September 2, 2021

Daily Market Commentary

Canadian Headlines

• Canadian stocks rise in the first trading day of September, after falling in the last two sessions. The S&P/TSX Composite rose as much as 0.5% in Toronto. Industrials stocks led the market higher, as Canadian National and Canadian Pacific Railway outperformed amid a battle for Kansas City Southern. Materials were the worst performing sector within the TSX, led by wood products stocks. Meanwhile, oil slipped ahead of an OPEC+ meeting that should see further output added to a market that the group sees as needing extra supply. Oil and gas stocks were slightly lower on Wednesday.
• Canadian Imperial Bank of Commerce is taking over Capital One Financial Corp.’s Costco Wholesale Corp. credit card business in Canada, helping diversify its portfolio away from travel rewards. CIBC will buy Capital One’s existing portfolio of Costco-branded Mastercards and become the exclusive issuer, according to a statement Thursday. The change is expected to begin in early 2022, Toronto-based CIBC said. Terms weren’t disclosed. CIBC Chief Executive Officer Victor Dodig said on an earnings call last week that the lender planned to invest in non-travel cards to capture more consumer spending as the pandemic wanes. The move also is meant to draw customers to the firm’s Canadian retail banking franchise, which has been on the rebound as its mortgage business improves.

World Headlines

• European equities edged back toward their recent record on Thursday amid positive earnings reports and dealing-making, while traders focused on new additions to the region’s benchmarks and awaited U.S. jobless data. The Stoxx 600 Index was up 0.3% as of 9:30 a.m. in London. Among the biggest gainers, Swedish Orphan Biovitrum AB soared 24%, after private equity firm Advent International and Singapore wealth fund GIC agreed to buy the biotechnology firm for 69 billion kronor ($8 billion). Corporate updates also spurred some big gains, with Poland’s CD Projekt SA climbing 9.5% after reporting earnings that beat expectations, and Melrose Industries Plc rising 5.4% after first-half results. But an earnings-driven 28% slump in CMC Markets Plc weighed on spread-betting peer IG Group Holdings Plc, which fell 5.6% and was the worst Stoxx 600 performer.
• U.S. equity futures inched higher as a cautious tone settled over markets the day before key U.S. jobs data that will shape bets on the path of Federal Reserve policy tightening. S&P 500 futures rose 0.2% after the main gauge closed flat on Wednesday. Ten-year U.S. Treasury yields steadied below 1.30%. The dollar was little changed. All eyes are turning to U.S. payrolls data due Friday for clues on the economy and the implications for a reduction in the Fed’s $120 billion of monthly bond purchases.
• Asian stocks edged higher, setting course for a fifth consecutive day of gains, with trading in a narrow range ahead of a report on U.S. jobs data that’s a litmus test for economic health. The MSCI Asia Pacific index swung between a gain of 0.2% and a fall of 0.3% throughout the day. A subgauge of consumer-discretionary firms including Alibaba and Sony provided the biggest support, while materials-group shares fell, weighing most on the gauge, as BHP Group and Nippon Steel dropped amid weaker iron ore prices. The lull comes after the Asian stock benchmark capped a 2.3% gain in August, the best month since December, which helped the regional measure to trade near its highest since mid-July. The gains were preceded by two months of losses as worries over the delta virus variant and China’s tightening regulatory grip on various industries took a toll on the region’s investor sentiment.
• Global benchmark Brent oil was little changed, near $72 a barrel, after OPEC+ stuck with a plan to boost crude production, wagering that the market can absorb the additional supply. Following a swift meeting on Wednesday, ministers from the Organization of Petroleum Exporting Countries and its allies ratified a 400,000 barrel-a-day increase scheduled for October. In the U.S., a government report showed a further contraction in nationwide crude inventories, while the nation’s oil infrastructure continues to grapple with Hurricane Ida’s impact.
• Gold steadied as investors counted down to U.S. jobs data due Friday for more clues on labor-market strength, which could give an indication on when the Federal Reserve will start to taper bond purchases. Traders are on the lookout for any signs of a pullback in the massive stimulus programs, which would weigh on bullion. U.S. data on Wednesday were mixed: private reports showed manufacturing expanded at a stronger-than-forecast pace in August, while companies added fewer jobs than expected. Bullion has traded in a tight range this week ahead of Friday’s headline jobs report. Economists surveyed by Bloomberg estimate growth in U.S. payrolls probably slowed in August after increasing by the most in almost a year the previous month. A strong figure could hurt gold by bringing forward forecasts on stimulus tapering.
• Natural gas prices in Europe rose after Russia announced plans to refill its depleted storage facilities, a move that could leave European traders scrambling to get the supplies needed to boost their own stockpiles ahead of winter.  Russia will restock its storage by November, Energy Minister Nikolay Shulginovtold reporters in Vladivostok, even with supplier Gazprom PJSC saying it’s overwhelmed with demand. The announcement comes amid an already tight European market. Futures prices jumped to an intraday record on Wednesday and have more than doubled this year as lower supplies — compounded by a post-pandemic demand recovery — have depleted the region’s storage. Asia is also scooping up cargoes of liquefied natural gas, making it harder for Europe to boost inventories.
• UBS Group AG Chief Executive Officer Ralph Hamers said staff who don’t wish to receive a vaccine against the coronavirus can apply to work from home, a flexible approach on an issue disrupting banks’ efforts to get workers back to their desks. Increasing Covid-19 cases in India are raising concerns about a potential third wave. Moderna Inc. and its Japanese partner Takeda Pharmaceutical Co Ltd.said there is currently no evidence linking the deaths of two men in the country to its vaccine. Moderna shares gained in premarket trading after the company released data from its booster shot and announced plans to seek authorization in the U.S. and Europe. Popular podcaster Joe Rogan said he is recovering after testing positive for Covid.
• Delek Drilling LP agreed to sell a stake in a natural-gas field to Mubadala Investment Co. for $1 billion, marking the biggest deal between Israel and the United Arab Emirates since they normalized ties last year. Tel Aviv-based Delek’s shares jumped after it said it would sell its 22% stake in the Tamar offshore field to Mubadala, an Abu Dhabi wealth fund with $243 billion of assets. The stock rose 4.8% to 5.02 shekels by 1.48 p.m. in Tel Aviv. Israel and the UAE’s political deal in August 2020 was an historic breakthrough, hailed by leaders including then-U.S. President Donald Trump as a step toward forging peace in the Middle East. The UAE was the first Arab nation after Egypt and Jordan to recognize Israel.
• Singapore Exchange Ltd. has introduced a framework for blank-check companies to list in the city-state, the first Asian financial hub to host the vehicles whose popularity in global financial markets has surged over the past year. Special purpose acquisition companies, or SPACs, will be allowed to list in Singapore starting Friday under a more liberal rulebook than initially envisioned by the exchange. The entities require a minimum market capitalization of S$150 million ($112 million), half of the amount SGX proposed earlier, while certain limits on warrants and share redemption have been removed, a statement from the bourse showed Thursday. Beating Hong Kong to the punch, Singapore’s approval comes as global financial regulators are stepping up scrutiny of SPACs. While firms worldwide have raised a total of $130 billion this year via SPACs — according to data compiled by Bloomberg — the pace of listings has abated in recent months with the U.S. Securities and Exchange Commission calling for more disclosures and a recent earnings bust validating some concerns over the structures.
• Private equity firm Advent International and Singapore wealth fund GIC agreed to buy Swedish Orphan Biovitrum AB for 69 billion kronor ($8 billion), attracted by the drugmaker’s portfolio of medicines for rare diseases. Investors will receive 235 kronor in cash for each share, the companies said Thursday. That’s 35% higher than the closing price Aug. 25, the day before Bloomberg reported that Advent was exploring an acquisition of the Swedish biotech firm. The deal would be one of the largest buyouts of a Nordic company in five years, according to data compiled by Bloomberg. Advent and GIC said the company will benefit by being a private company because it needs substantial investments to develop its new drugs. Sobi’s hemophilia business is facing price pressure and the company has accumulated debt after a number of acquisitions.
• The blank-check boom has turned into a rout. More than six months after the SPAC craze crested, a broad selloff has wiped about $75 billion off the value of companies that came public through special-purpose acquisition companies, according to a Dow Jones Market Data analysis of figures from SPAC Research. A group of 137 SPACs that closed mergers by mid-February have lost 25% of their combined value. At one point last month, the pullback topped $100 billion. The analysis doesn’t include companies that hadn’t closed mergers as of mid-February or those that are no longer trading.
• The remnants of Hurricane Ida ripped through New York, New Jersey and across the Northeast early Thursday, killing at least eight people and triggering tornadoes, thunderstorms and torrential rain that inundated streets and paralyzed transport services. Video of flooding posted on social media showed major thoroughways, airport terminals, baseball stadiums and subway stations turned into wading pools. Seven people died in Brooklyn  and Queens, a police spokesman said. An eighth was killed in Passaic, New Jersey, according to local news outlets. Tornadoes hit Maryland and New Jersey. Mayor Bill de Blasio declared an emergency for New York City, while Governor Kathy Hochul did the same for the state.
• Bill Gross is talking trash about the bond market — literally. In a meandering and sometimes off-kilter investment outlook posted on his website, the onetime bond king said longer-term Treasury yields are so low that the funds that buy them belong in the “investment garbage can.” Ten-year yields traded at 1.29% as of 6:07 a.m. in New York. They are likely to climb to 2% over the next 12 months, handing investors a loss of roughly 3%, he wrote. Stocks could also fall into the category of “trash” should earnings growth fall short of lofty expectations.
• Baxter International Inc. is buying Hill-Rom Holdings Inc. for $10.5 billion in cash a month after reports that its initial bid was rejected. Baxter is offering to acquire the medical equipment maker for $156 a share, a 7.5% premium from its close on Wednesday. The total enterprise value of the purchase, including debt, is $12.4 billion, the companies said in a statement. The new offer comes a month after Hill-Rom rejected a $9.6 billion takeover offer from Baxter, Bloomberg News reported earlier. Hill-Rom saw Baxter’s proposal of about $144 a share as too low, according to people with knowledge of the matter. Baxter was expected to return with a higher bid, the people said.
• Apple Inc. will allow developers of some apps like Netflix to link from its App Store to external websites for payments by users, a modest concession to global scrutiny of the 30% cut it typically takes from services and purchases on the iPhone. The Cupertino, California-based technology giant said the change will go into effect globally early next year for so-called reader apps spanning content like magazines, newspapers, books, audio, music and video. To date, Apple has forced such applications to use its in-app purchase system, which gives Apple up to a 30% commission on downloads and in-app subscriptions. That rule will still apply to games, the most lucrative class of mobile apps, as well as in-app purchases.
• A European Union panel called on the bloc to strengthen ties with Taiwan, the latest show of support from an expanding united front of democracies against an increasingly assertive China. The European Parliament’s Foreign Affairs Committee on Wednesday adopted a report that urged the EU to begin work on a bilateral investment agreement with Taiwan. It also suggested the bloc rename its trade office in Taipei the “European Union Office in Taiwan,” according to a June version of the document on the parliament’s website.
• Alibaba Group Holding Ltd. pledged 100 billion yuan ($15.5 billion) over five years toward Xi Jinping’s “common prosperity” vision, becoming the latest tech giant to bankroll China’s broad aim to share the wealth. China’s second-largest company will spread the money between 10 initiatives encompassing technology investment and support for small companies, the government-backed Zhejiang Daily reported Thursday. An Alibaba spokesperson confirmed the report, without elaborating. Alibaba joins a growing number of its largest peers in promising to give back after accumulating vast wealth during a decade-long mobile internet boom. Pinduoduo Inc., the fast-rising online commerce giant now challenging Alibaba in the countryside, pledged its next $1.5 billion in profit to farmers’ welfare. Tencent Holdings Ltd., China’s most valuable company, said last month it will double the amount of money it’s allocating for social responsibility programs to about $15 billion.
• Global food prices climbed back to near the highest in a decade on smaller crop prospects, reviving concerns about inflationary pressures. After easing in the previous two months, a United Nations gauge of food costs rose 3.1% in August to near a peak set in May. The advance was driven by reduced grain production expectations, frosts that hurt sugar-cane crops in top grower Brazil and tightening oilseed supplies, the UN’s Food and Agriculture Organization said Thursday. World food prices have rallied about 33% in the past year, increasing inflation risks for central banks as well as consumers, particularly those in poorer nations that are dependent on imports. Food supply chains have also been affected by a shortage of workers amid the coronavirus pandemic and higher shipping costs.
• At least two of China Evergrande Group’s largest non-bank creditors have demanded immediate repayment of some loans, according to people familiar with the matter, adding to liquidity strains at the world’s most indebted developer. The two creditors are trust companies, which pool money from wealthy individual investors and are a major source of financing for Evergrande and other Chinese developers. The trusts sent repayment notices to Evergrande over the past two months after growing concerned about the property giant’s financial health, the people said, asking not to be identified as the details are private. Trust loans often include terms that allow creditors to demand early repayment if certain conditions are met, such as sales targets, ratings downgrades or lawsuits.
• The market’s concerns about economic growth are overdone, opening the way for potential gains in cyclical assets in the near future, according to Goldman Sachs strategists. “We think the market is worrying too much about global cyclical risks from Delta outbreaks and China’s slowdown, and our Fed forecast is still more dovish than the market’s,” Goldman strategists led by Zach Pandl said in a note. “So we think some further relief in cyclical assets — higher equities and higher bond yields — is likely over the near-term.” The fast spread of the delta variant, concerns about the U.S. Federal Reserve’s tapering and China’s slowing economic growth have been weighing on investor mood in recent weeks. And while global stocks are trading at record highs, market participants have been turning to more defensive and growth sectors in a sign of caution.
• The U.S. Securities and Exchange Commission is considering more stringent disclosure requirements for investment funds amid concerns that some in the industry are making unfounded ESG claims. “Many funds these days brand themselves as ‘green,‘ ‘sustainable,‘ ‘low-carbon,’ and so on,” SEC Chairman Gary Gensler said on Wednesday, according to the text of a speech delivered to the European Parliament Committee on Economic and Monetary Affairs. “I’ve directed staff to review current practices and consider recommendations about whether fund managers should disclose the criteria and underlying data they use to market themselves as such.” The comments mark the latest warning to the asset management industry to avoid inflated language around its environmental, social and governance allocations. Last week, investors dumped shares of Deutsche Bank’s asset manager DWS Group, after learning it was being probed by Germany’s financial markets regulator BaFin and U.S. prosecutors. The investigations follow allegations by DWS’s former sustainability executive, Desiree Fixler, who says the firm overstated its ESG assets. DWS says it did nothing wrong.
• Facebook Inc.’s WhatsApp was ordered to pay a 225 million-euro ($266 million) penalty for failing to be transparent about how it handled personal information, its first fine under beefed-up European Union data protection law. The Irish Data Protection Commission — Silicon Valley’s main privacy watchdog in Europe — said it found violations in the way WhatsApp explained how it processed users’ and non-users’ data, as well as how data was shared between WhatsApp and other Facebook companies. The fine comes weeks after Amazon.com Inc. was hit with a record 746 million-euro penalty in Luxembourg, where it has its European base, for processing personal data in violation of the EU’s General Data Protection Regulation.
• Tesla Inc. temporarily halted some operations at its factory in Shanghai last month, according to people familiar with the matter, as the global shortage of semiconductors hit the electric-car maker in one of its most important markets. Part of a production line at the China plant was halted for about four days in August because of a lack of key chips, the people said, asking not to be identified because the details are private. One particular shortage had to do with the availability of electronic control units, small devices that control one or several electrical systems in a car, one of the people said. That caused output delays mainly for Tesla’s Model Y sport utility vehicle crossover, the person said. Production is now back to normal, the people said.
• The government of Italian Prime Minister Mario Draghi is preparing its first full annual budget with a view to keeping up extra spending even with the economy rebounding faster than expected. Finance Minister Daniele Franco’s staff are working on a new fiscal law worth about 20 billion euros ($24 billion) to sustain measures supporting families and businesses during the pandemic, according to officials familiar with the matter who declined to be identified discussing confidential plans. Draghi and his colleagues want to reinforce Italy’s rebound from its worst economic crisis since World War II while tapping historic low borrowing costs, and to keep a troublesome coalition in check long enough to pursue an ambitious program of pro-growth reforms.
• YouTube has signed up more than 50 million paid subscribers to its music service, a major milestone for Google’s video site that has long been criticized by record labels and Hollywood studios for giving away their work for free. That 50 million figure includes people paying for YouTube Music, customers for YouTube Premium, who get music as part of their subscription, as well as customers still on a trial basis. The company didn’t disclose how much revenue it was generating from its subscriptions, nor the average price the users paid. Google has experimented with charging for music for the last decade, cycling through several different products and names without much success. But the performance of the current music service, rolled out in June 2018, suggests YouTube has finally figured out how to persuade many of its customers to pay for music. YouTube is the fastest-growing paid music service in the world, according to Midia Research, and now accounts for about 8% of the world’s subscribers. Spotify is first by a wide margin.

“Without continual growth and progress, such words as improvement, achievement, and success have no meaning.” – Edith Widder 

*All sources from Bloomberg unless otherwise specified