July 13, 2022

Daily Market Commentary

Canadian Headlines

• Cable and wireless firm Rogers Communications Inc. said it will give customers a credit worth five days of service as compensation for last week’s network failure, which knocked more than 10 million people offline and temporarily choked Canada’s payments system. The move is “a first step” to regain the trust of consumers, Rogers spokesperson Chloe Luciani-Girouard said in an emailed statement. “We have been listening to our customers and Canadians from across the country who have told us how significant the impacts of the outage were for them,” she said. The company didn’t disclose the financial cost. In the first quarter, Rogers earned C$2.75 billion ($2.1 billion) in service revenue from divisions that provide wireless, cable television and internet service — about C$31 million a day.
• The Bank of Canada will likely step up efforts to rein in inflation with a 75-basis-point hike at Wednesday’s meeting. A steeper set of inflation forecasts and stiffer price expectations in consumer and business surveys mean the BoC will have to follow through on its warning from June that it was prepared to “act more forcefully if needed.” A similarly sized move may follow in September, even as the central bank downgrades the growth outlook at this meeting.

World Headlines

• European stocks retreated on Wednesday as investors braced for another rise in US inflation and the start of the second-quarter earnings season. The Stoxx Europe 600 Index was down 0.8% at 11:55 a.m. in London, with insurers and automakers leading the declines, while real estate and energy outperformed. The benchmark gauge has attempted a rebound in July after posting its biggest half-year decline since the global financial crisis as investors bet that runaway inflation may show signs of peaking. But fears that central banks will remain hawkish even amid a looming global recession has kept a lid on appetite for risk assets.
• American equity futures edged higher Wednesday in cautious trading dominated by a dimming economic outlook and an anxious wait for data that may show US inflation at a fresh four-decade high. S&P 500 and Nasdaq 100 futures posted modest gains after yet another volatile session Tuesday that ended with both gauges solidly in the red. Treasuries were steady and a key part of the yield curve remains inverted, a potential signal of recession ahead. The 10-year yield at one point Tuesday was 12.4 basis points below the 2-year rate, a level unseen since 2007. Rapidly tightening monetary policy in the US and elsewhere to fight price pressures is fueling worries about growth and leaving markets nervous. South Korea and New Zealand became the latest to hike interest rates further.
• Asian stocks advanced, led by the region’s technology shares, as investors await key US inflation data that may provide clues on the direction of the global economy and monetary policy. The MSCI Asia Pacific Index gained as much as 0.6%, halting a two-day slide that dragged the benchmark to the lowest level in two years on Tuesday. Tech names such as TSMC, JD.com and Meituan contributed the most to the rally. Information technology was the region’s best-performing sector as the Hang Seng Tech Index bounced back after its recent drops sent the measure into a technical correction. Taiwan’s benchmark jumped nearly 3% as the government vowed to support the stock market for the first time since the early days of the pandemic. Equities posted moderate gains in South Korea and New Zealand after their central banks hiked interest rates by 50 basis points as expected. Thailand’s stock market was closed for a holiday.
• Oil climbed after sliding below $100 a barrel on Tuesday as choppy trading gripped the market before a US inflation print. West Texas Intermediate rose almost 1% on Wednesday after tumbling 7.9% in the previous session to close at a three-month low. US inflation data for June is due Wednesday and economists project that it surged again, keeping the Federal Reserve geared for another big interest-rate hike. Oil has given up the gains seen in the wake of Russia’s invasion of Ukraine, which drove the US benchmark above $130 a barrel in March. Crude prices pose a high risk to global economic recovery, with signs that fuel costs are starting to “take their toll” on demand growth, according to a monthly report from the International Energy Agency.
• Gold held near a nine-month low as economists project inflation has soared the most since 1981, paving the way for the US Federal Reserve to impose another big interest-rate hike later this month. The consumer price index probably increased 8.8% from a year earlier, according to the median forecast in a Bloomberg survey. Fed officials have already signaled a 75 basis-point rate move at their next meeting, with investors increasingly concerned rapid monetary-policy tightening may spark a global economic downturn. Gold has been on a roller-coaster this year as Russia’s invasion of Ukraine spurred a rally in the haven to well above $2,000 an ounce in March, only for the momentum to fade as the growth and inflation outlook shifted. In recent weeks, investors have cut holdings in bullion-backed exchange-traded funds.
• Copper pulled back from early losses as a bounce in Chinese imports helped to underpin sentiment while investors await US inflation data that could strengthen the case for further rate hikes. China imported nearly 538,000 tons of unwrought copper in June, with shipments hitting the highest level this year as factories clocked more hours. That bucked a broader slump in purchases of other commodities including oil, coal and iron ore, and helped lift copper from a 19-month low struck earlier in the session. Other metals were mixed, as traders across financial markets brace for US inflation data later Wednesday that could keep the Federal Reserve on track for another big rate hike later this month.
• The euro might have narrowly avoided parity with the dollar so far, but strategists see it as an inevitable waypoint in a slide that could leave the common currency trading well below that milestone. The euro bounced off a low of $1.00003 on Tuesday — its weakest since 2002 — and is holding at about $1.004. It could come under fresh pressure as soon as today, particularly if the latest US inflation data fuel expectations of a relatively more hawkish Federal Reserve. The bid for haven assets such as the greenback is unlikely to abate amid a darkening global growth outlook. The picture in Europe is particularly grim, given fears that a halt to gas flows from Russia could trigger an economic crisis in the region and curtail the European Central Bank’s ability to raise rates, a major headwind for the currency.
• Delta Air Lines Inc. fell short of profit expectations in the second quarter and said high operating costs will persist through the rest of the year, weighing on a possible rebound as carriers try to capitalize on continued strong travel demand. So-called unit costs will climb as Delta extends constraints on its flying capacity for the remainder of 2022 in an effort to reduce flight delays and cancellations, the carrier said in a statement Wednesday. Delta’s adjusted profit was $1.44 a share in the second quarter, missing the $1.64 average expected by analysts.  US carriers are trying to return to consistent profits after the rout in travel during the pandemic, and Delta said it expects “meaningful full-year profitability.” But elevated expenses and flight disruptions are limiting carriers’ ability to take advantage of higher fares, strong domestic demand and growing international travel.
• Money markets are betting on a three quarter-percentage point hike by Federal Reserve officials later this month, wagering the US will need to ramp up the pace of monetary tightening to tame inflation. The repricing comes ahead of a key inflation report due Wednesday. The headline figure for June is set to accelerate to 8.8% year over year, the highest since 1981, according to the median estimate of analysts surveyed by Bloomberg. Tightening expectations were pared to as low as 63 basis points two weeks ago amid concerns that excessive rate hikes might tip the US toward a recession. Still, few doubt the Fed’s resolve to tighten rapidly in the short-term with price pressures remaining hot. A 75-basis-point increase would be the second in a row of that magnitude.
• Twitter Inc. has been put through the wringer by Elon Musk over the past few months. But some investors are still holding onto the stock in hopes that the deal debacle will end favorably. While Twitter plunged further below Musk’s $54.20 bid this week after the billionaire said he wants out of the deal, the shares are still pricing in the possibility that the two sides can agree on a transaction at a lower price. Analysts at MKM Partners said Monday the stock could fall as low as $24 if investors conclude the acquisition won’t happen at all. That would imply a further 30% drop from Tuesday’s $34.06 close. One sign that some traders aren’t giving up: Even after Musk said he’s abandoning the $44 billion deal, prompting Twitter to sue him, shares are holding up better than peers in this year’s tech rout. Twitter is down 21%, compared with 51% for Facebook parent Meta Platforms Inc. and a whopping 70% for Snap Inc.
• KKR & Co. has deployed about half of a new $2.1 billion private-credit fund, the first of its kind from the firm that will focus solely on asset-based financing. The fund will target a return of 13% to 15% and aims to invest in 40 to 50 transactions, KKR co-heads of private credit Dan Pietrzak and Matthieu Boulanger, said in an interview with Bloomberg News. About 60% of the portfolio is expected to focus on the US, with 40% in the rest of the world. The fund will predominantly invest in pools of mortgage and consumer loans, as well as lending to companies against hard assets.
• President Joe Biden seeks to salvage relations with Saudi Arabia in a Mideast trip that risks political embarrassment unless near-record US gasoline prices swiftly come back to Earth. The hope is that restoring relations with Crown Prince Mohammed Bin Salman, a leader he decried as a “pariah” after the murder of columnist Jamal Khashoggi, will secure a boost in oil production and help ease pump prices battering Biden’s approval ratings at home. The two will meet Friday night, an encounter that will be closely scrutinized for their body language and power dynamics. Biden must avoid an embarrassing retrenchment on human rights that would further anger liberal Democrats. He finds himself hamstrung with approval ratings at a near record-low ahead of November’s midterm elections.
• Turkey will host talks on Wednesday with Ukraine, Russia and the United Nations on ways to resume grain exports from Black Sea ports blocked by Russian troops to ease pressure on global food markets. Disruptions to crop shipments from Ukraine — one of the world’s biggest wheat, corn and vegetable-oil exporters — sent global food prices spiraling to record levels earlier this year and raised worries about rising hunger. The trading of looted commodities could constitute a war crime, Switzerland’s top prosecutor said in a thinly veiled warning to any company considering trading in coal, grain or other foodstuffs reportedly pillaged from Ukraine.
• Germany is in negotiations with some of the world’s top liquefied natural gas suppliers, including energy giant Shell Plc, to replace Russian fuel with alternative supplies. The government, which aims to begin importing LNG this winter, is currently in talks with several companies for long-term supply contracts, said people with knowledge of the matter. It is also considering signing more deals with US exporter Venture Global LNG, said the people, who requested anonymity as the discussions are private. Germany is set to become an LNG importing powerhouse within a year as it moves to slash its dependence on Russian fuel. The European Union is under pressure to find alternative supply amid fears that Moscow will cut deliveries of the fuel in retaliation to western sanctions.
• Germany’s Robert Bosch GmbH is making a bigger bet on semiconductors with plans to spend 3 billion euros ($3 billion) to help ease a worldwide shortage of computer chips that has crimped vehicle production. The auto-parts supplier said Wednesday it will make the investment by 2026 as part of European Union and German government efforts to double Europe’s share of global chip output to 20% by the end of the decade.  The US government also has stepped up calls to boost domestic production after supply constraints sparked by the pandemic heightened risks of over-reliance on Asian imports.
• A sprawling regulatory probe that’s ensnared the Indian partner of Schroders Plc is roiling one of the nation’s largest asset managers and is poised to shake up India’s $465 billion mutual fund industry. Axis Asset Management Co., which is India’s seventh largest mutual fund manager and partly owned by Schroders, in May sacked two employees, including its chief dealer, amid an ongoing internal probe. The fund in early July submitted its findings to regulators and said it had evidence to believe that the terminated executives had violated securities law. Meanwhile, the Securities & Exchange Board of India has been carrying out its own investigation into potential front-running by the two men, a person familiar with the agency’s probe said, asking not to be identified discussing private information.
• Air France-KLM’s French low-cost carrier, Transavia, cancelled 15% of flights amid a dispute with cabin crew, exacerbating the chaos engulfing European air travel. The airline is operating 85% of its flight program Wednesday, according to a spokesman. The SNPNC union, which had called for strike action over wages, said dozens of the company’s flights from Paris-Orly airport were pulled on the first day of a conflict that could drag on through Sunday.  The labor group refused to sign a deal agreed to with other parties last month — including the biggest CGT union — because the accord included bonuses but no increases in base pay.
• A Shanghai-listed arm of Foxconn Technology Group acquired a stake in China’s top chipmaker during its $9 billion bailout, people familiar with the matter said, the latest in a series of investments the Taiwanese-run firm has made in the mainland’s semiconductor industry. Foxconn Industrial Internet Co. invested in state-backed Tsinghua Unigroup through a fund it set up with investment house Wise Road Capital, according to people familiar with the deal. The fund paid about 5.3 billion yuan ($788 million) for a minority stake in Unigroup, one of the people said, asking not to be identified discussing a private deal. The investment by the unit of Apple Inc.’s main iPhone assembler, known also as Hon Hai Precision Industry Co., could raise eyebrows as tensions rise between Beijing and Taipei over issues including technology and supply chain security. The deal requires a green light from Taiwan’s investment commission, which oversees sensitive deals, but Foxconn hasn’t submitted an application for approval, an official with Taiwan’s Ministry of Economic Affairs told Bloomberg News by phone.
• Texas power use broke another record amid a punishing heat wave that’s not going away anytime soon. Electricity demand hit 78.4 gigawatts at 5 p.m. local time Tuesday, inching past the unofficial high of 78.3 gigawatts set Monday, according to the Electric Reliability Council of Texas, the state’s main grid operator. Ercot expects to have sufficient supplies to meet power use and hasn’t issued a requested to conserve energy, spokeswoman Trudi Webster said. Power prices surged to a statewide average of $1,455 per megawatt-hour at 4 p.m. local time, according to Ercot. They dipped to $400 an hour later.
• Oil prices pose a high risk to the global economic recovery, with signs that fuel costs are starting to “take their toll” on demand growth, the International Energy Agency said. The Paris-based adviser trimmed forecasts for oil consumption this year and next amid growing fears of a recession, warning that prices threaten stability in emerging economies. Still, the demand weakness is being offset by tightening supply as sanctions hit Russia and OPEC+’s spare capacity dwindles. “Rarely has the outlook for oil markets been more uncertain,” the agency said in its monthly market report on Wednesday. “A worsening macroeconomic outlook and fears of recession are weighing on market sentiment, while there are ongoing risks on the supply side.”
• One of the world’s richest families increased investments with Jorge Paulo Lemann’s 3G Capital as it continues to expand holdings outside the industry that made its fortune. Alejandro Santo Domingo and his family invested this year in 3G’s Special Situations Fund V Partners, which bought a majority stake in Hunter Douglas NV through a deal that valued the maker of Luxaflex window coverings at about $7.1 billion, according to a registry filing. The family partnered with 3G on at least three earlier occasions, according to data compiled by Bloomberg. The Latin American dynasty made its fortune brewing beer. They own a stake, alongside 3G’s founders, in Anheuser-Busch InBev SA, which comprises the bulk of their roughly $11 billion fortune, according to the Bloomberg Billionaires Index.

“Do what is right, not what is easy nor what is popular.” —Roy T. Bennett

*All sources from Bloomberg unless otherwise specified