The Daily – August 30, 2022

August 30, 2022

Daily Market Commentary

Canadian Headlines

• Bank of Montreal became another victim of the slowdown in capital markets last quarter, as a slump in equity and debt issuances reduced investment-banking fees. Capital-markets revenue fell 20% to C$1.26 billion ($974 million) in the fiscal third quarter, the Toronto-based company said in a statement Tuesday. Overall profit missed analysts’ estimates. Bank of Montreal, which generates a higher portion of its revenue from capital markets than some Canadian banking peers, is taking a hit from plummeting equity markets that have curtailed transactions such as initial public offerings and other share sales. Investment and corporate banking revenue fell 36% to C$451 million.

World Headlines

• European stocks gained for the first time in three sessions as cheaper valuations lured investors following a selloff on concern that the Federal Reserve will stay hawkish for longer. The Stoxx 600 Index was up 0.7% at 12:14 p.m. in London after sliding nearly 2.5% since Thursday’s close following an indication from Chair Jerome Powell that the Fed is likely to keep raising interest rates to tame scorching inflation. Banks and automaker stocks led the gains, while energy and miners underperformed. The European benchmark had rallied over the summer on the back of stronger-than-expected corporate earnings and bets of a dovish tilt in Fed policy. JPMorgan Chase & Co. strategists said on Tuesday they still believe the central bank will deliver the last of its big hikes in September, supporting the outlook for stocks over the next few months.
• Stocks rose on Tuesday as investor sentiment stabilized following a rout sparked by the Federal Reserve’s signal of a sustained period of restrictive monetary policy to quell inflation. Treasury yields and the dollar declined. US futures rallied, signaling a break in the equity slump that began Friday when Chair Jerome Powell stressed the Fed is willing to let the economy suffer to cool price pressures. Cryptocurrency-tied stocks climbed in premarket trading as Bitcoin rose, while Twitter Inc. slipped after Elon Musk cited recent accusations from a whistle-blower as a new reason to terminate the $44 billion takeover.
• Asian equities rebounded from a post-Jackson Hole slide, with investors focusing on earnings on the region’s busiest day this season. The MSCI Asia Pacific Index added as much as 1% following Monday’s 2.2% slump, lifted by technology and financial shares. Indian and Japanese shares were among the region’s best performers, while benchmarks in China and Hong Kong declined. While Asian stocks are set for a 1.1% monthly slump in the wake of Federal Reserve Chair Jerome Powell’s hawkish comments last week, there’s a possibility that the region’s valuations could attract investors, said Christina Woon, an Asian equities investment director at Abrdn in Singapore.
• Oil moved below $96 a barrel, retreating from its biggest gain in more than a month as traders weighed potential supply disruptions, including the possibility of an OPEC+ output cut. West Texas Intermediate pared a little less than half of Monday’s price jump — the biggest one-day rise in six weeks — as Iraq’s state oil marketing company said exports would continue uninterrupted despite recent violence. Striking a more bullish note, Goldman Sachs Group Inc. urged investors in a note Monday to “Buy commodities now, worry about the recession later.” Iraq, the second-biggest OPEC producer, has the capacity to boost oil exports to all destinations and won’t refuse any requests for more oil, Alaa Al-Yassiri, the director general of state-run oil marketing company SOMO, said in an interview. Violence has been reported in the center of Baghdad, far from the main production-and-export hub of Basra in the south and other important areas north of the capital.
• Gold was steady as traders weighed the Federal Reserve’s commitment to keeping monetary policy tight for some time in the wake of Chair Jerome Powell’s comments on Friday. Powell indicated at Jackson Hole that the Fed was likely to keep raising interest rates and leave them elevated to quell inflation — even at the risk of the economy suffering. A stronger dollar and rising Treasury yields have also been weighing on gold, which fell to a one-month low on Monday and is set for a fifth monthly drop. Spot gold fell 0.1% to $1,734.87 an ounce as of 7:05 a.m. in London, set for a monthly drop of 1.8%. Prices fell to $1,720.45 on Monday, the lowest level since July 27. The Bloomberg Dollar Spot Index fell 0.1%. Silver and platinum dropped, while palladium was little changed.
• Bonds are sliding toward the first bear market in a generation, burning investors who erred in bets that central banks would pivot away from rapid interest-rate hikes. The Bloomberg Global Aggregate Index, which tracks total returns from investment-grade government and corporate bonds, is within a percentage point of falling 20% from its peak after another bout of selling following the Federal Reserve’s Jackson Hole symposium. The hopes of a dovish shift that drove a rebound through June and July have evaporated since Fed Chair Jerome Powell committed to higher rates for as long as it takes to tame inflation. Bond investors, who were already on shaky ground in recent weeks as policy makers flagged price pressures, face further risks from US payrolls data on Friday and inflation figures two weeks from now.
• The Chinese Communist Party’s twice-a-decade leadership congress will begin on Oct. 16, state media said, bringing President Xi Jinping a step closer to an unprecedented third term in power. The 20th Party Congress’s start date was announced Tuesday by the official Xinhua News Agency, citing a Politburo meeting held on the same day. The Chinese leader is expected to extend his decade in power at the event, after lifting presidential term limits in 2018. The week-long pageant will also be scrutinized for signs Xi, 69, plans to ease the Covid Zero policy that’s kept deaths low but triggered anger and economic hardship. Investors will be alert for signals that the world’s second-largest economy will advance its common prosperity drive to shrink the wealth gap, and reforms in major sectors including technology.
• UK inflation could top 22% next year if natural gas prices remain elevated in the coming months, Goldman Sachs Group Inc. warned. The prediction is the latest startling forecast for the severity of the crisis that’s unfolding in the UK, with hopes fading that inflation will peak in October. Goldman’s outlook is even more gloomy than a prediction last week from Citigroup, which price gains peaking at 18.6%, well above the 13% figure the Bank of England forecast earlier this month. In a note on Monday, written after an upward spiral in gas prices, Goldman economists led by Sven Jari Stehn said that if prices stayed at those levels, the UK will be forced to increase its energy cap by a further 80% in January. That would push up inflation to 22.4% and and trigger a 3.4% decline in gross domestic product.
• Elon Musk has cited the recent accusations from a Twitter Inc. whistle-blower as a new reason to terminate the $44 billion takeover of the social media platform. Peiter Zatko, Twitter’s ex-head of security, claimed he raised questions about severe shortcomings in the social media company’s handling of users’ personal data, including running out-of-date software and that executives had withheld information about breaches and lack of protections for user data. In a filing on Tuesday, lawyers on behalf of Musk said the allegations by Zatko, including “egregious deficiencies” in the platform’s defenses against hackers and privacy issues, meant that Twitter had breached the conditions in the merger agreement.
• Taiwan’s China Airlines Ltd. ordered 16 Boeing Co. 787-9 aircraft with options for eight more and conversion rights to a higher-capacity Dreamliner jet, as it looks beyond the pandemic. The government-backed carrier announced the deal in a statement Tuesday, weeks after US House Speaker Nancy Pelosi visited Taiwan, infuriating Beijing, which considers the island to be part of China. Deliveries for the Boeing widebody jet will start in 2025 and are intended to replace China Airlines’ aging medium-haul Airbus SE A330-330 fleet, the carrier said. The deal for the 16 jets is valued at approximately $2.1 billion, based on estimates from aircraft appraiser Avitas.
• The Federal Reserve’s hopes for a “soft landing” rest on a rarely occurring phenomenon: Unemployment will rise not because workers lose their jobs, but because more people without jobs start looking for work. Typically, the unemployment rate goes up because a slowdown in the economy prompts a wave of layoffs. That hurts household spending, kicking off a dynamic that can feed on itself and plunge the economy into recession. This time around, many forecasters expect the labor force participation rate to rise as people who quit working during the pandemic return to the job market, just as employers slow hiring in the face of higher interest rates.
• First Solar Inc., America’s biggest panel maker, plans to invest about $1.2 billion in new and expanded US manufacturing after Congress passed a landmark climate bill. The company expects to choose a site in the US Southeast for a new 3.5-gigawatt facility and expand its factories in Ohio by about 900 megawatts, it said in a statement Tuesday. Three Southeast states are contenders for the new plant, with operations in 2025, according to Chief Executive Officer Mark Widmar. While solar has surged into the US mainstream, the country sources most of its panels from Asia — a reliance that’s threatened projects amid trade tensions and a crush of supply-chain obstacles. The new US climate law provides support for both domestic manufacturing, which is expected to spur new cleantech factories, and installations.
• Best Buy Co. surpassed Wall Street’s profit estimate after warning a month ago that it was under pressure from waning consumer-electronics demand. Adjusted earnings fell to $1.54 a share in the fiscal second quarter, Best Buy said in a statement Tuesday. That exceeded the $1.35 average of analyst estimates compiled by Bloomberg, which had come down sharply since the company cut its forecast for the year in late July. Best Buy is contending with flagging sales of discretionary goods as soaring US inflation forces shoppers to pay more for groceries and other essentials. Consumers are also shifting more spending to travel and other services after binging on televisions, computers and appliances during the first two years of the pandemic.
• Credit Suisse Group AG recommended investors to go underweight global equities following the Jackson Hole symposium, where central bankers doubled down on their bid to tame inflation through higher interest rates. The argument for an early dovish pivot by the Federal Reserve and other major central banks is now “clearly out of the window,” Michael Strobaek, global chief investment officer at the European bank, wrote in a note on Monday. Markets are now confronted with slowing growth, rising recession risks and elevated inflation, and “the next few months are thus likely going to be painful,” he said. Stock traders worldwide had wrongly bet the Fed may signal a slowdown in its tightening at Jackson Hole, leading to a 13% rally in the MSCI World Index from its trough to peak between June and August. Global stocks saw an intense two-day selloff as Chair Jerome Powell on Friday erased any lingering hopes of an early shift to looser monetary policy.
• The Biden administration is preparing to sell $1.1 billion in missiles and radar support to Taiwan, according to an official familiar with the matter, in what would be the largest such transfer in almost two years. The package would include as much as $650 million in continued support for a surveillance radar sold earlier, about $90 million for roughly 100 Sidewinder air-to-air missiles as well as about 60 additional anti-ship Harpoon missiles, the official said. Both weapons have been sold to Taiwan previously. The State Department informally notified Congress of the sale late Monday. Even though it offers Taiwan no new military capability, the move could prompt protests from Beijing, which has said American arms sales to Taiwan are a threat to its security and a violation of the agreements that established diplomatic relations with Washington.
• Total losses for China’s big three state-owned airlines during the Covid pandemic ballooned to 127.6 billion yuan ($18.5 billion) by the end of June, as the country stuck with its virus-fighting strategy of snap lockdowns and restrictions on movement. Air China Ltd. said Tuesday its net loss in the first six months of 2022 widened 186% to 19.4 billion yuan from the same period last year, while China Southern Airlines Co. reported a deficit of 11.5 billion yuan. China Eastern Airlines Corp. lost 18.7 billion yuan. China Southern cited a fall in passenger revenue from domestic travel, while Air China blamed its loss on reduced capacity. A weaker yuan and high oil prices also played a part.
• ADP Research Institute’s national employment report — a staple of US labor data ahead of the government’s payrolls release — will end its months-long hiatus on Wednesday, returning to the mix with updated methodology and a range of wage data. The revamped report, developed with the Stanford Digital Economy Lab, will include figures on both jobs and pay, ADP said in a statement. It will feature the monthly change in private employment as well as weekly payrolls data for the preceding month. Median annual growth by industry, company size, region, gender and age will also now be available each month. The ADP data often differed substantially from the government’s monthly private payrolls figure, frequently requiring significant revisions the following month to better align with the Bureau of Labor Statistics’ jobs report. ADP’s last report was for May, and it later said it was retooling its technique “to provide a more robust, high-frequency view of the labor market and trajectory of economic growth.”
• Roper Technologies Inc. agreed to buy Frontline Education in an all-cash deal valued at about $3.725 billion, pushing the longtime manufacturer further from its industrial roots. The net purchase price, to be funded with cash on hand and a revolving credit facility, will be $3.375 billion including a tax benefit from the transaction, according to a statement Tuesday. The deal for Frontline, which specializes in cloud-based software for educational organizations, is expected to close in the fourth quarter. The acquisition further reshapes Roper after the company in June sold a significant portion of its industrial operations to focus on higher-growth and less-cyclical business lines. Roper, founded in 1890 as a manufacturer of home appliances and industrial products, bought insurance software maker Vertafore in 2020 for $5.35 billion.

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

*All sources from Bloomberg unless otherwise specified