The Daily – November 20, 2023

November 20, 2023

Daily Market Commentary

Canadian Headlines

• With his government deeply unpopular and an election due in the next two years, Canadian Prime Minister Justin Trudeau may be tempted to spend money. The bond market is getting in the way. Trudeau’s administration is being squeezed by rising debt payments and slowing revenue growth — a challenge for a leader who, in eight years of governing, has never had to contend with an environment in which borrowing was expensive. Interest costs have risen substantially since Finance Minister Chrystia Freeland drafted her March budget. The economy is weakening and the path to a so-called soft landing has narrowed. Canada’s central bank is warning that its policy rate, already at a 22-year high, may stay elevated for a while, given the current level of inflation. This combination is a new problem for Trudeau, whose Liberals swept to power in 2015 promising to spend on social programs and infrastructure after years of austerity under Stephen Harper’s Conservatives. Interest charges on federal debt were C$28.2 billion ($20.5 billion) in the first eight months of this year, up 35% from the same period in 2022, and the pressure is rising to cut back on other spending.

World Headlines

• European stocks were steady after last week’s rally as investors turn their focus to economic risks and the outlook for earnings. Bayer AG slumped following a double blow from negative news. The Stoxx Europe 600 index was little changed by 11:50 a.m. in London. The energy and retail sectors were among the biggest gainers, while financial services and health cares lagged. Bayer sank to the lowest since 2009 after stopping the main study of its top experimental medicine and losing a key US trial against its weed killer Roundup. European stocks have rebounded in November, as optimism around cooling inflation bolstered wagers of a more dovish pivot from central banks. That’s prompting a verbal response from the European Central Bank, where Governing Council member Pierre Wunsch said the lender may have to raise borrowing costs again if investor bets on monetary loosening undermine the institution’s policy stance.
• The dollar extended a decline, with a gauge of greenback strength hitting its lowest level since August, amid speculation the Federal Reserve is nearing the end of its rate-hike cycle. Traders are currently pricing in about a 30% chance of a first Fed rate cut in March following cool inflation data last week. Investors are awaiting publication Tuesday week of minutes of the last Fed rates meeting for further insight into policy makers’ thinking. US equity futures edged higher, suggesting stocks may extend a three-week rally that propelled the S&P 500 to an 11-week peak. Microsoft Corp. climbed as much as 2.7% in pre-market trading after hiring OpenAI co-founders Sam Altman and Greg Brockman to lead its in-house artificial intelligence team. Treasury yields ticked higher ahead of a US 20-year auction.
• Oil rose above $81 a barrel in London as traders are waiting to see whether the OPEC+ alliance led by Saudi Arabia will intervene to bolster prices. Brent crude futures rose 0.7% after rallying 4.1% on Friday amid reports that Saudi Arabia and its allies could deepen production cuts when they gather next weekend. A Bloomberg gauge of the US dollar is heading for its lowest close since late August, making commodities more attractive. Crude futures are down this year following a run of four weekly losses, as the war-risk premium generated by the Israel-Hamas war fades away, and concerns escalate over robust supplies from outside the OPEC+ coalition.
• Gold declined — after a weekly advance of more than 2% — ahead of a US government bond auction that may impact the precious metal’s trajectory. Treasury yields climbed on Monday, putting pressure on bullion, after having fallen this month as slowing inflation and signs of cooling growth fueled demand for debt. Swaps markets have now priced out another rate hike by the Federal Reserve this year, with focus shifting on how rapidly loosening will come next year. Spot gold declined 0.5% to $1,971.44 an ounce as of 12:31 p.m. in London. The Bloomberg Dollar Spot Index fell 0.3%. Silver dropped 1.5%, while palladium and platinum were flat.
• After three days of high drama at the world’s most closely watched startup, which many compared to a coup, Microsoft Corp. capped the weekend with one of its own: the software giant hired ousted OpenAI chief Sam Altman. The moves reshape the world of artificial intelligence given that OpenAI is behind the hugely popular ChatGPT app that took generative AI into the mainstream, and Altman was its figurehead. He was unexpectedly fired by OpenAI’s board on Friday, setting off a frenzied weekend campaign to reinstate him, led by OpenAI executives and key investors — including Satya Nadella, the chief executive officer of Microsoft, which had pledged more than $10 billion for the startup.
• It’s touted as crypto’s big breakthrough on Wall Street: The imminent arrival of Bitcoin exchange-traded funds that will kick open digital-currency investing to the institutional and retail masses. That’s driving the latest hype cycle in the world’s largest token on bets that the likes of wealth managers and financial advisers will finally start to lavish a small portion of their trillion-dollar portfolios on the crypto promise. Thank an oncoming swing in the regulatory pendulum. The US Securities and Exchange Commission is expected, possibly by mid-January or sooner, to green-light exchange-traded funds that will buy and sell Bitcoin in the famously tax-efficient and cost-effective ETF wrapper — after a decade of rejecting such applications.
• NATO members Turkey, Romania and Bulgaria are nearing an agreement to create a joint force to clear mines drifting into their parts of the Black Sea as part of the fallout from Russia’s invasion of Ukraine. Deputy defense ministers from the three nations are set to meet in Ankara on Wednesday to try to finalize the details of the unit to clear the sea mines, according to three people familiar with the matter, asking not to be identified because the information isn’t public. It’s unclear whether a final accord will also be signed after the two-day meeting, one of the people said. The meeting comes just days after Turkey’s Navy Chief Admiral Ercument Tatlioglu expressed opposition to the presence of naval assets in the Black Sea from other NATO allies, including the US, saying they could further fuel tensions in the region.
• Bayer AG faces two fresh setbacks, causing the stock to plummet, after stopping the main study of its top experimental medicine and losing a key US trial against its weed killer Roundup. The shares fell as much as 11% in early Frankfurt trading to the lowest level in more than a decade. The plunge wiped out about 4.6 billion euros ($5 billion) in market value. The German company said Sunday it had ended a late-stage test for the anti-thrombotic drug asundexian — a therapy billed as a potential blockbuster — due to a lack of efficacy. A day earlier, Bayer’s Monsanto unit was ordered by a Missouri jury to pay more than $1.5 billion to three former Roundup users who blamed their cancers on the controversial product in one of its largest trial losses over the herbicide.
• Israeli forces engaged in heavy fighting with Hamas in the northern Gaza Strip overnight as the US said it was optimistic about a deal to free hostages held by the militant group. The Israeli military and Shin Bet, the country’s domestic security service, said they killed three Hamas commanders, while fighter jets bombed more buildings and sites used by Hamas. The main thrust of Israel’s ground offensive is eastwards into Gaza City, which the military describes as Hamas’s “center of gravity.” Israeli forces have taken control of many parts of the city’s Al Shifa hospital and over the weekend showed videos they say prove Hamas exploited the facility, building a command center and tunnels underneath it.
• Chinese regulators are drafting a list of 50 developers eligible for a range of financing, according to people familiar with the matter, the nation’s latest effort to put a floor under the property crisis. China Vanke Co., Seazen Group Ltd. and Longfor Group Holdings Ltd. are among companies that have been named in a draft of the so-called white list, the people said, asking not to be named because the matter is private. The list, which includes both private and state-owned developers, is intended to guide financial institutions as they weigh support for the industry via bank loans, debt and equity financing, the people said. It couldn’t be determined which other developers were included on the draft list.
• Consumers plan to spend an average of $567 during Black Friday and Cyber Monday shopping events, up 13% from last year, as they seek out the best deals while facing economic pressures such as higher prices and soaring interest rates. The result is a new record for Deloitte’s annual Black Friday-Cyber Monday survey. About 84% of shoppers feel confident enough to stick with the budgets they set in September. In order to stay within their spending limits, many consumers plan to do much of their shopping during Black Friday and Cyber Monday. Four in 10 expect to finish their shopping during the period. Consumers enjoy the holidays and “manage their budgets to make room for seasonal moments,” said Stephen Rogers, managing director of Deloitte’s Consumer Industry Center.
• Libertarian outsider Javier Milei won Argentina’s presidency promising a radical shakeup to fix decades of policy mismanagement, a strategy that resonated with a populace suffering under a nosediving economy and one of the world’s fastest inflation rates. With 99% of ballots counted after Sunday’s runoff election, Milei took 56% of the votes to 44% for Economy Minister Sergio Massa of the incumbent left-wing Peronist coalition, according to the official electoral authority. The scale of his victory was unexpected, and Massa conceded before the results were released. “Today starts the rebuilding of Argentina,” Milei told the jubilant crowd at his campaign headquarters in Buenos Aires, while supporters flooded the capital waving the national flag. “There’s no room for gradual measures.”
• Federal Reserve Bank of Richmond President Thomas Barkin asked for a show of hands: How many business people expect their price increases will be higher in the next year than before the Covid-19 pandemic? About two-thirds of the group raised hands. “Come on guys, I’m just trying to control inflation,” Barkin said Oct. 14 to a group of 120 business people in the small town of Westminster, South Carolina. “The bad news I hear is the price genie has been taken out of the bottle, and it’s hard to put it back in.” The exchange highlighted how Fed officials led by Chair Jerome Powell are increasingly seeking real-time, on-the-ground information about the US economy – not from hard data crunched by government statisticians but from feedback from ordinary business managers and consumers.
• Americans are increasingly tapping their retirement savings to cover housing and medical bills amid higher cost-of-living pressures, according to data released Monday from Fidelity Investments. Some 2.3% of workers took a hardship withdrawal last quarter, up from 1.8% a year earlier, the data showed. The top two reasons given for the uptick were to avoid foreclosure for homeowners or eviction for renters, and for medical expenses. Americans outside the wealthiest quintile have run out of extra savings generated early in the pandemic and now have less cash on hand than they did when the pandemic began, according to the latest Federal Reserve study of household finances.
• Oil is back in a bear market, but as things currently stand one of OPEC’s largest producers is set to increase output in January. With a few days to go before the Organization of Petroleum Exporting Countries and its allies meet to discuss policy, traders are focused on whether Saudi Arabia will extend its voluntary production cut of 1 million barrels a day into the new year. While that decision remains uncertain, the kingdom’s Gulf neighbor already has an agreement in place allowing it to pump more crude. The United Arab Emirates will increase its output target to 3.075 million barrels a day in January, or about 135,000 barrels a day more than it pumped last month. Abu Dhabi secured the concession at the group’s last meeting in June, when it argued that longstanding production limits failed to recognize capacity additions it has made in recent years.
• Some of Wall Street’s top strategists are divided when it comes to Corporate America’s earnings outlook next year. While Citigroup Inc.’s Scott Chronert expects profits to hold up even if the economy slips into a recession, JPMorgan Chase & Co. strategist Mislav Matejka says diminishing pricing power would crimp overall revenue and margins regardless of whether growth contracts. Given that “the starting point of margins is elevated,” profit growth next year “could end up more flattish, rather than up, and this is without having recession as a base case,” Matejka wrote in a note. “If we have an outright contraction, then corporate profits are likely to fall.” The pessimistic tone from Matejka — who has remained bearish on stocks this year despite an 18% rally in the S&P 500 — comes just as US companies are poised to see the end of an earnings recession one quarter earlier than expected. S&P 500 profits rose 4% in the third quarter, compared with analysts’ projections of a 1.2% decline, according to data compiled by Bloomberg Intelligence.