The Daily – February 13, 2023

February 13, 2023

Daily Market Commentary

Canadian Headlines

• B2Gold Corp., a Canadian gold miner with assets in Africa and the Philippines, agreed to buy Sabina Gold & Silver Corp. in a C$1.1 billion ($820 million) stock deal. The deal is the latest sign of M&A heating up in the industry, after Newmont Corp.’s $17 billion offer for Australia’s Newcrest Mining Ltd. B2Gold Chief Executive Officer Clive Johnson has said the company was looking to buy struggling smaller metals producers and distressed assets to expand and diversify operations. The deal announced Monday will result in B2Gold acquiring Sabina’s 100%-owned Back River gold district in Nunavut, Canada, according to a statement. B2Gold will issue 0.3867 of a common share for each Sabina share. Existing B2Gold shareholders and former Sabina shareholders will own about 83% and 17%, respectively, of the outstanding B2Gold shares. The deal is expected to be completed in the second quarter.

World Headlines

• European stocks gained on Monday amid optimism around resilient economic growth, while investors awaited US inflation data for clues on the Federal Reserve’s policy outlook. The Stoxx 600 Index was up 0.4% by 9:10 a.m. in London as the European Commission raised its forecast for growth this year, predicting a 0.9% expansion in the currency bloc, and said it would narrowly avoid a recession. Travel and leisure and construction stocks gained, while energy underperformed. European stocks have wobbled this month after posting one of the best starts to a year as investors weighed an upbeat corporate earnings season against concerns that elevated inflation would lead to higher-for-longer interest rates. Tomorrow’s US consumer prices data are expected to show a tick up in inflation after a drop in the previous month.
• Wall Street equity futures were steady and European stocks posted modest gains as investors positioned themselves for an action-packed week, including the release of US consumer price data that may confirm the inflation battle isn’t over, dashing hopes of a Federal Reserve rate pivot. Contracts on the S&P 500 were little changed while those on the tech-heavy Nasdaq 100 advanced after the underlying index recorded its first weekly loss of 2023. Sorrento Therapeutics Inc. slumped in premarket trading after the drug developer filed for Chapter 11 bankruptcy protection in Texas. Treasuries were rangebound following a selloff in US government debt Friday that pushed up the 10-year Treasury yield by seven basis points. A gauge of dollar strength climbed.
• Asian stocks fell, heading to their lowest level in about a month, as investors awaited key inflation data from the world’s largest economy.  The MSCI Asia Pacific Index declined as much as 1.2%, extending losses after a two-week rout. Tech stocks led the slump with TSMC and Tokyo Electron dragging the gauge the most. Benchmarks in South Korea, Taiwan and Singapore slid while those in Hong Kong fluctuated. Asian stocks have declined over the past two weeks as strong US jobs data and hawkish comments by Federal Reserve officials dashed hopes of an interest-rate pivot. Investors are reassessing how high US rates will rise this year, with inflation and jobs data likely to still come in hot later this week.
• Oil retreated as the dollar climbed and exports resumed from a key Turkish port. West Texas Intermediate futures dropped below $79 a barrel, after gaining more than 2% on Friday following Russia’s decision to cut oil supply by half a million barrels a day. Tanker loadings of Azeri oil at the Turkish port of Ceyhan resumed on Sunday, ending a major supply disruption. Oil has had a choppy start to 2023, bouncing within a $10 band, as Russia’s almost year-long war in Ukraine continues to impact the energy market, while China’s reopening after restrictive Covid curbs boosts the outlook for demand. In addition, there has been a host of supply disruptions in Europe, adding to the concerns about the outlook for even tighter US monetary policy.
• Gold edged lower ahead of Tuesday’s release of key US inflation figures, which may give a steer on the trajectory of rate hikes this year. Bullion traders are trying to anticipate the Federal Reserve’s next move after gold’s rally since October ran out of steam. There are increasing signs the Fed may need to stay hawkish for longer, with that view reinforced by US consumer sentiment rising to the highest in more than a year in early February. Higher borrowing costs undercut gold’s allure as it doesn’t pay interest.  Spot gold declined 0.2% to $1,861.01 an ounce as of 11:21 a.m. in London. The Bloomberg Dollar Spot Index added 0.2%. Silver and platinum dropped, while palladium was little changed.
• Copper steadied as investors assess a stoppage at the world’s second-largest mine and await US inflation figures for a steer on a potential Federal Reserve rate pivot. Freeport-McMoRan Inc. suspended mining and processing at Grasberg in Indonesia due to mudflow at a mill and expects to restore operations by the end of this month. The halt in Indonesia highlights risks to global copper operations after disruptions in major producer Peru, including at the Las Bambas and Antapaccay mines. Base metals have stumbled in February on a stronger dollar and signs the Fed will pursue higher rates for a sustained period to quash inflation. The absence of any strong recovery in Chinese demand so far has also weighed on prices for industrial materials.
• US stocks are ripe for a selloff after prematurely pricing in a pause in Federal Reserve rate hikes, according to Morgan Stanley strategists. “While the recent move higher in front-end rates is supportive of the notion that the Fed may remain restrictive for longer than appreciated, the equity market is refusing to accept this reality,” a team led by Michael Wilson wrote in a note. Wilson — a staunch Wall Street bear who correctly predicted last year’s selloff when US equities posted their worst performance since 2008  — expects deteriorating fundamentals, along with Fed hikes that are coming at the same time as an earnings recession, to drive equities to an ultimate low this spring. “Price is about as disconnected from reality as it’s been during this bear market,” the strategists said.
• The euro-zone economy will fare better this year than previously feared as a mild winter and high levels of gas storage help to ease the energy crisis, and the labor market holds up, according to the European Commission. European Union officials in Brussels raised their forecast for growth this year, predicting a 0.9% expansion in the currency bloc, and said it would narrowly avoid a recession. They also cut their projection for consumer price growth, though it remains high at 5.6%. “Almost one year after Russia launched its war of aggression against Ukraine, the EU economy is on a better footing than expected in autumn,” the commission said Monday in its updated economic report. “Inflation appears to have peaked and favorable developments in energy markets foreshadow further forceful declines.”
• The US military had never shot down an object in American airspace before taking out a Chinese balloon off South Carolina earlier this month. Now it’s becoming a near-daily occurrence. The sudden spate of US jets blasting unidentified objects of mysterious origin from the skies has provoked so much befuddlement — not to mention panic — that Pentagon officials were forced to field questions about the issue Sunday night, just as Americans were tuning into the second quarter of the Super Bowl. One reporter even asked if it was possible the objects-turned-targets were sent by extraterrestrials. In reality, the answer is probably more mundane. Officials said they had started watching the skies more closely in the days since the alleged Chinese spy balloon traversed US territory, provoking both a national uproar and a new round of tensions with China. That resulted in shootdowns of smaller objects over Alaska on Friday, northern Canada on Saturday, and Michigan on Sunday.
• Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week, ending 18 weeks of inflow that reached $25.3 billion. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $544.2 million in the week ended Feb. 10, compared with gains of $1.53 billion in the previous week, according to data compiled by Bloomberg. This was the biggest weekly outflow since Sept. 30. So far this year, inflows have totalled $12.2 billion.
• Castellum AB, Sweden’s third-largest listed property company, slid as much as 11% after disclosing plans to sell about 10 billion kronor ($955 million) in new shares to strengthen its financial position. The Swedish commercial real estate sector has come under stress from a fast increase in borrowing costs, with companies unable to raise rents to keep up with inflation. Years of fast growth and increased leverage are now catching up with the industry, faced with refinancing maturing debt at higher rates. Castellum’s board is seeking authorization from an upcoming shareholder meeting to carry out a new share issue with preferential rights for existing owners, according to a statement on Monday. The rights offering is expected to be carried out during the second quarter with more details to be made available later, it said.
• Teddy Sagi offered to buy the remaining shares of UK software company Kape Technologies Plc in a cash deal that he said would help the UK software company continue to grow “away from the scrutiny and constraint of the public markets.” Sagi’s Unikmind Holdings Ltd. agreed to pay $3.44, or about 285 pence, for each share in a deal that would value Kape’s equity at about $1.51 billion, the company said in a statement on Monday. That’s a 9.8% premium to Kape’s 259.50 pence closing share price on Friday. Sagi, who already owns 54.8% of Kape, said he intends to delist the company and drive additional acquisitions. He backed its $936 million acquisition of ExpressVPN in 2021 and contributed to the company’s $220 million investment round last year. Still, Unikmind wouldn’t necessarily be willing to continue to offer backing while Kape is on the public markets, he said in the statement.
• Activist investors are finding their European targets more willing to do away with management than heed calls for dramatic change—for now. A wave of campaigns launched in the last 18 months has been followed by the exits of chief executive officers at companies with a combined market capitalization of more than $225 billion, according to data compiled by Bloomberg. These range from British telecom giant Vodafone Group Plc to Swiss software developer Temenos AG. Despite the personnel wins, many activists are still waiting for companies to enact deeper structural changes like break-ups, which they say are needed to boost flagging share prices and better position the businesses for the years ahead.
• Traders with knowledge of upcoming merger and acquisition deals used ETFs consisting of target firms’ stocks to mask $2.75 billion of insider trading, according to an academic paper. Findings show “significant levels” of such transactions known as shadow trading over their 13-year sample period of all US companies and ETFs, according to a paper from academics at the Stockholm School of Economics in Riga and the University of Technology, Sydney. Their results were obtained by observing statistically notable increases in volumes in the five days prior to M&A announcements in 3% to 6% of same-industry ETFs on average. “These ETFs, which are the most likely to be traded by insiders if shadow trading does occur, have significantly higher levels of abnormal trading than various randomized control samples of other ETFs and other trading days,” Elza Eglite, Dans Staermans, Vinay Patel and Talis Putnins wrote in the study, dated Jan. 26.
• The European Union is set to propose a new package of sanctions to further restrict Moscow’s ability to support its war machine, according to people familiar with the proposals. The measures will include extensive new export bans on a number of products, technologies and components that have been identified in Russian weapons deployed in Ukraine, said the people, who spoke on the condition of anonymity to discuss the plans. The European Commission, the EU’s executive arm, is planning to also propose export measures aimed at heavy vehicles — including trucks and machines normally used in the forestry and agricultural sectors — as well as possible import restrictions on Russian rubber and asphalt, according to the people.
• Turkish officials are considering extending a closure of the Istanbul stock market past Wednesday, after imposing a halt following a pair of devastating earthquakes in the nation’s southeast last week. Market regulators could delay the resumption of trading after the initially announced Feb. 15, according to two people with direct knowledge of the discussions. No decision has been made yet, they said, also declining to provide additional details on what options were under discussion. The bourse suspended trading on Feb. 8 and canceled trades made that day after the earthquakes on Monday devastated 10 cities in the worst natural disaster in modern Turkish history. The benchmark Borsa Istanbul 100 Index, which was already the worst-performing equity market in the world this year, erased tens of billions of dollars in market value over the two days it stayed open last week. While a breakup of megacaps could be an unlikely scenario, and one that could take years to play out in the legal system, it isn’t an idle question. The group is a bipartisan target, and President Joe Biden last week called for legislation targeting big tech; his State of the Union speech marked the first time the word “antitrust” had been used in the annual address since 1979, according to historical records. Breaking up big tech could unlock value in companies like Amazon.com Inc. or Alphabet Inc., both of which have powerhouse businesses whose potential is obscured in their sprawling corporate structure. If those were spun out into pure plays, the thinking goes, the new families of stocks could be worth more together than the combined entities are now.
• The native token of Binance, the largest crypto exchange, extended declines Monday amid uncertainty over the platform’s outlook. Binance Coin dropped as much as 8.9% to $287.14, the lowest level since mid-January. Wider crypto markets also fell though the selloffs were generally smaller than the drop for Binance Coin. Binance said it’s been told by Paxos Trust Co. that the latter has been directed to cease minting a Binance-branded token that ranks as the third-largest stablecoin. Crypto markets retreated as investors grappled with the implications of the development. The slide came even as US equity futures held steady.
• The riskiest bond trade in emerging markets is mounting a comeback, offering double-digit returns to those brave enough to flirt with default. A rebound in distressed government bonds is helping emerging-market dollar debt to its best start since 2019. All but one of the 10 best-performing developing-economy bonds are in distress — from Bitcoin-touting El Salvador to pandemic-era defaulter Zambia, to serial bailout recipient Argentina. The rally is, in part, due to prices recovering from rock-bottom levels last year when traders were overly pessimistic about recovery expectations. But it’s also a reflection of how investors pivoted toward riskier investments at the start of the year, driving up assets across financial markets.

*All sources from Bloomberg unless otherwise specified