September 9, 2021

Daily Market Commentary

Canadian Headlines

• Erin O’Toole’s Conservative Party published the estimated cost of its election platform on Wednesday, ahead of a televised debate for the Sept. 20 vote.  Canada’s federal deficit would be C$168 billion ($132 billion) in 2021-22 under the Conservative plan, about C$30 billion more than the baseline forecast of parliament’s budget office. The Conservatives would introduce C$29.7 billion in new spending in current fiscal year in an effort to spur economic growth. Justin Trudeau’s plan includes C$78 billion in new spending through 2025-26

World Headlines

• European stocks retreated for a third day amid concerns that the economic recovery is stalling and as investors await the European Central Bank’s update on the timing of a possible reduction in stimulus. The Stoxx 600 Europe Index was 0.5% lower as of midday in London, with cyclical sectors under pressure. Travel and leisure stocks fell the most, weighed down by a 9% slump in EasyJet Plc after the airline announced a share sale and said it rejected a takeover approach. Miners also dropped as iron ore futures declined. Equities in the region have fallen with global peers this week on mounting fears over the recovery and reduced support expected from central banks. The Stoxx 600, up 16% this year, has stalled after hitting an all-time high in August and is now at its lowest level in three weeks.
• U.S. stock-index futures declined along with European equities as investors continued to fret over slowing economic recovery and the prospect of reduced central-bank stimulus. December contracts on the S&P 500 Index dropped 0.3% after the underlying gauge posted the longest run of losses since July.  The yield on 10-year Treasuries shed 1 basis point. Digital Realty Trust Inc. fell in premarket trading after pricing a stock offering. The relentless spread of the delta virus variant is taking its toll on the U.S. economy as well as global supply chains, depressing growth while boosting inflation. That reduces central banks’ ability to continue to support the recovery and policy tightening has already begun in many countries. China’s regulatory crackdown on the technology sector worsens the macro outlook.
• Asia stocks dropped for a second day, weighed down by declines in Chinese and Korean tech firms on concerns about how government regulations will affect earnings.  The MSCI Asia Pacific Index slid as much as 1.2%, the most since Aug. 20, in a broad selloff led by benchmarks in Hong Kong and Australia. Tencent was the biggest drag on the regional gauge, as Chinese regulators took aim at gaming firms for focusing solely on profit. Kakao and Naver extended losses sparked by warnings from lawmakers about abuse of market dominance. Investors’ tech-sector worries widened after authorities in South Korea seemed to echo China’s months-long crackdown, with the Financial Services Commission in Seoul saying it would sternly respond if fintech firms show no efforts to correct practices that could violate local rules.
• Oil swung between gains and losses with continued supply disruption in the U.S. weighed against an uncertain demand outlook in some regions. Futures lost 0.2% in New York, erasing earlier gains. Just over 20% of U.S. Gulf of Mexico oil output is back online after Hurricane Ida hitLouisiana, marking a slower comeback than in the wake of Katrina. Yet crude faces headwinds from wider markets, which drifted lower on Thursday as investors fretted over Covid’s ongoing impact on demand and risks to the global economic recovery.
• Gold edged higher as Treasury yields fell for a second day on fears of a slowing economic recovery and the prospect of reduced central-bank stimulus. A reduction in economic support from major central banks would weigh on bullion, which surged to a record last year on pandemic-era stimulus. Kaplan’s comments follow a separate Fed survey that added to signs that U.S. economic growth is moderating due to the spread of the delta strain. Gold added 0.3% to $1,793.76 an ounce as of 9:22 a.m. in London. The Bloomberg Dollar Spot Index edged lower. Silver, palladium and platinum gained.
• Iron ore futures declined for a second day on demand concerns amid muted steelmaker operations and a crackdown in the property sector. Futures in Singapore are headed for a second weekly loss as renewed steel output curbs in China, high port inventory levels and constrained blast-furnace operations hit the demand outlook. “Industry chatter is still about China mills conducting maintenance works, with this number continuously increasing day by day,” Everbright Futures said in a note. Maintenance plans last at least a month, and further weakness is seen in iron ore amid broader steel output curbs and low levels of ore restocking, the analysts said.
• President Joe Biden has an opportunity this fall to reshape the Federal Reserve, potentially ushering in an era in which the U.S. central bank’s governing board will have more women and people of color and those who would put more weight on reducing economic inequality. The members of the Fed board face the ongoing challenge of repairing the U.S. economy from damage caused by the coronavirus pandemic. They’ll be tasked with deciding when to pull back support for the recovery and when to raise interest rates from the rock-bottom levels that have fueled a housing boom and sent stocks soaring to record highs since last year. Progressive Democrats are urging the Biden administration to shape Fed leadership so that the central bank uses its tools to better promote job gains across racial groups, keep Wall Street banks in check and combat climate change.  The president himself has made a more equitable labor market a centerpiece of his agenda.
• Ford Motor Co. will shut its car factories in India and record roughly $2 billion in restructuring charges, scaling back significantly in a country that past management saw becoming one of its three biggest markets. Manufacturing of vehicles for sale in India will stop immediately, and about 4,000 employees will be affected, the carmaker said in a statement Thursday. Ford will wind down an assembly plant in the western state of Gujarat by the fourth quarter, as well as vehicle and engine manufacturing plants in the southern city of Chennai by the second quarter of next year.
• Sea Ltd. aims to raise $6.3 billion in the largest equity offering of the year, a deal that will propel a global expansion and acquisitions for Southeast Asia’s largest company. The online gaming and e-commerce firm backed by Tencent Holdings Ltd. is offering 11 million shares, a stake worth about $3.8 billion at Wednesday’s close. It also intends to issue $2.5 billion of equity-linked debt. Sea, which has risen more than 70% this year, fell in post-marketing trading in New York. The region’s most valuable company has rapidly expanded its market share in e-commerce and gaming during the pandemic, riding hit titles like shooter game Free Fire and its Shopee online shopping app. Its founder Forrest Li became Singapore’s richestperson in August after shares of his company surged.
• Carlyle Group Inc. is considering a sale of its outsourcing business VXI Global Solutions, according to people familiar with the matter. The U.S.-based buyout firm is working with a financial adviser on a potential deal for the company, which could be valued at $1.5 billion to $2 billion in a sale, the people said, asking not to be identified because the matter is private. Other investment funds and companies in the sector have shown preliminary interest in acquiring VXI, the people said.
• Morgan Stanley has raised $3.1 billion for a new fund dedicated to global real estate bets, eclipsing the $2.7 billion it raised for a predecessor vehicle in 2018. The vehicle, known as North Haven Real Estate Fund X Global LP, or ‘G10,’ garnered backing from investors including sovereign wealth funds, U.S. and international pension funds, insurers, high-net-worth individuals and family offices, John Klopp, head of global real assets for Morgan Stanley Investment Management, said in an interview. Maryland State Retirement and Pension System is among the fund’s investors, according to data compiled by Bloomberg.
• Congressional Democrats are poised to advance sweeping legislation to combat climate change that would, if the Senate goes along, block drilling in most U.S. offshore waters and invest tens of billions of dollars in resilience measures. The bill, set to be approved by the House Natural Resources Committee on Thursday, would also slap new fees on oil and mining companies and ban drilling in the Arctic National Wildlife Refuge. The $31.7 billion measure, which calls for spending on drought relief, conservation and other programs, is designated to be part of a broader multi-trillion-dollar social reform and climate change measure in the House.
• The Taliban accused the U.S. of violating last year’s peace deal signed in Doha, and called on the Biden administration to immediately lift sanctions against senior members of the Taliban’s new cabinet. Sirajuddin Haqqani, who is on the FBI’s most wanted list for terrorism, and his family are “part of the Islamic Emirate,” Taliban spokesman Zabihullah Mujahed said in a statement Thursday. “Similarly, in the Doha Agreement all officials of the Islamic Emirate without any exception were part of the interaction with the U.S. and should have been removed from the UN and U.S. blacklists, a demand which still remains valid.” Haqqani, who was named Afghanistan’s new acting interior minister, is among two-thirds of the newly unveiled cabinet members who are on UN or U.S. sanctions lists. That’s likely to complicate any moves by the U.S. to cooperate with the Taliban, particularly as President Joe Biden has urged the militants to cut all ties with terrorist groups.
• EasyJet Plc rejected a takeover approach from Wizz Air Holdings Plc, according to people familiar with the plan, as its Hungarian discount rival sought to take advantage of a recovery in the short-haul aviation industry. The preliminary offer was conditional, all-stock and had a low premium, EasyJet said Thursday in a statement without identifying the bidder. It was rejected unanimously by the board and has been withdrawn, the U.K. airline said. Shares of EasyJet fell as much as 14%, as the company said it will instead raise $2 billion in stock and debt. The money will provide a buffer for EasyJet to get through the slow winter season and position it for a tentative rebound in leisure travel.
• Electricity prices surged in Britain, driven by supply shortages. An auction for U.K. intraday power prices cleared at 2,000 pounds ($2,762) per megawatt hour from noon to 12:30 p.m local time, as a shortfall in power in Ireland exacerbated near record-high prices across Europe. The late morning price was more than nine times higher than intraday power values at 8 a.m. Thursday, highlighting the extreme volatility in electricity markets that will likely get worse as demand increases this winter. Ireland, which usually exports wind power to the U.K., faced acute supply shortages and issued a warning earlier Thursday that the country could face blackouts. The Moyle interconnector, which sends electricity across the Irish Sea from Northern Ireland to Scotland, was halted to prevent any exports.
• Some of the world’s biggest economies are seeing oil consumption turn the corner and even surpass pre-pandemic levels as falling Covid-19 infection rates drive a recovery in activity.  Oil demand in China, the world’s top energy consumer, will be 13% higher next quarter than in the same period in 2019 before the pandemic, according to SIA Energy. Indian fuel sales extended a rebound last month, while American consumption of petroleum products just hit a record high. Europe has also just had its best August for gasoline demand in 10 years, IHS Markit said. The improvement in consumption across major economies is buoying oil prices that have rallied around 40% this year. Against this backdrop, the OPEC+ alliance decided to keep restoring crude supply earlier this month, citing tighter balances into year-end.
• Regulators in Beijing have signed off on a China Evergrande Group proposal to renegotiate payment deadlines with banks and other creditors, paving the way for a temporary reprieve as the cash-strapped developer struggles to come to grips with more than $300 billion of liabilities. China’s Financial Stability and Development Committee, the nation’s top financial regulator, gave its blessing to Evergrande’s plan last month after the property giant missed interest and principal payments on some loans, a person familiar with the matter said, asking not to be identified discussing private information. Evergrande has already contacted some banks and trusts to request deadline extensions, four people said. It’s unclear how many of those discussions have led to agreements and whether the company intends to delay payments to bondholders.
• Goldman Sachs Group Inc. is dropping social distancing rules in its London office and will return to full occupancy starting next week. With the “vast majority” of staff in the U.K. fully vaccinated, Goldman is already seeing about half of its London workers in the office each day, according to an internal memo seen by Bloomberg News.  “We encourage those of you who have not yet had the opportunity to be in the office to speak to your manager about doing so,” the memo said. The bank will keep mask wearing in common areas and a mandatory testing program in place.
• Saudi Aramco is considering a bold move to open up one of the world’s largest unconventional gas fields to foreign investors, as it looks to fund a $110 billion project to help it diversify from oil sales, according to people familiar with the matter. The state-controlled producer is working with an adviser as it explores raising new equity or debt for its vast Jafurah site and has started preliminary talks with potential investors, including large commodity traders, the people said. Deliberations are in the early stages and Aramco could decide to pursue other ways of gathering money to fund the Jafurah development, the people said, asking not to be identified discussing confidential information.
• A Biden administration plan to lower prescription-drug prices offers the first detailed road map of administrative actions the White House would support in addition to legislation aimed at driving down costs. The plan, to be released Thursday, backs legislation from congressional Democrats, including a push to empower the federal government to negotiate for drug prices in Medicare and pass those lower costs along to the private sector. The road map goes further, however, by outlining administrative actions by agencies and departments that could come in concert with possible legislative changes. Administrative measures include testing reimbursement for drugs in Medicare based on the clinical value they provide to patients and offering federal funding for research into new treatments, according to the plan viewed by The Wall Street Journal.
• Orchard, which offers cash to homebuyers upfront so they can purchase a new residence before selling their old one, raised $100 million to fuel growth in an ultra-competitive housing market that’s pushing shoppers to find new ways to stand out. The fundraising round values the startup at more than $1 billion, making it the latest unicorn company to tackle the challenge of simplifying the process of buying or selling a home. Boston-based Accomplice led the round, with existing investors FirstMark, Revolution, First American and Juxtapose also participating. Cunningham, previously CEO of online marketing company Yodle, started Orchard in 2017 to take on what he viewed as a ripe opportunity: Consumers were frustrated with the traditional way of buying and selling homes, and the $1.7 trillion U.S. housing market was big enough to make tackling the problem worthwhile.
• If nothing else, President Xi Jinping is known for his pursuit of order. So how far the Chinese president’s attack on the “disorderly expansion of capital” will go has emerged as a defining question for investors trying to navigate the country’s wave of regulatory crackdowns. Since first appearing in a Politburo readout in December, the phrase has been employed by government agencies and researchers to explain actions against technology moguls, celebrities and private tutors that fueled a $1.5 trillion stock rout last month. The slogan, like “common prosperity,” is among several Xi-isms feeding concerns that China is tilting away from free markets and back toward more ideologically driven centralized planning. Its meaning, however, is even more mysterious than its egalitarian-sounding cousin. The exact words “disorderly expansion of capital” have appeared only five times in documents directly connected with Xi, according to a Bloomberg News review of nine years of the leader’s speeches and meetings. All mentions came in the past 10 months. That should have been a boon for Swedish retailer Ikea — and it some ways it was because demand for household goods has surged. But it has not been trouble free. In the U.K. and Ireland, up to 10% of some Ikea product lines are currently unavailable, as problems with transport, raw materials, and sourcing and production have compounded the impact of the pandemic. Ikea’s issues have also been reported elsewhere in Europe such as Germany and in some areas of the U.S.

“Try not to do too many things at once. Know what you want, the number one thing today and tomorrow. Persevere and get it done.”- George Allen

*All sources from Bloomberg unless otherwise specified