The Daily – August 2, 2022

August 2, 2022

Daily Market Commentary

Canadian Headlines

• Toronto-Dominion Bank agreed to buy US brokerage Cowen Inc.for $1.3 billion in cash, bulking up its presence in American capital markets just months after striking a historic deal to expand its retail operations in the country. Toronto-Dominion agreed to pay $39 a share, according to a statement Tuesday. The acquisition is likely to be “modestly accretive” to adjusted earnings per share next year, the Toronto-based company said. Bloomberg News reported last month that the bank was weighing the deal. In purchasing Cowen, Canada’s second-largest bank is addressing its relative weakness in the capital-markets business relative to larger competitors such as Royal Bank of Canada and helping cushion the company from potential downturns in its retail-banking operations. The deal also further deepens Toronto-Dominion’s reach into the US, along with its planned $13.4 billion acquisition of First Horizon Corp., announced in February.
• Air Canada reported results below estimates in the second quarter, a period in which the global aviation industry could not meet passenger demand. Operating revenue was nearly five times the same quarter as 2021, when Covid-related travel restrictions were still in place, at C$3.98 billion ($3.1 billion), but short of the C$4.02 billion expected by Bloomberg’s consensus estimates. The company also recorded a C$1.60 net loss per share, about double what analysts predicted. Canada’s largest airline had to cut dozens of daily flights amid labor shortages and wider airport disruptions. For the quarter, Air Canada still managed to increase its available seat miles, a measure of airlines’ capacity, about five times from the same period in 2021. That was in line with projections made in April. Capacity was still 73% of levels in the second quarter of 2019.

World Headlines

• European equities dropped for a second day as results season rumbled on while investors monitored growing tensions between the world’s two biggest economies. The Stoxx Europe 600 fell 0.6% at 10 a.m. in London. Technology and financial services shares led declines while telecommunication and energy stocks outperformed. Investors are closely monitoring the movements of US House Speaker Nancy Pelosi, who is expected to land in Taiwan on Tuesday evening in defiance of Chinese threats. China, which regards Taiwan as part of its territory, has vowed an unspecified military response to any Pelosi visit that risks sparking a crisis between the countries. Along with tensions between China and the US, investors are anticipating a recession in Europe chiefly due to hawkish central banks and limited gas supplies. Earnings statements are also providing clues about how companies are grappling with headwinds such as higher rates and slowing demand.
• US equity futures slid Tuesday amid escalating US-China tension over Taiwan and deepening worries about a global economic slowdown, driving investors into the safety of government bonds. Contracts on the S&P 500 and Nasdaq 100 slumped as much as 0.8% as July’s equity market rebound stumbled into August. US Treasury 10-year yields dropped for a fifth day and approached 2.5%, a level last seen in April, while the Japanese currency advanced to the strongest level in two months. US House Speaker Nancy Pelosi is set to land in Taiwan on Tuesday and would be the highest-ranking American politician to visit in 25 years. China views the island as its territory and has vowed an unspecified military response to any Pelosi visit.
• Equities across Asia fell as traders braced for a potential escalation of US-China tensions given a possible visit by US House Speaker Nancy Pelosi to Taiwan. The MSCI Asia Pacific Index dropped as much as 1.4%, poised for its worst day in five weeks. All sectors, barring real estate, were lower with chipmaker TSMC and China’s tech stocks among the biggest drags on the regional measure. Pelosi is expected to arrive in Taipei late on Tuesday. Beijing regards Taiwan as part of its territory and has promised “grave consequences” for her trip. Benchmarks in Hong Kong, China and Taiwan were among the laggards in Asia, slipping at least 1.4% each. Japan’s Topix declined as the yen received a boost from safe-haven demand.
• Oil held its decline, after closing at the lowest level in more than five months, as traders counted down to an OPEC+ meeting on supply amid signs that physical markets have eased in recent weeks. West Texas Intermediate slipped 0.2%, having lost almost 5% on Monday on concern a global economic slowdown will erode energy demand. Equity markets and several other commodities fell again Tuesday as worries over a recession — and rising US-China tension over Taiwan — drove investors toward havens. The Organization of Petroleum Exporting Countries and its allies are due to gather virtually on Wednesday to decide on output policy for September. As the meeting nears, oil’s backwardation, a bullish pattern, has narrowed. Meanwhile the West African market flashed weakness as Dalia crude was offered at a discount to its benchmark on Monday.
• Gold rose to the highest level since early July as investors braced for a stormy period in US-China relations with House Speaker Nancy Pelosi heading for Taiwan. The precious metal often benefits from bouts of geopolitical turbulence, and the Pelosi trip only adds to tailwinds that have helped gold rebound from a 15-month low. Growing fears about the global economy have also aided bullion’s rise to a four-week high. Pelosi is expected to arrive later Tuesday in Taiwan, which China views as its territory. She would be the most senior US politician to visit the island in a quarter of a century, and Beijing has warned of consequences including military action if the trip goes ahead.
• Uber Technologies Inc. reported revenue that beat analysts’ estimates, boosted by resilient demand from customers who continued to hail rides and order takeout food despite rising inflation. Shares jumped about 11% in early trading. Revenue more than doubled to $8.1 billion in the second quarter, the company said Tuesday in a statement. That beat the $7.4 billion average projection from analysts, according to data compiled by Bloomberg. In the three months ended June 30, Uber reported gross bookings, which encompass ride hailing, food delivery and freight, increased 33% to an all-time high of $29.1 billion. Adjusted earnings before interest, tax, deprecitaion and amortization rose $873 million to $364 million, far exceeding expectations.
• Italy won more time from the European Union to complete restructuring of Banca Monte dei Paschi di Siena SpA and sell its stake in the troubled lender, ahead of a planned 2.5 billion-euro ($2.6 billion) capital raising. The European Commission said Tuesday that a set of revised commitments including further branch closures and divestments offered by the government “is acceptable” and adequately offsets the revision of the deadline. The EU’s executive didn’t disclose the new deadline to exit Paschi. Italy had requested an extension of the terms to revamp the bank and exit from its capital after it failed to sell its stake by the end of last year. To minimize possible distortions of competition caused by the extended deadline, Italy proposed a series of additional commitments, including more disposals and divestments, additional branch closures and the continued obligation to respect certain limitations on the way it conducts business.
• A bout of jitters in global markets over deepening US-China tension weighed on cryptocurrencies, pushing Bitcoin lower for a third day. The largest digital token fell as much as 1.6% to $22,769 on Tuesday and was trading at $22,860 as of 2:57 p.m. in Tokyo. Ether at one point shed 3.7%, while smaller coins ranging from Polkadot to Cardano were also in the red. Before the latest gyrations, Bitcoin made a weekend run toward $25,000 on the way to rounding out its best monthly gain since October last year. The climb has encouraged the view the worst of this year’s crypto rout — Bitcoin is down about 51% — is in the rear-view mirror.
• President Joe Biden said a US strike in Afghanistan over the weekend killed the leader of al-Qaeda, Ayman al-Zawahiri, calling him a longtime terrorist commander who helped plan the 9/11 attacks. “No matter how long it takes, no matter where you hide, if you are a threat to our people, the United States will find you and take you out,” Biden said in remarks Monday evening at the White House.  The US withdrew hastily from Afghanistan a year ago as the victorious Taliban marched on Kabul. Thirteen American military personnel and scores of Afghans were killed in a terrorist bombing as the withdrawal was underway. But Biden said the strike in Kabul showed that the US remained a force to be reckoned with in the region, and won’t let Afghanistan again become a terrorist “safe haven.” He said that the killing also backed up his insistence, before the withdrawal, that the US could reach its enemies in the country even without a military presence within its borders.
• China barred shipments from more than 100 Taiwanese food exporters in an apparent effort to impose economic pressure on a key industry ahead of an expected visit by US House Speaker Nancy Pelosi. China’s General Administration of Customs imposed the ban Monday, according to local outlet United Daily News, which said affected goods included seafood, tea and honey. The issue was outdated information on import documentations, the Taipei-based Apple Daily reported, adding that the Taiwan Food and Drug Administration was trying to understand more about the problem.  The Chinese ban is the latest in a series of measures taken by Beijing that target Taiwan’s agricultural industry. Many of the fruit-producing regions of southern Taiwan are typically bastions of political support for President Tsai Ing-wen’s Democratic Progressive Party, which advocates for Taiwan’s formal independence.
• Less than a month after delivering its first interest-rate hike in over a decade, traders are betting the European Central Bank is already a third of the way through its tightening cycle. Money markets show the central bank will raise rates by an additional 100 basis points, or 1 percentage point. That’s roughly half of what was expected in late July. They’re paring wagers on the back of reports showing rapid weakness in the European economy and a worsening gas supply crunch. At one point on Tuesday, traders were betting on less than 100 basis points, which shows just how quickly the mood in markets has shifted. ECB officials raised rates by 50 basis points last month, but since then more economists have predicted the euro area will succumb to a recession this year and limit the central bank’s ability to tighten policy.
• The number of companies filing for insolvency in the UK last quarter was the highest since 2009, a situation that’s expected to get worse before it gets better. The period saw 5,629 company insolvencies registered in the UK, an 81% increase on the same period a year earlier, according to data released on Tuesday by the UK’s Insolvency Service. It’s the largest number of companies to go out of business for nearly 13 years. The majority of the company insolvencies were creditors’ voluntary liquidations, or CVLs, accounting for around 87% of all cases. That’s when the directors of a company take it on themselves to wind-up an insolvent company.
• Japanese trading giants Mitsui & Co. and Mitsubishi Corp. wrote off a combined 218 billion yen ($1.7 billion) linked to their investments in a Russian liquefied natural gas project. Mitsui cut the fair value of its investments in the Sakhalin-2 LNG plant by 136.6 billion yen from the level at end-March, it said Tuesday in a regulatory filing, while Mitsubishi recorded a 81.1 billion yen drop. The two companies together own a 22.5% stake in the project, which President Vladimir Putin has decreed must be transferred to a new Russian company. Shell Plc is the only other foreign investor in Sakhalin-2 with a 27.5% stake, with the remaining half held by Gazprom PJSC. The London-based major has already booked billions of dollars in impairments from its ventures in Russia, though it hasn’t specified how much is linked to the LNG export plant just north of Japan.
• UK house prices barely rose in July, an indication that the property market is cooling in response to the worsening cost of living crisis. The 0.1% gain from June was the weakest reading for a year, Nationwide Building Society said Tuesday. Values rose 11% from a year earlier to £271,209 ($332,000).  The housing market boomed during the pandemic, and values continue to be underpinned by a shortage of homes for sale and the lowest unemployment since the 1970s, Nationwide said. House prices are now in their longest run of gains for eight years.
• Caterpillar Inc. posted second-quarter sales that beat analysts’ expectations, though the company saw a slowdown in China, a key market for construction equipment. Revenue was $14.2 billion, beating the $13.98 billion average estimate of 17 analysts polled by Bloomberg, the Deerfield, Illinois-based company said Tuesday in its quarterly report. Caterpillar, often viewed as an economic bellwether, said construction equipment sales fell in Asia Pacific, citing lower revenue to end users in China. The equipment maker also said “unfavorable manufacturing costs largely reflected higher material and freight costs.” Caterpillar’s results come a week after government data revealed the US economy contracted for a second straight quarter, worrying investors that the nation could be heading into a recession. Shares of Caterpillar are down about 5.8% this year as the producer grapples wit headwinds from supply-chain troubles, surging power costs across Europe and Covid-related shutdowns in China.
• Japan is set to raise its minimum wage by the most on record, a boost for low-income households as they try to cope with the increasing costs of living.  An advisory panel at the labor ministry decided late Monday to seek a rise in the national average of minimum hourly pay by 31 yen, or 3.3%, from the current 930 yen ($7.07) this fiscal year, according to the ministry. If finalized, that will be a record hike both in terms of the amount and percentage difference since the government began using hourly pay as the benchmark in 2002. Prime Minister Fumio Kishida sees wage gains as a key factor to drive growth while he also seeks a fairer distribution of wealth. Except for fiscal 2020 at the height of the pandemic, the minimum wage has risen at least 2% since fiscal 2013 as late Prime Minister Shinzo Abe pressed ahead with his economic revitalization program.
• JetBlue Airways Corp. reported a second-quarter loss that missed Wall Street’s expectations as high fuel prices kept operating expenses elevated ahead of the carrier’s planned purchase of deep discounter Spirit Airlines Inc. The adjusted loss was 47 cents a share in the period, JetBlue said in a statement Tuesday, compared with an 11-cent deficit on average from analyst estimates compiled by Bloomberg. Revenue was $2.45 billion, while expectations were for $2.46 billion. Total costs soared 89% in the quarter to $2.56 billion, led by $910 million spent on fuel. The carrier said it’s started a new cost-reduction program that should deliver savings of as much as $250 million a year by 2024, including a decision to accelerate the retirement of its Embraer E190 aircraft.
• Ukraine began mandatory evacuation of its citizens from Donetsk following President Volodymyr Zelenskiy’s call on civilians to leave the eastern region for their own safety. Germany urged permanent alternative routes for the Ukrainian grain exports that are seen as vital to easing a global food crisis but have been hindered by Russia’s blockade of Black Sea ports. “It’s about reducing Putin’s power to blackmail,” Agriculture Minister Cem Oezdemir told public broadcaster ARD. The Kremlin announced that Russian President Vladimir Putin will meet Turkish leader Recep Tayyip Erdogan for talks in the Black Sea resort of Sochi on Friday, including on the deal brokered by Turkey and the United Nations to unblock Ukraine’s grain exports.
• Credit Suisse Group AG shares slumped after the bank’s credit outlook was cut to negative by S&P Global Ratings and its senior debt was downgraded by Moody’s Investors Services, signaling that management changes announced last week are failing to shore up investor confidence. S&P revised the outlook to negative from stable, while Moody’s downgraded the lender’s senior unsecured debt to Baa2 from Baa1. Later Tuesday, analysts at Swiss asset manager Vontobel Holding AG lowered its price target for the bank’s shares, citing “stunningly weak” performance at the key wealth management division. Credit Suisse posted a larger-than-expected 1.59 billion-franc ($1.65 billion) loss for the second quarter, underscoring the Swiss firm’s challenges in exiting its worst slump since the financial crisis. The lender announced that Ulrich Koerner, 59, would replace Thomas Gottstein as CEO in an effort to steer the bank back to profitability.
• KKR & Co.’s distributable earnings fell 9% to $839.8 million during the second quarter as the alternative-asset manager saw fewer deal exits amid tough market conditions. Realized investment income declined 25% from a year earlier to $276.9 million while realized performance income rose 18% to $730.9 million, according to a statement Tuesday. Distributable earnings were 95 cents per share, in line with Wall Street estimates. New York-based KKR, led by co-Chief Executive Officers Scott Nuttall and Joe Bae, took advantage of buoyant markets in 2021 to unload assets on its balance sheet, contributing to higher realized investment income a year ago.

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

*All sources from Bloomberg unless otherwise specified