The Daily – March 8, 2023

March 8, 2023

Daily Market Commentary

Canadian Headlines

• A major shareholder of Canaccord Genuity Group Inc. is trying to force out a quartet of directors who are standing in the way of a leveraged buyout by management of the Canadian financial firm. Skky Capital Corp. has requisitioned a shareholder meeting to remove Gillian Denham and three other board members, according to a statement Tuesday. The four make up a special board committee that’s examining a proposal by dozens of executives and employees to take Canaccord private for C$11.25 a share. The committee, which is led by Denham, has refused to endorse the plan, saying the price is too low and that an assessment by Royal Bank of Canada places the firm’s value as high as C$15.75 per share. Last week, the group said it has hired Barclays Plc to explore strategic alternatives.
• Vancouver-based PI Financial Corp. agrees to “merger of equals” with Toronto-based Echelon Wealth Partners Inc., companies say in press release Tuesday. Firms applied for regulatory approval of ownership changes that will result in common ownership effective April 1, according to emailed statement. Amalgamated firm will have more than 550 employees, including 210 investment advisers and more than 80 capital markets professionals

World Headlines

• European stocks traded little changed as traders digested the hawkish comments from Federal Reserve Chair Jerome Powell and assessed the latest earnings news. The Stoxx Europe 600 Index was flat by 11:15 a.m. in London, erasing earlier declines of as much as 0.4% as US equity futures advanced. The chemical and real estate sectors were among the biggest decliners, while miners, autos and banks outperformed. European stocks have seen a strong start to the year on optimism over China’s reopening and bets that the pace of rate increases would soon slow, but sentiment has been subdued in recent weeks as strong economic data fuel worries that central banks will need to keep rates higher for longer in their battle against inflation.
• Global markets steadied on Wednesday, after a selloff triggered by Federal Reserve Chair Jerome Powell’s hawkish comments. S&P 500 futures rose 0.1% and those on the Nasdaq rose about 0.2%, after the underlying index suffered their biggest daily losses in two weeks, while Europe’s Stoxx 600 equity benchmark was flat. US 10-year Treasury yields held just below 4% and the dollar held firm, close to this year’s peak against a basket of currencies. Money markets are now pricing US interest rates to rise above 5.6% later this year after Powell signaled readiness to speed up policy tightening, should inflation keep running hot. The Fed boss will deliver more testimony to Congress later on Wednesday.
• Asia equities fell as hawkish comments from the Federal Reserve hurt appetite for risk assets, with China’s technology shares bearing the brunt of the selloff. The MSCI Asia Pacific Index declined as much as 1.5%, the most in three weeks, dragged by Tencent, Alibaba and Meituan. Fed Chair Jerome Powell told the Senate Banking Committee that the ultimate level of interest rates is likely to be higher than previously anticipated. The MSCI Asia gauge has been falling for two days, with sentiment shaky after a selloff in February stalled its rebound. The measure is struggling to cross its 50-day moving average amid concerns over the Fed’s policy path and a lack of major catalysts from the National People’s Congress in China.
• Oil held a hefty loss after Federal Reserve Chair Jerome Powell signaled interest rates could rise higher and faster than previously anticipated, raising concerns about the economy and energy demand. West Texas Intermediate futures edged lower near $77 a barrel after posting the biggest one-day decline since early January. The remarks, made during a testimony before Congress, opened the door to the Fed lifting interest rates by half a percentage point at this month’s meeting and weighed on equity markets on Wednesday.  Adding to the bearishness, OPEC Secretary-General Haitham Al-Ghais said that slowing oil consumption in Europe and the US poses a concern, even as Asia experiences “phenomenal” growth. Citigroup Inc. said that global supply is ample and demand remains low.
• Gold was little changed after slumping the most in a month after hawkish comments by Federal Reserve Chair Jerome Powell, which triggered a shift in bets to a larger rate increase than markets had previously expected. Spot gold traded little changed at $1,813.39 an ounce as of 9:09 a.m. in London after sliding 1.8% on Tuesday. The Bloomberg Dollar Spot Index edged up 0.1%, following a 1% surge in the previous session. Silver and platinum were flat while palladium dropped.
• The euro-area economy failed to expand at the end of 2022 as worse-than-expected performances in Germany and Ireland helped pull down initial growth readings. Gross domestic product was unchanged from the previous quarter during the final three months of last year — worse than the preliminary estimate for a 0.1% advance — data released Wednesday by Eurostat showed. While household expenditure and investment declined, government spending and trade helped offset the drops. Germany’s economy, the continent’s largest, shrank by 0.4%, while Ireland’s rose by significantly less than initially reported. While gloomier than thought, stagnation means the bloc may still manage to narrowly dodge a recession that was seen as unavoidable after Russia invaded Ukraine. Looking ahead, analysts predict a downturn in the first quarter as the rising cost of living continues to weigh on consumers.
• All of a sudden, the prospect of US rates hitting 6% is becoming real enough for investors to rethink their strategies. BlackRock Inc. and Schroders Plc are among those who are weighing in on the debate of what will happen if US rates peak at 6%. As late as end-February, investors across bonds, stocks and currency markets were still calling for an end to higher rates with bets for a broad rally in the second half.  Instead, Federal Reserve Chair Jerome Powell’s testimony on Tuesday is fueling expectations of a bigger hike this month, with traders pricing in peak rates of 5.6% from less than 5% at the end of last year. Treasury traders are doubling down on recession expectations, the dollar has rebounded while equity markets from the S&P 500 Index to the MSCI Asia Pacific gauge are giving up gains.
• The US is set to lift Covid-19 testing requirements for travelers from China as soon as this week, people familiar with the matter said, a significant step toward normalizing links between the two countries as the pandemic recedes. The Biden administration in January ordered all travelers older than 2 to provide a negative test before entering the US, after China’s pivot away from strict Covid restrictions led to a massive outbreak. The measure was initially put in place to protect American citizens while the US could determine the impact of the outbreak in China and gain insight into the variants that were circulating, the people said. The measure will be lifted because the US has evidence that cases, hospitalizations and deaths are declining in China, they added. The Biden administration will continue to monitor cases in China and other countries and will keep in place the traveler-based genomic surveillance program.
• The US Federal Trade Commission plans to depose Elon Musk as part of its probe into Twitter Inc., the social media platform that Musk bought for $44 billion last year, according to a person familiar with the investigation. The FTC late last year deepened an investigation into Twitter’s privacy and data security practices in the wake of the company’s takeover by Musk, Bloomberg reported last year. The deposition of Musk would mark an escalation of that investigation. The FTC has pummeled Twitter with document requests, asking the company to turn over communications related to its recent layoffs, Musk’s leadership and other topics, according to the congressional report. The agency is also asking for documents related to the so-called “Twitter Files,” a project in which Musk gave outside journalists access to internal Twitter information.
• President Joe Biden’s budget proposal is an opening salvo in the looming impasse with Republicans over raising the debt ceiling and funding the US government. Biden is expected to defy GOP calls for deep spending cuts, instead proposing new taxes on corporations and Americans making more than $400,000 a year as he seeks to shore up entitlement programs and address budget deficits. The White House wants the plan, to be released in full on Thursday, to provide political leverage in the approaching standoff with House Republicans, when the $31.4 trillion debt limit must be raised to avoid a US default.
• Boeing Co. is close to sealing an order from Japan Airlines Co. for at least 20 of its 737 Max planes, according to people familiar with the talks, beating out arch-rival Airbus SE and its competing A320neo aircraft family.  After holding discussions with both manufacturers, JAL is leaning toward Boeing, the people said, asking not to be identified as the deliberations are private. The order will likely be a combination of smaller Max 8 jets along with some of Boeing’s larger Max 10 planes, one of the people said. Talks are ongoing and a final decision is still to be made, the people said. JAL may sign the deal by the end of March, they said, and make a formal announcement when it updates markets at the end of its fiscal year.
• WHP Global, the owner of the Toys “R” Us and Express retail brands, has secured $375 million in growth capital from private equity giant Ares Management Corp. The transaction values the company at $1.6 billion, according to a statement reviewed by Bloomberg News. The investment will add significant cash to the retail operator’s balance sheet and spur its “next wave of acquisitions,” the companies said. With valuations lower against the backdrop of an economic slowdown, WHP Chairman and Chief Executive officer Yehuda Shmidman said he sees “an enormous amount of growth opportunities, and particularly for us that means more brand acquisitions.”
• The trial of the former head of Gazprombank’s Swiss unit and three colleagues got underway in Zurich on Wednesday morning, who are charged with failing to raise the alarm over financial transactions made by a cello-playing confidant of Vladimir Putin. The chief of Gazprombank Schweiz AG, two senior executives at the bank and a client relationship manager neglected to carry out proper due diligence between 2014 and 2016 into Sergei Roldugin’s finances and connections, according to the Zurich prosecutor’s indictment. Roldugin is a “close friend” of the Russian president and godfather to Putin’s daughter, and the bankers should’ve scrutinized if he was was the real beneficial owner of Gazprombank accounts belonging to shell companies in Panama and Cyprus, the prosecutors said. The four, three of whom are Russian and one Swiss, “continued the business relationship unacceptably, although they themselves had serious doubts about the correctness of the information about the beneficial owner,” according to prosecutors. They are seeking a seven-month suspended sentence with two years of probation for the men, who can’t be identified under Swiss law.
• The bond market is doubling down on the prospect of a US recession after Federal Reserve Chair Jerome Powell warned of a return to bigger interest-rate hikes to cool inflation and the economy.  As swaps traders price in a full percentage point of Fed hikes over the next four meetings, the yield on two-year Treasury notes touched 5.08% on Wednesday, its highest level since 2007. Critically, longer-dated yields remained stalled, with the 10-year rate remaining relatively unchanged under 4% and 30-year bonds having barely budged since Friday. As a result, the closely-watched spread between 2- and 10-year yields this week showed a discount larger than a percentage point for the first time since 1981, when then-Fed Chair Paul Volcker was engineering hikes that broke the back of double-digit inflation at the cost of a lengthy recession. A similar dynamic is unfolding now, according to Ken Griffin, the chief executive officer and founder of hedge fund giant Citadel.
• As stock markets take another pummeling, more traders are hiding out in credit markets. They’re finding refuge in top-quality bonds, especially short-term securities. So far this year, global investment-grade credit funds have absorbed almost $70 billion, making it the biggest inflow for this part of the year since EPFR Global started tracking the data in 2017.  “Why would you subject yourself to this very data dependent, binary, weekly equity environment with rates repricing, when you can sleep at night sitting in Treasury bills or short-duration investment-grade credit,” said Charlie McElligott, cross-asset macro strategist at Nomura Securities International.
• For the first time since the global financial crisis, investors are betting long-term inflation in the euro area will match that of the US, underscoring the dramatic shift in the outlook for Europe recently. A proxy for inflation expectations in the euro area in the second half of the next decade — the so-called five-year, five-year forward inflation swap rate — is at roughly 2.5%, catching up with the US on wagers of prolonged price pressures. That’s a monumental reversal for the region where central bankers, conversely, turned to negative rates and bond-buying to fan the economy and below-target inflation for most of the past decade. Inflation expectations dropped on both sides of the Atlantic, reversing an upward trend, after this week’s comments from European Central Bank member Robert Holzmann and Federal Reserve Chair Jerome Powell, but Europe’s gauge remains within touching distance of the US. The move also follows a strong repricing of markets’ bets on the peak for interest rates in the US and Europe, with traders anticipating more tightening.
• Adidas AG’s new Chief Executive Officer Bjorn Gulden is mulling the idea of selling Yeezy products and donating the profit to charity, as he tries to offset some of the huge financial hit from the collapse of the alliance with rapper Ye. The last of the Yeezy products, some of which only recently arrived at Adidas warehouses, have a retail value of €1.2 billion ($1.3 billion), showing the immense success of the partnership. Gulden ruled out other options, such as burning them, giving them away for free in countries such as Turkey and Syria, or rebranding them. He was speaking in his first press conference since taking over the German sneaker brand after the ouster of former CEO Kasper Rorsted.
• US mortgage rates increased for a fourth week to the highest level since mid-November, according to the Mortgage Bankers Association. The contract rate on a 30-year fixed mortgage rose 8 basis points to 6.79%, the group said Wednesday. The group’s index of mortgage applications to buy a home, however, increased. The data can be volatile around holidays, and the week followed Presidents’ Day. After easing into the start of the year, mortgage rates have been resurgent recently on the heightened prospect of more aggressive Federal Reserve policy. Chair Jerome Powell said Tuesday the central bank is likely to lift borrowing costs higher and potentially faster than previously anticipated. The MBA’s index of refinancing applications also increased in the week ended March 3. The gauge of overall mortgage applications rose 7.4%.
• President Xi Jinping called on China to boost its military might via technological innovation and better coordination of the defense industry with the wider economy, according to state broadcaster CCTV. China should accelerate its push for high-tech independence to achieve an advantage over international rivals, Xi told military delegates at the National People’s Congress on Wednesday, CCTV reported. Supply chain resilience also needs to be improved, he said. Underscoring those objectives, the government has said it will boost defense spending by 7.2% this year, the fastest growth in four years, according to a release earlier this week.