August 18, 2023

Daily Market Commentary

Canadian Headlines

  • Officials in Northwest Territories continued their evacuation of the capital, Yellowknife, with a deadline of 12 p.m. today for getting the city’s 20,000 residents out of harm’s way due to nearby wildfires. Stocks slumped, putting MSCI’s global benchmark on track for the biggest weekly loss since March, as worries about China and higher global interest rates sapped sentiment. Statistics Canada reports industrial and materials prices at 8:30 a.m. Ottawa time. Ford Motor Co. is joining with South Korean battery-component makers SK On Co. and EcoPro BM Co. to build a cathode active material plant in Quebec worth more than C$1.2 billion ($887 million). The Canadian and Quebec governments are providing loans of C$644 million for the facility in Becancour, which will create at least 345 jobs and serve Ford’s factories in Canada and the US. The project announced Thursday is the latest investment by a corporate giant in the small community northeast of Montreal, which aims to become a crucial hub for the North American electric-vehicle supply chain.

World Headlines

  • European stocks fell on Friday to their lowest level in more than five weeks, as concerns over higher interest rates and a slowing Chinese economy further sapped this year’s rally. The Stoxx 600 Index was down 0.6% by 8:29 a.m. in London, extending a drop into a fourth session as miners and auto stocks fell. While the losses were broad-based, among individual stocks, Dino Polska dropped after the Polish supermarket operator’s earnings missed expectations. Swiss semiconductor device maker u-blox Holding AG plunged after cutting its full-year guidance. Investor concerns over interest rates remaining higher for longer, rising bond yields and a crisis in China’s property sector have seen gains for European stocks cool in August. The Stoxx 600 Index is down 4.8% in August, with the month’s biggest laggards including basic resources, autos and industrials — sectors which are both particularly sensitive to the economic cycle and have significant exposure to China.
  • Meanwhile, bond markets staged a rebound on speculation losses may be overdone. The yield on 10-year Treasuries fell five basis points, pulling back from levels that were approaching the highest since 2007. Even with today’s retreat in yields, investors are still contending with the risks of entrenched inflation and rates that have moved sharply higher in recent weeks. China’s property crisis and troubles in the shadow banking system have also added to the anxiety in markets and raised questions about possible spillover effects. Options expiration is also catching the attention of traders today. There’s some $2.2 trillion of longer-dated contracts tied to stocks and indexes are scheduled to mature on Friday. The global retreat in fixed-income was turbocharged by Wednesday’s publication of minutes from the last Federal Reserve meeting that suggested officials are considering tighter policy, slamming hopes that the central bank was done raising rates. Now, investors are looking to next week’s gathering of policymakers at Jackson Hole in Wyoming to gauge Fed sentiment.
  • Asian stocks fell, headed for their worst week in eight, as a selloff in China resumed despite further steps by policymakers to shore up the market. Worries about higher US interest rates also kept traders on edge. The MSCI Asia Pacific Index dropped as much as 0.8%, set for a sixth straight day of losses. Technology shares including Alibaba, Tencent and TSMC were among the biggest drags on the benchmark. Most regional markets were down, including Hong Kong, Japan and South Korea. Confidence in Chinese assets remained weak after a slew of disappointing data confirmed the nation’s economic downturn, while rising concerns over developers’ defaults and a spiraling crisis in the shadow banking industry dealt a further blow to sentiment. The Hang Seng Index fell to the lowest since November.
  • Oil headed for its first weekly loss since June as concerns over economic weakness in China and potentially even tighter monetary policy in the US combined to overshadow signs of a solid physical market. West Texas Intermediate traded above $80 a barrel, set for a drop of about 3% this week as a stream of poor economic data and widening housing crisis in China has weighed on risk assets including oil. That has eclipsed signs of a tighter crude market, with US stockpiles declining to the lowest level since January. Crude remains markedly higher from its lows in June, driven largely by supply cuts by OPEC+ linchpins Saudi Arabia and Russia. That’s led many observers, including the International Energy Agency, to forecast tighter balances and higher prices before the year is out. Nevertheless, Citigroup Inc. has countered that oil will weaken as consumption disappoints and supply swells.
  • Gold headed for a fourth weekly decline, the longest such run in a year, on speculation that the Federal Reserve may not be done with raising interest rates. A robust US jobs report on Thursday suggested the resilient economy is making employers reluctant to reduce headcount. Minutes released this week of the Fed’s July meeting also showed officials were still concerned that inflation could fail to recede and more rate hikes might be needed. Spot gold added 0.2% to $1,893.70 an ounce by 11:06 a.m. in London. The Bloomberg Dollar Spot Index was little changed, heading for a fifth weekly advance. Silver, palladium and platinum all rose.
  • WeWork Inc., the troubled co-working company on the brink of collapse, is moving forward with a 1-for-40 reverse stock split in a bid to save its listing on the New York Stock Exchange. Shares fell around 20% to 13 cents in premarket trading. The reverse stock split will go into effect at 4:01 p.m. New York time on Sept. 1 and begin trading on a post-split basis at the market open on Sept. 5, WeWork said in a statement Friday. WeWork has been trying to deliver a turnaround story for years — one in which the rowdy co-working startup transforms into a stable, profitable public company. But the New York-based company has been bleeding cash, and customers of its office rentals are canceling memberships in droves, forcing the firm on Aug. 8 to warned that it may not be able to stay afloat.
  • Chinese authorities have stepped up efforts in recent days to bolster financial markets in a sign that Beijing is growing uncomfortable with the pace of declines in stocks and the yuan. Mainland exchanges this week asked some investment funds to avoid net selling equities. Officials requested state-owned banks to escalate intervention to support the yuan, while also encouraging companies listed on the tech-heavy Star Board to buy back shares. The securities regulator said late Friday it will slash handling fee in stock transactions and study extending trading hours for equities and bonds. The moves complemented the People’s Bank of China’s surprise interest rate cut this week, which was the biggest reduction since 2020, and its most forceful yuan fixing guidance ever on Friday.
  • Economists see a stronger US economy into the next year and a smaller rise in unemployment, supporting expectations that the Federal Reserve will keep interest rates higher for longer. Gross domestic product is expected to advance an annualized 1.8% in the third quarter, nearly quadruple the 0.5% pace projected in July, according to the latest Bloomberg monthly survey of economists. They also see the economy expanding somewhat in the last three months of the year, rather than contracting. While forecasters are now projecting a stronger economy across the board, consumer spending — which accounts for about two-thirds of GDP — is seen driving momentum as Americans continue to spend at a healthy pace. The Aug. 11-16 survey of economists included 68 responses, and many were submitted before a government report showed retail sales beat estimates in July after upward revisions to the prior two months.
  • Deere & Co. lifted its financial outlook for the year as machinery demand from farmers remained robust despite slumping crop prices. The world’s top agricultural equipment producer expects net income for fiscal 2023 between $9.75 billion and $10 billion, the Moline, Illinois-based company said Friday in a statement. That’s above its outlook in May for $9.25 billion to $9.5 billion, and it compares to the Bloomberg consensus for about $9.4 billion. Farmers have been paying up for the iconic green and yellow tractors in the wake of Russia’s invasion of Ukraine, which sent global crop prices surging. While expanding harvests in the US, Brazil and Russia are cooling crop markets, large-scale farmers are continuing to upgrade to newer and more technologically advanced equipment.
  • The United Steelworkers have delivered a fresh show of support for Cleveland-Cliffs Inc.’s $7.3 billion bid to buy American industrial icon US Steel Corp. USW President Tom Conway said the union would transfer to Cliffs its legal right to launch a future counteroffer for US Steel. That could open a pathway for Cliffs to trump other offers for the company, which has received a rival $7.8 billion bid from privately held Esmark Inc. The union’s pledge is the latest twist in what’s turning out to be a dramatic battle to take over the storied US firm and reshape the nation’s steel-industry landscape. US Steel said Sunday it had rejected the Cliffs offer and launched a strategic review of alternatives, adding it had received multiple other approaches for all or part of its business.
  • All four Moscow-area airports were briefly closed early Friday and planes diverted as air defense repelled a drone, according to Russia’s aviation watchdog. The UAV was taken down and fell on what was described as a non-residential building a few miles from the Kremlin. Moscow’s mayor reported no casualties and no significant damage. Ukraine hasn’t commented. Denmark has received US approval to send its F-16 fighter jets to Ukraine as soon as pilots have been trained, said foreign minister Lars Lokke Rasmussen. He declined to say exactly when Copenhagen might send the aircraft. The New York Times reported on Thursday that a Ukrainian air force spokesman said the advanced planes won’t arrive this year. The first trade ship to leave Ukraine’s seaports since the collapse of a safe-corridor grain deal with Russia reached Istanbul early Friday. It’s unclear if other vessels will follow soon via the temporary Black Sea route established by Kyiv in a bid to keep exports moving. Turkey said it warned Russian officials to refrain from actions that could escalate Black Sea tensions, days after Kremlin troops fired on a Turkish-owned cargo vessel. Grain transit is expected to be on the agenda when Ukraine’s prime minister meets with his Romanian counterpart on Friday.
  • Almost no-one saw Adyen NV’s €18 billion ($20 billion) share plunge coming. Prior to Thursday’s 39% drop, the majority of analysts had a buy or equivalent rating on the Dutch payments processing company. And of the few that had a sell, even Citigroup Inc.’s Street-low target of €1,050 was made to look optimistic. Adyen shares closed at €898.4 in Amsterdam, and extended their losses on Friday. For many short sellers, meanwhile, the stock’s dive represented a missed opportunity. As of Wednesday, shares out on loan — an indication of short interest — represented about 3% of the company’s free float, according to data from S&P Global Market Intelligence. That’s down from this year’s high of 5.4% reached in April.
  • UK retail sales fell more than expected in July after a spell of cool and rainy weather kept people out of shops at a moment consumers are becoming more cautious with spending. The volume of goods sold in stores and online fell 1.2% last month after an 0.6% gain in June, the Office for National Statistics said Friday. Economists had forecast a 0.6% month-on-month decline. The figures mark the first time in four months that sales have fallen short of expectations and may indicate households are starting to buckle under the weight of soaring prices and interest rates. The Bank of England is trying to slow the economy to rein in inflationary pressures, triggering an unexpected increase in unemployment in the second quarter.
  • The asset management unit of JPMorgan Chase & Co. has launched two new exchange-traded funds tied to Paris-aligned benchmarks that meet strict EU rules for investing in line with the goal of limiting global warming to 1.5C. JPMorgan Asset Management said one of the funds will have a global focus (Ticker: JSEG) while the other will look at the US (Ticker: JSEU), according to an emailed statement. Both ETFs live up to EU rules for its so-called Article 9 classification under the EU’s Sustainable Finance Disclosure Regulation. The new funds are making their debut as Europe’s market for ESG ETFs looks poised for a rebound. Investor attitudes toward European ESG ETFs have remained positive in 2023, contrasting with recent steep declines globally and in the US, according to Bloomberg Intelligence. The JPMorgan ETFs feed into the asset manager’s $7 billion Research Enhanced Index equity ETF platform, the firm said.
  • The United States, Japan and South Korea are set to sign on to a new security pledge, committing the three countries to consult with each other in the event of a security crisis or threat in the Pacific, according to Biden administration officials. Details about the new “duty to consult” commitment emerged as President Joe Biden prepared Friday to welcome South Korean President Yoon Suk Yeol and Japanese Prime Minister Fumio Kishida for a summit at the Camp David presidential retreat in Maryland. The move is one of several joint efforts that the leaders are expected to announce at the daylong summit, as the three countries look to tighten security and economic ties amid increasing concerns about North Korea’s persistent nuclear threats and Chinese provocations in the Pacific.
  • Arm Ltd. has filled out the roster of underwriters for its initial public offering, with 28 banks in all on the deal, people familiar with the matter said. In addition to four lead banks — Barclays Plc, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Mizuho Financial Group — the offering will have 10 second-tier underwriters, including Bank of America Corp. Citigroup Inc., Deutsche Bank AG and Jefferies Financial Group Inc., the people said, asking not to be identified because the information was private. A third-tier consists of a diverse group of 14 securities firms, such as Daiwa Securities Group Inc., HSBC Holdings Plc, Intesa Sanpaolo SpA and Societe Generale SA, they said.
  • A period of unusual calm in crypto markets ended abruptly this week as the notion of higher-for-longer interest rates sparked a selloff in risk assets like Bitcoin, leading to mass liquidations of bullish bets. The rout pushed Bitcoin from near $29,000 to as low as $25,314 in a 24-hour span before the biggest token recovered slightly in early European trading on Friday. More than $1 billion of positions were unwound in the selloff, according to Coinglass data. Bitcoin remains 60% above where it started the year, handily beating other well-performing assets like technology stocks. But a multitude of headwinds — from rising bond yields to regulatory pressures and economic weakness in China — threaten to undermine the appeal of assets like cryptocurrencies.
  • Estée Lauder Cos. beat an already-slashed forecast for the current quarter but its profit outlook for the fiscal year was below estimates, a sign the beauty company continues to struggle in its crucial Asia travel retail business. Fourth-quarter earnings beat expectations on stronger sales in Europe and Asia. But travel retail in Hainan and South Korea continued to drag. The beauty company reported adjusted earnings per share of 7 cents for the period ending June 30, compared with the Wall Street estimate for a loss. Revenue also beat expectations. The company expects fiscal year 2024 adjusted earnings per share between $3.43 and $3.70, below the Bloomberg consensus. Sales are expected to rise 5% to 7%.