April 28, 2022

Daily Market Commentary

Canadian Headlines

  • Block Inc., the digital-payments firm run by Jack Dorsey, is expanding its small-business loans service to Canada, bringing it into more direct competition with the country’s big banks. The program, known as Square Loans, will make offers to eligible users and deliver funds as soon as the next day, the San Francisco-based company said Thursday. The loans come with one upfront fee, and borrowers pay the money back over time as a set percentage of daily card sales with Square. The move sets up Block’s Square as a competitor to Canada’s major banks by moving it further beyond payments technology and into the business of providing capital. Square in September introduced a card that gives sellers instant access to funds they processed through Square, giving the company a way into customers’ cash-flow management systems.
  • Whitecap Resources Inc., a Canadian conventional and shale driller, plans to increase natural gas output in the second half of the year to capitalize on a surge in prices, Chief Executive Officer Grant Fagerheim said.  The Calgary-based company will increase its gas-focused capital program, Fagerheim said Wednesday in a phone interview, without giving specific numbers. The plan to drill for more gas comes after Alberta prices for the commodity surged to more than $6 per million British thermal units, the highest since 2014. Natural gas represented about a quarter of Whitecap’s hydrocarbon production last year. The company’s 2022 capital plan is focused on targets in northern and central Alberta and the neighboring province of Saskatchewan.

World Headlines

  • European stocks advanced for a second day, trimming their monthly decline, as investors monitored a busy earnings day to gauge the companies’ ability to overcome inflationary and policy risks. The Stoxx Europe 600 Index was 1.3% higher by 9:39 a.m. in London, with autos and technology sectors outperforming. Banks also rose as Standard Chartered Plc shares surged after it beat estimates and Barclays Plc gained after traders delivered a surprise jump in revenue.  European equities have been under pressure in April and this year on concerns about the hawkish turn in central bank policies and as the war in Ukraine fuels inflation and energy crunch worries. Investors have been monitoring Europe’s busiest reporting week so far this year, with Thursday set to be particularly lively as almost 70 companies publish results.
  • U.S. equity futures rose Thursday after upbeat earnings bolstered the bull case for the economy and markets, dispelling growth fears for now. Contracts on the technology-heavy Nasdaq 100 jumped more than 2%, paced by gains in Meta Platforms Inc. after Facebook’s main social network added more users than projected. In the premarket, PayPal Holdings Inc. shares rose on reported better-than-expected first-quarter revenue while Qualcomm Inc. led U.S. chip stocks higher. S&P 500 futures surged 1.5%.
  • Asian stocks rose with Japan leading after the country’s central bank kept its easing stance unchanged, while the stabilizing of Covid cases in China also helped investor sentiment. The MSCI Asia Pacific Index advanced as much as 1%, rebounding from its lowest since mid-2020. Australian miner BHP Group and Chinese internet giant Alibaba provided the biggest boosts to the benchmark, with financials and materials leading the sectoral advances.  Japan stocks outperformed in the region as the yen tumbled to the 130 per dollar level for the first time since 2002, bolstering exporters including Toyota Motor, which was the third-biggest contributor to the Asian measure’s gain.
  • Oil traded near $103 a barrel as China’s spreading virus outbreak continued to weigh on the outlook for global demand. West Texas Intermediate futures have struggled for direction this week, erasing earlier losses to trade little changed on Thursday. Hangzhou is the latest Chinese city to start mass virus testing, while the nation’s top state-run oil processor said during an earnings call that the resurgence was slowing fuel demand. The oil market has been gripped by a volatile period of trading since Russia’s invasion of Ukraine in late February and the more recent Covid-19 comeback in China. Traders are also grappling with just how big the hit to Russian supply will be. Surging oil product prices — U.S. diesel futures are at a record — point to a tight underlying market for refined products.
  • Gold was little changed Thursday, after dropping in the previous session to its lowest in since February, as the dollar’s rally continued. Spot gold edged up 0.2% to $1,889.08 an ounce as of 10:30 a.m. in London. The Bloomberg Dollar Spot Index added 0.3%, touching the highest level since May 2020. The greenback got a fresh boost from a dovish Bank of Japan statement. The yen has been in freefall this year as the BoJ keeps yields anchored to the floor while their Treasury equivalents surge on expectations for aggressive Federal Reserve rate hikes.
  • Corn extended its rally to the highest since 2012 in Chicago as the war in Ukraine chokes supplies and adverse weather threatens crops in the Americas. Russia’s invasion of its neighbor is hampering exports from there, leaving Ukraine’s silos bulging with last year’s grain and also hurting crop plantings. Those supply losses are pushing buyers toward other origins, while growers in both North and South America are facing weather challenges. In major grower and shipper Brazil, the center-west region has had a dry April, hampering corn in its final development stages before harvest. In the U.S., where crops are just being sown, wet and chilly soils has left the plantings pace at its slowest start since 2013.
  • Comcast Corp. exceeded analysts estimates for profit and revenue despite near record low growth in internet subscribers marking the third straight quarter of slowdowns in one of its most prized business. The largest U.S. cable TV provider posted earnings of 86 cents a share, excluding some items, Comcast said Thursday, topping the 80-cent average of analysts’ estimates. Revenue rose to $31 billion, topping Wall Street’s prediction of $30.5 billion. The company added 262,000 internet subscribers, exceeding estimates of 232,854 new customers, but nearly half the number of broadband subscriber gains the company added a year ago.
  • China’s technology giants have had their earnings estimates slashed for a second straight month amid the nation’s relentless pursuit of its Covid-Zero strategy. Analysts have trimmed profit projections for Hang Seng Tech Index members by 4% in April, following a similar reduction in March, according to data compiled by Bloomberg. Among their reasons is the prospect for further Covid flareups in the world’s most populous nation.  The escalating concerns over Covid are adding to a raft of challenges facing China’s technology sector. These include more than a year of regulatory crackdowns, Federal Reserve interest-rate hikes that are luring capital away from riskier assets, and speculation that more of the firms may lose their U.S. stock exchange listings.
  • Southwest Airlines Co. expects a rebound in domestic travel to carry into the summer following an “incredibly challenging” recent stretch, joining rivals predicting that consumers will shrug off worries about coronavirus variants, fork over higher fares and fill planes in the coming months. Southwest maintained a plan to restore 93% of its pre-pandemic flight capacity this quarter as robust leisure demand is joined by improving corporate travel, the Dallas-based airline said Thursday as it reportedfinancial results. Revenue will be as much as 12% higher than three years ago. An uptick in business and international trips driven by the return to offices and lifting of travel restrictions is giving carriers new reason for optimism after a nascent recovery in domestic flying. That demand, coupled with a tightening of available seats, has enabled carriers to boost fares enough to cover jet fuel prices that are more than double a year ago in some regions.
  • The Federal Reserve’s plans to reduce its balance sheet in coming years could add about 90 basis points to inflation-adjusted 10-year yields in the coming years, JPMorgan Chase & Co. strategists said.  The so-called real yield was at minus 0.07% on Thursday, so an increase of that magnitude could put it within 35 basis points of the 1.16% reached in 2019 that was the highest since 2011. The Fed’s quantitative tightening plans would add about 25 basis points to real yields once it ramped up to an annualized pace of $1.1 trillion in asset reductions, the expected peak level for its run-off, wrote strategists led by Nikolaos Panigirtzoglou. A further 65 basis points of increase would be generated as the central bank’s stock of Treasuries dwindles, the strategists calculated, based on JPMorgan’s modeling of the dynamics that drive real yields.
  • Who pays the price for China’s current Covid crisis will show the strength of President Xi Jinping’s grip over the Communist Party heading into a crucial leadership reshuffle. While Xi last month renewed his threat to punish any cadres who fail in their virus-fighting duties, only 15 low-ranking officials have been disciplined over the weeks-long lockdown in Shanghai. And any criticism of the financial hub’s performance risks blowing back on Xi, since it’s run by one of his closest associates on the decision-making Politburo, Li Qiang.  The outbreak in Shanghai, however, has raised the price of elevating Li. The financial hub has seen food shortages, overwhelmed quarantine facilities and clashes between citizens and health workers, generating an unusual outpouring of anti-government posts on social media. Some residents have dismissed his public visits during the lockdown as “choreographed.” In one exception, he was intercepted by a woman in a wheelchair who scolded the government for failing to provide enough food.
  • Moderna Inc. applied for emergency use authorization for its Covid-19 vaccine in children from six months to under 6 years old after a successful trial showed two doses generate high levels of antibodies to the virus. The highly anticipated application comes just over a month after Moderna said a large trial showed two low doses of its vaccine produced powerful immune responses in young kids. Even though its effectiveness against omicron-related infections is modest, the application will put tremendous pressure on the Food and Drug Administration to quickly make a decision on whether to authorize it. Similar submissions for clearance are underway with regulators outside the U.S., Moderna said Thursday in a statement. Meanwhile, Moderna has also initiated a submission for authorization of its vaccine for use in kids ages 6 to 11.
  • McDonald’s Corp. comparable sales rose 11.8% last quarter, topping analyst estimates for an 8.7% gain worldwide. But the chain posted same-store sales that trailed projections in the U.S. Domestically, the key gauge for restaurants gained 3.5%, falling short of analyst estimates for nearly 3.6% growth. The world’s biggest restaurant company said Thursday that its U.S. results were bolstered by price increases and growth in digital channels. The results show that diners are still spending to eat out, yet those gains may be slowing as consumers grapple with soaring inflation at the gas pump and grocery aisle as well. The quarter reflected “an increasingly complex and uncertain operating environment,” McDonald’s Chief Executive Officer Chris Kempczinski said in a statement.
  • The Bank of Japan sparked a sharp slide in the yen and a currency warning from an official after doubling down on its promise to defend a rock-bottom yield target that leaves it as a dovish outlier among major central banks tightening policy. The central bank said it would buy an unlimited amount of bonds at a fixed rate every business day to protect a 0.25% ceiling on 10-year government debt yields as part of its stimulus measures.  The BOJ’s decision prompted a day of rapid market moves that ultimately triggered the strongest words yet from Japan’s finance ministry as the yen shed 2% of its value against the dollar.
  • Facebook parent Meta Platforms Inc. is fueling gains in Nasdaq 100 futures as it surged in premarket trading after the social network added more users than projected. Nasdaq 100 futures climbed 2.2% as of 4:07 a.m. in New York, halting a two-day decline. S&P 500 futures rose 1.5% and Dow Jones futures added 0.9%. China’s pledge to support its economy and promote the growth of internet platform firms also boosted equities globally. Shares of Meta Platforms jumped as much as 19% in U.S. premarket trading after Facebook’s main social network added more users than projected in the first quarter. Meta has a 3% weighting in the Nasdaq 100 and a 1.1% weighting in the S&P 500. The move accounts for about one-third of the total Nasdaq futures gains today, according to Bloomberg calculations.
  • KKR & Co. unveiled a tender offer to take Hitachi Transport System Ltd. private in a deal valued at about 670 billion yen ($5.2 billion). KKR is offering 8,913 yen for each share of Hitachi Transport on the market, a 166% premium to Hitachi Transport’s 12-month average closing price through yesterday, KKR said in a statement Thursday. The private equity firm said that it’s paying 6,632 yen a share for Hitachi’s 40% stake.  Hitachi intends to re-invest and own around 10% of Hitachi Transport after KKR’s acquisition and the unit’s delisting, according to the statement. KKR’s goal is to make Hitachi Transport the leading third-party logistics company in Asia, Hiro Hirano, KKR Japan’s chief executive officer and KKR’s co-head of Asia Pacific private equity, said in the statement.
  • While investors have been fixating on inflation and rate hike fears, the true signs of trouble lie in earnings growth outlooks, according to JPMorgan Chase & Co. quantitative strategists. “Global profit forecasts have been slowing for a number of months” and global earnings data are now “in net downgrade territory,” quant and derivatives strategists led by Khuram Chaudhry wrote in a note to clients. “Our reading of the earnings cycle, and its drivers, suggests that the slowdown is indicating that inflation may have peaked and bond yields may have exhausted themselves.” Global stock markets have slumped this year, following a ferocious rally that catapulted major indexes in Europe and the U.S. to successive record highs. Much of the malaise has been attributed to soaring input costs due to record inflation, and rising bond yields, as central banks across the developed world raise rates to regain control of runaway prices.
  • Teladoc Health Inc., a provider of medical consultations via video that’s backed by Cathie Wood’s ARK Investment Management LLC, plunged after warning of cost inflation and a slowdown in sales.  The shares dropped as much as 40% in premarket trading after full-year revenue and profit guidance fell short of analyst expectations. That puts Teladoc — a former stay-at-home winner — on course to extend a slump of more than 80% since its record high in February last year. ARK is Teladoc’s largest shareholder, with a 12% stake that was worth about $1.1 billion as of the close, according to Bloomberg data. Teladoc’s plunge adds to ongoing woes at Cathie Wood’s flagship fund, the ARK Innovation ETF, which hit a two-year low this week.
  • Caterpillar Inc.’s first-quarter profit topped analysts’ expectations as surging demand and higher prices for the company’s diggers, bulldozers and trucks offset the impact of rising costs for raw materials and ongoing supply-chain issues. The producer of construction and mining equipment posted adjusted quarterly earnings of $2.88 a share, surpassing the $2.61 average of analysts’ estimates compiled by Bloomberg. Revenue rose 14% to $13.6 billion, topping estimates. The company “achieved double-digit sales growth despite ongoing supply chain challenges,” Chief Executive Officer Jim Umpleby said Thursday in a statement. “We remain focused on supporting our customers and executing our strategy for long-term profitable growth.”
  • Algeria threatened to cut natural gas flows to Spain if it re-exports Algerian supplies to other countries, amid rising diplomatic tensions over Morocco. The warning came after Spanish Energy Minister Teresa Ribera said Madrid would start sending gas, albeit of non-Algerian origin, to Morocco via the Maghreb-European pipeline. Spain has discussed the use of the pipeline, known as MEG, with Algeria in recent months and its decision was communicated on Wednesday, according to a statement from the Spanish government.
  • Europe’s response to Russian demands that gas must be paid for in rubles is in disarray as companies seek workarounds to keep vital supplies flowing and governments tussle over how hard a line to take against Moscow. European Commission President Ursula von der Leyen warned companies on Wednesday not to bend to Russia’s demands, saying that doing so would breach sanctions. But companies are taking steps to at least partly comply with Russia’s demands, and the bloc’s own guidance issued last week appeared to give them cover to do so. Hungary’s government confirmed on Thursday that it is paying euros to Russia’s Gazprombank, which it is then allowing to be converted into rubles. It’s the clearest indication yet that a compromise may be possible.
  • Unilever Plc, Carlsberg A/S and Pernod Ricard SA are increasing the pressure on consumers worldwide with higher prices for Dove soap, beer and Havana Club rum, raising the risk that shoppers may start to balk at spending more. All three companies reported sales growth Thursday at about double the pace analysts had expected. Unilever forecast full-year revenue growth at the top end of its forecast, though warned that profitability may suffer as consumers cut back on purchases. Consumer-goods makers are walking a tightrope as the war in Ukraine exacerbates a surge in transport, packaging and raw material costs and simultaneously squeezes household budgets that are straining with higher energy prices. Their dilemma is that they need to raise prices, but if they do too much, consumers will switch to cheaper products.
  • China will cut import tariffs for coal to zero from May to the end of March to help guarantee energy supplies, the Ministry of Finance said in a statement. Current tariffs range from 3% to 6% depending on the type of coal, the ministry said in a statement dated April 26 and posted to its website Thursday. China’s coal imports are down 24% through the end of March this year as global prices have soared.  China is the world’s biggest coal importer, and any move that helps boost its purchases will add pressure to prices of the fuel, which surged this month as the European Union and Japan moved to ban imports of the fuel from Russia, further tightening the market.
  • Hong Kong’s exports plunged in March by the most since January 2020 as Covid restrictions in China weighed on the flow of goods.  Exports fell 8.9% last month from a year earlier, the Census and Statistics Department said Thursday. Economists had expected an expansion of 2.5%. Imports dropped 6% in the month, the most since June 2020, also defying economist expectations of a 4% increase. The trade deficit worsened to HK$37.3 billion ($4.75 billion). The slump comes amid “moderating external demand and epidemic-induced disruptions to cross-boundary cargo flows between the mainland and Hong Kong,” a government spokesperson said in a statement. The spokesperson cited elevated global inflation, tightening monetary policy at major central banks and heightened geopolitical tensions as challenges to Hong Kong’s export performance.

“You only pass through this life once, you don’t come back for an encore.” – Elvis Presley

*All sources from Bloomberg unless otherwise specified