September 15th, 2020

Daily Market Commentary

Canadian Headlines

1. For most of the past century, Big Oil executives found it pretty easy to explain to investors how their businesses worked. Just locate more of the commodities that everyone needed, extract and process them as cheaply as possible, and watch the profits flow. That’s all over now. The change has been so profound that the chief executive officer of BP Plc recently found himself hyping the profit potential of another commodity. “People may not know—BP sells coffee. We sold 150 million cups of coffee last year,” Bernard Looney said in an interview in August, referring to beverage kiosks attached to the company’s fuel stations. “This is a very strong business. It’s a growth business.” Perhaps it was tongue-in-cheek, or a way for the leader of the world’s fifth-largest international oil company to emphasize a relationship with consumers. But it’s clear Looney and other oil bosses are struggling to sell their plans for a future in which the world wants more green energy. Last year, for the first time in history, solar and wind made up most of the world’s new power sources, according to BloombergNEF. If the margins on cappuccinos look good right now, that’s an indication of how hard it will be for Big Oil to rapidly ditch its winning formula of drilling, pumping, and refining while spending its way into renewables.

World Headlines

1. European stocks rose for a third day as positive corporate updates boosted retailers and miners rose on data showing an acceleration in China’s economic recovery. The Stoxx Europe 600 Index added 0.5% as of 9:53 a.m. in London. Retailers rallied after Hennes & Mauritz AB returned to profit and Ocado Group Plc reported a surge in sales. Miners advanced after Chinese data showed the first growth in retail sales since Covid-19 hit early in the year. Investors are awaiting news in a week full of potential catalysts, including rate decisions due from the Federal Reserve and the Bank of England. For the Stoxx 600, the 200-day moving average remains the ceiling to watch, with the benchmark stuck in a 20-point range since June.
2. U.S. equity futures advanced with European stocks after data from China and Germany showed the economic recovery is gaining traction. The dollar weakened for a third day, while crude rose. Tesla Inc., Apple Inc. and Nvidia Corp. climbed in U.S. pre-market trading. Hennes & Mauritz AB led a rally among fashion retailers after beating profit estimates. Ocado Group Plc gained after the U.K. grocery delivery company reported a strong surge in sales. Investors are awaiting the Federal Reserve’s policy meeting Wednesday to gauge the outlook for markets following a slide of about 2% in global stocks this month. The Fed is expected to maintain its dovish stance after earlier saying it will shift to a more relaxed approach on inflation. Central bank largesse is shoring up sentiment in the face of risks from the pandemic, the U.S. presidential election and the possibility of a no-deal Brexit.
3. Japanese stocks fell for the first time in four sessions as the yen strengthened and investors adjusted their holdings after a party leadership vote confirmed Yoshihide Suga will become the country’s next prime minister. Technology and railway shares weighed most on the benchmark Topix gauge, which remains near its highest level since February. U.S. stocks gained and the dollar weakened overnight amid a flurry of corporate deal activity and signs of progress toward a coronavirus vaccine. Chief Cabinet Secretary Suga was elected leader of the ruling Liberal Democratic Party by an overwhelming majority on Monday, assuring he will succeed Shinzo Abe as prime minister. The Nikkei reported that Finance Minister Taro Aso will retain his post, including his position as a deputy prime minister.
4. Oil rose as data showed China’s economic recovery from the coronavirus crisis is gathering strength, offsetting a bleak assessment of demand by another top energy organization. Futures gained 1.7% in below-average trading volumes in New York. Chinese retail sales rose for the first time this year in August while industrial production gained by a larger-than-expected 5.6%. The data drove European equities higher. The International Energy Agency was the latest bearish voice on oil demand, following pessimistic calls this week from BP Plc, Trafigura Group and the OPEC cartel. The market outlook has grown “even more fragile” with a resurgence of the pandemic, the IEA said Tuesday.
5. Gold held gains as the dollar remained under pressure before a key U.S. Federal Reserve meeting, with investors’ seeking clues on the outlook for immediate policy tweaks. The two-day Federal Open Market Committee gathering begins Tuesday, and investors are awaiting further guidance after Chair Jerome Powell said last month that the central bank will let inflation overshoot its 2% target and not tighten rates when unemployment falls. A softer dollar is boosting gold’s appeal as an alternative asset, while positive China economic data and vaccine optimism added support to other precious metals. Spot platinum hit a four-week high. Its sister metal rhodium, which isn’t traded on exchanges and can be susceptible to sharp price swings, surged to an all-time high, according to Johnson Matthey pricing.
6. A new batch of sustainable bond offerings surfaced in Europe’s primary market on Tuesday, in a sign that the once-niche sector of debt linked to environmental, social and governance factors is becoming increasingly mainstream. Swiss pharmaceutical firm Novartis AG hired banks to arrange an investor call for a euro-denominated, sustainability-linked note designed to boost its expansion in low and lower-middle income countries. Two banks in Germany and Norway also brought green bonds to the market on Tuesday, adding to a total of 10.3 billion euros ($12.2 billion) of debt sales linked to environmental, social and governance factors this month.
7. Britain’s labor market took a turn for the worse in July even as the economy gradually reopened, taking total job losses under the pandemic to almost 700,000 and raising pressure on the government to extend its wage support. Employment fell by 102,000, the first decline since the initial full month of lockdown in April, the Office for National Statistics said Tuesday. The pandemic also finally began filtering through to the unemployment rate — so far subdued by the furlough program — pushing the single-month figure up the most since 2013.
8. Citigroup Inc., Qantas Airways Ltd. and Singapore’s United Overseas Bank Ltd. joined companies worldwide making deeper cost cuts, from property and equipment to staff and pay, as the pandemic persists. A U.K. court ruling in a landmark insurance case could lead to tens of millions of payouts related to Covid-19. Britain’s labor market took a turn for the worse in July, taking total job losses during the crisis to almost 700,000, fresh data showed. In India, where infections trail only the U.S., total cases approached 5 million. Hong Kong reported no locally transmitted infections for the first time since early July. The city injected its struggling economy with fresh stimulus and lifted some social distancing measures, including temporarily reopening bars.
9. Charoen Pokphand Foods Pcl, the meat producer owned by Thai billionaire Dhanin Chearavanont, posted its biggest gain in three months after announcing a 131 billion baht ($4.1 billion) plan to buy its parent’s Chinese swine business. Thailand’s biggest meat producer rose as much as 6.9%, its biggest gain since May 27, to 31 baht before trading up 2.6% at 12:05 p.m. in Bangkok. CP Foods will acquire its parent Chareon Pokphand Group’s swine business in China, the company announced in a filing to the Bangkok Stock Exchange late Monday. It will pay for the acquisition by issuing its parent with a 65% stake in an unlisted unit, Chia Tai Investment Co. After the deal, CP Foods’s stake in the unit will fall to 35%.
10. Nikola Corp. fell in U.S. pre-market trading after Bloomberg News reported that the U.S. Securities and Exchange Commission is examining the company to assess the merits of a short-seller’s allegations that the electric-truck maker deceived investors about its business prospects. Nikola sank 8.8% to $32.65 at 4:36 a.m. New York time, after a day of wild price swings. The stock fell as much as 11% Monday after the company issued a lengthier rebuttal to a Sept. 10 report from Hindenburg Research, only to turn higher and finish up 11%. After the market closed, Bloomberg, citing people familiar with the matter, reported that the SEC was looking into the allegations from Hindenburg to determine whether Nikola may have violated securities laws. The short seller called Nikola an “intricate fraud” that, among other things, overstated the capabilities of its earliest test trucks.
11. Autohome Inc., a Chinese online car-sales website, is planning a second listing in Hong Kong that could raise about $1 billion, people familiar with the matter said. New York-listed Autohome, which counts Ping An Insurance Group Co. as its largest shareholder, is working with advisers on the Hong Kong share sale, the people said. An offering could happen as soon as early next year, one of the people said, asking not to be identified as the information is private.
12. Fiat Chrysler Automobiles NV agreed to shrink a dividend tied to its merger with PSA Group by 2.6 billion euros ($3.1 billion) to shore up the combined company’s finances in the wake of the coronavirus pandemic. The special cash payout to Fiat Chrysler shareholders will be reduced to 2.9 billion euros from 5.5 billion euros, the carmakers said Monday evening. The reduction will be partially offset by the Italian-American company’s investors getting a stake in French supplier Faurecia SE, and the boards of both automakers will consider an additional dividend later.
13. China National Chemical Corp.’s newly sold offshore bonds are struggling to perform amid unabated concerns over potential U.S. sanctions and the firm’s operating prospects. The state-owned borrower priced a jumbo $2.4 billion dollar bond deal and a 500 million euro offering overnight, according to people familiar with the deal who are not authorized to speak publicly. It was the firm’s first global fundraising move since the Pentagon added it to a list of companies it said have connections to the Chinese military. Spreads on the new offshore notes widened as much as 10 basis points Tuesday morning in Hong Kong, according to traders.
14. It’s a $1 trillion market and a vital part of the global financial system’s plumbing. Yet these days, both borrowers and investors are increasingly steering clear of short-term company IOUs known as commercial paper, and industry watchers say it’s just the beginning. A tenuous economic recovery and narrow yield gap between near- and medium-term debt are spurring banks and corporations to issue securities with longer maturities. At the same time, plunging spreads relative to Treasury bills and lingering liquidity concerns — even after the Federal Reserve intervened in the market — are squelching demand, fueling a mass exodus from funds that buy the debt and prompting some to shutter entirely.
15. A 50-member group of House Democrats and Republicans will release a $1.52 trillion coronavirus stimulus plan Tuesday in a long-shot attempt to break a months-long deadlock on providing relief to the pandemic-battered U.S. economy. The Problem Solvers Caucus plan, to be announced at an 11 a.m. news conference, has been developed for weeks with the knowledge of the White House and leadership from both parties, according to House aides. Treasury Secretary Steven Mnuchin has referred to the discussions and at a House hearing this month hinted that the White House could accept a $1.5 trillion level of spending.
16. Citigroup Inc. will resume job cuts starting this week, joining rivals such as Wells Fargo & Co. in ending an earlier pledge to pause staff reductions during the coronavirus pandemic. The cuts will affect less than 1% of the global workforce, the bank said Monday in a statement. With recent hiring, overall headcount probably won’t show any drops, Citigroup said. The reductions will come as Citigroup is facing a likely revenue drop and another increase to loan-loss reserves this quarter as the pandemic drags on, as well as years of expenses to improve risk controls. The Office of the Comptroller of the Currency and the Federal Reserve are weighing public reprimands of the firm because of continued deficiencies in its infrastructure and control functions, people familiar with the matter said earlier on Monday.
17. The alternative data that have illuminated the U.S. labor market, spending and mobility during the pandemic are becoming a permanent part of the toolkit for the Federal Reserve and Wall Street economists. Previously relegated to secondary status behind established government macroeconomic figures — most released monthly — the rapid shifts in activity during the pandemic have made it essential for economists to follow weekly or even daily readings including credit- and debit-card spending, mobility trackers, restaurant reservations and air travel. As the Federal Open Market Committee starts a two-day meeting Tuesday, central bankers will be reviewing such reports in addition to traditional government data. While hedge funds and other investors have been using alternative data like credit-card spending for years, the tools have become more widespread during the pandemic and in particular are poised to be a lasting part of the arsenal for the economics profession.
18. U.K. Prime Minister Boris Johnson’s plan to renege on part of the Brexit divorce deal passed its first hurdle in Parliament late Monday after a bruising debate in which senior members of his own party denounced the move. The House of Commons passed the Internal Market Bill by 340 to 263 in its first main vote, allowing it to go through to the next stage in the parliamentary process on Tuesday. The prime minister said the proposed legislation, which will rewrite part of the Withdrawal Agreement, is “essential” to maintain the U.K.’s economic and political integrity. He accused the European Union of making “absurd” threats to stop food moving from mainland Great Britain to Northern Ireland.
19. Donald Trump will be center stage as the United Arab Emirates and Bahrain sign accords establishing diplomatic relations with Israel, an achievement the president’s supporters say merits the Nobel Peace Prize and his detractors claim is mostly illusory. The UAE and Bahrain will become just the third and fourth Mideast nations to formally recognize Israel at a White House ceremony on Tuesday that the president sees as vindication of his peacemaking skills after decades of failed efforts by his predecessors in both parties.
20. It was billed as a lifeline for America’s middle-market companies seeking cash to get through the pandemic. Yet more than two months since its launch, the Federal Reserve’s Main Street Lending Program isn’t living up to expectations as few banks are willing to provide the loans. Some of the nation’s biggest lenders have demanded such crushing terms that discussions have stalled from the get-go, while other banks have decided not to participate at all. That’s meant the take-up for the $600 billion program is just 0.2%, threatening to undercut the economic recovery and efforts to protect jobs. It was hoping to get a Fed-assisted loan to support payroll, refinance debt and potentially hire more employees. What the Reston, Virginia-based company found instead was banks in West Virginia and Georgia that weren’t taking part, while it wasn’t able to pursue a loan with JPMorgan Chase & Co. because the firm was asked to pledge real estate it doesn’t have.
21. The Federal Reserve’s new approach to setting interest rates will probably be hard to divine from the economic projections it’s set to publish on Wednesday. That’s because those forecasts, released alongside its policy decision, only encapsulate Fed officials’ views about the next few years. The new framework — which dictates a less-aggressive response to rising inflation than in the past — likely won’t be put to the test until later on. The Fed isn’t expected to offer clearer guidance about the conditions it wants to see before raising rates in the statement it releases at 2 p.m. As a result, Chair Jerome Powell and his colleagues will be asking the public to believe them when they say that this time will be different, because of their strategy shift.

*All sources from Bloomberg unless otherwise specified