Category: Market Action

Click for Big

There was encouraging coronavirus news today:

Pfizer Inc’s experimental COVID-19 vaccine is more than 90 per cent effective based on initial trial results, the drugmaker said on Monday, a major victory in the war against a virus that has killed over a million people and battered the world’s economy.

Experts welcomed the first successful interim data from a large-scale clinical test as a watershed moment that showed vaccines could help halt the pandemic, although mass roll-outs, which needs regulatory approval, will not happen this year.

Pfizer … and German partner BioNTech said they had found no serious safety concerns yet and expected to seek U.S. authorization this month for emergency use of the vaccine, raising the chance of a regulatory decision as soon as December.

The financial markets loved it:

The stock market raced toward a post-pandemic existence on Monday when long-struggling airlines, banks, energy producers and theatre chains surged on promising test results for a COVID-19 vaccine that could be cleared for widespread use later this month.

The S&P 500 rose 1.2 per cent, continuing a powerful rally that began last week following the U.S. presidential election. It lost some momentum towards the end of the trading day after touching a record intraday high soon after the start of trading, as technology stocks slumped.

Canada’s S&P/TSX Composite Index also ended the day 1.2 per cent higher, about level where it was a month ago.
…
Major benchmarks in the U.K. and Germany rose 4.7 per cent and 4.9 per cent, respectively.

The bond market also responded in dramatic fashion, as yields surged to their highest levels in months in anticipation of stronger economic activity. The yield on the 10-year U.S. Treasury bond jumped to 0.929 per cent, up 11.4 basis points (there are 100 basis points in a percentage point).
…
Energy stocks also rallied, after the price of West Texas Intermediate crude, a U.S. oil benchmark, rose 7.7 per cent to US$40 per barrel. The gain underpinned a rally in the Canadian energy sector, which saw Suncor Energy Inc. rise 24.7 per cent and Canadian Natural Resources Ltd. rise 22.6 per cent.

TXPR closed at 588.47, up 1.07% on the day. Volume today was 1.41-million, below the median of the past thirty days.

CPD closed at 11.73, up 1.38% on the day. Volume was 103,311, well below the median of the past 30 trading days.

ZPR closed at 9.24, up 1.43% on the day. Volume of 371,216 was third-highest of the past 30 trading days, behind only November 2 and October 21.

Five-year Canada yields were up 7bp to 0.47% today.

Jobs, jobs, jobs!

The American economy gained 638,000 jobs last month, a sign the labor market continues to heal slowly as a resurgence in the coronavirus threatens future growth.

The unemployment rate fell sharply to 6.9 percent, from 7.9 percent in September, the Labor Department reported.

The overall job gain would have been larger without the loss of 147,000 temporary census positions.

Click for Big

TXPR closed at 581.28, up 0.58% on the day. Volume today was 1.70-million, below the median of the past thirty days.

CPD closed at 11.58, up 0.43% on the day. Volume was 149,441, near the median of the past 30 trading days.

ZPR closed at 9.11, up 0.11% on the day. Volume of 104,897, well below the median of the past 30 trading days.

Five-year Canada yields were unchanged at 0.38% today.

The FOMC Statement had no surprises:

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Patrick Harker; Robert S. Kaplan; Loretta J. Mester; and Randal K. Quarles. Ms. Daly voted as an alternate member at this meeting.

Powell commented:

Mr. Powell said the two biggest economic risks right now are the “further spread of the disease” and the likelihood that households will “run through the savings” they were able to accumulate as a result of government spending early in the pandemic, including stimulus checks and enhanced unemployment benefits.

While the Fed is prepared to act as needed to support the recovery, Mr. Powell once again said more fiscal support will be needed to help mitigate those risks.

“We can obviously support financial stability through our lending programs,” he said. “We’ll have a stronger recovery if we can get at least some more fiscal support, when it’s appropriate and at the size Congress thinks is appropriate.”

Ontario plans to (gasp!) balance the budget someday:

Ontario budget highlights:

• Ontario’s budget includes an unprecedented deficit of $38.5-billion this year, followed by $33.1-billion in 2021-22 and $28.2-billion in 2022-23;
• The government has put off its requirement for a plan to balance its books, says it will present a path to balance in a spring budget;
• To fight COVID-19, the budget includes $7.5-billion in new spending on the health sector over the next 3 years;
• The government will subsidize hydro rates for large and medium-sized business, cutting their power costs by 14 to 16 per cent;
• New seniors home tax credit for 25 per cent on renovations to help them stay in their homes;
• A commitment to develop an Ontario “staycation” 20-per-cent rebate on tourism expenses to encourage local travel in the province;
• No specific funds are dedicated to a new promise to fund an average four hours a day of direct care in long-term care homes over the next four years;

There is, of course, no mention of actually paying back the borrowed funds. The plan, so far as I can tell, is to get back to the fiscal environment of the early nineties, when interest payments comprised 35%-odd of government budgets. Pay $1 in taxes, get $0.65 in services! That’s good enough for today’s kids. If they had really wanted to get $1 in services for $1 in taxes, they would have been born in an earlier generation. Losers.

PerpetualDiscounts now yield 5.15%, equivalent to 6.70% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.07%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has declined slightly (and perhaps spuriously) to 365bp from the 370bp reported October 28.

DBRS finalized the rating on the CWB LRCNs at BB(high):

DBRS Limited (DBRS Morningstar) finalized its provisional rating of BB (high) with a Negative trend on Canadian Western Bank’s (CWB or the Bank) NVCC Additional Tier 1 (AT1) Limited Recourse Capital Notes (the Capital Notes).

Following the review of documentation associated with the recent offering, DBRS Morningstar confirmed that the terms of the issuance are consistent with those reviewed at the time the provisional rating was assigned on October 23, 2020. For further details on the provisional rating, please see the DBRS Morningstar press release entitled “DBRS Morningstar Assigns Provisional Rating of BB (high), Negative, to Canadian Western Bank’s NVCC Additional Tier 1 (AT1) Limited Recourse Capital Notes.”

The Bank plans to issue $175 million of Capital Notes on October 30, 2020. The Capital Notes mature on April 30, 2081, and will have an initial five-year fixed rate of 6.00%. DBRS Morningstar notes that the Office of the Superintendent of Financial Institutions granted Tier 1 capital treatment to the Capital Notes.

RATING DRIVERS
Given the Negative trend, an upgrade is unlikely at this time. The trend could change to Stable if the impact of the current economic crisis on CWB’s earnings and credit quality metrics is manageable.

Conversely, material losses in the loan portfolio as a result of the oil price shock and a longer-than-expected adverse impact of the Coronavirus Disease (COVID-19) pandemic, or significant pressures on funding and liquidity, could result in a rating downgrade.

Click for Big

TXPR closed at 578.55, down 0.69% on the day. Volume today was 2.15-million, above the median of the past thirty days.

CPD closed at 11.52, down 0.99% on the day. Volume was 189,115, above the median of the past 30 trading days.

ZPR closed at 9.06, down 1.52% on the day. Volume of 258,409, about the median of the past 30 trading days.

Five-year Canada yields were up 1bp at 0.37% today.

The damage has been attributed to the usual suspect:

Coronavirus flare-ups across the United States and new lockdown measures in major European economies sent stocks sliding to their worst performance in months on Wednesday.

The S&P 500 ended the day 3.5 percent lower, notching the market’s third straight decline and the worst drop for Wall Street since June 11.

The decline wiped out the S&P’s gains for the month as investors dumped shares. All 11 sectors fell as traders jettisoned stocks in economically sensitive sectors like energy. Even tech was squeezed — the tech giants were once thought to be almost immune to the economic effects of the virus. Treasury yields fell as investors sought the safety of government bonds, and economic nervousness pushed oil prices down: Benchmark West Texas Intermediate crude oil fell 5.5 percent to $37.39 a barrel.

As recently as Oct. 12, the S&P 500 was up more than 9 percent for the year, as investors seemed to grow more confident that Congress and the White House would be able to produce a new dose of federal stimulus before the election.
…
Even before trading opened in New York, European markets were enduring an ugly session. Major markets slid 4.2 percent in Germany and 3.4 percent in France. The pan-European Stoxx 600 index declined nearly 3 percent. As the U.S. trading day unfolded, Germany announced a new one-month partial lockdown aimed at stemming a surge of infections. France followed, announcing a full nationwide lockdown for the second time in 2020.
…
The United States, too, is suffering a renewed wave of coronavirus infections: The number of Covid-19 hospitalizations is up an estimated 46 percent over the last month. And New Jersey’s largest city, Newark, imposed a curfew and reinstated some limits on gatherings to control an outbreak there.

PerpetualDiscounts now yield 5.13%, equivalent to 6.67% interest at the standard equivalency factor of 1.3x. Long corporates now yield 2.98%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained steady at the 370bp reported October 21.