The Daily – November 2, 2022

November 2, 2022

Daily Market Commentary

Canadian Headlines

• Canada Goose Holdings Inc. lowered its outlook for the year, saying coronavirus restrictions in China and “significant uncertainty” in the global economy will hurt sales and margins. The shares fell 8% in premarket trading in New York. The Canadian manufacturer of high-end parkas and apparel said it expects revenue to come in at C$1.2 billion ($882 million) to C$1.3 billion for the fiscal year than ends next March. Previously, it projected as much as C$1.4 billion. Canada Goose also cut its forecast for adjusted earnings before interest and taxes, giving a range of C$215 million to C$255 million for the fiscal year. That’s nearly 15% below earlier projections.
• Business Development Canada, a lender owned by the federal government, is seeking to mobilize about C$2.4 billion ($1.8 billion) from private-sector investors to boost growth in clean technology companies. Montreal-based BDC is launching the C$400 million Climate Tech Fund II, backed by government money, to invest in innovative Canadian firms, said Jerome Nycz, executive vice-president at BDC Capital. A similar fund that started in 2018 ultimately helped raise $6 in capital for every dollar of direct investment by BDC. That’s the goal again. Clean technology and climate tech startups “take a lot of capital, capital to get to full scale. What we’ve done is we’ve invested in companies that we feel have the opportunity to really grow and scale,” said Susan Rohac, managing partner of the fund, who leads a team of 15 people.
• Rio Tinto Group has struck a deal with key shareholders of Turquoise Hill Resources Ltd. to sit out an upcoming takeover vote, paving the way for its approval at a special shareholders’ meeting. The London-based mining giant has agreed with Turquoise Hill shareholders Pentwater Capital Management LP and SailingStone Capital Partners LLC that they will withhold their votes in exchange for C$34.40 ($25.23 per share) and enter into arbitration over a “remaining consideration” for their shares, it said in a statement to the Australian Stock Exchange Wednesday. Rio said its C$43 per share offer for the Canadian miner remains its best and final. Turquoise Hill had earlier rescheduled the meeting to Nov. 8, the Montreal-based company said Tuesday in a statement that came out about half an hour before investors were set to gather in Montreal to consider the transaction. That delay raised doubts about Rio’s bid to gain control of Mongolia’s Oyu Tolgoi, one of the world’s biggest copper mines.
• Cenovus Energy Inc. generated more than $4.0 billion in cash from operating activities, approximately $3.0 billion in adjusted funds flow and nearly $2.1 billion in free funds flow in the third quarter of 2022, driven by continued strong operations. Total upstream production was approximately 778,000 barrels of oil equivalent per day (BOE/d)¹ and downstream throughput averaged 533,500 barrels per day (bbls/d). As part of Cenovus’s commitment to increasing shareholder returns, in addition to its base dividend, the Board of Directors declared a variable dividend payable on December 2, 2022 and approved filing an application with the TSX to renew its normal course issuer bid (NCIB) for another year.

World Headlines

• European stocks edged higher in a cautious extension of their recent rally as investors awaited the outcome of a key Federal Reserve meeting. The Stoxx Europe 600 rose 0.3% at 8:13 a.m. in London. Health care was among the best-performing sectors after Novo Nordisk A/S raised its operating profit and sales forecasts for the year. Banks and miners also climbed more than most.
• Equities pared gains ahead of the Federal Reserve’s policy meeting Wednesday. A gauge of the dollar fell and gold rose. US futures and European stocks fluctuated amid signs of slowing global growth. US-listed Chinese stocks rallied in premarket trading and the Hang Seng Index rose in a session cut short by a storm warning as growing speculation over China’s reopening spurred another rally in Asia. Traders are weighing mixed economic data ahead of the Fed meeting, where the central bank is expected to raise interest rates by 75 basis points for the fourth time in a row. The European Central Bank hiked last week at a second straight meeting, and the Bank of England is due to lift its benchmark on Thursday.
• Asian stocks headed for a three-day advance as growing speculation over China’s reopening spurred another strong rally, while traders awaited the Federal Reserve’s decision on interest rates. The MSCI Asia Pacific Index rose as much as 0.9%, led by the consumer discretionary sector. Chinese and Hong Kong stocks drove gains in the region as investors scooped up shares following wide circulation of unverified posts outlining a loosening of the nation’s Covid Zero policy. The Hang Seng China Enterprises Index rose 2.8%, capping its best two-day rally since March.
• Oil traded near $88 a barrel ahead of a Federal Reserve interest rate decision and after an industry report pointed to another big decline in US crude inventories. West Texas Intermediate futures pared an earlier gain to trade little changed with prices stuck in a $12 band over the last month. The American Petroleum Institute reported crude stockpiles shrunk by 6.53 million barrels last week, according to people familiar with the data. The market will be keenly watching an interest-rate decision from the Federal Reserve later Wednesday to gauge the outlook for demand. The central bank is expected to raise rates by 75 basis points for the fourth time in a row. As traders look for clues about the pace of economic growth, container shipping giant Maersk said Europe was close to a recession.
• Gold gained as the dollar weakened while traders focused on the Federal Reserve meeting later Wednesday for clues on when the US central bank will start scaling back jumbo-sized interest-rate hikes. The greenback fell for a second day Wednesday, providing some relief for gold which is priced in the currency. Attention is firmly on the outcome of the US central bank’s meeting, where officials are expected to opt for another large 75 basis-point hike. Investors are divided on whether the Fed will start to slow the pace of its monetary tightening from there. Mixed US economic data is clouding the outlook further, putting central bank officials in a quandary.
• Glencore Plc officials delivered cash in private jets to officials in west Africa, UK prosecutors said as they laid out a web of bribery and corruption orchestrated by the London oil trading desk. The company, founded by Marc Rich, admitted to seven counts of bribery across countries including Nigeria and Cameroon, following a Serious Fraud Office investigation. Prosecutors said the company paid more than $28 million in bribes to secure access to oil cargoes. It marks the first time a corporate has been convicted for paying bribes, according to the SFO. The sentencing will draw a line for the company in the UK over a series of long-running investigations, but leaves open the possibility of charges against former employees. An SFO prosecutor said Oct. 24 as many as 11 ex-staff were under investigation for criminal wrongdoing.
• North Korea fired at least 23 missiles Wednesday including the first ballistic one to fly over a nautical border with South Korea, in its biggest daily barrage under leader Kim Jong Un. The launches came about a day after Pyongyang threatened to take “powerful measures” if the US doesn’t halt military drills with partners including South Korea, in what might be an effort by Kim to lay the groundwork for his first nuclear test in five years. South Korean President Yoon Suk Yeol called the launch a territorial violation, and his country responded a few hours after barrages were fired off in the morning by firing three air-to surface missiles into international waters on North Korea’s side of the sea border known as the Northern Limit Line. South Korea also closed some air routes east of the peninsula for safety reasons, the transport ministry said.
• The Russian defense ministry confirmed it is resuming its participation in the Black Sea grain-export deal, after receiving written guarantees from Ukraine that the safe-passage corridor will only be used for grain exports. Earlier, Ukrainian President Volodmyr Zelenskiy, asked the European Union to help restore electricity in his country, where the energy infrastructure has been damaged by Russian attacks. Central and northern Ukrainian regions will be cut off from the grid Wednesday, as the state-run utility operator tries to conserve power. The situation is set to dominate the agenda in Muenster tomorrow when foreign ministers from the Group of Seven gather.
• CVS Health Corp., Walgreens Boots Alliance Inc. and Walmart Inc. have tentatively agreed to pay more than $12 billion to resolve thousands of state and local government lawsuits accusing the chains of mishandling opioid painkillers, according to people familiar with the matter. The proposed settlement — potentially one of the last big accords spawned by more than five years of litigation over the highly addictive painkillers — calls for CVS to pay $4.9 billion, Walgreens to pay at least $4 billion and Walmart to pay $3 billion to resolve the municipalities’ suits, according to the people, who asked not to be identified because they weren’t authorized to speak publicly about the tentative deal. CVS officials Wednesday confirmed in a release their portion of the settlement and noted they are also paying $130 million to resolve opioid claims brought by Native American tribes. The settlement payout will be spread over 10 years, CVS said in the release.
• A Bank of America Corp. contrarian indicator based on Wall Street strategists’ allocation views is nearest to flashing “buy” US equities in more than five years. “The indicator is the closest it has been to a ‘Buy’ signal since early 2017 and is closer to a ‘Buy’ signal than a ‘Sell’ signal for a sixth consecutive month,” strategists including Savita Subramanian wrote in a note dated Nov. 1. “Wall Street’s consensus equity allocation has been a reliable contrarian indicator over time.” The bank’s equity-sentiment measure, called the Sell Side Indicator, is one of the inputs that has gone into setting its S&P 500 target at 3,600 for this year and signals the equity gauge can rise to 4,500 over the next 12 months, they wrote. The stocks benchmark closed at 3,856.10 on Wednesday.
• Sony Group Corp. shares had their biggest surge in seven months after the company said PlayStation 5 production went better than expected in the past quarter and it now aims to surpass its sales target for the fiscal year. The Tokyo-based conglomerate also bumped its full-year operating profit forecast by 5%, largely on the weakness of the yen. It reported sales of 2.75 trillion yen ($18.6 billion) in the three months ended September, 16% higher than the prior year, after getting a boost from its music streaming division. The company is now gearing up to beat its goal of 18 million PS5 sales this fiscal year and set a target of 23 million units for the next. Shares were up 7% in Tokyo on Wednesday after slumping more than 30% this year prior to its latest earnings report.
• EQT AB is emerging as the front-runner to acquire a stake in French telecom tower owner TDF, people familiar with the matter said. The Stockholm-based private equity firm is seen as the strongest contender to acquire the 45% TDF stake being sold by Brookfield Asset Management Inc., the people said. TDF could be valued at about €9 billion ($8.9 billion) including debt in any sale, one of the people said, asking not to be identified discussing confidential information. Other suitors have also been competing for the stake in TDF, and Brookfield hasn’t yet picked a winning bidder, the people said. Tillman Infrastructure and TDF’s former owner Orange SA are among parties that were earlier studying a potential deal, according to the people.
• Airbnb Inc. shares fell after the company gave a disappointing outlook for bookings in the fourth quarter, suggesting that consumer preferences are shifting away from higher cost rentals that thrived during the pandemic and back to urban and cross-border destinations. The San Francisco-based home-sharing platform said it expects the pace of nights and experiences booked will “moderate slightly” in the fourth quarter compared with the third quarter’s gain of 25%. Airbnb reported 99.7 million nights and experiences booked in the three months ended in September, falling short of analysts’ estimates of 99.9 million. The shares fell about 6% in premarket trading before exchanges opened in New York. The stock rose 2% to close at $109.05 in trading on Tuesday and had declined 35% this year.
• China has ordered a seven-day lockdown of the area around Foxconn Technology Group’s main plant in Zhengzhou, a move that will severely curtail shipments in and out of the world’s largest iPhone factory. The lockdown will last until Nov. 9, the local government said in a statement posted to its WeChat account. It ordered people and vehicles off the streets except for medical or other essential reasons, a prohibition that threatens to cut off the flow of additional workers and components needed to rev up production ahead of the holiday-season crush. The abrupt action reflects Beijing’s Covid Zero approach and is likely to further disrupt Foxconn’s main operations base, which cranks out an estimated four out of five of Apple Inc.’s latest handsets. The Taiwanese company, whose main listed arm is Hon Hai Precision Industry Co., was already grappling with a Covid flare-up that forced some of its 200,000 staff into quarantine and pushed others to flee the facility — some on foot.
• Chinese President Xi Jinping and Pakistani Prime Minister Shehbaz Sharif agreed in a meeting in Beijing to launch a high-speed rail project that could cost $9.85 billion, a move that comes as the world’s No. 2 economy moves to slow some of its lending due to growth concerns. The two nations agreed to get started on the Main Line-1, according to a statement from Sharif’s office, which described it as “a project of strategic importance.” That project involves upgrading a 1,163-mile, colonial-era track from Karachi to Peshawar to carry high-speed trains. Earlier this week, Pakistan formally approved the project, which has been in discussion for years, without saying where the funding would come from or providing technical details.
• China will extend a limit on thermal coal prices in 2023 and penalize suppliers who renege on contracts as it continues to expand use of the fuel to avoid any new energy crunch. The National Development and Reform Commission, the country’s top economic planning body, has set a benchmark for annual contracts for next year at about 675 yuan ($92.85) a ton and has asked producers to finalize pacts by Nov. 25, according to a notice sent to companies and seen by Bloomberg News. Specific price caps for cargoes will fluctuate above and below the benchmark dependent on costs of production, transportation and other factors. Since a 2021 squeeze on fuel supply that led to widespread electricity curbs, Beijing has been pressing coal miners to meet power producers’ needs under long-term contracts and to agree to prices that are far lower than spot market rates.
• Apollo Global Management Inc.’s earnings rose 6.4% in the third quarter as higher fees and its growing retirement-services business helped offset a tough environment for asset sales. Adjusted net income was $800.5 million, or $1.33 a share, the New York-based alternative-asset manager said Wednesday in a statement. That beat the $1.23 average estimate of 14 analysts surveyed by Bloomberg. Fee-related earnings grew 13.9% year-over-year to a quarterly record of $364.6 million, driven by management revenue in its credit business as well as a rise in transaction charges. Athene, its insurance arm that sells annuities, generated $578.1 million from higher interest rates.
• Credit Suisse Group AG’s long-term rating was downgraded by S&P Global Ratings to just one level above junk status, underscoring the bank’s challenges after it laid out a radical restructuring plan last week. The Swiss bank’s long-term rating was cut to BBB- from BBB, with a stable outlook. That’s just one notch above the BB “speculative grade.” The US ratings firm, echoing several analysts after the restructuring was announced on Thursday, said it sees “material execution risks amid a deteriorating and volatile economic and market environment.” It also signaled that some details around asset sales remain “unclear.” Credit Suisse’s new strategy triggered the biggest single-day decline on record on the day, with shares tumbling 18%, as investors weighed the high costs of the plan, the modest return predictions and the significant dilution. The strategic review came as the bank posted a quarterly loss of 4.03 billion Swiss francs, including a large impairment of deferred tax assets related to the revamp. The restructuring will see the investment bank broken up and will cost about 2.9 billion francs ($2.9 billion) through 2024.
• Tesla Inc. shut its flagship China showroom in Beijing last month, according to a person familiar with the matter. The US electric carmaker has a number of showrooms in China’s capital, and the one now shuttered was in a shopping center called Parkview Green, a mainly residential area. Reuters reported the closure earlier Wednesday. Tesla largely sells its cars via a direct sales model over the internet rather than through dealerships or its own showrooms. China is its most important market after the US and it delivered a record 83,135 cars in September after upgrading production capacity at its Shanghai factory.
• Europe is close to entering a recession and the US economy may not be far behind.  That’s the stark message Wednesday from A.P. Moller-Maersk A/S, the world’s No. 2 container carrier and a bellwether for the $29 trillion market for global trade. “It’s really hard to be very optimistic with a war on our doorstep and a bigger energy crisis this winter so that is impacting consumer confidence and therefore also demand,” Maersk CEO Soren Skou said in an interview on Bloomberg Television. “It’s quite likely that we either are or will soon be in a recession, certainly in Europe but potentially also in the US.”

*All sources from Bloomberg unless otherwise specified