The Daily – February 14, 2023

February 14, 2023

Daily Market Commentary

Canadian Headlines

• Shopify Inc. was the among the first technology giants to slash its workforce during last year’s market rout. Now, some investors say its stock is poised to outperform peers over the course of 2023 as those job cuts translate into lower costs, narrower losses and better cash flow. The Canadian e-commerce firm shocked the market when it cut 1,000 jobs in July – a move that sent the stock plummeting 14% in a day as Chief Executive Officer Tobi Lutke said the company need to lower expenses after an aggressive pandemic expansion plan. The move preceded waves of layoffs across the tech sector, including at Amazon.com Inc. and software maker Microsoft Corp. The payoff should begin to be evident on Wednesday, when Shopify reports fourth-quarter results. Analysts in aggregate have boosted earnings per share estimates by 37% over the past six months, according to data compiled by Bloomberg. While free cash flow is still expected to be a negative $109.3 million, that’s less than half the amount from the third quarter.
• Restaurant Brands International Inc., which owns the Burger King, Tim Hortons and Popeyes fast-food chains, has named a new chief executive officer, Joshua Kobza, effective March 1. Kobza has been chief operating officer since January 2019 and has held senior roles with the company since 2012. Current CEO Jose Cil will remain with the company for a year to help with the transition. Restaurant Brands also announced fourth-quarter adjusted earnings per share that missed estimates. Earnings were 72 cents in the quarter, while analysts estimated 74 cents. Higher costs and economic uncertainty are still a problem for restaurants. Burger King comparable-sales growth of 8.4% was also below the analyst estimate of 8.9%. The company and its franchisees have been working to remodel Burger King locations across the US, with investments in marketing and digital. The results show that these efforts have yet to pay off.

World Headlines

• European stocks advanced amid robust earnings and ahead of a key US inflation print, which will provide an insight into the path of the Federal Reserve’s monetary policy. The Stoxx Europe 600 was 0.6% higher by 9:05 a.m. in London. Travel and leisure stocks rose after TUI AG jumped after saying recent bookings for the upcoming summer are running ahead of pre-pandemic levels. Telecommunication shares outperformed as Vodafone Group Plc shares gained after Liberty Global Plc said it had acquired a 4.9% stake in the rival British telecom group. European stocks have extended last month’s gains as traders took comfort in a strong earnings season and signs that the economy are holding up better than expected. Tuesday’s US inflation print will show whether the optimism was misplaced, with a hotter-than-expected reading likely to weigh on markets after the Fed repeatedly signaled the need for further rate hikes.
• Wall Street equity futures edged higher and European stocks advanced as investors prepared for the release of US inflation numbers later Tuesday that will be crucial in assessing the Federal Reserve’s stance on the pace of further interest rate increases. Contracts for the S&P 500 rose 0.2% and those on the tech-heavy Nasdaq 100 climbed 0.3. Palantir Technologies Inc. rallied in premarket trading, after the data analysis company said it expects 2023 to be its first-ever profitable year. Avis Budget Group Inc. rose after the vehicle rental company’s earnings exceeded analyst estimates. US inflation probably accelerated in January to 0.5% from December’s 0.1%, while slowing year-on-year to 6.2% from 6.5%, according to estimates compiled by Bloomberg. After a rally of almost 8% in the S&P 500 this year, Tuesday’s print will show whether investor optimism over an easing in the path of Fed rate hikes has been justified, with a hotter-than-expected reading likely to weigh on markets.
• Asian stocks advanced, rebounding from the lowest in about a month, as large tech shares rose ahead of crucial US inflation figures. The MSCI Asia Pacific Index climbed as much as 0.7%, with TSMC and SK Hynix among the biggest drivers. South Korea and Taiwan helped lead the charge while equities in Japan held gains as the government formally nominated Kazuo Ueda as Bank of Japan governor. Benchmarks in India also rallied close to the levels seen before the selloff in Adani Group stocks. Risk appetite in Asia was partly helped by a Federal Reserve survey showing US wage growth expectations slipped in January. The MSCI Asian stock benchmark had dipped as a months-long rebound on China reopening hopes peaked in late January and as investors tried to gauge how high US interest rates will go.
• Oil fell on a US requirement to sell more crude from reserves, offsetting a lift from Russian output cuts and rising Chinese demand. West Texas Intermediate dropped toward $79 a barrel after a volatile session Monday. The US is looking to sell 26 million barrels from the Strategic Petroleum Reserve in accordance with a budget mandate enacted in 2015. The decline in crude comes ahead of the release of crucial US inflation data later Tuesday that’ll shape investor expectations for how high the Federal Reserve will push interest rates to bring inflation back under control.
• Gold rose from a five-week low ahead of US inflation data that may offer clues on the outlook for Federal Reserve interest-rate moves. After rallying from the end of October to the start of this month, bullion has since retreated amid signs that the Fed may need to stay hawkish for longer. Higher borrowing costs hurt gold’s allure because it doesn’t pay interest. Spot gold gained 0.5% to $1,862.04 an ounce as of 10:10 a.m. in London The Bloomberg Dollar Spot Index declined 0.2%. Silver and palladium edged lower, while platinum was little changed.
• UK wages rose quicker than expected at the end of 2022, heaping pressure on the Bank of England to deliver another interest-rate increase next month. Average earnings excluding bonuses were 6.7% higher in the three months through December from the previous year, the Office for National Statistics said Tuesday. That’s the fastest pace since records began in 2001, excluding the pandemic period. The figures provide ammunition to BOE policymakers who say that more needs to be done to bring double-digit inflation back to the 2% target, with the tightness of the labor market a key warning sign.
• Secretary of State Antony Blinken is considering a meeting with Wang Yi, China’s top diplomat, at a security conference later this week, people familiar with the matter said, in what would be their first face-to-face talks since an uproar over a Chinese balloon led to a new spike in tensions. Blinken and Wang would meet at the Munich Security Conference, which runs Feb. 17 to Feb. 19, provided both sides agree, said the people, who asked not to be identified discussing private deliberations.   Blinken called off his trip to Beijing that had been set for last week after the US identified an alleged Chinese spy balloon hovering over US airspace. The US said it would send the wrong impression to have Blinken visit while the balloon was still aloft. A day after the trip was canceled, the Pentagon shot down the balloon off South Carolina.
• Tesla Inc. workers in New York state are launching a unionization campaign, teeing up a potential first for the electric-vehicle maker and the latest labor challenge for Chief Executive Officer Elon Musk. The employees, who label data for Tesla’s Autopilot technology at the company’s plant in Buffalo, New York, sent an email to Musk early Tuesday with their intent to unionize. Employees say they’re seeking better pay and job security alongside a reduction in production pressures that they say have been harmful to their health. Workers at the plant told Bloomberg News that Tesla monitors keystrokes to track how long employees spend per task and how much of the day they spend actively working. This leads some to avoid taking bathroom breaks, six employees said.
• The Securities and Exchange Commission’s aggressive stance on crypto is dividing the performance of tokens including Bitcoin and Ether. The SEC on Feb. 9 signaled a crackdown on platforms offering rewards for customers via staking, a process that’s critical to proof-of-stake blockchains. That came a day after Coinbase Global Inc.’s Chief Executive Officer Brian Armstrong evinced the fear that some such development was coming. Coins from proof-of-stake networks — including Ether, Cardano, Solana and Avalanche — have since posted deeper falls than the likes of Bitcoin and Monero, whose blockchains use the proof-of-work method. Ether is down about 9% since Feb. 8 to trade at around $1,505 as of 8:15 a.m. in London on Tuesday. Bitcoin has shed 5% over the period as was trading near $21,750. Avalanche’s near-13% retreat is among the steeper drops.
• Boeing Co. expects 90% of new aircraft deliveries to India over the next 20 years will be single-aisle jets like the 737 Max, according to its latest outlook on the country’s commercial aviation market. In total, India will require 2,210 new planes over the next two decades, with passenger traffic growing nearly 7% a year through 2041, Boeing said Tuesday. Of the new deliveries, 227 will be widebody jets, the manufacturer said. India’s air traffic has “transitioned from recovery to growth,” having returned to 98% of pre-pandemic levels, Boeing said, adding that domestic traffic should double by the end of this decade.
• Northvolt AB joined European companies putting policy makers on notice about the allure of US green tech incentives, calling tax credits tucked in President Joe Biden’s Inflation Reduction Act impossible to ignore. The supplier of batteries to Volkswagen AG and BMW AG highlighted the tax credits included in the law that cover about 30% of cell manufacturers’ operating costs. If the Swedish startup producing batteries in its home country were to start work now on building a similar-size factory in North America, it would be in line for about $8 billion of tax credits by the end of the decade. The comments echo those of CEOs from Siemens Energy AG and Volvo AB, who last week lauded the US subsidy framework — which includes roughly $500 billion in new spending and benefits — for having a clear 10-year funding window for tax breaks that can be implemented immediately. Companies have largely bristled at the EU plan, which is based on a cumbersome application process and draws on money that was already pledged through various green transition programs.
• Turkey is throwing its full weight behind stocks before the planned resumption of trading at the nation’s key equity market on Wednesday. The government is channeling billions of liras from pension funds and state lenders into the stock market and planning tax waivers for buybacks, according to officials with direct knowledge of the matter. The scope of measures shows authorities are determined to reverse the rout that erased tens of billions of dollars from Turkish companies’ market value in the two days following Feb. 6 earthquakes that devastated much of the country’s southeast. The main index was already the world’s worst performer this year before the disaster induced a selloff that sent it into a technical bear market.
• Ford Motor Co. will cut about 3,800 jobs across Europe in the latest sign of industrial disruption caused by the global automotive sector’s shift to electric vehicles. Workers in Germany and the UK will be hardest-hit with about 2,300 and 1,300 positions to be eliminated respectively over the next three years, Ford said Tuesday. Germany’s IG Metall last month estimated estimated around 3,200 people would lose their jobs. “Paving the way to a sustainably profitable future for Ford in Europe requires broad-based actions and changes in the way we develop, build and sell Ford vehicles,” Martin Sander, general manager of Ford’s electric-vehicle business in Europe, said in a statement. “This will impact the organizational structure, talent, and skills we will need in the future.” Ford, which is shifting its model lineup in Europe to battery-only by 2035, previously said the lower complexity of electric cars meant it could cut staff from its product development teams. The company is also trimming jobs in the US as Chief Executive Officer Jim Farley targets $3 billion in savings to help finance a costly shift to electric vehicles.
• Air India Ltd. announced a 250 plane order with Airbus SE as part of what stands to be the largest aircraft purchase in commercial aviation history, underscoring the industry’s recovery from the coronavirus pandemic and the airline’s ambition to become a global force after years of contraction. The carrier signed a letter of intent to purchase 210 A320neo family jets as well as 40 A350s, Tata Group Chairman N Chandrasekaran said in an online briefing that was also attended by Indian Prime Minister Narendra Modi and French President Emmanuel Macron. Air India also has “significant options” to increase its order as the carrier grows, Chandrasekaran said. The long-awaited transaction, reported by Bloomberg News last week, will help Air India reinvent itself by stocking its ranks with a fuel-efficient fleet that can take on domestic low-cost rivals and powerful Gulf airlines. Boeing Co. is also set to win a sizeable order that could be announced later.
• Samsung Electronics Co. will borrow close to $16 billion from its display-making subsidiary to help it sustain a blistering pace of investment. The Suwon-based electronics company signed a deal with Samsung Display Co. to borrow 20 trillion won at a 4.6% interest rate, the company said in a regulatory filing Tuesday. The loan matures Aug. 2025 and its purpose is to secure working capital, according to the filing. Samsung Electronics owns 85% of Samsung Display. Samsung said in January that it intends to keep its capital expenditure this year in line with 2022 — when it spent $39 billion on its chipmaking efforts — defying expectations that it would cut back as peers like SK Hynix Inc. and Micron Technology Inc. had done in prior weeks. But executives at Korea’s biggest company said the dour market situation and weak consumer sentiment presented an opportunity to make early investments in future technology and production capacity.
• President Joe Biden has decided to name Federal Reserve Vice Chair Lael Brainard as his top economic adviser, with an announcement coming as soon as Tuesday, people familiar with the matter said. In addition, according to the people, Jared Bernstein, a member of the Council of Economic Advisers, is considered likely to be named its chair, replacing Cecilia Rouse, who is stepping down.  The president’s selection of Brainard to replace outgoing NEC Director Brian Deese places her alongside another high-profile former Fed official, Treasury Secretary Janet Yellen, as crucial players on economic policy amid the continuing battle with inflation and as Biden prepares for a likely reelection campaign.
• Brazil’s largest publicly-traded banks have set aside 9.3 billion reais ($1.8 billion) for potential losses tied to the collapse of retailer Americanas SA, which is adding to an increasingly complicated credit environment in the South American nation. While banks didn’t specifically name the retailer as the company responsible for higher provisions in their earnings statements, the impact of the firm’s sudden downfall after uncovering 20 billion reais in accounting “inconsistencies” last month is clear to see in fourth-quarter results.  Banco Bradesco SA was the hardest-hit among local lenders, posting an extraordinary expense for loan losses of 4.9 billion reais linked to “a specific large corporate client,” booking 100% of its exposure. Itau Unibanco Holding SA reported a 1.3 billion-real pre-tax provision for the event, which it also didn’t name, and used complimentary provisions that had already been booked in its balance sheet to cover the remainder of its exposure.
• The European Central Bank may be able to return borrowing costs to levels that do little to stimulate or restrict the economy before the full impact of its current bout of interest-rate increases is felt, according to Governing Council member Mario Centeno. A robust labor market and cash squirreled away during the pandemic are delaying the effect of the ECB’s hikes since July, Centeno said. At the same time, the euro zone’s worst-ever spike in consumer prices is moderating. “There are a few things that are mitigating the impact of the 300 basis points on the economy,” the Portuguese central bank chief said in an interview. “And they may never fully filter through — if China comes back to global trade and the war ends, both would contribute toward reducing inflation.”
• Former Vice President Mike Pence is planning to challenge a grand jury subpoena from the special counsel investigating Donald Trump and his allies on grounds the separation of powers shields him from some Justice Department inquiries.   Pence will resist the subpoena under the argument he was acting president of the Senate during the Jan. 6, 2021, insurrection when a mob of Trump supporters tried to stop the counting of Electoral College votes, according to a person familiar with his plan. Special Counsel Jack Smith subpoenaed Pence and and former National Security Adviser Robert O’Brien as part of his investigation into efforts by Trump and others to overturn the 2020 presidential election, as well as the former president’s handling of classified documents that were found at his Mar-a-Lago resort.

*All sources from Bloomberg unless otherwise specified