August 2, 2023

Daily Market Commentary

Canadian Headlines

  • Meta Platforms Inc. started its process of ending news availability in Canada over a law requiring digital platforms to pay local news outlets. The California-based company has followed through with its threat to block news on Facebook and Instagram. The move came after Prime Minister Justin Trudeau’s government passed the Online News Act, expected to come into effect before the end of this year. “For many months, we have been transparent about our concerns,” said Rachel Curran, Meta Canada’s head of public policy, in a statement Tuesday. “It is based on the incorrect premise that Meta benefits unfairly from news content shared on our platforms, when the reverse is actually true.”
  • Canaccord Genuity Group Inc. cut about 75 jobs in Canada, primarily in its capital markets division, amid a dearth of dealmaking activity. The terminations on Tuesday represent about 7% of its 1,200 workers in Canada, according to people familiar with the matter. The move marks the second round of job cuts Canaccord has taken in response to a global slowdown in dealmaking and new equity issuances, with the firm laying off about 25 people in its US capital markets unit last month. That represented about 6% of the division’s roughly 400 employees.  Canaccord’s management said in a memo to staff announcing the Canadian cuts on Tuesday that the firm has been evaluating each area of its business in its new fiscal year, which started in April, to design “an organizational structure consistent with the current and forecasted economic environment.”

World Headlines

  • European stocks slumped the most in almost a month as Fitch Ratings’s downgrade of US sovereign debt triggered risk-off trades across the board, while earnings reports did little to offset the negative sentiment. The Stoxx 600 Index was 0.9% down as of 11:55 a.m. in London, with all the subindexes and about 85% of its constituents trading in the red. After Europe’s benchmark posted its third month of gains in four in July, August has started on a negative note, following a trend in which August and September are usually the worst time for European stocks, based on the average performance of the Stoxx 600 over the past 25 years.
  • Global equities dropped as Fitch Ratings’ downgrade of US government debt spurred a rapid retreat from riskier assets and anxiety over this year’s spectacular rally in tech stocks. Nasdaq 100 futures slid 0.8%, signaling a pullback later Wednesday for a market that has surged 44% in 2023. Broad losses in Europe dragged all industry groups in the benchmark regional index into the red. Fitch stripped the US of its top-tier rating, criticizing the ballooning fiscal deficit and an “erosion of governance.” The downgrade serves up an extra dose of jeopardy for equity investors already concerned over the risks of recession and whether this year’s run-up in stocks is sustainable. Treasuries were steady, in keeping with Treasury Secretary Janet Yellen’s assertion that they remain “the world’s preeminent safe and liquid asset.”
  • Asian equities fell, headed for their biggest drop since mid-March, as a selloff in the region’s high-flying technology shares led a broad-based decline in the region. The MSCI Asia Pacific Index fell as much as 1.9%, with all sectors and major markets in the red, as investors booked profits on chip and electric-vehicle stocks that have surged on artificial intelligence and net zero emissions trades. Gauges in Singapore, Taiwan and Japan had their worst day this year. Hong Kong-listed indexes fell more than 2.4% each as internet stocks slid. Meanwhile, measures in Singapore, India and South Korea also fell. “It’s buyers’ fatigue,” said Derek Tay, head of investments at Kamet Capital Partners.
  • Oil resumed a rally after an industry estimate pointed to a huge drawdown in US inventories, adding to signals the market is tightening. West Texas Intermediate climbed near $82 a barrel, though pared an earlier gain of as much as 1.3%. The American Petroleum Institute reported that nationwide crude stockpiles plunged 15.4 million barrels last week, according to people familiar with the figures. If confirmed by government data later Wednesday, that would be the biggest draw in volume terms in figures going back to 1982. Crude soared last month after the Organization of Petroleum Exporting Countries and allies including Russia cut supplies in a bid to lift prices. That’s spurred calls from players including BP Plc that the market is set to strengthen in the coming months.
  • Gold edged up as Fitch Ratings’ move to strip the US of its top-tier sovereign credit grade triggered risk-off sentiment, sending global stocks falling. Gold has been consolidating around $1,950 an ounce in recent weeks as investors wait for more clarity on the outlook for monetary policy. While swaps traders are paring bets on a quarter-point hike in September, views on the rate trajectory beyond then remain divided. Spot gold rose 0.3%% to $1,951.06 an ounce as of 9:17 a.m. in London. The Bloomberg Dollar Spot Index edged higher after gaining 0.5% on Tuesday. Silver was flat, while platinum and palladium fell.
  • Donald Trump has been indicted in Washington on federal charges over his efforts to overturn the 2020 presidential election, the third politically explosive criminal prosecution of the former president as he makes his latest run for the White House. The charges from Special Counsel John “Jack” Smith’s office can carry penalties of as much as 20 years in prison, but Trump would likely face far less than the maximum penalties if convicted since he doesn’t have a criminal record. Trump, 77, has been instructed to appear in court at 4 p.m. on Aug. 3. “The attack on our nation’s Capitol on Jan. 6, 2021 was an unprecedented assault on the seat of American democracy,” Smith told reporters after the indictment Tuesday. “Described in the indictment, it was fueled by lies. Lies by the defendant.”
  • US mortgage rates rose last week, curbing demand for those looking to buy a home. The contract rate on a 30-year fixed mortgage rose by 6 basis points to 6.93% in the week ended July 28, according to Mortgage Bankers Association data out Wednesday. That took an index of home-purchase applications down to the lowest in nearly two months, and dragged down the overall measure of applications which also includes refinancing. Mortgage rates have climbed in recent months back toward levels last seen in the early 2000s. While its unclear whether the Federal Reserve will raise borrowing costs again in September, officials are expected to keep interest rates elevated for some time until they’re convinced inflation is on a sustained downward trend.
  • Fitch Ratings’ downgrade of US government debt sparked criticism from Washington and Wall Street even amid unease that swollen fiscal deficits risk eventual turbulence in markets, the economy and next year’s presidential election. Fitch cut the US’s sovereign credit grade one level from AAA to AA+. The move comes just two months after it warned the rating was under threat as lawmakers flirted with default by battling over raising the nation’s debt limit. The credit grader justified the shift by arguing the country’s finances will likely deteriorate over the next three years given tax cuts, new spending initiatives, economic shocks and repeated political gridlock.
  • Economists at Bank of America Corp. revoked their forecast for a recession in the US, becoming the first large Wall Street bank to officially reverse its call amid growing optimism about the economic outlook. The change comes just a week after Federal Reserve Chair Jerome Powell told reporters that the central bank’s own economists are no longer forecasting a recession. “Recent incoming data has made us reassess our prior view that a mild recession in 2024 is the most likely outcome for the US economy,” BofA economists, led by Michael Gapen, wrote in a note to clients on Wednesday.
  • Inc. is launching the biggest overhaul of its grocery business since it acquired Whole Foods Market six years ago—revamping stores, testing new highly automated warehouses and, for the first time, offering fresh-food delivery to customers who aren’t Prime subscribers. In a move likely to play well with shoppers, the company also plans to merge its various e-commerce supermarket offerings—from Whole Foods, Amazon Fresh,—into one online cart. The changes, which will roll out in the coming weeks and months, mark the Seattle-based company’s latest effort to grab a bigger share of a US grocery market that UBS Group AG analysts estimate is worth $1.5 trillion. The tech behemoth has elevated a slate of more traditional retail executives to help. Tony Hoggett, the former Tesco Plc executive leading the charge, has deep brick-and-mortar experience but confronts a landscape dominated by the likes of Walmart Inc. and Kroger Co.
  • CVS Health Corp. beat estimates for second-quarter profit and sales, a sign of strength as the drugstore chain cuts staff to reduce costs and focuses on broadening its health-care offerings. Adjusted earnings for the quarter were $2.21 a share, according to a statement Wednesday, beating the $2.10 average estimate of analysts surveyed by Bloomberg. Revenue rose 10% from a year ago to $88.9 billion, also exceeding estimates. The company maintained its annual adjusted profit forecast of $8.50 to 8.70 a share.  CVS has been taking steps to move away from its retail roots and expand further into other dimensions of health care, in part with the recent acquisitions of home health-care provider Signify Health Inc. and primary care company Oak Street Health Inc. On Tuesday, the company said it would cut 5,000 jobs from its workforce of 300,000 as part of an initiative to re-prioritize investments around care delivery and technology.
  • Speculation is growing the Bank of England will surprise economists by signaling an increase to the pace of bond sales as it looks to reduce its outsized footprint in the market. Officials may say as soon as Thursday they will start shrinking their balance sheet at a faster pace, according to analysts at firms including Capital Economics and BNP Paribas. The BOE halted reinvestments of its maturing gilts and has been actively selling bond sales since September, targeting a £80 billion annual portfolio reduction. While most economists expect the overall target to be raised because there are more gilts maturing in the coming year, an increase to outright bond sales could catch the market off guard. Capital Economics says the pace could increase to £120 billion, with bond sales almost doubling to £70 billion.
  • European natural gas prices rose as additional works at a massive Norwegian field tightened the continent’s supplies, already curbed by lower imports of the fuel on tankers. Benchmark futures advanced as much as 5.3%. Capacity at the Troll field will be further reduced Wednesday amid maintenance at other Norwegian and some UK production facilities. Supply to Europe, which is coping without much of the usual Russian pipeline flows, is being closely scrutinized as dependence on imports from other sources surged after the invasion of Ukraine. While summer demand is low and storage sites are more than 85% full, any unplanned disruptions in the winter time could bring back volatility to the market.
  • Russian drones struck a Ukrainian port on the Danube River, driving global wheat and corn prices higher as Moscow continues its campaign to cripple Kyiv’s ability to export food. The attack damaged grain storage facilities, a fuel tank and administrative buildings in the Odesa region in southwestern Ukraine, the country’s prosecutor’s office said Wednesday. Government and industry officials with knowledge of the situation said it hit Izmail, one of Ukraine’s biggest river terminals near the border with Romania, although the head of the port said it was still operating. “Russian terrorists again were attacking ports, grain, global food security,” Ukrainian President Volodymyr Zelenskiy said on Telegram. “The world has to react. When civilian ports are targets, when terrorists deliberately destroy even silos — this is a threat to everyone on all continents.”
  • Aviation company Volato is going public via a blank-check transaction valuing the combined company at $261 million on an enterprise basis in a deal paired with an unusual funding round. The initial close of the Series A funding was completed in July and involved venture capital firm, which is a backer of the special purpose acquisition company merging with Atlanta-based Volato, according to documents reviewed by Bloomberg News. In conjunction with that $10 million financing, $38 million in earlier convertible notes were converted into Series A preferred equity. The merger is expected to be completed this year, with Volato trading under the symbol SOAR, according to the documents. Volato co-founder and Chief Executive Officer Matt Liotta will lead the company.
  • Carlyle Group Inc. reported a decline in second-quarter profit, underscoring the challenge facing new Chief Executive Officer Harvey Schwartz as he seeks to reposition the private equity firm. Distributable earnings tumbled 26% from a year earlier to $388.8 million, or 88 cents a share, the Washington-based company said Wednesday in a statement. That still beat the 67-cent average estimate of analysts surveyed by Bloomberg. The pace of investment exits, as well as new deals, slowed for Carlyle’s key funds amid an industrywide slump. The results reinforce the unpredictable backdrop for Schwartz, 59, as the former Goldman Sachs Group Inc. executive hammers out a plan to boost the stock price and steady the business after years of leadership churn.