September 23, 2021

Daily Market Commentary

Canadian Headlines

  • The S&P/TSX Composite rose for the second day, climbing 0.8%, or 157.2 to 20,401.49 in Toronto. The move was the biggest gain since July 21. Gainers included cannabis, energy, and tech stocks. Oil advanced after U.S. crude inventories slid to the lowest since October 2018 amid a global energy crunch expected to increase demand.
  • Boralex Inc. is considering the sale of a minority stake in its French business to help raise money for expansion elsewhere in Europe and in the U.S., according to people familiar with the matter. The Canadian renewables group is working with an adviser as it explores options for its operation in France, the people said, asking not to be identified discussing confidential information. A sale could attract financial investors, the people said. Deliberations are ongoing and Boralex may still decide against a stake sale, according to the people. Boralex, which has a market capitalization of C$4 billion ($3.2 billion), specializes in wind, solar, hydroelectric and thermal power production. It is France’s largest owner-operator of onshore wind turbines, according to its annual report, and the country accounted for about 50% of group earnings before interest, taxes, depreciation and amortization in the final quarter of 2020.

World Headlines

  • European stocks climbed on Thursday as investors were reassured that the scaling back of stimulus measures by the Federal Reserve will be commensurate to the pace of economic recovery. The Stoxx 600 Europe Index gained 0.8% as of noon in London, extending its winning streak to a third day. Autos and technology stocks were among the biggest gainers, while construction and media underperformed. With valuations stretched following a rally that pushed stocks to successive records, concerns that global growth is now past its peak and supply chain disruptions have clouded the outlook in recent weeks. Contagion fears from the blowup of China Evergrande Group add to the jitters, with Thursday’s gains briefly pared when the Dow Jones reported that authorities had asked local governments to prepare for the demise of the real estate behemoth.
  • U.S. futures and stocks in Europe pared gains as fresh concerns about China Evergrande Group’s debt crisis rippled through global markets, damping the risk-on mood sparked by the Federal Reserve’s latest guidance on stimulus. Contracts on the S&P 500 and Nasdaq 100 advanced earlier after the Federal Reserve signaled it’s on track to start scaling back asset purchases this year, but left the door open to extend stimulus if the economy needs it. Treasury yields rose and the dollar declined.
  • Asian stocks rose for the first time in four sessions, as Hong Kong helped lead a rally on hopes that troubled property firm China Evergrande Group will make progress on debt repayment. The MSCI Asia Pacific Index climbed as much as 0.5%, with Tencent and Meituan providing the biggest boosts. The Hang Seng jumped as much as 2.5%, led by real estate stocks as Evergrande surged more than 30%. Hong Kong shares later pared their gains. Asian markets were also cheered by gains in U.S. stocks overnight even as the Federal Reserve said it may begin scaling back stimulus this year. A liquidity injection from the People’s Bank of China also provided a lift, while the Fed and Bank of Japan downplayed Evergrande risks in comments accompanying policy decisions Wednesday.
  • Oil edged down from its highest close in almost two months amid ongoing concerns about the risk to markets from China Evergrande Group’s ongoing tumult. However, there are signals that stockpiles globally are declining. Futures in London fell after earlier touching their highest level since July 14. Dow Jones reported that China has asked local governments to prepare for Evergrande’s potential failure, causing equity markets to pare earlier gains, though the company has been told to avoid near-term default on its bonds. Still, government data Wednesday showed nationwide U.S. crude inventories fell for a seventh week, while those at a key hub in Europe remain below average levels for the time of year.
  • Gold held a decline after the Federal Reserve indicated it could start reducing stimulus in November, while investors continued to monitor the debt crisis at China Evergrande Group. Fed Chair Jerome Powell said the U.S. central bank could begin scaling back asset purchases as soon as the next policy meeting in early November and complete the process by mid-2022, after officials revealed a growing inclination to raise interest rates next year. Still, he left the door open to waiting longer to start tapering and stressed the process wouldn’t offer a direct signal on the timing of lifting rates.
  • U.S. regulators authorized a booster dose of Pfizer Inc.’s Covid-19 vaccine for people aged 65 and over. Anthony Fauci said earlier that he expects mRNA vaccines to be administered as a three-dose regimen. Thailand is debating reducing its quarantine period for vaccinated visitors to one week. Singapore signaled that virus cases were rising faster than it expected. Australia’s Victoria state saw a daily case record while an outbreak in New South Wales appears to be slowing, as the country battles the delta variant. South African-born biotech billionaire Patrick Soon-Shiong is set to back Covid and cancer vaccines in the country.
  • The cost of the intractable semiconductor shortage has ballooned by more than 90%, pushing the total hit to 2021 revenue for the world’s automakers to $210 billion. That’s the latest dire forecast from AlixPartners, which predicts global automakers will build 7.7 million fewer vehicles due to the chip crisis this year. That’s almost double the consultant’s previous estimate of 3.9 million. Despite ongoing efforts to shore up the supply chain, semiconductor availability has worsened as automakers exhaust stockpiles and other industries have no more to spare. Manufacturers have begun warning the problems are metastasizing and could crimp third quarter earnings, with suppliers Faurecia SE and Hella GmbH & Co.on Thursday joining Volkswagen AG’s truck unit Traton SE as the latest to sound the alarm. Last week, forecaster IHS Markit made the biggest adjustment yet to its auto-production projections, which have been falling all year due to the global chip shortage.
  • Dongguan Rural Commercial Bank Co. raised HK$9.1 billion ($1.2 billion) in its Hong Kong initial public offering after pricing shares at the bottom of a marketed range, according to people familiar with the matter. The lender sold shares at HK$7.92 apiece, said the people, who asked not to be identified as the information isn’t public. DRC Bank had marketed 1.15 billion shares for as much as HK$8.71. An external representative for DRC Bank declined to comment. DRC Bank is raising funds in the Asian financial hub in a tough week for Chinese lenders. A number of China’s publicly-traded banks have rushed to assuage investors who are concerned about risks from the deepening crisis at China Evergrande Group and regulators’ broader crackdown on developers’ use of leverage.
  • Boeing Co. expects Chinese airlines will need 8,700 new aircraft for a total of $1.47 trillion by 2040, doubling the country’s commercial fleet size as air travel booms. China’s demand for wide-body aircraft is likely to account for 20% of global deliveries, according to the U.S. manufacturer’s Commercial Market Outlook. China’s civil aviation industry will also need more than 400,000 new personnel including pilots, cabin crew and technicians by 2040, Boeing said.
  • Five months after President Joe Biden unveiled his vision of a new social contract between the federal government and American families, the administration is struggling to unite congressional Democrats behind a bill that can pass in face of united Republican opposition. With moderate and progressive lawmakers split over the final size of what in August was penciled in as a $3.5 trillion package, and over a welter of elements from spending to taxes, Biden on Wednesday put his engagement into high gear. The president hosted three separate meetings with Democratic lawmakers at the White House on Wednesday — one with the leadership, one with progressives and one with moderates — in an effort to salvage what would likely be his biggest legislative achievement. Failure would also likely kill off a separate infrastructure bill, leaving Biden’s long-term economic agenda in tatters.
  • The Biden administration is pressuring companies involved in the semiconductor supply chain to be more transparent as the global chips shortage continues to wreak havoc across many industries, officials said. Commerce Secretary Gina Raimondo and National Economic Council Director Brian Deese will convene several companies Thursday to discuss how to respond more rapidly to shutdowns around the world, brought about by the spread of the coronavirus, and what comes next for legislation to finance domestic manufacturing that’s lingered on Capitol Hill for months.  Representatives of companies including the Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co. Ltd., Apple Inc., Intel Corp., General Motors Co., Ford Motor Co. and Stellantis NV are to attend, according to people familiar with the planning.
  • Valley National Bancorp agreed to acquire Bank Leumi Le-Israel BM’s U.S. banking arm for about $1.15 billion in cash and stock, adding a lender that works with middle-market commercial clients and high-net-worth individuals. Leumi shareholders will receive 3.8025 shares of Valley National stock and $5.08 in cash for each Leumi share they own, according to a statement Thursday. After the transaction is completed, Bank Leumi Le-Israel BM will own move than 14% of the common stock of Valley National, which has executive offices in New York. A wave of consolidation is sweeping U.S. regional banks with lenders including U.S. Bancorp and PNC Financial Services Group Inc. bulking up through mergers and by purchasing foreign firms’ U.S. units, an attempt to compete with the retail-banking businesses of Wall Street giants. Earlier this week, U.S. Bancorp agreed to buy Mitsubishi UFJ Financial Group’s U.S. regional bank for about $8 billion.
  • Citigroup Inc. more than doubled its Asian and European natural gas forecasts for next quarter and said prices could surge to as high as $100 per million British thermal units in the event of a particularly cold winter. Liquefied natural gas prices are skyrocketing as seasonally low European inventories, booming Chinese demand and supply constraints from Russia to Nigeria lead to a bidding war for the power generation feedstock before the northern hemisphere winter. Japan-Korea marker prices have jumped almost 50% so far this month to near $30 per mmBtu, while in Europe LNG is up around 40% to close to $25. Price gains in the U.S. have been more subdued.
  • Facebook Inc. Chief Technology Officer Mike Schroepfer, a 13-year veteran who oversees the social network’s work in artificial intelligence, virtual reality and the blockchain, will step down next year. Another longtime Facebook executive, Andrew Bosworth, will take over as CTO, according to an internal message on Wednesday from Chief Executive Officer Mark Zuckerberg. Schroepfer’s move marks the most significant departure from the company in years and follows the recent exits of several other top executives. His decision to step aside comes at a time when Facebook is under escalating pressure to clean up its service — a challenge the company believes it can tackle using the artificial intelligence software that Schroepfer’s teams are building.
  • Italian Prime Minister Mario Draghi said his government will respond rapidly to rising energy costs as it prepares to enact measures to help consumers and businesses offset higher utilities bills. The country will spend more than 3 billion euros ($3.5 billion) to mitigate the effect of the energy price trend, Draghi said Thursday at an event hosted by the country’s employers lobby Confindustria. Italy is enjoying its strongest economic rebound since the 1970s as the world emerges from the coronavirus crisis. Growth is expected to approach 6% this year — a forecast Draghi reiterated in his comments on Thursday — and the government will present an update to its economic outlook later this month.
  • Traders brought forward wagers on a Bank of England rate hike to 0.25% after officials said developments since its August meeting appear to have strengthened the case for modest tightening. Money markets now see at 15-basis-point increase in March 2022, having priced it for May before Thursday’s meeting. They still see a further quarter-of-a-percentage-point rise to 0.5% in November 2022. Two BOE officials dissented to vote for a reduction in bond purchases. While the central bank traditionally shifts its key interest rate by multiples of 25 basis points, it last cut rates by 15 basis points in March 2020, at the height of the coronavirus pandemic. If officials wanted to raise rates, a move back to 0.25% is seen by strategists as the likely first step.
  • China’s central bank net-injected the most short-term liquidity in eight months into the financial system, with markets roiled by concerns over China Evergrande Group’s debt crisis. The People’s Bank of China pumped in 110 billion yuan ($17 billion) of cash with seven- and 14-day reverse repurchase agreements. That was the largest addition through open-market operations since late January, when a funding squeeze sent interbank rates soaring. Prior to Thursday, the PBOC had injected liquidity for three straight sessions, stoking bets that Beijing hopes to soothe market nerves over Evergrande. The need to help calm market jitters is pressing, as concerns over Evergrande’s ability to make good on its liabilities spills over into global markets. Focus is on whether the developer can pay $83.5 million of interest due Thursday on a five-year dollar note. The coupon on the security, which has a 30-day grace period before a missed payment would constitute a default, is part of $669 million of bond interest due through the end of this year.
  • Turkey’s lira fell to a record low after the central bank unexpectedly cut its benchmark rate on Thursday, risking further volatility in the currency amid high inflation and reflecting the long shadow cast by President Recep Tayyip Erdogan over monetary policy. The Monetary Policy Committee reduced its key one-week repo rate by 100 basis points to 18%. All but one of the 23 economists surveyed by Bloombergpredicted the policy rate would be held at 19%. Turkish inflation unexpectedly climbed to 19.25% last month, pushing the nation’s real yield below zero for the first time since October. But Governor Sahap Kavcioglu shifted the bank’s policy focus earlier in September to core inflation, which strips out volatile items like food and energy and is nearly 250 basis points lower than the headline figure.
  • Deutsche Bank AG said its traders and dealmakers performed better than expected in the third quarter, allowing Germany’s largest lender to invest in initiatives to boost controls and growth. Revenue at the investment banking division will fall about 10% in the third quarter from a year earlier when a global trading boom led to surging income, Chief Financial Officer James von Moltke said Thursday at a conference hosted by Bank of America. The consensus forecast from analysts polled by Bloomberg currently sees third-quarter investment banking revenue down 19%. Deutsche Bank also plans to book about 700 million euros ($820 million) in additional restructuring costs in the remainder of the year — for IT investments, job cuts and reductions in office space — and is counting on robust revenues in the investment bank and lower-than-expected credit provisions to offset the hit, von Moltke said.
  • The Bank of England said the case to tighten U.K. monetary policy is building and inflation may breach 4%, prompting investors to bring forward bets on an interest-rate hike. While the BOE kept its ultra-loose monetary policy settings in place as forecast by economists, officials shifted tone on the outlook, and Deputy Governor Dave Ramsden joined Michael Saunders in pushing to end bond purchases as soon as possible.  Noting the “modest tightening” in policy foreseen over their horizon in August, “some developments during the intervening period appear to have strengthened that case, although considerable uncertainties remain,” the Monetary Policy Committee said in a statement.
  • President Joe Biden plans to nominate a law professor who has criticized cryptocurrencies and advocated for the government to have a much bigger role in banking to run a top Wall Street regulator. Saule Omarova, who has said she wants to “end banking as we know it,” will be tapped to run the Office of the Comptroller of the Currency as soon as this week, according to three people familiar with the nomination process who asked not to be named before a White House announcement. The OCC supervises the nation’s biggest lenders including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. Picking Omarova, who teaches at Cornell University Law School, is a shot across the bow for Wall Street as she’s expected to pursue tougher oversight and stricter rules. The pick also raises questions about whether the Biden administration would support Omarova’s agenda if she pursues some of her most radical positions, such as moving consumer banking to the Federal Reserve from private institutions.
  • Veritas Capital and Elliott Investment Management are exploring options for Athenahealth Inc. including a sale or initial public offering, according to people familiar with the matter. Veritas and Elliott are aiming for the health information technology company to be valued at more than $20 billion in a transaction, said the people, who asked to not be identified because the matter isn’t public. The firms are working with Goldman Sachs Group Inc. and Evercore Inc. to help explore options for the company, the people said. The bankers have reached out to about a half dozen potential buyers to gauge their interest, one of the people said.
  • Airbus SE’s push to quickly scale up production as air travel recovers from the Covid-19 pandemic is testing suppliers that have struggled to hire enough workers and secure raw materials. Back in May, the European planemaker said it would increase outputof its best-selling A320 family of aircraft to 45 per month by the fourth quarter of 2021, rising to as high as 70 in early 2024. The demand is there to support those rates and higher, but suppliers aren’t in the best position to deliver, Airbus Chief Commercial Officer Christian Scherer said in an interview. “There are suppliers that have been severely hurt by the downturn and have lost some of their surface manpower, investment capability or both,” Scherer said. “We’re in a ramp-up situation that is supply-chain constrained.”
  • Business activity in the euro area “markedly” lost momentum in September after demand peaked over the summer and supply chain bottlenecks hurt both services and manufacturers. Surveys of purchasing managers by IHS Markit showed growth in both sectors slowing more than expected, bringing overall activity to a five-month low. Input costs, meanwhile, surged to the highest in 21 years, according to the report. “Firms have become increasingly frustrated by supply delays, shortages and ever-higher prices for inputs,” said Chris Williamson, chief business economist at IHS Markit. “Businesses, most notably in manufacturing but also now in the service sector, are being constrained as a result, often losing sales and customers.”
  • Best Inc., a U.S.-listed Chinese logistics company whose shareholders include Alibaba Group Holding Ltd., is considering a sale of its express delivery business, according to people familiar with the matter. Best is working with a financial adviser on the potential divestment and could seek a valuation of as much as $1 billion for the business, the people said, asking not to be identified because the matter is private. A sale could draw interest from other logistics companies, the people said. Hangzhou-based Best is exploring a range of options as it seeks to raise funds to cut debt, the people said. Considerations are still ongoing, no final decision has been made and the company could decide to keep the express unit, they said.

“It’s hard to beat a person who never gives up.” –Babe Ruth

*All sources from Bloomberg unless otherwise specified