September 20, 2021

Daily Market Commentary

Canadian Headlines

• Canadian equities fell for a second week as materials shares dipped on commodity headwinds. The S&P/TSX Composite fell for the second day, dropping 0.5%, or 111.74 to 20,490.36 in Toronto. The index dropped to the lowest closing level since Aug. 23. Today, financials stocks led the market lower, as 8 of 11 sectors lost; 147 of 229 shares fell, while 75 rose. Royal Bank of Canada contributed the most to the index decline, decreasing 1.5%. NexGen Energy Ltd. had the largest drop, falling 9.3%.
• Canadian Prime Minister Justin Trudeau appears set to retain power in a close election Monday, but may fall short of regaining the parliamentary majority he’s been coveting. Trudeau’s Liberal Party is likely to win 155 of the 338 seats in the House of Commons, compared with 119 for the opposition Conservatives under Leader Erin O’Toole, according to projections based on national polling averages compiled by the Canadian Broadcasting Corp. The prime minister tried to shore up support Sunday with a blitz through key districts in Quebec, Ontario and British Columbia on the final day of the campaign. O’Toole made a handful of stops near his home district in the suburbs of Toronto.
• AusNet Services Ltd., which owns Australian power transmission and distribution assets, will enter takeover talks after Brookfield Asset Management Inc. made an approach valuing the company at about A$9.6 billion ($7 billion). Melbourne-based AusNet, which serves about 1.5 million customersin southeastern Victoria state, has contacted its two largest holders, Singapore Power International Pte and State Grid Corp. of China, the company said Monday in a statement. AusNet shares surged as much as 22% to A$2.42 in Sydney. Brookfield’s indicative offer of A$2.50 cash per share is a 17% premium to AusNet’s closing price Friday, according to the target. The parties will carry out due diligence and have agreed to negotiate on an exclusive basis for at least seven weeks.

World Headlines

• European stocks slid to the lowest level in two months as China’s real estate crackdown and worries ahead of this week’s Federal Reserve fueled risk-off sentiment. The Stoxx Europe 600 index fell 2%, the most in a month and to the lowest level since July 21. Germany’s DAX slumped 2.3% on the day the index’s expansion takes effect, with banks and automotive shares underperforming. While all sectors retreated on the European gauge, miners declined the most, sliding to the lowest level since February as iron ore’s rout deepened and base metals fell. Anglo American Plc, Rio Tinto Plc and Glencore Plc were among the worst performers.
• The global stock rout sparked by investor angst over China’s real-estate sector and Federal Reserve tapering deepened on Monday, with U.S. futures falling more than 1% and European equities hitting a two-month low. Contracts on the three major U.S. indexes signaled further declines when the market opens after the S&P 500 fell the most in a month, a test for the buy-the-dip mentality as the gauge jabs at its 50-day moving average. Treasuries gained along with the dollar before Wednesday’s Fed meeting, where policy makers are expected to start laying the groundwork for paring stimulus.
• Hong Kong shares tumbled amid the biggest selloff in property stocks in more than a year as traders tracked the risk of contagion from the debt crisis at developer China Evergrande Group, which is fueling new fears about China’s growth path. Aside from Evergrande and the prospect of reduced Fed stimulus, financial markets also face risks from uncertainty over the outlook for President Joe Biden’s $4 trillion economic agenda as well as the need to raise or suspend the U.S. debt ceiling. Investors were already fretting over a slowing global recovery from the pandemic and inflation stoked by commodity prices.
• Oil dropped as risky assets began the week on the back foot and the dollar gained ahead of a Federal Reserve meeting that’s expected to see stimulus scaled back. Futures in New York fell to trade below $71 a barrel amid a broader decline in stock markets. The dollar rose for a third day, making commodities priced in the currency less attractive to investors. Policy makers are poised to start laying the groundwork for reducing monthly asset purchases when the Fed meets for two days from Tuesday, while markets are also weighing the risk of spillover from China Evergrande Group’s woes.
• Gold edged higher as fears of spillover from China Evergrande Group’s woes rippled through markets, stoking demand for havens. Chinese stocks and U.S. futures slid Monday on concerns the debt crisis at the developer could spark financial contagion. The dollar gained while Treasury yields eased amid the anxious mood in markets, allowing non-interest bearing bullion to rise.
• World leaders gather at a scaled-back United Nations General Assembly in New York this week, with global vaccine distribution taking center stage. President Joe Biden will propose a new course for worldwide vaccine allocation amid anger in some countries that the U.S. is rolling out boosters while millions have yet to get a first jab. Meanwhile, fears about a possible spike in cases from the meeting are making New Yorkers less enthusiastic about hosting the gathering. Italy has started giving booster shots to its vulnerable citizens, while the Czech Republic is offering third doses of Covid-19 vaccines to people inoculated more than eight months ago. Singapore recorded more than 1,000 infections Saturday for the second straight day, marking a 17-month high and prompting concern about capacity constraints at intensive care facilities. China’s Fujian outbreak has disproportionately affected children, according to a vice premier. Japan could lift its state of emergency at the end of September.
• 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 $1.57 billion in the week ended Sept. 17, compared with gains of $792.6 million in the previous week, according to data compiled by Bloomberg. This was the biggest weekly inflow since May 28. So far this year, inflows have totalled $38.9 billion.
• The fate of President Joe Biden’s economic agenda rests largely on Speaker Nancy Pelosi navigating deep Democratic rifts and the minefield of promises she’s made to keep the party’s moderate and progressive wings moving toward her goal. The California Democrat, who has only three votes to spare on any party-line votes, has a jam-packed September agenda that includes action on a multi-trillion dollar tax and spending bill as well averting both a politically disastrous government shutdown and a potentially catastrophic Treasury default.  How she manages the stream of consequential legislation and the competing demands within her own party could come to define Biden’s presidency and what may be her last term as speaker. The emerging strategy, to be carried out over the next two weeks, is as risky as it is high-stakes.
• Deutsche Lufthansa AG plans to raise 2.14 billion euros ($2.5 billion) through a heavily discounted share sale as it strives to repay a German government coronavirus bailout. The airline group will offer new shares at 3.58 euros apiece, less than half Friday’s closing price of 8.21 euros, and aims to return all of its 9 billion euros in state borrowings by the end of the year, according to a statement Sunday. The shares rose despite the lowly issue price, which has long been expected by the market. Oil prices declined for a second session, lifting the broader airline industry, while full repayment will free Lufthansa from restrictive conditions attached to the bailout and allow it to avoid punitive interest payments.
• Bill Gates raised more than $1 billion in corporate funding for Breakthrough Energy Catalyst, drawing on BlackRock Inc.’s Larry Fink and Microsoft Corp.’s Satya Nadella to rally support for some of the world’s most demanding clean-energy projects. BlackRock is making a five-year, $100 million grant from its charitable foundation. Microsoft and the other backers — General Motors Co., Bank of America Corp., American Airlines Group Inc., Boston Consulting Group and ArcelorMittal SA — are providing a mix of equity capital and so-called offtakes, or purchase agreements tied to the projects. Gates established Breakthrough Energy Catalyst to accelerate the commercial viability of four key solutions to the climate crisis: green hydrogen, sustainable aviation fuel, long-duration battery storage and carbon capture from the air. In practice, Catalyst will supply the cash needed to get capital-intensive projects off the ground, before debt financing and government funds can be raised to cover the remaining 90% of the cost.
• European gas prices surged more than 10% as Russia is keeping its grip on the market, opting to cap additional flows to the continent. Gazprom PJSC opted not to flow more gas to Europe via Ukraine in October, according to the results of an auction on Monday. There were also signs Russian flows via the key Yamal-Europe pipeline will remain limited, with traders booking just a fraction of the capacity offered to flow gas next month into Germany via the Mallnow compressor station. The cap on additional Russian supplies is leaving Europe starved for the fuel it needs to boost buffer inventories before the winter. With just a few weeks to go before the start of the heating season, storage sites are less than 72% filled, the lowest level for this time of year in more than a decade. The supply crunch also boosted the cost of producing electricity, sending prices up in Germany.
• Cryptocurrency prices slumped as a broad selloff sparked by worries about contagion from China Evergrande Group swept through global markets.  Bitcoin dropped 7.3% to $44,127 as of 7:33 a.m. in New York, reaching the lowest level in a week. Other digital assets also retreated, with Bitcoin Cash, EOS and Ether all declining. The losses mirrored the action in the broader market as investors weighed the risks coming from Evergrande’s debt woes and this week’s Federal Reserve meeting. U.S. equity futures pointed to losses at the open and the Stoxx Europe 600 index dropped as much as 2%, on track for the biggest decline since July.
• Pfizer Inc. and partner BioNTech SE said their Covid-19 vaccine was safe and produced strong antibody responses in children ages 5 to 11 in a large-scale trial, findings that could pave the way to begin vaccinating grade-school kids within months. The long-awaited results offer one of the first looks at how well a Covid vaccine could work for younger children. Pressure to immunize kids has been on the climb in the U.S., where a new school year has started just as the delta variant is fueling a surge in cases. In a trial with 2,268 participants, two shots of a 10 microgram dose — one-third the adult shot — produced antibody levels comparable to those seen in a trial of 16-to-25-year-olds who got the adult dose, the companies said, with similar side effects.
• CVS Health Corp., one of the biggest U.S. providers of Covid-19 tests and vaccines, is racing to hire thousands of workers as staffing shortages prompt stores to close drive-through lanes and at times turn away customers seeking shots. The largest U.S. pharmacy chain by stores said it plans to add 25,000 employees this week in a single-day hiring spree to prepare for a potential surge in demand from booster shots and as more people seek Covid-19 tests and flu vaccines. CVS employees and customers at some locations have described chaotic stores, hourslong lines and phones that go unanswered as the chain addresses a national labor shortage. Companies in sectors from retail to manufacturing are having a hard time filling jobs, leading to deteriorating service, production slowdowns and burnout among staff.
• Australia’s top three iron ore miners have shed a combined $109 billion in share value in less than two months — roughly equivalent to the market cap of General Electric Co. — following a record-breaking price rout. It’s a dramatic reversal of fortunes for Rio Tinto Group, BHP Group and Fortescue Metals Group Ltd., which only last month were showering record dividends on shareholders after prices of the steel-making ingredient surged to an all-time high above $230 a ton in May. They’ve since plunged to near $90 as China stepped up curbs on steel production to meet environmental goals. Rio Tinto, the world’s biggest ore producer, has retreated 29% from July 29, BHP is down 30% and Fortescue has plunged 44%. That adds up to value destruction of A$150 billion ($109 billion), Bloomberg calculations show. The three miners together account for more than 8% of Australia’s benchmark S&P/ASX 200 share index, which has slipped 2% over the period.
• Australian toll-road operator Transurban Group and three partners will pay A$11.1 billion ($8.1 billion) to acquire the remaining half stake they don’t already own in a network of Sydney cross-city routes. The company’s Sydney Transport Partners consortium has prevailed in an auction run by the New South Wales state government to privatize its 49% ownership of tolled tunnel network Westconnex, the government said in a statement Monday.  Transurban will raise A$3.97 billion in a share sale to help fund the deal, it said in a separate statement. It will raise a further A$250 million in a placement to consortium partner AustralianSuper Pty.
• OVH Groupe SAS kicked off an initial public offering in Paris, looking to raise as much as 400 million euros ($469 million) that will give the cloud-storage provider funding to finance its competition with Amazon.com Inc. and accelerate its international expansion. Existing holders will also sell shares in the IPO, the company said in a statement Monday. OVHcloud was valued at more than $1 billion in 2016, when KKR & Co. and TowerBrook Capital Partners took a combined 20% stake in the business. OVH Groupe leases out storage and processing power to customers such as tiremaker Michelin and the French presidential palace. Besides Amazon Web Services, its competitors include Microsoft Corp.’s Azure division and Alphabet Inc.’s Google Cloud.
• Chinese private equity firm FountainVest Partners has agreed to buy New Zealand pet food company Ziwi.  While the terms of the agreement weren’t disclosed, Bloomberg News reportedSept. 18 that the deal would value closely-held Ziwi at about NZ$1.5 billion ($1.06 billion), according to people familiar with the matter who asked not to be identified.  Founded in 2002 by Peter Mitchell, a free-range deer farmer, Ziwi sells pet food including air-dried and wet cat and dog food, as well as chews, treats and bones, according to its website. Its meats and poultry are ethically raised and its seafood is wild-caught and sustainable, the site shows.
• Apple Inc.’s “Ted Lasso,” a show about a U.S. football coach who moves to England to lead a soccer team, was crowned television’s best comedy, a breakthrough for the giant tech company’s efforts to build its Apple TV+ service. In addition to best comedy, the show’s star and co-creator, Jason Sudeikis, won best comedy actor. Hannah Waddingham and Brett Goldstein nabbed awards for best supporting actress and actor for their work in the series. Jean Smartwas voted best actress in a comedy for her work in “Hacks” on HBO Max. Many Hollywood figures have expressed skepticism about Apple’s foray into entertainment. It hasn’t acquired a catalog of shows to fill out its library for Apple TV+, and it has been wary of igniting controversy with its programs. Yet the company is dominating one category at the TV industry’s biggest annual gala less than two years after introducing the service.
• Emerging-market bond sales are springing back to life before this week’s Federal Reserve meeting, as renewed speculation over imminent tapering prompts borrowers to raise money while it’s still cheap. The past week shattered a summer lull for dollar- and euro-denominated debt, bringing $36 billion of issuance from governments and companies after the previous 10 weeks saw only $90 billion raised. Sales from Indonesia, Turkey, Chile, Serbia and Hungary were all met with robust investor demand. Middle Eastern borrower Arab Petroleum Investments Corp. is due to start investor calls on Monday, while Nigeria is gearing up for its first dollar-bond sale in almost three years.

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*All sources from Bloomberg unless otherwise specified