September 4th, 2020

Daily Market Commentary

Canadian Headlines

  1. Canadian stocks fell the most since late June, led by a rout in technology shares. The S&P/TSX Composite Index lost 1.5% on Thursday. All 11 sectors retreated, led by a 4.5% drop in technology shares. Broader decliners included Dye & Durham Ltd. and Ballard Power Systems Inc., both falling at least 10%. Oil dipped to its lowest level in nearly a month with a stronger dollar, looming extra supplies from Iraq and depressed demand all contributing to the bearish sentiment. The global copper market could be on the cusp of a historic supply squeeze as Chinese demand runs red hot and exchange inventories plunge to their lowest levels in more than a decade.
  2. Canada’s airports are asking Prime Minister Justin Trudeau to step up relief efforts for industries hardest hit by the pandemic, as the governing Liberal Party prepares to roll out a recovery package for the nation’s economy. The Canadian Airports Council will issue a request Friday for the government to extend rent relief to airports beyond this year, and to provide long-term interest free loans and other funding to help the sector stave off a historic revenue loss. Daniel-Robert Gooch, president of the Ottawa-based advocacy group, said he’s hoping the government will provide enough help to cover a “big chunk” of the almost C$3 billion ($2.3 billion) airports will need to borrow through the end of next year to cover expenses and keep workers employed.

World Headlines

  1. In Europe, the Stoxx Europe 600 turned positive after a negative open. The gauge rose 0.5%, led by cyclicals including banks, travel, miners and autos. Banks were supported by consolidation talks, with Spanish lenders Bankia SA and CaixaBank exploring a possible merger. In a textbook sector rotation, the main laggards were defensive industries such as real estate, food, utilities and telecoms. The technology sector underperformed moderately.
  2. U.S. stock futures pointed to a market rebound after the worst slide in almost three months, with investors remaining on edge ahead the August jobs report. Contracts on the S&P 500 pared a drop to turn positive, up 0.4% as of 9:36 a.m. in London, after the underlying index tumbled 3.5% in the cash session. Nasdaq 100 futures also trimmed an earlier 1.9% drop, but were still in red, down 0.2%. Volatility has returned to the American equity market after stocks enjoyed the best August in 34 years and valuations spiked to levels last seen in the dot-com era, even as the pandemic rages on and a federal spending bill remains in limbo. Investors may need evidence of a fuller economic recovery after a 60% run-up in the S&P 500 since its March lows. Friday’s labor report is expected to show employers added 1.35 million jobs last month.
  3. Technology companies pulled Japanese stocks lower, mirroring a drop in U.S. equities as investors questioned the sustainability of high valuations. Electronics makers and telecommunications providers were the biggest drags on the Topix index, while automakers and banks rose. The S&P 500 Index fell by the most since June, led by slumps in technology giants including Apple, Microsoft, Amazon and Facebook.
  4. Oil erased earlier losses as the dollar’s decline makes commodities more attractive, but crude was still headed for a weekly drop over demand concerns. Futures in New York rose 0.8% while the greenback gave up gains to trade 0.2% lower. The oil market is still struggling with a slow recovery in consumption while higher supply from OPEC and its allies is starting to kick in. Oil has got off to a weak start in September with many countries still fighting to contain the coronavirus. The market will be watching August non-farm payroll data due Friday for signs of improvement in the U.S. economy. At the same time, crude supply is likely to remain higher than expected as Iraq is struggling to meet its output commitments under the OPEC+ deal.
  5. Gold advanced, trimming a weekly loss, as the dollar edged lower ahead of key U.S. jobs data. Equity markets were mixed, with traders preparing for a three-day weekend in America. Bloomberg Economics said the non-farm payrolls report later Friday should show modest gains in August, reflecting ongoing deceleration in the pace of the labor market recovery. On the demand front, gold buying in India, the world’s second-biggest bullion consumer, is showing signs of recovery after a slump earlier this year. The country’s gold imports more than doubled in August from a year earlier, according to a person familiar with the data.
  6. The coronavirus pandemic continued to spread in India, which added more than 83,000 new confirmed infections, taking total cases in the country to almost 4 million. In Italy, former Premier Silvio Berlusconi was hospitalized in Milan after testing positive for the virus. The Bank of England is likely to have to ease monetary policy further to help combat the economic impact of the coronavirus, a central bank official said. Economists expect the European Central Bank to also step up its crisis response later this year as the rebound starts to run out of steam. Meanwhile, Novo Nordisk A/S is exploring whether a class of medicines that helps people lose weight and control diabetes can also fight Covid-19.
  7. With two months to go until Election Day, U.S. President Donald Trump is trying to make good on a number of trade promises to protect key constituencies in swing states to bolster support for his campaign and vulnerable Senate Republicans. Mexico on Friday begins issuing pre-approval permits on some steel exports to ensure they aren’t just rerouted from China. The step was negotiated with the U.S. to avoid tariffs that America used against the nation last year on national-security grounds and seems aimed at states that are top producers, including Pennsylvania and North Carolina. Trump’s trade envoy this week also asked that the U.S. International Trade Commission probe whether Mexican blueberries have hurt American farmers and hold talks to address concerns about strawberries from south of the border. The steps look targeted to win over growers in Georgia, Michigan and Florida and come after years of requests for protection by Republican Senators Marco Rubio and Rick Scott.
  8. Yum China Holdings Inc. has raised $2.2 billion after pricing its second listing in Hong Kong at HK$412 per share, according to people familiar with the matter, joining the growing ranks of U.S.-listed Chinese firms selling shares in the financial hub. The New York-listed company, which operates KFC and Pizza Hut in the world’s most populous country, sold 41.91 million shares in the offering, the people said, asking not to be identified as the information is private. A price of HK$412 represents a 4.9% discount to its closing price of $55.92 on Thursday, according to Bloomberg calculations. Yum China’s New York shares fell 3.5% in Thursday trading. The S&P 500 saw its worst single-day plunge since June, closing 3.5% lower.
  9. U.S. drugmaker AbbVie Inc. and Chinese drug developer I-Mab agreed to collaborate on a cancer treatment in a deal that could be worth more than $2.9 billion. The deal gives North Chicago, Illinois-based AbbVie an exclusive global license to develop and sell I-Mab’s cancer-fighting drug outside of Greater China, according to a statement seen by Bloomberg News. The drug lemzoparlimab, also known as TJC4, is an antibody discovered by the Shanghai-based company that is used to treat multiple forms of cancer. AbbVie will pay I-Mab $180 million up front as well as $20 million based on recently-released clinical data, according to the statement. I-Mab could also receive as much as $1.74 billion in milestone payments based on development, regulatory and sales criteria. The Chinese firm will get royalties from future sales of the drug.
  10. Thursday’s megacap tech selloff is likely just some froth coming off a hot market rather than a portent of a larger pullback to come. That’s the view of most market participants after the tech-heavy Nasdaq 100 suffered a 5.2% decline, its worst since March. Profit taking after a good run, seems to be the consensus explanation. Robust purchases of downside hedges, the possibility for positive news on the U.S. labor market and the potential for longer-term earnings growth, all suggest technology shares can remain supported.
  11. Michael Forest Reinoehl, a suspect in the recent fatal shooting of a right-wing activist in Portland, Oregon, was killed in Washington state when police moved to arrest him, the New York Times reported, citing three law enforcement officials. A car drove through a group of Black Lives Matter protesters in New York’s Times Square, according to local media reports. Video shows the vehicle approaching a line of protesters, briefly pausing and then speeding through them as people jumped back to get out of the way. The New York Police Department said an investigation is ongoing, and stressed the black sedan was not an NYPD vehicle. Rochester Mayor Lovely Warren said she’s suspending the officers involved in the death of Daniel Prude, a Black man who suffocated during a police incident in the city in New York in March. People protested outside Rochester’s police headquarters after body-camera footage released by Prude’s family showed the officers covered the man’s head with a hood and pressed his face into the ground. The incident has been under investigation by New York state Attorney General Letitia James’s office since April.
  12. The North Atlantic Treaty Organization pointed the finger at Russia over the poisoning of Alexey Navalny, calling the attack “appalling” but stopping short of any immediate concrete response. NATO Secretary General Jens Stoltenberg reiterated a call for an international reaction to the use of a military-grade nerve agent on the Russian opposition leader, and said that alliance members are continuing discussions about what that might be. Navalny, a prominent critic of Russian President Vladimir Putin, has been in a Berlin hospital for the past two weeks after falling violently ill on a domestic flight in Russia and being evacuated to the German capital for treatment. The apparent attempted murder risks sharpening a deterioration in the West’s relations with Russia.
  13. Novo Nordisk A/S, the Danish drugmaker, is exploring whether a new class of medicines that helps people lose weight and control diabetes also has potential in fighting Covid-19. Research shows people afflicted by obesity and diabetes often fare worse in trying to overcome SARS-CoV-2. Now initial analysis of electronic medical records shows that GLP-1 drugs, which help patients keep blood sugar levels in check, could be a “very meaningful therapy” in helping people with diabetes battle Covid-19, Novo Chief Scientific Officer Mads Krogsgaard Thomsen said in an interview. He pointed to evidence the virus attacks cells that produce the hormone insulin.
  14. The Bank of England will probably need to ease monetary policy further to help combat the economic impact of the coronavirus, according to central bank official Michael Saunders. Saunders, who sits on the BOE’s rate-setting committee, said in a speech Friday that the risks to the central bank’s growth forecasts are to the downside, and the bank should “lean strongly” against such threats. The pound initially slipped and gilts pared losses as Saunders spoke. In response to questions after the speech, Saunders said there was “certainly” scope to expand the BOE’s bond-buying plan, and that officials were still reviewing whether taking interest rates below zero would be an effective form of stimulus.
  15. SoftBank Group Corp. is exploring assembling a group of bidders for TikTok’s India assets and has been actively looking for local partners, according to people familiar with the matter. Over the past month, the Japanese conglomerate, which owns a stake in TikTok’s Chinese parent ByteDance Ltd., has held talks with the heads of India’s Reliance Jio Infocomm Ltd. and Bharti Airtel Ltd., the people said, asking not to be identified because the details are private. While discussions have fizzled since, SoftBank is still exploring options, according to the people.
  16. When it comes to raising money, nothing is off limits for airlines mired in their worst-ever crisis. From fresh vegetables to peanuts and pajamas, they’re selling almost anything to make it through the pandemic. Even airlines that received government bailouts and slashed costs are looking for new revenue streams as they burn through cash while fleets are largely grounded and people stay at home. A recovery is expected to take years and cost carriers billions of dollars more.
  17. Australian Prime Minister Scott Morrison said most state and territory leaders have recommitted to opening up the economy by December, but failed to secure an immediate agreement to lift border restrictions that are hampering the recovery. The nation has fragmented along state lines, with many leaders barring travel from the two most-populous states of New South Wales and Victoria due to community transmission of Covid-19. That’s complicating efforts to steer the economy out of its first recession in almost 30 years. Seven out of the eight state and territory leaders recommitted to dropping restrictions by Christmas, something that was originally envisaged by the end of July. The state of Western Australia, the powerhouse of the nation’s resources industry, was the holdout.
  18. Beijing is allowing faster gains in the yuan as it seeks to cheapen imports and bolster weak consumer spending. That’s one theory touted by DBS Bank Ltd. and Mizuho Bank Ltd., who say a stronger yuan is ideal for Beijing at a time when Chinese President Xi Jinping is pushing for a more self-reliant economy. That marks a shift from when officials worried that a strong yuan would undercut the nation’s exports to the world. The daily currency fixings show China’s equanimity toward accelerating gains in the yuan, with the central bank refraining from sending clear warning signals to traders. That’s even as the yuan gained nearly 5% since late May versus the dollar to its highest level in more than a year. The fixings — – a tool the PBOC often uses to limit currency strength — have generally been tracking the market higher as the dollar has weakened.
  19. Russia’s proposed Covid-19 vaccine induced an antibody response in all participants in early trials and found no serious adverse effects, according to the first peer-reviewed data on studies of the controversial project. The vaccine also produced a response in T-cells — a type of white blood cell that helps the immune system destroy infection — according to preliminary results from phase 1 and 2 trials that were published Friday in the Lancet medical journal. Russian officials had previously made broadly similar claims about the shot, prior to review by outside experts. Russia has been seeking to gain international credibility after health officials elsewhere harshly criticized the country’s regulatory approval of the vaccine last month, before it had gone through wider phase 3 trials. Russian President Vladimir Putin hailed Sputnik V, named after the Soviet Union’s 1957 launch of the world’s first satellite into space, as the first vaccine globally to receive clearance.
  20. Thursday’s Nasdaq nosedive dispensed painful lessons in how options-market leverage can blow up in an investor’s face. Losses in benchmark indexes were brutal enough, getting to 6% in the Nasdaq 100, or about $730 billion erased. In single-stock equity contracts they were downright existential, with some instruments wiped out in the space of a few hours. Volumes in puts and especially calls has been exploding in recent weeks, much of it in the tiny lot sizes denoting individual traders. While it’s never hard to pick out staggering losses in options when markets tumble, and plenty of examples exist of well-timed puts, today’s losses were particularly harrowing for the longs. A call with a $125 strike price on Apple Inc. shares, expiring tomorrow, plunged 89% as shares sank 8% to $121. A bullish wager for Tesla Inc. to reach $500 by Friday’s expiry lost 90% as the stock dropped 9% to $407. And a call on Zoom Video Communications Inc. with a strike price of $420 became essentially worthless as shares hit $381.
  21. Boris Johnson’s government said it will be able to avoid border chaos when the U.K. completes its split from the European Union despite stark warnings from industry over its lack of readiness. A government memo, first reported by Bloomberg News on Thursday, warned there are “critical gaps” in its Brexit plans, while logistics experts have highlighted the threat of chaos at ports and shortages of key products if a critical IT system isn’t finished in time. “We’ve kept the supply chains going, and I’m absolutely confident we will do that again in the future,” Transport Secretary Grant Shapps told BBC Radio 4 on Friday. “There will always be concerns about what if this happens, what if that happens. Our job is to work with people like the hauliers to make sure that we’ve got the best systems in place.”

*All sources from Bloomberg unless otherwise specified