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How is everyone feeling today? Today is Blue Monday, apparently, it’s the most miserable day of the year as failed New Year resolutions, and the credit card bills from Christmas come a calling. The good news is, 2021 has a lot to look forward to, the great recovery is underway, and we are really looking forward to the end of these lockdowns in Ontario. Domestically, it appears there are some speed bumps with the vaccine supply, with Canada’s next shipment from Pfizer expected to be cut in half.
The US financial markets are closed today to honor the life of Dr. Martin Luther King Jr. As such, it is a rather quiet news day in the financial markets. Futures are softer, following the big reveal last week of Biden’s $1.9T fiscal plan and the Fed saying rates will not be hiked for years. International markets are mixed in trading, but on balance they are slightly lower. Chinese shares are higher, despite the U.S. adding a few more companies to the blacklist, including Xiaomi and CNOOC.
On Wednesday, Joe Biden will take the oath of office as president in a ceremony dramatically reshaped by the coronavirus pandemic and still-simmering threats of violence in Washington. The National Guard has beefed up its security, with approximately 25,000 guardsmen in the city.
Speculation that Biden’s incoming administration may cancel the Keystone XL pipeline project is growing. The cancellation, according to insider sources, would be executed via an executive action on his first day in office. An extreme measure, undoubtedly. Still, the words “Rescind Keystone XL pipeline permit” appeared on a transition briefing note for January 20th circulated by Biden’s transition team over the weekend. The pipeline has been in development for more than 10 years at this point and received approval from the Canadian National Energy Board in 2010. The pipeline – running from Alberta to Nebraska – can carry +800k bpd. The project has been passed from disapproval to approval and now, it seems, back to disapproval as U.S. administrations have turned over.
The look and feel of Washington will be very different in the coming days. Contrary to Trump’s hands off approach to regulations, Wall Street and even the tech space should prepare itself for a new era of tougher oversight and stricter rule. President-elect Joe Biden’s team of financial regulators is taking shape, with progressive favorites being chosen for the top jobs at the Securities and Exchange Commission and the Consumer Financial Protection Bureau.
Janet Yellen is expected to affirm the U.S.'s commitment to market driven exchange rates when she testifies on Capitol Hill Tuesday. Unlike the previous administration, which tried its best to meddle (mostly over Twitter) over the dollar’s strength, she will make clear the U.S. doesn't seek a weaker dollar for competitive advantage. It’s difficult to say if this official positioning will make much of a difference for the greenback, as it remains at the whim of traders' overall risk sentiment.
Diversion: Samsung's Bot Handy is in the development stage, but the video they released showing help with household chores is very cool.
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Company news
Alimentation Couch-Tarde deal for Carrefour was dead on arrival according to the French Finance Minister Bruno Le Maire. Shares of Carrefour are down more than 7% on the news. General Motors is planning to invest $800mm in an electric vehicle plant in Ontario. It would be the first large-scale electric vehicle plant. It is rumored that Joe Biden might cancel the Enbridge Keystone XL pipeline on his first day in office. It was confirmed by a tweet by the premier of Alberta saying he is deeply concerned in the province. Jay Lee an heir to the Samsung corporation has been sentenced to 30 months in jail over bribery charges. He was previously jailed in 2017 for his role in a corruption scandal that toppled former South Korean President Park Geun-hye.
Commodities
Oil prices traded flat this morning amidst a mixed bag of news – U.S. dollar strengthening and lower physical prices in Asia; at the time of writing, NYM WTI Crude futures were up +10 bps to US$52.41/bbl while ICE Brent Crude futures were down -10 bps to US$55.06/bbl. The big news today comes from Canada / U.S., where speculation is arising regarding the potential cancellation of the Keystone XL pipeline by Joe Biden’s administration. Most of the other news today comes from overseas markets. In Russia, East Siberian Pacific Oil (ESPO) export prices fell by more than -US$1.00/bbl since last month according to traders familiar with the market. The move comes as demand is poised to be shaken in China as the country wrestles with a new flurry of COVID-19 cases. Chinese refiners, meanwhile, processed record volumes of oil last month as margins improved and holiday fuel stockpiling. According to the National Bureau of Statistics, ~60mn tons of crude were processed in December, or 14.19mn bpd. Gold prices are trading on little news this morning but have held relatively steady; at the time of writing, the spot price for the yellow metal was up +30 bps to US$1,833.96/oz.
Fixed income and economics
Central banks headline a busy economic calendar this week with no less than five financing authorities providing an update over the next five days. The first policy decisions of 2021 will be released by the Bank of Canada, Bank of Japan, Norges Bank, Central Bank of Turkey, and the European Central Bank. While no change to rock bottom interest rates is expected by any of them, all focus will lie be on the accompanying statements from officials given the continued surge in global coronavirus cases and subsequent impact to Q1 growth. In tandem with these policy updates, the Eurozone, U.K., Canada, Japan, and New Zealand will release consumer prices mid-week to once again bring their bond yield curves in focus on whether recent inflation concerns are warranted. Flash PMI’s for Australia, Japan, Eurozone, U.K., and U.S. are also scheduled to be released and will provide a preliminary indication to the health of manufacturing and services in their respective economies to conclude the week. Oh, did we also mention that there’s a new person taking over the Oval Office on Wednesday too? The DXY opened this morning at its strongest level since early December and may try to push above technical support on the weekend announcements proposed on Biden’s first few days in office.
Fitch Ratings cut their 2021 default rate forecast for both U.S. leveraged loans and high-yield debt in an updated report last week. The former is now projected to see just 4.5% of total issues (from 7.5%-8%) fail cover their interest costs, while the latter’s likelihood of non-payment was slashed to 3.5% (from 5%-6%). Total loan and junk bond default volume will top $65 billion and $50 billion respectively. It’s the first time in over a year that the agency has lowered said rates, but if you think it’s because of positive issuer developments, think again. The agency noted in their report that the primary driver for the reduction in their default rate forecasts is the recent swath of debt refinancing activity seen in Q3 and Q4, which have effectively pushed out maturities (i.e. borrowers are simply kicking the proverbial can down the road). As the economic effects of the pandemic continue to weigh on issuers’ operating profiles, it’s worth mentioning that the final 2020 leveraged loan and high yield default rates hit 4.5% and 5.2% respectively --- in line with Fitch’s forecast established last March.
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