April 25, 2023

Daily Market Commentary

Canadian Headlines

  • The Ontario Teachers’ Pension Plan is closing down an Asia equity investment team in Hong Kong, resulting in the loss of five jobs. The C$247 billion ($182 billion) fund is shutting the country-focused stock picking teams in Asia, and will concentrate that work from its Toronto head office, according to a statement Tuesday. “Asia continues to be core to our global investment strategy, including China where our focus is on building value in our existing portfolio,” according to the statement. Teachers’ added it will continue to invest in private and public assets in China via fund partners, and in public companies through its global investment teams. The Canadian investor said last year it plans to move into new offices in Singapore with capacity for about 45 to 50 people as part of an Asia push, surpassing the 35 staff in the fund’s Hong Kong office at the time. The pension manager has paused direct investing in private assets in China, people familiar with the matter said in January.

World Headlines

  • European stocks fell as investors parsed a busy day of corporate earnings while remaining wary of the interest rate outlook and economic risks. The Stoxx Europe 600 index was down 0.4% as of 11:58 a.m. in London. Banks fell after UBS Group AG reported earnings that disappointed analysts and Banco Santander SA revealed lackluster results in Brazil and outflows of Spanish deposits. Mining stocks were weighed down by continued weakness in metals prices. European shares have bounced back from a March slump that was spurred by banking industry worries, with the region’s main benchmark recently hitting its highest level since February 2022. However, investors are now studying earnings reports for signs of how the cost-of-living crisis and surge in interest rates are impacting companies’ margins and revenues.
  • Contracts on the S&P 500 and the Nasdaq 100 traded about 0.5% lower, with First Republic Bank plunging more than 20% in premarket trading after results late Monday shook investor confidence, after weeks of calm in the banking sector. United Parcel Service Inc. sank more than 5% on disappointing sales guidance. PepsiCo. Inc. gained after raising its outlook. Spotify Technology SA rose after adding subscribers. Tech heavyweights including Microsoft Corp. and Alphabet Inc. will report results later Tuesday. Markets are now pricing the peak for US interest rates in June, and then a decline to end the year below 4.5%. The small shifts in Fed projections underscore the lack of direction at the start of a busy week for economic data and corporate earnings. Data published Monday showed US manufacturing data was weaker than economists forecast, while uncertainty over the debt ceiling persisted. Later this week, US GDP data is forecast to reveal slower growth, and the so-called core PCE deflator, the Fed’s preferred inflation gauge, is expected to show price growth cooled.
  • Asian stocks declined for a third day as investors continued to sell Chinese shares on economic and geopolitical risks. The MSCI Asia Pacific Index declined as much as 0.8% Tuesday, with Tencent and Alibaba among the biggest drags. Key indexes of Hong Kong-listed stocks fell by more than 1.7% as top leaders highlighted risks to China’s economy and as Beijing’s relations with the US remained strained. Stocks also declined in South Korea and Taiwan, while equity benchmarks in Japan advanced. Australia, New Zealand and Indonesia were closed for holidays. The MSCI Asia gauge is down 1.4% so far in April, while its 90-day historical volatility has slumped to the lowest in more than one year.
  • Oil fluctuated as uncertainty about the strength of demand and the direction of the global economy blunted recent supply-driven gains. West Texas Intermediate traded below $79 a barrel after rallying around 2% over the previous two sessions. Fuel markets are slumping as refining margins shrink in Asia, with a hoped-for sharp rebound in China still proving elusive. Oil shipments from Iraq’s north and the country’s Kurdish region are still halted — causing some tankers to leave ports there empty and indicating a resumption isn’t likely in coming days. There are also supply risks in Sudan, where heavy fighting continues between rival groups.
  • Gold steadied ahead of a swath of US economic data that will help steer the Federal Reserve’s course on monetary policy. The metal is holding much of its gains made since early March, which were driven by turmoil in the banking sector. The latest figures on growth, inflation and wages due this week will feed the debate on whether there’s more tightening to come from the Fed. Swaps markets are currently pricing in at least one more hike this year, while bets on rate cuts have diminished since last month as concerns about financial stability faded. Investors are still alert to any rapid deterioration in US economic data which may trigger looser monetary policy, which is normally a positive for bullion. Spot gold was little changed at $1,988.65 an ounce as of 9:47 a.m. in London, after earlier rising as much as 0.6%. The Bloomberg Dollar Spot Index added 0.1%. Silver, platinum and palladium declined.
  • Germany is facing a shortfall of about €12 billion ($13.2 billion) in its special climate-protection fund, suggesting the government in Berlin has significantly underestimated the cost of greening Europe’s biggest economy. Commitments to climate—protection projects exceed earmarked resources through 2026, according to people familiar with the budget details, who asked not to be identified discussing confidential information. The estimated deficit doesn’t take into account subsidies to ease the financial burden of replacing fossil-fuel heating systems, which could be as much as €15 billion, the people said. The ruling coalition agreed last week to ban new gas- and oil-fired heaters in Germany from next year.
  • First Republic Bank’s quarterly results — including a worse-than-expected drop in deposits — reignited investor concerns about prospects for its business, breaking with more than a week of industry earnings reports that had broadly reassured the market. The company’s shares fell 21% in early trading in New York Tuesday, and were set for the biggest drop in more than a month. Executives at the San Francisco-based lender laid out plans Monday for shoring up the firm after its first-quarter results showed customer deposits plunged 41% to $104.5 billion in the period. That missed the $137 billion average of analyst estimates compiled by Bloomberg and came even after the country’s largest lenders parked $30 billion of their own cash there.
  • President Joe Biden formally announced that he would seek reelection in 2024, readying a historic campaign against a Republican field dominated by his predecessor while economic uncertainty clouds his case for a second term. Biden, 80, implored voters to let him “finish this job” he began when he took office and put aside any worries about his age. He said there is still work to do to give Americans a “fair shot” and beat back “extremists” in the Republican Party who want to cut government spending and curb abortion rights.  “The question we are facing is whether in the years ahead we have more freedom or less freedom,” Biden said in a video released Tuesday. “I know what I want the answer to be and I think you do too. This is not a time to be complacent. That’s why I’m running for reelection.”
  • General Motors Co. beat first-quarter profit estimates and raised its full-year earnings and cash-flow guidance after vehicle demand at the start of the year surpassed expectations. Its shares rose in premarket trading. GM made $2.21 a share in adjusted profit in the first quarter, compared to a consensus forecast of $1.72 a share. Revenue rose 11% to $39.99 billion, it said Tuesday, which was more than the $39.24 billion analysts expected. The stronger results stem from rising sales in the US, even in the face of higher interest rates and inflation. GM executives said demand was strong enough to revise 2023 guidance upward, boosting profit estimates for the year by $500 million to between $11 billion and $13 billion.
  • The Federal Reserve and global counterparts will revert to fewer auctions for dollar funding after financial-market tensions in the wake of US bank failures subsided.  The joint announcement on Tuesday shifts the frequency of such emergency liquidity provision to a weekly basis rather than the daily offerings announced on March 19. The lower frequency of auctions will begin on May 1. The decision effectively amounts to an official downgrade in the threat level to world financial stability to a status closer to relative normality. That draws a line on a tense moment that had briefly inspired nervous parallels to the global financial crisis of 2008.  Central banks unveiled the daily dollar operations just days after a catastrophic run on Silicon Valley Bank and two other associated failures in the US. The stress had also spread to Switzerland, where Credit Suisse Group AG was forced into a takeover by rival UBS Group AG — marking in effect the first downfall of a globally systemic financial institution since the 2008 turmoil.
  • Hyundai Motor Group and SK On Co. will spend as much as $5 billion in North America for the production of electric car batteries as President Biden’s green bill encourages companies along the EV supply chain to make investments there. Shares rose as much as 5% in Seoul.  The South Korean firms will have an equal shareholding in the plant, to be constructed in Bartow county, Georgia. It’s expected the facility will produce EV battery cells starting in the second half of 2025. The new plant should have an annual production capacity of 35 GWh of EV battery cells, enough to produce 300,000 all-electric vehicles.
  • The Biden administration is setting up a network of advanced computer-chip design and engineering facilities, the focal point of plans to spend $11 billion on research and development to bolster US economic and national security. The Commerce Department envisions the National Semiconductor Technology Center involving a number of new technical sites around the country, working with academic and industry partners to drive innovations in products and workforce development. The goal is to have it up and running by the end of the year. Goals of the program include producing the latest semiconductor technology in the US; reducing the time from design to commercialization; and training workers from technicians to engineers. It aims to bring together stakeholders from across the industry, from chip designers, universities and community colleges to state and local governments, manufacturers, labor unions and investors.
  • Two executives who worked for a Geneva-based oil production firm involved in the multibillion dollar 1MDB scandal have been indicted for allegedly misappropriating at least $1.8 billion. The ex-Petrosaudi employees are suspected of having worked with Jho Low, the alleged mastermind behind the 1MDB scheme, to set up a fraudulent deal purported between the governments of Saudi Arabia and Malaysia, according to a statement from the Swiss Attorney General.  1MDB was the Malaysian sovereign wealth fund designed to finance economic development projects across the southeastern Asian nation but become a byword for scandal and corruption that triggered investigations in the US, UK, Singapore, Malaysia, Switzerland and Canada.
  • European efforts to rapidly scale-up offshore wind farms to help cut dependence on Russian natural gas and reduce planet-warming emissions are falling short as developers struggle to deliver projects.  Significant changes in how governments offer new developments as well as incentives for hydrogen production are crucial to get Europe on track to reach its renewable power goals, which are key to the EU’s climate and energy security plans, according to Rasmus Errboe, head of Europe for Orsted A/S, the largest offshore wind farm developer in the region. The prognosis comes after European leaders gathered in Belgium Monday to promote the promise of the North Sea in Europe’s low-carbon future. Nearly a year ago, Germany, Belgium, the Netherlands and Denmark issued a declaration to speed offshore wind construction to reach 65 gigawatts of capacity by 2030, about five times the amount deployed today. The UK plans an additional 50 gigawatts of wind farms off its coast.
  • UBS Group AG warned that wealthy clients are turning increasingly risk-averse, adding to challenges for Switzerland’s largest bank as it embarks on the complex task of integrating Credit Suisse Group AG. Shares of UBS fell as much as 5.4% in Zurich trading after the lender reported the weakest quarterly profit in more than three years, along with an outlook for interest income at the wealth unit that disappointed analysts.  That overshadowed $28 billion in new money from rich clients during the quarter, including $7 billion that came in the 10 days after the rescue of the smaller rival was announced late last month.
  • United Parcel Service Inc. said annual sales will come in at the low end of its guidance as US retail sales slow, weighing on demand for package deliveries. Revenue will be at the bottom end of the range of $97 billion to $99.4 billion provided in January, the company said Tuesday in a statement. Adjusted first-quarter earnings were $2.20 a share, the Atlanta-based courier said. That matched analysts’ estimate of $2.20. Sales were $22.9 billion, also in line with expectations. Shares of UPS fell 5.6% in early trading in New York. The stock climbed 13% this year through Monday’s close, outpacing the gain in the S&P 500 Index.
  • 3M Co. plans to cut 6,000 jobs in the manufacturer’s latest move to adjust to slumping demand in several key markets. The reductions, part of a wider restructuring of the manufacturer, are expected to narrow annual costs by as much as $900 million, 3M said in a statement reporting first-quarter earnings on Tuesday.  These actions “will reduce costs at the corporate center, further simplify and strengthen our supply chain structure, and streamline our go-to-market business models, which will improve margins and cash flow,” Chief Executive Officer Mike Roman said in the statement.
  • McDonald’s Corp. reported first-quarter sales and profit that outpaced analysts’ projections, a renewed sign that the burger chain is picking up customers amid stubborn inflation and higher menu prices. The key metric of comparable sales rose nearly 13% above the average estimate of 8.2% compiled by Bloomberg. US results also handily topped projections by that measure, with the company adding that comparable guest counts rose. Earnings in the quarter, excluding some items, were $2.63 a share, also beating estimates.  The company’s results show the resilience of the McDonald’s business — and US diners — in the face of relentless inflation for basic goods including food. McDonald’s said it benefited from “strategic menu price increases” in the US as well as growth in digital sales and delivery. The Big Mac seller is viewed as a value offering during economic uncertainty, when consumers move to trade down from higher-price peers.
  • Verizon Communications Inc. topped Wall Street estimates for profit and broadband subscriber gains in the first quarter, helping to offset a larger than anticipated loss of mobile phone customers. The company added 437,000 broadband customers including 393,000 wireless home internet subscribers in the quarter. Analysts predicted a total of 302,100 new internet customers including 264,500 wireless home broadband users. Adjusted earnings were $1.20 a share on $32.9 billion in revenue. Analysts were looking for EPS of $1.19 on $33.6 billion in sales. While the largest US mobile carrier added 633,000 new monthly wireless customers including home broadband sign ups, phone customer losses of 127,000 exceeded the 116,200 analysts expected.
  • General Electric Co. beat Wall Street’s estimates for profit, sales and cash flow in the first quarter and boosted the low end of its annual guidance as the manufacturer benefited from surging aerospace demand. Adjusted earnings were 27 cents a share in the first three months of the year, GE said Tuesday in a statement, about double the average of analysts’ estimates. Sales were $13.7 billion, compared with $13.2 billion expected by Wall Street.  GE has said it’s aiming to more than double earnings this year before separating its energy-related businesses in early 2024. The spinoff of GE Vernova will leave GE Aerospace as the remaining company, completing Culp’s multiyear plan to fix and break up the iconic American manufacturer.