The Daily – September 21, 2022

September 21, 2022

Daily Market Commentary

Canadian Headlines

• Manulife Financial Corp. and Sun Life Financial Inc., Canada’s two largest life insurers, each finance emissions equal to those of Ontario and Quebec, making it imperative for the firms to accelerate their climate plans, according to an advocacy group.  Manulife finances emissions of about 277 million tons of carbon dioxide equivalent, and Sun Life has about 222 million tons, according to a study conducted by Dutch sustainability researcher Profundo and commissioned by Investors for Paris Compliance. Both figures top the combined 226 million tons of emissions for Ontario and Quebec in 2020, according to the study, released Wednesday. Global banks, insurers and asset managers have been committing to zero out the emissions from the firms they finance with their lending or investing activities by 2050 to help the world avoid catastrophic global warming. While Manulife and Sun Life have pledged to reduce financed emissions, the companies manage combined assets of C$2.84 trillion ($2.13 trillion) and need to be aggressive to hit their goals, according to Investors for Paris Compliance, a shareholder group that seeks to hold companies accountable for net-zero pledges.
• Rio Tinto Plc Chief Executive Jakob Stausholm made it clear Tuesday that its offer is final to take over a company that is behind one of the world’s largest copper mines. Speaking during an interview at Bloomberg News headquarters in New York, Stausholm said the world’s second-largest miner has made a full offer to acquire full ownership of Turquoise Hill Resources Ltd. Rio will not make any more offers if it’s rejected by minority shareholders, despite criticism from a top investor saying the offer undervalued the project. The comments comes weeks after Rio agreed to buy out the 49% stake in Turquoise Hill it doesn’t already own in a deal valued at about $3.3 billion.

World Headlines

• European equities edged higher after six days of losses as investors anticipated another large Federal Reserve interest-rate hike and monitored increasing geopolitical tensions with Russia. The Stoxx Europe 600 Index rose 0.3% at 11:24 a.m. in London. Commodity-linked stocks outperformed while travel & leisure stocks declined. Among big individual movers, Uniper SE tumbled to a record low after Germany announced a nationalization in a historic move to rescue the country’s largest gas importer.
• Markets were muted Wednesday with investors mostly staying on the sidelines before another expected rate hike from the Federal Reserve. Treasuries and the dollar gained on haven flows after Russian President Vladimir Putin stepped up his war against Ukraine. US equity futures pointed to a recovery from Tuesday’s slide in the S&P 500 on anxiety policy makers are risking recession in their zeal to subdue price pressures. Benchmark Treasury yields slipped three basis points to 3.54%. Officials are widely expected to boost rates by 75 basis points for the third time in a row, according to the vast majority of analysts surveyed by Bloomberg. Only two project a 100 basis points move.
• Asian stocks declined ahead of an expected interest-rate hike by the Federal Reserve and as Russia’s escalation of war sapped investors’ appetite for risk. The MSCI Asia Pacific Index fell as much as 1.5%, driven by losses in technology shares. The benchmark held the loss as Russia said it was mobilizing more troops for its war against Ukraine. Hong Kong’s Hang Seng Index led declines among regional measures, with notable drops also in Japan, South Korea, Australia and the Philippines. The main gauge of Hong Kong-listed Chinese firms sank into a technical bear market.
• Oil rallied after Russian President Vladimir Putin ordered a partial mobilization to hold onto occupied territories in Ukraine, an escalation that could lead to further disruption to energy supplies. West Texas Intermediate surged toward $87 a barrel, adding as much as 3.2%. Russia will take necessary steps to defend its sovereignty and will defend territory with all available means, Putin said as he announced a partial mobilization of the country’s population.
• Gold was steady near a two-year low as traders braced for another hefty interest-rate hike by the Federal Reserve. Bullion has come under pressure this week as the dollar rose alongside inflation-adjusted Treasury yields. The metal, which had mainly hovered above $1,700 an ounce in the first half of the month, has extended declines after falling below that level last week. Investors have been waiting for the Fed’s latest tightening move, due Wednesday. The central bank is expected to bump up rates by as much as a full percentage point, which could trigger a further dip in the traditional haven that doesn’t offer interest. Gold has already slid around 20% from its highest point this year in March.
• Germany will nationalize Uniper SE in a historic move to rescue the country’s largest gas importer and avert a collapse of the energy sector in Europe’s biggest economy. Chancellor Olaf Scholz’s administration will control about 99% of the Dusseldorf-based utility after injecting 8 billion euros ($8 billion) into the company and buying the majority stake held by Finnish utility Fortum Oyj. The final package will likely run into the tens of billions of euros, including credit lines to keep the company operating with energy markets still in turmoil. Germany is paying the price for building up a reliance on Russia, which supplied more than half of the country’s gas before President Vladimir Putin ordered the invasion of Ukraine. Scholz is now overseeing a rapid overhaul, but the implications will last for years.
• Some investors have a message for anyone looking to bet big before one of the most pivotal Federal Reserve policy meetings of this year: don’t, or risk getting burned.  “Close shorts on equities and bonds,” said Stephen Miller, a four-decade market veteran and investment consultant at GSFM, a unit of Canada’s CI Financial Corp. in Sydney. “I’d be closing long dollar positions too — the next 24 hours are so uncertain when the market has already worked itself into such a pessimistic lather into the meeting.” Miller’s caution is mirrored across trading desks from Woori Bank in Seoul to BNP Paribas Asset Management in Hong Kong as investors brace for another jumbo rate hike from a Federal Reserve bent on cooling surging price pressures. Markets are pricing in a 75-basis point rate increase with a chance of a full-percentage point rise — a risk that would only compound recession fears.
• China said it has the patience to someday bring Taiwan under its control, partly because “compatriots” there want it to happen — a view that contrasts with polling showing skeptical views of Beijing in the democracy. “With regard to resolving the Taiwan question and realizing the complete unification of China, we have strategic composure and historic patience, and we are also full of confidence,” Qiu Kaiming, an official in a Chinese government department that handles ties with the island, said Wednesday. A survey in August that was commissioned by the Taiwan government found some two-thirds of respondents saw Beijing as unfriendly to them, the highest level in more than two decades. More than a quarter said they backed immediate or eventual independence, while less than 10% supported unification at some point.
• Schneider Electric SE agreed to buy out minority shareholders in Aveva Group Plc in a deal that values the UK industrial software company at £9.5 billion ($10.8 billion), the latest foreign takeover of British tech company. Schneider will pay £31 per share, the company said in a statement on Wednesday, confirming an earlier Bloomberg News report. Under the terms of the deal, the company, which already owns 59.14% of Cambridge, England-based Aveva, will pay about £3.87 billion for the remaining equity. Schneider Chief Executive Officer Jean-Pascal Tricoire, 59, will gain full control of an asset he’s coveted since at least 2015, when the company made its first failed attempt to buy Aveva. Control of Aveva will help Schneider accelerate plans to move the power plants and factories its customers own onto more digital services, selling software that reduces energy use and increases efficiency.
• The British government unveiled a multibillion-pound bailout to help companies with their energy bills this winter amid soaring prices that threaten to put many out of business. Under the estimated £40 billion ($45 billion) plan, announced Wednesday in a statement, the government will cap the wholesale energy prices that feed into gas and power contracts for businesses for six months. Thereafter, a review will determine whether ongoing support is needed for specific sectors. The cap for businesses is set at 21.1 pence per kilowatt-hour for electricity and 7.5 pence for gas, the government confirmed, after Bloomberg News reported the numbers Tuesday. That would impose a discount of roughly 50% on the current wholesale prices this winter, but the markets remain volatile, and the exact discount for each business depends on when it signed a contract.
• President Vladimir Putin declared a “partial mobilization,” calling up 300,000 reservists, in a major escalation of his flagging invasion of Ukraine, which he portrayed as a fight to the death with the US and its allies. As Russia moves to annex occupied Ukrainian territory, Putin also renewed his warnings of a nuclear threat. “When the territorial integrity of our country is threatened, we will certainly use all the means at our disposal to protect Russia and our people,” he said in a televised national address Wednesday. “This is not a bluff.” Putin’s land grab and military escalation comes after a Ukrainian counteroffensive in the last few weeks dealt his troops their worst defeats since the early months of the conflict, retaking more than 10% of the territory that Russia held. The Kremlin had long resisted announcing any steps toward mobilization, seeking to limit the impact of its seven-month invasion on the Russian population, but the latest battlefield losses have underlined its shortage of manpower.
• Thailand plans to borrow a gross 2.23 trillion baht ($60 billion) in the fiscal year starting Oct. 1, about 3% less than its target this year, as the Southeast Asian nation rolls back Covid-related spending, according to people familiar with the matter. The debt-raising will include 793.6 billion baht of fresh borrowing to meet the fiscal deficit and 1.44 trillion baht for refinancing and restructuring existing debt, the people said, declining to be identified before a public announcement. The targets were discussed by the Public Debt Management Office with the primary dealers and market participants on Wednesday, they said.
• Banks including JPMorgan Chase & Co. and Morgan Stanley may leave the Glasgow Financial Alliance for Net Zero, Mark Carney’s coalition to fight climate change, because they fear the organization’s strict requirements for decarbonization may make them legally vulnerable. The lenders’ misgivings have been raised in recent GFANZ meetings, people familiar with the matter said, who declined to be identified because the discussions have been private. The Financial Times reported the news earlier. Bank of America Corp. also has considered exiting the coalition, according to a person familiar with the matter. Climate pledges and ESG mandates have become increasingly contentious in recent months: Regulators are increasing scrutiny of climate-risk disclosures, and Republican politicians and state officials in the US are targeting ESG as an extension of liberal overreach.
• US technology stocks are in focus on Wednesday ahead of the Federal Reserve’s interest-rate decision and Chair Jerome Powell’s comments on the path forward. The tech-heavy Nasdaq 100 Index tumbled nearly 1% on Tuesday after the yield on the 10-year Treasury note spiked to its highest level in more than a decade. The Fed is raising borrowing costs in an effort to cool the highest inflation in 40 years following a disappointing August inflation reading last week. Tech companies are sensitive to higher rates because they’re typically valued on projected profits, so the present value of those future earnings falls as yields rise. While the US central bank is widely expected to deliver a third jumbo-sized rate hike when it ends its two-day meeting Wednesday afternoon, equity investors will zero in on Powell’s press conference at 2:30 p.m. in Washington for any hints on the pace of additional rate increases. The Fed’s new projections for the US economy will also be a focus, along with any changes in the quarterly “dot plot,” which central bankers use to project rate outlooks.
• Brazil’s central bank, one of the first to raise interest rates in the aftermath of the pandemic, is closing its aggressive monetary tightening campaign as annual inflation eases after 12 straight hikes. The bank’s board will keep the benchmark Selic unchanged at 13.75% on Wednesday, according to 35 of 42 economists in a Bloomberg survey. The other seven, including JPMorgan Chase & Co. and Credit Suisse AG, expect a final 25 basis-point boost, an option policy makers have promised to “evaluate.” The bank, led by Roberto Campos Neto, is seeing the first signs of abating price pressures in a cycle that’s raised borrowing costs from a record low of 2%. Brazil’s cost of living fell in July and August, and annual inflation has eased back to single digits. Yet much of the improvement came on the back of gasoline tax cuts that are set to expire next year, while stronger economic activity is adding to concerns that prices could keep rising above target for longer.

*All sources from Bloomberg unless otherwise specified