April 24, 2023

Daily Market Commentary

Canadian Headlines

  • Glencore Plc’s attempt to seal mining’s biggest deal in a decade has thrust Chief Executive Officer Gary Nagle into center stage. Little known outside Glencore before taking the job nearly two years ago, the energetic South African is pursuing one of mining’s most unattainable targets, in a bitter brawl that’s headed for a potential climax this week. While the bid for Canada’s Teck Resources Ltd. is Nagle’s first major move as CEO, the deal itself was dreamed up under his predecessor Ivan Glasenberg, who privately tried and failed to get it done in 2020. Nagle was involved in those efforts too, according to people familiar with the matter, as head of Glencore’s coal business and already earmarked to replace the man that hired him two decades earlier. Three years later, Glencore under Nagle is trying again. It has proposed a $23 billion takeover of Teck, with a plan to create two new companies from the combination — one focused on metals and the other that produces coal.
  • Canada’s massive civil service strike is poised to drag into its second week as the federal government and the union representing more than 155,000 federal workers trade barbs amid tense and slow negotiations. Federal workers, including 35,000 from the Canada Revenue Agency, the country’s tax-collection body, have been on strike since Wednesday over wages and return-to-work policies. Still, the federal government has said it isn’t ready to force the civil servants back to work. “At this time, it’s not something that I believe is the best outcome,” Treasury Board President Mona Fortier said on CTV Question Period on Sunday morning, when asked if the Liberal government would rule out a back-to-work law.

World Headlines

  • European stocks held near the highest level since mid-February amid earnings reports, while LVMH was in focus as it became the region’s first company to surpass $500 billion in market value. The Stoxx Europe 600 Index was steady as of 11:06 a.m. in London. Financial services and construction sectors gained, while energy and telecom shares fell. Luxury stocks outperformed the benchmark, with LVMH hitting its fresh milestone thanks to a luxury-sales boom in China and a strengthening euro. More broadly, European equities have rebounded from a March selloff that was triggered by banking sector worries, with the region’s main benchmark recently hitting its highest level since February 2022. Now, equity investors are looking to companies for insight into the effect of the cost-of-living crisis and surge in central-bank interest rates.
  • US equity futures struggled for traction at the start of a week packed with corporate earnings reports and economic data that may help illuminate the path for interest rates. Contracts for the S&P 500 and the Nasdaq 100 were little changed following a muted end to trading last week. Treasury yields fell and a gauge of the dollar was steady. Leveraged investors boosted net short positions on 10-year Treasury futures to a record 1.29 million contracts as of April 18, data from the Commodity Futures Trading Commission show. That’s an indication they think the Federal Reserve will keep raising rates to tackle inflation. Earnings this week from tech majors, among others, will be parsed for insights into the effect of higher borrowing costs and a struggling economy.
  • Asia’s stock benchmark was modestly lower at the start of the busiest week of the earnings season in the region, with shares in China and South Korea among the biggest decliners. The MSCI Asia Pacific Index fell as much as 0.5%, with tech and materials shares weighing the most on the gauge. Chinese stocks posted their biggest two-day loss this year as geopolitical tensions and signs of an uneven recovery spurred traders to pare exposure ahead of the Golden Week holiday. In contrast, benchmarks in Japan and India climbed. The Nikkei 225 rose past its previous 2023 closing high ahead of new Bank of Japan Governor Kazuo Ueda’s debut policy decision on Friday.
  • Oil steadied after slumping almost 6% last week as shrinking refining margins in Asia added to warning signs on the outlook for global demand. West Texas Intermediate traded near $78 a barrel after dropping last week by the most since the banking crisis in March. Diesel and gasoline markets in Asia are slumping, leading some refiners to consider reducing operations. Still, China’s Golden Week holiday could spur increased jet fuel consumption from this weekend as travelers return to the skies. Crude has wiped out nearly all of the rally seen earlier this month after the Organization of Petroleum Exporting Countries and its allies announced surprise new production cuts. Citigroup Inc. said it was taken aback that the magnitude of the pullback in Asian refining margins, which is partly attributable to ramp up of new Middle Eastern refineries.
  • Gold extended losses, with traders awaiting fresh US economic data due later this week that will help guide the Federal Reserve as it looks set to raise interest rates next month. The prospect of further hikes has been keeping a lid on non-interest bearing assets like bullion, which posted its worst week since February on Friday after US business activity unexpectedly climbed to nearly a one-year high, risking more price increases. The latest US figures on growth, inflation and wages due this week will likely reinforce the view that there’s more tightening to come, with the initial estimate of first-quarter gross domestic product expected to show consumer spending getting off to a solid start for the year.
  • Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the third straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $397.2 million in the week ended April 21, compared with gains of $266.5 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $9.17 billion.
  • Credit Suisse Group AG reported 61.2 billion francs ($69 billion) of outflows in the first quarter and took a large writedown at its wealth management unit, underscoring the challenge for UBS Group AG in retaining key clients and assets after the emergency takeover of its biggest rival. The Swiss bank lost more than 200 billion francs of customer deposits over a six-month period, culminating in several frantic days in March before the government-orchestrated sale. First-quarter results on Monday showed that its key units continued to lose money and shed clients, and the firm borrowed far more from a central bank liquidity backstop than previously known. The figures give a fuller picture of the drama that ended Credit Suisse’s 167-year run as one of the most storied European banks and a sense of the work ahead for UBS. Ironically, in what may be its final quarter as a standalone company, Credit Suisse had a record 12.4 billion-franc profit, but only because of a gain tied to the controversial regulatory decision to wipe out many of its bondholders in the deal. Without that, it would have posted another loss.
  • Bed Bath & Beyond Inc., the big-box retailer that for decades provided essential shopping for college dorms, wedding gifts and new homes, will close all of its stores and liquidate inventory over the next two months after its turnaround failed. The Union, New Jersey-based company filed for Chapter 11 bankruptcy on Sunday, a move that came months after saying it was weighing options to restructure debt, with “substantial doubt” about its ability to keep operating. The filing will allow it to begin liquidating 360 Bed Bath & Beyond stores and 120 Buy Buy Baby shops immediately, though the company said it’s also searching for a buyer for some or all of its assets. The shuttering of one of America’s most well-known home goods retailers will put the jobs of thousands of employees — and their retirement savings and severance pay — on the line. The company currently employs about 14,000 people in the US and Puerto Rico, and among its initial requests in bankruptcy is to pay about $76 million of employee wages and benefits.
  • A rally in US stocks leading up to this earnings season presents a near-term risk to equities given the prospect of further Federal Reserve rate hikes and fading profit growth, according to Morgan Stanley’s Michael Wilson. The S&P 500 rallied more than 6% in the final three weeks of March, in contrast to selloffs in the lead-up to the previous three reporting seasons, and that’s a cause for concern to Wilson — one of the most bearish voices on Wall Street. The strategist — who ranked No. 1 in last year’s Institutional Investor survey after he correctly predicted the selloff in stocks — doesn’t expect a trough in earnings growth until the third or fourth quarter of the year, a contrast with consensus analyst estimates for a rebound in the second half.
  • Procter & Gamble Co. is seeking its first new euro debt since October 2021 following a strong sales outlook last week, as investors welcome major companies with strong demand. The world’s largest maker of consumer packaged goods plans to raise an expected €1 billion ($1.1 billion) in a two-part deal due in August 2026 and August 2031, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it. The firm raised $2.1 billion in the US primary bond market in January. Household-name companies seeking new debt have received bumper interest in recent weeks, including the likes of investment firm Porsche Automobil Holding SE, the majority owner of Volkswagen AG, luxury goods conglomerate LVMH, and food trader Cargill Inc., the largest private company in the US. Investors are seeking refuge in the most well-known firms as credit markets recover from turmoil in the banking sector.
  • Credit Suisse Group AG and Michael Klein ended a plan to fold the ex-Citigroup Inc. banker’s investment advisory boutique into the bank’s plan to resurrect the First Boston brand under his leadership. The Swiss bank and M. Klein & Co. LLC “have mutually agreed to terminate the acquisition” as a result of the emergency takeover of Credit Suisse by UBS Group AG announced last month, the bank said in a statement Monday. The brief notice in Credit Suisse’s first-quarter results represents the end of a saga for the veteran dealmaker, who had stood to enjoy a personal payout of potentially more than $200 million and a shot at running his own investment bank.
  • Tesla Inc. increased its forecast for capital expenditures again and is now budgeting at least $7 billion for this year. The electric-car maker expects to spend as much as $9 billion in 2023, according to a regulatory filing. As of January, Tesla provided a forecast range that was $1 billion less at both the low and high end. While Tesla executives have been emphasizing cost-cutting efforts recently, as the company has repeatedly reduced vehicle prices, the carmaker has increased its capex forecast several times in the last nine months. In July, the company was expecting $6 billion to $8 billion for 2022 and the following two years.
  • Hedge funds are betting on higher Treasury yields in a market that’s divided over whether the US economy can avoid recession and Federal Reserve interest-rate cuts. Recent positioning data suggests leveraged investors are about as confident as the central bank is that a slump be dodged even as the past year’s inflation-fighting policy tightening bites on activity. That group of investors boosted net shorts on 10-year Treasury futures to a record 1.29 million contracts as of April 18, data from the Commodity Futures Trading Commission show. It was the fifth straight week that net shorts had increased.
  • Coca-Cola Co. reported first-quarter organic revenue growth that surpassed estimates as consumers absorbed higher costs for the company’s sodas, juices and energy drinks. Organic revenue, which excludes the impact of currency shifts and acquisitions, increased by 12% in the quarter, above the 9.6% average analyst estimate. Adjusted earnings of 68 cents a share exceeded the estimated 65 cents. “Our system alignment is stronger than ever, and our networked organization is allowing us to adapt as needed,” Chief Executive Officer James Quincey said in a statement. “We are confident in our ability to deliver on our 2023 objectives.”
  • During AT&T Inc.’s earnings call last week, an analyst asked Chief Executive Officer John Stankey how the wireless giant would usher in the next wave of computing. AT&T, the analyst noted, had played a critical role in the rollout of Apple Inc.’s original iPhone, so what talks was the company having with device makers about the wireless gadgets of tomorrow? Stankey’s response was vague. AT&T’s 5G network is key to the future, he explained, citing its performance capabilities. As for the products it will enable? Stankey pointed to “things like augmented reality” and generally to “the next generation of applications.” After years of 5G hype, the pitch remains amorphous, even after carriers such AT&T, T-Mobile and Verizon have spent over $100 billion upgrading their networks. If anything, 5G has mostly been a marketing ploy, akin to a shaving brand hawking more razor blades.