The Daily – September 18, 2023

September 18, 2023

Daily Market Commentary

NEWS

Canadian Headlines

• Canadian Prime Minister Justin Trudeau accused India’s government of masterminding the assassination of a prominent Sikh leader, an explosive allegation that threatens to alter perceptions of the South Asian democracy among US allies. Prime Minister Narendra Modi’s administration on Tuesday forcefully denied any involvement in the June murder of Hardeep Singh Nijjar, a Canadian citizen who has been at the forefront of a movement calling for an independent Sikh homeland in India called Khalistan. Canada expelled a top Indian diplomat, prompting Modi’s government to do the same in a tit-for-tat action. Canada’s accusation puts the US and its allies in an awkward spot shortly after leaders including President Joe Biden hailed close ties with India at the Group of 20 summit earlier this month. They were instrumental in bolstering India’s position as a counterweight to China, agreeing to watered-down language over the war in Ukraine with a broader goal of propping up the US-world order among emerging economies that constitute the Global South.

World Headlines

• European stocks edged slightly higher after Monday’s drop, with investors wary of making bets ahead of this week’s central bank meetings. Brent oil’s rally to $95 triggered worries about inflation spiking again, but boosted the energy sector. The Stoxx 600 Index rose 0.2% as of 11:07 a.m. in London. Automakers and real estate stocks led gains while the consumer products and services sector lagged. Energy shares also outperformed as benchmark Brent surpassed $95 per barrel for the first time since November. Meanwhile, a report that European Central Bank policymakers are considering raising the amount of reserves European lenders must park at the central bank is unwelcome news for the banking sector, Morgan Stanley analysts wrote in a note Tuesday.
• The prospect of rates staying higher for longer has drained some of the enthusiasm toward tech shares, after they led the rally in US stocks earlier this year. Flows suggest investors are positioning for more losses in the Nasdaq 100, according to Citigroup Inc. strategists. Nasdaq futures continued to attract bearish flows last week, leaving positioning heavier on short bets rather than long, the team led by Chris Montagu said. That suggests “few investors are comfortable taking a bullish view on the possibility of a near-term reversal for the growth/tech related index,” they wrote in a note dated Sept. 18. The Nasdaq 100 is down about 3.9% from a peak on July 18.
• Asian stocks edged lower as traders awaited a slew of major central bank decisions, with rising inflationary pressure from higher oil prices keeping the door open for hawkish messages. The MSCI Asia Pacific Index dropped as much as 0.4% on Tuesday before paring, led lower by technology and health-care shares. Japanese equities were mixed after the market reopened following a holiday. Australia slid as traders parsed minutes from the central bank’s September meeting. Hong Kong and mainland Chinese benchmarks traded in a tight range as investors weighed the recent green shoots in economic data against ongoing property sector woes. They are closely monitoring headlines from distressed developers for further clues on their financial health.
• Oil surged to a 10-month high — extending a powerful rally that may rekindle inflation — as supply cuts from OPEC+ tightened the market, with Saudi Arabia’s energy minister shying away from any change in course. Global benchmark Brent topped $95 a barrel for the first time since November before paring gains. The tighter market has ignited a flurry of predictions that $100 oil could soon return in a roster than runs from industry heavyweights such as Chevron Corp. Chief Executive Officer Mike Wirth to traditional bears at Citigroup Inc. The latest upswing has been marked by significant moves in timespreads, one of the market’s most-keenly tracked metrics. Brent’s three-month spread earlier ballooned to more than $4 a barrel in backwardation, a bullish pattern. That compares with a differential of $1.26 a barrel about a month ago.
• Gold futures edged higher early Tuesday, building on the yellow metal’s highest close in more than two weeks as traders awaited this week’s Federal Reserve decision for clues on interest rates. Gold has largely traded sideways since spring, and is off around 0.5% so far in September. It’s seen pressure as Treasury yields advanced and the U.S. dollar strengthened. Higher yields raise the opportunity cost of holding nonyielding assets like gold, while a stronger dollar makes commodities more expensive to users of other currencies.
• An expected increase in UK inflation is making the Bank of England’s already difficult decision on when to pause rate hikes even harder. UK inflation data due out Wednesday will likely show that price gains notched higher to 7% last month from 6.8% in July, according to the median of more than 30 estimates in a Bloomberg survey. It would mark the first acceleration since February, with economists attributing the move to fuel price fluctuations. While some downturn in inflation had been anticipated by the BOE, it would make for a complicated backdrop when policymakers meet the next day to decide whether to raise rates for what could be the last time of the cycle. All but one of the more than 50 economists surveyed by Bloomberg believe the bank will increase the key rate by 25 basis points Thursday to 5.5%, a view overwhelmingly endorsed by financial markets.
• The European Central Bank will keep interest rates at 4% for as long as needed to tame inflation, Governing Council member Francois Villeroy de Galhau said — indicating he doesn’t favor future increases at this stage. “Looking at the situation today, we think that is a good level and barring surprises — we are pragmatic, we look at how inflation evolves – it’s more important now to be patient, to be tenacious,” he told BFM TV Tuesday. “We have the right dose, but we have to take the medicine for a sufficiently long time and we will see the deceleration of inflation.” The comments come after the ECB raised borrowing costs last week for a 10th successive meeting — despite push-back from more cautious officials. President Christine Lagarde said she can’t say if that will be the peak, and more hawkish colleagues have since stressed it may not be the last hike.
• The United Auto Workers said more of its members will go on strike at General Motors Co., Ford Motor Co. and Stellantis NV facilities starting at noon Friday unless substantial headway is made toward new labor contracts. “Either the Big Three get down to business and work with us to make progress in negotiations, or more locals will be called on to stand up and go out on strike,” UAW President Shawn Fain said in a video released late Monday. The deadline raises the stakes for talks between three of the biggest automakers in the US and the union representing 146,000 of their workers. Friday will mark one week since the UAW called its first-ever walkout across all three of the legacy Detroit manufacturers, which is costing the companies output of about 3,200 vehicles a day, according to S&P Global Mobility.
• Blackstone Inc. Chief Executive Officer Steve Schwarzman said the US public is not interested in older people running for president and that could throw a surprise in the 2024 elections. “Apparently the public is not that interested in really older people,” Schwarzman said in a Bloomberg Television interview on Tuesday in Paris, citing polls that show a majority of voters didn’t want Joe Biden to run for reelection because of his age. “When you have that kind of situation, usually something else happens.” In the 2016 race, few had expected Donald Trump would become the president as there were others who were leading in the contest prior to him, he said in the interview on the sidelines of the International Private Equity Market conference.
• Janet Yellen planted a flag during her confirmation hearing in January 2021. Climate change, she declared, was an “existential threat,” and as Treasury secretary, she would make it a focus of her work. Since taking office, she’s warned of the danger to the economy and financial system. She’s urged Congress and foreign governments in the rich world to do more to help poorer countries adapt to global warming, and thrown the Treasury behind implementing President Joe Biden’s signature climate bill, seeking to squeeze the most from the sprawling new law. Yellen is the “best ally of climate action in the entire Biden administration,” according to Democratic Senator Sheldon Whitehouse of Rhode Island, an outspoken climate hawk.
• China’s top diplomat pledged to strengthen his country’s “strategic coordination” with Russia, as the two nations lay the groundwork for a meeting of their leaders in Beijing next month. Foreign Minister Wang Yi is making a three-day trip to Moscow for security and foreign policy talks with his Russian counterpart Sergei Lavrov, as the two sides continue to deepen ties. China and Russia should “demonstrate their responsibilities as major powers, fulfill their due international obligations, and continue to strengthen strategic coordination,” Wang said on Monday, according to a statement from China’s Foreign Ministry. He added that neither side should be influenced by “third parties,” in a veiled reference to the US.
• The world economy is set for a slowdown as interest-rate increases weigh on activity and China’s pandemic rebound disappoints. Growth will ease to 2.7% in 2024 after an already “sub-par” expansion of 3% this year, according to the latest OECD forecasts. With the exception of 2020, when Covid struck, that would mark the weakest annual expansion since the global financial crisis. “While high inflation continues to unwind the world economy remains in a difficult place,” OECD Chief Economist Clare Lombardelli told a news conference on Tuesday. “We’re confronting the double challenges of inflation and low growth.” The Paris-based organization warned that risks to its prediction are tilted to the downside as past rate hikes could yet have a stronger impact than expected and inflation may prove persistent, requiring further monetary tightening. It called China’s struggles a “key risk” for output around the world.
• UBS Group AG Chief Executive Officer Sergio Ermotti said the bank will give investors an outline of its growth strategy early next year and signaled the direction of plans to grow in the US, as the lender progresses with the integration of Credit Suisse. The Swiss lender is currently working at “full speed” on the fusion of the two banks, including on implementing more than $10 billion in cost savings, Ermotti said at an event in London on Tuesday. UBS is “also preparing the three year plan that we will announce in February,” he said. The announcement of a strategic update is an early sign that UBS is beginning think beyond the task of integrating its former rival, rescued with government backing after it came close to collapse in March. While some of Credit Suisse’s businesses in Asia and Latin America give UBS an immediate boost in terms of scale, it’s less clear how the wealth-management giant will seek to grow in the world’s largest economy.
• Elon Musk said that a small monthly service fee for using X could help fight off bot operations on the social media platform formerly known as Twitter. A subscription for all users would make “the effective cost of bots” very high and would require operators to use a new payment method for each account, the billionaire said in a conversation with Israeli Prime Minister Benjamin Netanyahu at Musk’s Tesla Inc. offices in Fremont, California on Monday. Netanyahu, who questioned Musk about antisemitism and hate speech on the platform, had asked how he could prevent “armies of bots” from amplifying hate speech. X currently has a free tier and subscriptions for individual subscribers and brands, and Musk said bots are the “single most important reason” to shift to monthly payments.
• Microsoft Corp. plans to refresh its Xbox consoles in the holiday season of 2024, according to a product roadmap posted online as part of its case against the Federal Trade Commission. A trove of Xbox planning documents revealed the codenames of Brooklin, a successor to the Xbox Series X priced at the same $499, and Ellewood, a refreshed Xbox Series S that also maintains the current price of $299. Both new devices are intended for release in the holiday season of 2024, according to the roadmap dated April 2022. The key changes contemplated are improvements to power consumption, better wireless technologies, more built-in storage and a physical redesign. Each new console will be accompanied by a redesigned controller as well, codenamed Sebile and priced at $69, if purchased separately. The new Xbox Series X wouldn’t include a disc drive, with Microsoft describing its intended content delivery for the future platforms as “all digital.”
• An array of US government tax credits, loan guarantees and research are unlocking billions in private sector investments that can build a clean energy economy, President Joe Biden’s top economic adviser Lael Brainard will say Tuesday. The former Fed vice-chair is set to extol the benefits of historic public incentives that are driving spending toward green manufacturing and innovation — helping “to position the United States at the forefront of the industries of the future,” according to her prepared remarks for a launch event of the new MSCI Sustainability Institute during New York Climate Week. Programs and tax policies in Biden’s sweeping climate, infrastructure and semiconductor laws “have the potential to catalyze a dramatic transformation of our economy toward the sectors, technologies and places where investment will be most productive and is most urgent,” Brainard, director of Biden’s National Economic Council, will say, according to prepared remarks. Biden’s Paris Agreement pledge to at least halve US carbon dioxide emissions below 2005 levels by the end of this decade in many ways hinge on the success of that transformation.