August 17, 2023

Daily Market Commentary

Canadian Headlines

  • JSW Steel Ltd. is looking to form a consortium to bid for a majority stake in Teck Resources Ltd.’s steelmaking coal business, people with knowledge of the matter said, potentially rivalling an $8 billion offer from commodities giant Glencore Plc. Mumbai-based JSW is seeking partners for an offer to acquire a 75% interest in the asset, known as Elk Valley Resources Ltd., the people said. That’s a marked shift in approach from July, when Bloomberg News reported JSW was interested in up to 20% of Teck’s coal business. A deal could value the coal business at more than $8 billion and JSW has been sounding out banks about financing for a potential offer, according to the people. Deliberations are ongoing and there’s no certainty an agreement will be reached, they said, asking not to be identified discussing confidential information.
  • Wildfires have forced an evacuation of Yellowknife, the capital of Canada’s Northwest Territories. Officials with the territorial government told residents in the highest-risk areas to evacuate immediately. Other residents have until 12 p.m. local time on Friday to leave the city of about 20,000. Depending on smoke conditions, those leaving by car will be escorted through the active fire zone, officials said. Residents who can’t leave by road are being asked to register for evacuation flights. The fires were about 17 kilometers (10.6 miles) from the city, Shane Thompson, the territory’s environment minister, told reporters Wednesday evening. “Without rain, it is possible it will reach the city outskirts by the weekend,” he said.
  • Former Bank of Canada Governor Stephen Poloz says inflation is likely to cool faster than people are expecting, opening the door for lower interest rates. The economist, who led Canada’s central bank from 2013 to 2020, said the country’s stronger-than-expected growth in the first half of the year was driven by population increases and the resolution of unique supply shocks from the pandemic. An early-year jump in household spending was likely a mirage, he said, driven by savings built up during the Covid lockdowns. Canada’s economy grew at a 3.1% annualized pace in the first quarter, which many analysts interpreted as proof that interest rates should rise further. Governor Tiff Macklem and the central bank’s policymakers did exactly that, boosting rates in June and July to bring the overnight lending rate to 5%, the highest since 2001.

World Headlines

  • European stocks extended declines after minutes from the Federal Reserve’s policy meeting in July suggested further interest-rate increases could be needed to contain inflation. The Stoxx Europe 600 fell 0.2% by 12:54 p.m. in London, declining for a third session. Industrial goods and services stocks led the retreat, while while the basic resources sector gained. Among individual stocks, Adyen NV had its biggest intraday decline on record after reporting first-half earnings that missed estimates as increased competition in North America contributed to the Dutch payment company’s slowest revenue growth since its IPO. Swiss building materials firm Geberit AG fell after reporting second-quarter results that analysts said represented a “sizeable” miss.
  • US equity futures hinted at recovery from Wednesday’s retreat, even as a selloff intensified across bond markets worldwide. S&P 500 contracts added 0.2%, while Europe’s equity benchmark slid for a third day. While many investors had believed that the Federal Reserve was done raising interest rates, that’s no longer a sure thing after minutes from last meeting suggested officials are considering tighter policy. The moves across bond markets have been sharp and swift this week. The 10-year Treasury yield rose four basis points to 4.29% on Thursday, approaching the highest level since 2007. In the UK, equivalent maturity gilts touched 4.71%, the highest since the financial crisis of 2008. Japan’s 20-year bond yield surged after a debt auction drew tepid investor demand.
  • Asian stocks fell for a fifth day amid ongoing worries about China’s economic slowdown and concerns over elevated interest rates in the US. The MSCI Asia Pacific Index pared early losses Thursday and were down 0.4% late in the session, with health-care and energy shares the biggest decliners. Japan and Australia underperformed in the region, while resilience in technology shares helped Chinese stocks reverse earlier losses. A midday bounce in Chinese benchmarks was seen as technical by traders, with the market still gripped by fears that the slump in the property sector may snowball into a bigger systemic crisis. Steps taken by policymakers so far have failed to boost sentiment, and some investors are calling for more forceful measures.
  • Oil steadied after a three-day drop spurred by concerns over the Chinese economy and the possibility of even tighter US monetary policy. West Texas Intermediate was little changed above $79 a barrel after shedding more than 4% this week. Worries over top importer China’s post-pandemic recovery have taken center stage, despite vows of support from policymakers. That’s hurt appetite for risk assets including commodities. With prices slipping away from multi-month highs in recent days, Citigroup Inc. urged investors to sell oil into the winter, given the likelihood of soft demand and robust supply. Prior to that they had rallied as OPEC+ supply cuts and a robust physical market buoy prices.
  • Gold edged up after closing below $1,900 an ounce for the first time since March, amid increased speculation US central bank policymakers will extend their rate-hiking cycle as the inflation threat lingers. The Federal Reserve’s minutes for its July meeting, released Wednesday, showed officials were still concerned that inflation could fail to recede and more interest-rate increases might be needed, though cracks in that consensus were also apparent. Long-maturity Treasury yields approached their 2022 highs after the release and the US dollar climbed to a two-month high, weighing on non-interest bearing bullion.
  • Copper rebounded from its lowest in almost three months as investors weighed the extent of China’s property woes. The metal rose as much as 1.2% on Thursday after earlier touching the lowest since June 1. Traders are taking cues from other markets, particularly iron ore which surged on doubts about the extent of Chinese steel output curbs. Metals also received a boost after Beijing told state-owned banks to step up intervention in the currency market this week in order to curb volatility in the yuan. China’s currency climbed following the Bloomberg report, snapping a run of five straight declines.
  • Chinese authorities told state-owned banks to step up intervention in the currency market this week, in a push to prevent a surge in yuan volatility, according to people familiar with the matter. Senior officials are also considering the use of tools such as cutting banks’ foreign-exchange reserve requirements to prevent a rapid depreciation in the currency, said the people. The request came as the yuan fell toward 7.35 per dollar, a level that top leadership has been paying close attention to, they added. Authorities were also checking whether domestic companies helped accelerate yuan declines by conducting speculative trades against it, said the people, who requested not to be named as they are not authorized to discuss the matter.
  • Norway’s central bank Governor Ida Wolden Bache kept the door open for further monetary tightening beyond September, saying it would depend on incoming data. Wolden Bache spoke after Norges Bank raised borrowing costs by a quarter point to 4% earlier on Thursday and signaled it still plans a similar hike in the current tightening cycle. “We raised the policy rate today and we signalled a further hike in September, but whether there will be a hike in September, whether there will be further hikes, will depend on incoming information,” Wolden Bache said in an interview in Arendal, southern Norway.
  • BAE Systems Plc agreed to buy the aerospace division of soda-can giant Ball Corp. for $5.6 billion, as the UK defense company seeks to expand its missile, space and munition products at a time of heightened weapons spending by governments. The London-based defense giant entered into a definitive agreement to purchase the unit, which manufactures instruments and sensors for everything from space travel to weather forecasting, according to a regulatory filing on Thursday. Bloomberg News reported the companies were close to an agreement on Wednesday. If completed, the transaction would mark the biggest purchase yet in the company’s history and give BAE a presence in the fast-growing space sector, from where it has been largely absent. Olivier Brochet, an analyst at Redburn Atlantic, said that while the price paid looks high, it reflects the long-term value that can be derived from the asset.
  • Adani Power Ltd. shares rose after GQG Partners bought 8.1% of the firm’s total outstanding stock for about $1.1 billion through block deals, according to people familiar with the matter. The thermal power generation business owned by billionaire Chairman Gautam Adani advanced as much as 3.1% before closing 2.4% higher on Thursday in Mumbai trading after the US investor bought more than 310.9 million shares the day before. The stake was purchased from Adani family entities Worldwide Emerging Market Holding Ltd. and Afro Asia Trade and Investments Ltd., according to stock exchange data. The embattled power-to-port conglomerate has sought international backing and funding in a bid to recover from a damaging short-seller attack earlier this year. This is one of the largest bulk deals by the Adani family, two of the people said, asking not to be identified as the information is private.
  • A recent surge in US mortgage rates has pushed affordability to the lowest level in nearly four decades. For house hunters, waiting for any relief is a risky gamble. It’s been a hard lesson. Last year’s slowdown brought a brief respite from the price gains of the pandemic boom but that’s now vanished, with home values recovering the nearly $3 trillion they’d lost. Now, one measure of borrowing costs has climbed back up to a level last seen in 2001, and the Federal Reserve has indicated it may hike rates further, raising the risk that mortgage rates may push toward 8%.
  • Tyson Foods Inc., the biggest US meat company, is exploring options including a potential sale of its China business, according to people with knowledge of the matter. The process is at an early stage and some private equity firms have expressed initial interest in the business, the people said, who asked not to be identified as the information is private. Deliberations are ongoing and Tyson could still decide to keep the asset, the people said. Reuters reported earlier that the meat giant was planning to sell its poultry business and has hired Goldman Sachs Group Inc. to advise.
  • Israel said it will proceed with the biggest military export agreement in the country’s history after the US backed Germany’s $3.5 billion purchase of the Arrow 3 air-defense system. Following approval from Washington, senior officials from the German and Israeli governments will take part in a ceremony to sign a letter of commitment, Israel’s defense ministry said Thursday. An initial allocation of $600 million will enable work on the project to begin immediately and the full contract will be ready to sign by the end of this year, it added. “This is a significant decision which will contribute to Israel’s force buildup and economy,” Israeli Defense Minister Yoav Gallant said in an emailed statement.
  • Walmart Inc. raised its annual profit forecast for the second straight quarter after scoring new sales gains with bargain-hunting US shoppers. Food revenue continued to rise strongly and Walmart’s general merchandise business was stronger than the company expected at the beginning of the second quarter, said Chief Financial Officer John David Rainey. The retailer is also still benefiting from stepped-up demand among higher-income customers. “We’re gaining share and our value proposition continues to resonate, both for value and convenience,” Rainey said in an interview Thursday as Walmart reported results for the three months ended in late July. “The consumer is still spending, but they’re being discerning in their spending.”
  • Global government bond yields extended their climb to the highest level since 2008 — while the US 30-year yield reached a level last seen in 2011 — as resilient economic data challenges the view that central banks rates are peaking. In early US trading Thursday the 30-year Treasury yield rose as much as seven basis points to 4.42%, slightly exceeding last year’s high. It was below 4% as recently as July 31. The US 10-year yield approached 4.31%, within a few basis points of its 2022 peak. The equivalent UK yield jumped to a 15-year high, while its German counterpart approached the highest since 2011. Treasuries have been a key driver of the global debt selloff as resilience in the US economy defies expectations that more than five percentage points of Federal Reserve interest-rate hikes would bring on a recession. Officials at the last policy meeting remained concerned that inflation would fail to recede and that further rate increases would be needed, minutes of the meeting showed.
  • The top three US wireless carriers have lost billions in revenue as smartphone sales dwindle in a reversal of the pandemic boom. AT&T Inc., T-Mobile US Inc. and Verizon Communications Inc. collectively lost nearly $5 billion in equipment sales over the past 12 months compared to the previous year. T-Mobile’s equipment revenue fell 23% last quarter, while AT&T’s slipped 7% and Verizon’s postpaid phone upgrades dropped 34%. Executives partly blame smartphone makers and say customers are content waiting longer between upgrades. Verizon Chief Executive Officer Hans Vestberg said on a recent earnings call that there hasn’t been any “major” new devices recently, while T-Mobile Chief Financial Officer Peter Osvaldik said customers are “happy with their devices” for longer time frames.
  • A pair of polls suggest that student debt will be a key issue for millions of Americans this fall, when monthly bills resume and borrowers can’t lean on President Joe Biden’s forgiveness plan after the nation’s top court tossed it out. About half of borrowers said the situation has become a national crisis, according to a poll released by Bankrate on Thursday. A similar share said the federal government has not done enough to provide financial assistance for those with student debt. Millions of student-loan borrowers are preparing to resume paying back their debt at the end of this month, more than three years after mandatory payments were paused due to the pandemic. They will do so without help from Biden’s main relief program, which would have wiped out as much as $20,000 per borrower. The Supreme Court threw it out in June.