliningrad to demonstrate the enclave hasn’t stationed cruise missiles that the U.S. cited as a reason for its withdrawal last year from the 1987 Intermediate-range Nuclear Forces Treaty, according to a Kremlin statement Monday. The checks would be conditional on reciprocal access to U.S. and North Atlantic Treaty Organization sites in Europe. Putin also offered not to deploy the missiles in Europe, unless the U.S. and its allies place weapons Moscow claims violate the treaty. Each side rejects the other’s allegations of breaching the agreement.
  18. Amazon.com Inc. and Mukesh Ambani’s Reliance Industries Ltd.’s fight for dominance of India’s lucrative e-commerce space is turning into a face-off, with both sides battling over the assets of a supermarket chain that could be key to their wider ambitions. Ambani and Jeff Bezos, two of the world’s wealthiest men, want the stores and warehouses of Future Retail Ltd., which has penetrated Indian cities and small towns with sales of everything from grocery to fashion and electronics. Amazon, which owns stake in a Future unit, and Reliance have in recent months made pacts with the Future Group, which they say are now being violated. Reliance intends to purchase Future Retail’s assets “without any delay,” the conglomerate’s unit said in a statement late Sunday, after a Singapore arbitration court restrained Future from going ahead with the transaction. Reliance had agreed to buy Future’s retail, wholesale, logistics and warehousing units for $3.4 billion in August, pushing Amazon to request an emergency hearing to stall it.
  19. Investors wondering how China plans to evolve its financial markets in the coming years need look no further than the commentary from the weekend’s Bund Summit in Shanghai for guidance. People’s Bank of China Governor Yi Gang said that promoting broader use of the yuan will continue alongside the opening of markets. “The regulator’s main job is to reduce restrictions on the cross-border use of the currency, and let it take its own course,” he said. Those comments were echoed by Zhu Jun, director general of the central bank’s international division. Policy makers will remove obstacles that stand in the way of broader use of the currency with steady liberalization of the capital account, increasing yuan exchange-rate flexibility and improving liquidity in the bond market, she said.
  20. UBS Group AG plans to raise the fixed salaries for some of its more senior employees by as much as 20% in a move that may help reduce poaching and allow the bank to lower its bonus pool. A review at Switzerland’s largest bank found differences in base pay among employees in the same roles, and when compared with competitors, people familiar with the plans said. As a result, UBS will increase fixed compensation for those it found were underpaid while reducing their variable pay, the people said. The changes come as competition for top bankers heats up, with Julius Baer Group Ltd. and Credit Suisse Group AG poaching teams from UBS in recent months. At the same time, retaining talent with the promise of large bonuses is getting harder as the Covid-19 pandemic puts a spotlight again on banks’ variable compensation.
  21. SAP SE shares dropped as much as 21%, the biggest intraday fall since 1999, after the software company cut its revenue forecast for the full year and said it expects a fresh wave of lockdowns to hurt demand through the first half of 2021. In a test for Christian Klein, who became sole chief executive officer in April, the pandemic will delay SAP’s goals for cloud revenue, overall sales and operating profit by one or two years, especially in hard-hit industries such as business travel, the Walldorf, Germany-based company said in a statement on Sunday. The drop in shares on Monday wiped 28 billion euros ($33.1 billion) off SAP’s market value. The drop-off in SAP’s cloud revenue is a sign that companies are putting off making major decisions about updating their software, as the pandemic continues to limit any global economic recovery.
  22. California’s latest blackouts have become yet another stark reminder of the Golden State’s battle with Mother Nature. Barely months after a summer heat wave prompted its first rolling blackouts in almost two decades, the state’s largest utility began cutting power again, affecting an estimated 1.1 million people. This time, it was to prevent live wires from toppling into dry brush and sparking blazes as violent winds rattled Northern California. PG&E Corp. shut off electricity to 225,000 homes and businesses in areas mostly north of San Francisco on Sunday and was set to turn off power to an additional 136,000 customers in places including the East Bay and South Bay in the evening, as gusts exceeding 50 miles (80 kilometers) an hour swept through an area already bone-dry from heat and drought. Utilities in Southern California warned they may need to cut power, too.
  23. The heirs of Samsung Electronics Co. Chairman Lee Kun-hee, who died Sunday, could face billions of dollars in inheritance taxes. But that doesn’t necessarily mean they’ll have to cede control over the group by selling shares. South Korea’s richest man had an estimated fortune of $20.7 billion, with the bulk of it comprised of his stakes in four Samsung units, according to the Bloomberg Billionaires Index. With the country’s levy of as much as 60% on inherited shares for large shareholders and 50% on real estate and other assets, Lee’s family could owe a tax bill of about $10 billion — which could be Korea’s largest — based on Friday’s closing prices.
  24. Dunkin’ Brands Group, Inc., parent company of coffee-and-donuts chain Dunkin’ and Baskin-Robbins, said it’s in talks to be acquired by private equity-backed Inspire Brands. The New York Times reported the talks earlier, saying Inspire will take Dunkin’ private at $106.50 a share, citing two people with knowledge of the negotiations who weren’t identified. The deal — valued at $8.8 billion — could be announced as soon as Monday, the newspaper added. The price is a 20% premium over Friday’s closing price, when the company had a market capitalization of $7.3 billion. “Dunkin’ Brands confirms that it has held preliminary discussions to be acquired by Inspire Brands,” Karen Raskopf, a Dunkin’ spokeswoman, said in a statement, declining to offer further details and cautioned that there’s is no certainty an agreement will be reached.
  25. Hasbro Inc. reported solid sales in the third quarter as parents flocked to well-known brands like Monopoly and Magic: The Gathering to pass the time during lockdown. The largest U.S. toymaker’s revenue fell 4% on a pro forma basis to $1.78 billion, beating analysts’ predictions of $1.74 billion. Excluding Entertainment One, which Hasbro acquired earlier this year, revenue rose 13%. Adjusted profit was $1.88 a share, topping estimates of $1.60, led by its games segment.
  26. The three months of squabbling over a new round of virus relief moved no closer to a resolution over the weekend, all but extinguishing the prospects of a stimulus bill being written, voted on, and signed into law by President Donald Trump before the election. House Speaker Nancy Pelosi said she’s waiting for another counteroffer Monday from Treasury Secretary Steven Mnuchin, as she and White House Chief of Staff Mark Meadows accused each other of “moving the goalposts” in negotiations. Much of the weekend was devoted to work by congressional committees with the goal of writing legislation, but aides in both parties said little progress was made despite the pledges from both sides that they want to quickly deliver $1,200 stimulus payments to most Americans along with aid to struggling businesses.
  27. The U.S. economic recovery’s strength has consistently surprised over the past several months, thanks in part to steadfast consumer finances that were underpinned by robust government aid and ultra-low interest rates. Three months ago, economists were penciling in third-quarter growth at an annualized 18%. The latest Bloomberg survey of economists now shows a median projection almost double that — a record 31.8% pace — for the report due Thursday. Even with such an outsize quarterly improvement, the economy still has its work cut out for it as the value of output will remain below the previous peak of $21.7 trillion at the end of 2019. Unemployment is more than double pre-crisis levels and Covid-19 is expected to restrain growth for months and possibly years to come.

*All sources from Bloomberg unless otherwise specified