April 27, 2023

Daily Market Commentary

Canadian Headlines

  • Brookfield Asset Management is looking to raise $3.5 billion for its second fund focused on providing bespoke debt or equity financing to businesses, according to people with knowledge of the situation. The BSI II fund aims to write large checks to a small subset of companies globally without taking control of them, said the people, who asked not to be identified because the matter is private. The Toronto-based firm is eyeing opportunities in the health care and retail sectors, they said. Brookfield’s fundraising efforts come as traditional sources of capital dry up and borrowing costs remain high, the people said. As regional banks retreat, private capital is poised to help fill the void, such as funding potential M&A deals or acquisition of loan books, they added.
  • Glencore Plc reiterated its offer to buy Teck Resources Ltd. and said it’s still willing to bid more, pressing its advantage after the Canadian miner’s shareholders rejected a plan to split the business. The companies have spent the past three weeks in a bruising fight to win over Teck investors, after its board and controlling shareholder publicly rejected Glencore’s proposal. The Swiss commodities giant offered to buy Teck for $23 billion and then create two new companies combining their respective metals and coal businesses. Teck canceled a shareholder vote on its plan to spin off its coal business just hours before a shareholder meeting on Wednesday, admitting that it did not have the support it needed. The company said it would work on a new plan to split out coal, and once again dismissed Glencore’s proposal.
  • TotalEnergies SE reported a smaller-than-expected decline in first-quarter profit and offered more generous shareholder returns after announcing the sale of its carbon-intensive Canadian oil sands business to Suncor Energy Inc. The French company kicks off a Big Oil earnings season that’s expected to deliver sizable cash flows despite the decline in energy prices from the highs reached last year following Russia’s invasion of Ukraine. So far, companies have been using the profit bonanza to reward investors and pay down debt, leaving analysts speculating about whether they could pivot to pursue faster growth through big deals. In fact, TotalEnergies agreed to sell assets to Suncor for C$5.5 billion ($4 billion) in cash, with potential for additional payments up to C$600 million depending on prices and production levels, according to a separate statement. The French company had initially planned to spin off a stake in these operations on the Toronto Stock Exchange. The proceeds of this divestment could be used to boost investor returns. TotalEnergies will allocate at least 40% of the cash flow from its operations this year to shareholders, at the high end of the previously announced 35% to 40% range, according to the statement. This will be done through share buybacks or a special dividend.

World Headlines

  • European stocks were steady after their steepest drop in a month as investors assessed a slate of corporate earnings reports for signs of the impact of sticky inflation and higher rates. The Stoxx 600 Index was up less than 0.1% by 9:17 a.m. in London. Banks outperformed as Barclays Plc jumped after a surprise increase in fixed income revenue and Deutsche Bank AG gained after announcing more cost cuts and said it’s working to exceed its medium-term revenue targets. After recovering from losses spurred by banking turmoil in March, European stocks have been subdued as the earnings season kicked off. While results have been broadly better than feared so far, market strategists have warned estimates for 2023 are still too high amid the specter of a recession.
  • US equity futures rose as traders saw positive signs in corporate earnings reports. Contracts for the S&P 500 advanced after a two-day decline in the underlying guage, while those for the tech-heavy Nasdaq 100 extended Wednesday’s rally. Earnings from Meta Platforms Inc. beat analyst estimates, pushing its shares 11% higher in after-hours trading. About three-quarters of US corporate earnings so far have exceeded expectations. Amazon.com Inc., Caterpillar Inc., Merck & Co. and Intel Corp. are among the next to report. Treasuries and the dollar were steady before US GDP and jobless claims to gauge the strength of the US economy. The Federal Reserve’s preferred inflation gauge, the core PCE deflator, is due Friday.
  • Asian stocks rebounded in afternoon trading as China markets extended gains, with investors digesting a slew of corporate earnings for clues on the recovery’s strength. The MSCI Asia Pacific Index erased losses to advance as much as 0.2%, set to snap a four-day losing streak. Ping An Insurance was among the biggest boosts after reporting a surge in its first-quarter profit as China’s rebound helped demand and investment returns. Financials hauled up mainland China and Hong Kong indexes in afternoon trading.  Markets in the region were mixed, with stocks also advancing in South Korea, Japan and Taiwan while indexes in Thailand and Singapore posted declines. Investors were focused on results including those from tech heavyweight Samsung Electronics, which reported worse-than-expected earnings but gave an upbeat outlook.
  • Oil steadied as traders took stock following a two-day slump, amid persistent concerns over demand as the global economy falters. West Texas Intermediate futures traded above $74 a barrel, having erased all of the gains since key OPEC+ nations announced surprise output cuts at the start of the month. Fuel markets are showing weakness and some refiners in Asia are considering reducing processing as margins shrink. Oil has also been tracking wider markets in recent sessions, with higher equities in Europe and the US on Thursday providing some boost for crude. Investors are gearing up for US Federal Reserve and European Central Bank interest rate decisions next week for clues on the health of the economy and the path of monetary policy.
  • Gold climbed as renewed worries over the US banking sector spurred speculation the Federal Reserve might have to soon end its rate-hike cycle. Bullion has been hovering around the $2,000 an ounce level for most of this month. It rallied to near that mark again Thursday in the wake of a report that US bank regulators were weighing placing borrowing curbs on First Republic Bank, after it reported earnings that fell far short of analysts’ estimates.  Spot gold was 0.5% higher at $1,999.43 an ounce as of 9:43 a.m. in London, after falling 0.4% on Wednesday. The Bloomberg Dollar Spot Index dipped 0.1%. Silver, palladium and platinum all gained.
  • Glencore Plc agreed to buy 30% of the Alunorte alumina refinery in Brazil from Norsk Hydro ASA and a stake in bauxite producer Mineracao Rio do Norte for an enterprise value of $1.1 billion. Glencore will have offtake rights for life of mine in respect of its pro rata share of the production from both Alunorte and MRN, the miner said in a statement Thursday.  “The acquisition of the equity stakes in Alunorte and MRN provide Glencore with exposure to lower-quartile carbon alumina and bauxite, enhancing our capability to supply such critical material for the ongoing energy transition to our customers,” Robin Scheiner, Glencore’s head of alumina and aluminum unit, said in the statement. Hydro will remain the largest shareholder of Alunorte with a 62% stake, Glencore will own 30% and the remaining four minority shareholders will own 8% together. Following the transaction, MRN will continue to be independently operated with Glencore as the largest shareholder owning 45%.
  • Meta Platforms Inc.’s surprising digital advertising sales rebound is buying the company time to keep pouring money into speculative businesses like artificial intelligence and virtual reality. The owner of Facebook, Instagram and WhatsApp, which spent the last few months aggressively cutting costs, reported quarterly revenue and user growth that beat analysts’ estimates. As Meta’s stock surged, Chief Executive Officer Mark Zuckerberg said that generative artificial intelligence was going to “impact every single one of our apps and services” and that Meta was well-positioned in the industry’s current AI race. “A stronger financial position will enable us to weather a volatile environment while remaining focused on our longer-term priorities,” he told investors on a call Wednesday. “There’s an opportunity to introduce AI agents to billions of people in ways that will be useful and meaningful,” improving customer service chats with businesses, the advertisement creation process and the gaming experience in virtual reality, he said.
  • When French President Emmanuel Macron arrived in Washington for a state visit in December, he groused that it’s not in America’s interest if much of Europe’s industry is “just killed.” South Korean President Yoon Suk Yeol, who visited the White House on April 26, has warned of a widening “economic war” of government subsidies and tax perks that could leave all nations worse off. Both were expressing alarm at the international fallout of the US-China rivalry and President Joe Biden’s Made in America policies. Europe and South Korea—important trade and security partners for the US—are among the most exposed to the Biden administration’s two-pronged agenda of supporting strategic industries such as electric vehicles, semiconductors and artificial intelligence while working to hobble China’s efforts to make advances in those same fields for military purposes. America’s newly muscular industrial policy is already warping global supply chains. Laws Congress approved last year together offer about $420 billion in funding to incentivize the domestic production of chips and clean-energy technologies. Add the infrastructure bill Biden signed in 2021, which requires that all iron, steel and other construction materials used in public-­works projects be made in the US, and you’ve got about $2 trillion in federal spending over 10 years.
  • Southwest Airlines Co. reported a worse-than-expected loss in the first quarter as the carrier contended with fallout from an operations breakdown that disrupted flights in December. The adjusted net loss was 27 cents a share in the period, the company said in a statement Thursday as it also cut its expected aircraft deliveries. That compared with a 22-cent deficit expected on average from analyst estimates compiled by Bloomberg. Revenue of $5.71 billion was roughly in line with estimates. The December turmoil resulted in a financial hit of $380 million before taxes in the quarter, including higher costs and lost revenue tied to travel cancellations and slower bookings in January and February. The company said trends were more favorable in March and it expects to return to profitability this quarter.
  • American Airlines Group Inc. said its second-quarter profit may exceed Wall Street projections as international demand builds headed into the peak summer season. Adjusted profit will be $1.20 to $1.40 a share in the quarter, American said in a statement Thursday, compared with an expected $1.13 a share on average from analyst estimates compiled by Bloomberg. American’s comments tracked with those of its largest rivals, with international demand booming even as the pace of domestic travel growth has waned compared with 2022, when Covid-related restrictions in other countries drove a wave of trips within the US.  United Airlines Holdings Inc. said last week that global travel is expanding at twice the rate of domestic, while Delta Air Lines Inc. is increasing international seats by more than 20% this quarter over a year ago.
  • Germany is in talks to limit the export of chemicals to China that are used to manufacture semiconductors as Berlin steps up efforts to reduce its economic exposure to the Asian nation. The proposal is part of a package of measures that Chancellor Olaf Scholz’s government is discussing that would cut off China’s access to goods and services needed for the production of advanced semiconductors, according to people familiar with the matter. If implemented, such a step would limit German companies like Merck KGaA and BASF SE from selling some of their semiconductor chemicals to China, said the people, who asked not to be identified because the discussions are private.
  • Deutsche Bank AG plans to cut about 800 senior back-office staff as Chief Executive Officer Christian Sewing steps up cost reductions amid a slowdown in the trading business that has fueled much of the lender’s growth. Deutsche Bank announced the steps alongside first-quarter earnings that showed revenue from fixed-income trading slumped 17%, one of the worst performances among the investment banks that have reported results so far. The decline was offset by a 35% jump in revenue at the corporate bank, allowing the lender to post its strongest top line since 2016. Sewing is increasingly leaning on the corporate and private bank to drive growth as the trading boom of the past years peters out and Europe emerges from its experiment with negative interest rates. While he’s managed to lift revenue growth and profitability, high inflation and investment in controls have caused frequent expense overruns since he took over five years ago.
  • There’s no need for additional oil output cuts beyond what key producers have already agreed, as the global crude market has achieved balance, Interfax reported, citing Russian Deputy Prime Minister Alexander Novak. “We took this decision only a month ago, and it will come in force from May for the countries that joined the cuts voluntarily,” Novak said in Moscow, referring to OPEC+ curbs, according to the news agency. The voluntary output reductions will be supportive for the market in case of an imbalance, he added.  Russia and its partners in the Organization of Petroleum Exporting Countries plan to hold their next meeting at the beginning of June to discuss the market situation. Some key members of the OPEC+ alliance announced surprise cuts of more than 1 million barrels a day earlier this month, amid concerns of an oversupply. Those curbs came on top of an extension of Russia’s pledge to reduce output by 500,000 barrels a day.
  • Jefferies Financial Group Inc. said Sumitomo Mitsui Financial Group Inc. plans to more than triple its stake in the US investment bank and the two firms will expand their alliance into additional businesses. The Japanese bank, which purchased 4.5% of the outstanding shares of New York-based Jefferies in 2021, intends to increase that investment to as high as 15%, the companies said in a joint statement Thursday. They plan to collaborate on future corporate and investment-banking opportunities, as well as in equity sales, trading and research. Shares of Jefferies surged 9.4% in early New York trading. The stock dropped 7.6% this year through Wednesday.
  • Federal Reserve officials from opposite ends of the policy spectrum are finding some common ground in a key topic of interest-rate debates: They’re skeptical wage gains will fuel further inflation. While Chair Jerome Powell has spoken of the risk of rapid pay gains feeding into prices, Fed presidents Austan Goolsbee of Chicago — who’s taken a dovish stance in recent weeks — and leading hawk James Bullard of St. Louis have played down their significance to the price outlook. The divergences may play a role in policy in coming months, as officials balance their desire to bring inflation to heel against an expected softening of the labor market on the back of tighter credit.
  • Comcast Corp. topped analysts’ estimates for profit in the first quarter even as the media and telecommunication conglomerate continues to lose cable TV subscribers and faces increasing competition in broadband services. The owner of Xfinity broadband and cable services, the NBCUniversal media empire and Sky TV, reported earnings excluding one-time items of 92 cents a share on $29.7 billion in revenue. The results were boosted by gains at its studio and theme park businesses, which opened Super Nintendo World at Universal Studios Hollywood in February. Analysts were looking for profit of 83 cents a share on $29.4 billion in sales.  The company was rocked last weekend by the abrupt ouster of Jeff Shell, the chief executive officer of NBCUniversal, who was fired after it was disclosed he had an inappropriate relationship with an employee. Comcast President Mike Cavanagh has taken charge of the business, and will have to steer the company through a complex set of challenges, from a struggling streaming service to the hemorrhaging of cable TV subscribers. The company says it’s not immediately seeking a replacement for Shell.
  • Newmont Corp. reported a strong start to the year for gold production as it pursues its biggest takeover to counteract depleting reserves. The world’s top gold miner produced 1.27 million ounces of gold in the first quarter, Newmont said Thursday while reporting financial results that topped analysts’ expectations. Production was on par with last year’s output and expectations of analysts surveyed by Bloomberg. The results come as Newmont forges ahead on a $19.5 billion acquisition of Australian rival Newcrest Mining Ltd. Newmont’s output has stagnated in recent years as the world’s biggest gold miners struggle with harder-to-extract deposits and higher input costs. Without an acquisition, the Denver-based company predicted its gold production will stay around 6 million ounces a year for the next decade. The company is now undergoing due diligence with Newcrest after issuing its “best and final” offer earlier in April.
  • Harley-Davidson Inc. reported first-quarter motorcycle shipments and gross margins that beat Wall Street’s estimates as higher prices offset a plunge in sales. The Milwaukee-based manufacturer posted earnings of $2.04 cents a share in the period. Shipments of motorcycles rose 14% to 62,200 for the quarter, higher than the 54,841 average of analysts’ estimates compiled by Bloomberg. Revenue rose 20% to $1.79 billion, the company said Thursday in a statement. Chief Executive Officer Jochen Zeitz, who took the helm of the 120-year-old manufacturer in 2020, has been trying to boost profits by tightening inventory and focusing on more premium heavyweight bikes. That strategy is now being challenged by the risk of recession, as the highest interest rates in more than a decade discourage consumers from spending on discretionary purchases like motorcycles.