August 16, 2022

Daily Market Commentary

Canadian Headlines

  • Quebec Auditor General Guylaine Leclerc forecasts a significant drop in the provincial deficit, according to a pre-election report. “Some expenses may not be realized as expected, and more persistent inflation could have temporary positive effects on incomes of the government,” it says. Budget deficit is expected to fall to C$729 million after deposits of C$3.43 billion in the Generations Fund dedicated to reduce public debt, compared to the C$6.45 billion deficit forecast in provincial budget in March 2022. Forecast revenues are up C$6 billion to C$144.5 billion. The pre-election report will provide a basis for all political parties during the next election, expected to start at the end of August
  • Crypto custody firm BitGo said the termination of its acquisition by Mike Novogratz’s Galaxy Digital Holdings is “improper” and it plans to seek a $100 million termination fee. Earlier, Galaxy said it’s ending its acquisition of BitGo in a $1.2 billion deal, citing the firm’s failure to deliver audited 2021 financial statements by July 31 to comply with requirements of the deal. No termination fee is payable, according to the Galaxy statement Monday. BitGo has honored its obligations thus far, including the delivery of its audited financials, said R. Brian Timmons, a partner with Quinn Emanuel, a law firm representing BitGo.
  • Canada eyes cash for critical minerals in Biden’s big new climate bill. A historic climate bill just passed by the U.S. Congress could have implications in entrenching Canada’s role in the shift toward clean transportation. The legislation that passed last week established preferential tax treatment for electric vehicles assembled anywhere in North America. That made-in-North-America approach generated some news headlines by bringing an amicable resolution to a months-long Canada-U.S. irritant. Less noticed in the bill was a pot of money containing hundreds of millions of dollars to jump-start a new domestic industry in components for electric-vehicle batteries. The ripple-effects could eventually be felt across the border, up into remote Canadian mining communities. At issue is growing U.S. concern about becoming dependent on its great geopolitical rival, China, for the critical minerals powering future vehicles.

World Headlines

  • China is ramping up efforts to revive its economy and boost market confidence. But, stock investors preoccupied with the damage inflicted by the nation’s strict Covid-Zero strategy aren’t buying it. A gauge of Chinese equities listed in Hong Kong is one of the world’s worst-performing major benchmarks this year, while the MSCI China Index is trading near the lowest level versus its global peers since 2005. China’s benchmark CSI 300 Index is trading 15% below its peak for the year as a flareup in US-China tensions has compounded their woes. China’s military said it held fresh patrols around Taiwan on Monday to “fight back” against another US congressional visit less than two weeks after House Speaker Nancy Pelosi traveled to Taipei. Beijing claims the island as its territory.
  • European equities gained for a fifth day, poised for their longest winning streak since March, as investors mulled the central bank policy outlook amid reduced summer trading volumes and persisting economic risks. The Europe Stoxx 600 Index climbed 0.3% as of 9:16 a.m. in London. Miners outperformed while consumer products declined, weighed down by a drop in Pandora A/S after the jeweler’s second-quarter earnings missed estimates.
  • US stock futures edged lower as attention returned to lingering worries about the path of economic growth and Federal Reserve policy. Contracts on the Nasdaq 100 and the S&P 500 were down 0.2% by 5:42 a.m. in New York. Gains in technology stocks on Monday spurred the broader benchmark equity index to its highest since May, with investors shrugging off underwhelming economic data from China
  • The European Union said it’s studying Iran’s response to a proposed blueprint for reviving the 2015 nuclear deal and consulting with the US on a “way ahead” for the protracted talks. Tehran outlined its positions to the bloc late on Monday, answering mediators’ “final” proposal circulated last week. The EU described that text as the last remaining hope of rescuing an accord that’s meant to limit Tehran’s nuclear activity in exchange for the lifting of sanctions, including on its energy sector. But comments from top Iranian officials suggest they are seeking further changes. Extra oil from Iran could provide much-needed relief for a global economy hit by soaring energy costs.
  • Singapore’s prime minister-in-waiting Lawrence Wong warned that the US and China may “sleepwalk into conflict” if they don’t engage with each other and deescalate rising tensions over Taiwan. In an interview on Monday with Bloomberg Editor-in-Chief John Micklethwait, Wong said the relationship between the world’s biggest economies was on a “very worrying” trajectory in the wake of House Speaker Nancy Pelosi’s visit to Taiwan and China’s subsequent military drills around the island. “We are starting to see a series of decisions being taken by both countries that will lead us into more and more dangerous territory,” Wong, now serving as deputy prime minister and finance minister, said at the Finance Ministry office overlooking the central business district. “As they say, no one deliberately wants to go into battle, but we sleepwalk into conflict,” he added. “And that’s the biggest problem and danger.”
  • The Home Depot Announces Second Quarter Results; Reaffirms Fiscal 2022 Guidance. Home Depot Inc.’s revenue growth topped estimates despite a slowdown in US home sales and the broader economy. The home-improvement retailer said Tuesday that comparable sales increased by 5.8% in the fiscal second quarter ended July 31. Analysts surveyed by Bloomberg had expected an increase of 4.56%. Home Depot maintained its guidance for the rest of its fiscal year, including annual comparable sales growth of about 3% and earnings per share up by a mid-single-digit percentage
  • Credit Suisse Group AG is facing a further delay in getting approvals for some of its China operations after a flurry of senior management departures, according to people familiar with the matter. The Swiss bank lost nearly half of the senior personnel management at its China securities ventures in recent months, including Chief Financial Officer Annie Qiu, compliance head Xu Yang, and Chief Information Officer Larry Tung, the people said, asking not to be identified discussing a private matter.  As a consequence of the departures, the China Securities Regulatory Commission told the lender it will postpone any on-site inspection until those positions are filled, one of the people said. The inspection is the final step needed before Credit Suisse is allowed to start building out its wealth management business onshore and expand its equities trading services beyond Shenzhen into other cities.
  • BofA Survey Shows Mood Is No Longer ‘Apocalyptically Bearish’. Sentiment is no longer “apocalyptically bearish” as more investors expect the inflation and rates shock will start to ease in coming quarters, BofA says in its Global Fund Manager Survey. Both growth expectations and equity allocation rose from “dire July lows,” strategists led by Michael Hartnett write in a note. 58% of investors think the global economy will be in a recession over the next 12 months while 88% of investors expect lower inflation over the next 12 months
  • Tencent-Backed Giants Dive on $24 Billion Meituan Sale Talk. Tencent Holdings Ltd.’s biggest investees plummeted after Reuters reported the social media giant intends to sell all or much of its $24 billion stake in food delivery giant Meituan to appease Beijing. The social media giant has engaged financial advisors in recent months on ways to execute the sale of a roughly 17% stake, Reuters reported, citing sources with knowledge of the matter. Meituan slid more than 9% in Hong Kong, while video service Kuaishou Technology fell more than 4% and Bilibili Inc. dipped 2.5%. In New York, e-commerce player Pinduoduo Inc. slipped about 3%. Beijing since late 2020 has worked to curb the influence of tech industry leaders from Tencent to Alibaba Group Holding Ltd. The two companies exert enormous sway over the Chinese internet economy through part-ownership of hundreds of startups and publicly traded firms. Tencent controlled 606 billion yuan ($89.2 billion) of listed company investments as of March.
  • Apple Lays Off Recruiters as Part of Its Slowdown in Hiring.  Apple Inc. laid off many of its contract-based recruiters in the past week, part of a push to rein in the tech giant’s hiring and spending, according to people with knowledge of the matter. About 100 contract workers were let go in a rare move for the world’s most valuable company, said the people, who asked not to be identified because the situation is private. The recruiters were responsible for hiring new employees for Apple, and the cuts underscore that a slowdown is underway at the company. Workers laid off were told the cuts were made due to changes in Apple’s current business needs. Bloomberg first reported last month that the company was decelerating hiring after years of staffing up, joining many tech companies in hitting the brakes. Chief Executive Officer Tim Cook confirmed during Apple’s earnings conference call that the company would be more “deliberate” in its spending — even as it keeps investing in some areas.
  • Masayoshi Son’s Rough Week Is Capped By Elliott Selling SoftBank. In a stretch of difficult years, Masayoshi Sonhas had a particularly rough week. Just eight days after SoftBank Group Corp. reported a record loss for the last quarter, its shares fell after a report that hedge fund Elliott Management Corp. has sold off almost all of its position in the Japanese conglomerate. SoftBank’s stock is off almost 50% from its peak last year. Elliott made the move earlier this year, when tech stocks including SoftBank’s were in the grip of an extended selloff, the Financial Times reported, citing people familiar with the trade. The exact size and timing of the sale were unknown, though the US-based activist investor also sold a substantial amount of shares at a profit last year, it added. Elliott had accumulated a stake of close to $3 billion in SoftBank by February 2020.
  • Saudi Arabia’s sovereign wealth fund invested more than $7 billion to build new positions in US stocks including Inc., Alphabet Inc., BlackRock Inc. and JPMorgan Chase & Co. as markets were battered by recession fears. The $620 billion Public Investment Fund also added to positions it held in Facebook Inc. owner Meta Platforms Inc., PayPal Holdings Inc. and Electronic Arts Inc. in the second quarter, according to a 13F filing. The acquisitions show that the PIF, as the fund is known, is doubling down on its bet on technology investments despite a rout in valuations. The PIF’s most recent buying spree echoes the fund’s strategy in early 2020 when it spent billions snapping up stakes in US firms whose valuations had been battered by the onset of the coronavirus pandemic. It then sold many of those stakes when markets rebounded.
  • Activist investor Dan Loeb acquired a stake in Walt Disney Co.and called for sweeping changes at the world’s largest entertainment company, including a spinoff of the ESPN sports network and new board members. The suggestions were made in a letter Monday to Disney Chief Executive Officer Bob Chapek. Loeb said his Third Point investment firm has taken a “significant stake” in the company in recent weeks. The investor owned Disney shares previously but sold earlier this year, according to Bloomberg data. Loeb’s outreach to Chapek will likely pressure the company to justify its costs and explain why ESPN should remain part of the entertainment giant. The shares rallied last week after earnings beat estimates, but they have fallen this year as investors fretted about a slowdown in streaming growth. Disney shares rose 2.2% to close at $124.26 in New York. They were down 22% this year through the Aug. 12 close.
  • Zinc surged after one of Europe’s largest smelters announced it would halt production next month as the continent’s energy crisis threatens to hobble heavy industries. The Budel smelter in the Netherlands — controlled by Trafigura Group’s Nyrstar — will be placed on care and maintenance from Sept. 1 “until further notice,” according to a company statement. Zinc jumped as much as 7.2% on the London Metal Exchange as traders priced in even tighter supply. Earlier this month, top zinc producer Glencore Plc warned that Europe’s energy crisis posed a substantial threat to supply. Smelters across the region are barely turning a profit and the 315,000 tons-a-year Nyrstar plant has been operating at a reduced rate since the fourth quarter of last year. Industries from fertilizer to aluminum are being crippled by soaring energy costs as Russia squeezes gas flows to Europe following its invasion of Ukraine
  • The owners of Babylon Holdings Ltd. are starting to consider the possibility of taking the health tech company private, less than a year after it went public, people familiar with the matter said. Babylon, founded by its Chief Executive Officer Ali Parsa, has been holding preliminary discussions with some investors about how to address a crumbling share price that’s wiped almost $4 billion off its value since its October listing in New York, the people said. The company is exploring multiple options, ranging from a take private to a potential deal with a strategic partner, and no final decisions have been taken, the people said. The company could also try to raise fresh funding to grow the business, one of them said.

“Do what is right, not what is easy nor what is popular.” —Roy T. Bennett

*All sources from Bloomberg unless otherwise specified