The Daily – August 24, 2022

August 24, 2022

Daily Market Commentary

Canadian Headlines

• Royal Bank of Canada’s capital-markets division dragged down the company’s results last quarter as slumping investment-banking activity took a toll on revenue, while a deteriorating economic outlook prompted a bigger-than-expected provision for loan losses. RBC Capital Markets’ revenue fell by a third to C$1.65 billion ($1.27 billion) in the fiscal third quarter, the Toronto-based bank said in a statement Wednesday. Overall profit missed analysts’ estimates. Plunging equity markets have dried up investor demand for initial public offerings and share sales, reducing the fees investment banks reap from arranging the transactions. Despite the quarter’s turbulent markets, trading revenue also fell, failing to counter the hit from the investment-banking downturn.
• National Bank of Canada’s traders helped the firm weather a downturn for investment-banking fees, boosting revenue in the lender’s capital-markets business. Revenue in the financial-markets unit rose 14% to C$611 million ($470 million) in the fiscal third quarter, the Montreal-based company said in a statement Wednesday. Analysts had estimated C$576.5 million. Overall profit also topped projections. Among Canada’s six biggest banks, National Bank generates the largest portion of its revenue from capital-markets activities. While a dearth of initial public offerings and other transactions hurt investment-banking revenue, last quarter’s volatile markets helped trading revenue rise 18%.

World Headlines

• European stocks erased early declines in volatile trading, although fears of a hawkish-for-longer Federal Reserve and a looming recession capped risk demand. The Stoxx Europe 600 Index was little changed as of 9:41 a.m. in London after earlier falling as much as 0.7%. Retail and mining stocks were among the biggest decliners, while more defensive sectors like utilities and food outperformed. Consumer products were boosted by gains in Richemont after the luxury conglomerate sold a stake in its online retail business YNAP to Farfetch Ltd. After a strong summer rebound, the European equity benchmark has declined for three straight days as weaker-than-expected data reignited concerns of an economic contraction. Stocks have also been pressured by a potential energy crisis and a weaker euro, which has fallen below parity against the dollar for the first time in two decades.
• US index futures struggled for direction as investors digested the latest hawkish noises from the Federal Reserve amid mounting signs of a global economic slowdown. Futures on the S&P 500 and Nasdaq 100 fluctuated between modest gains and losses, with markets on edge ahead of the Jackson Hole central bankers’ retreat later this week. The 10-year Treasury yield held above 3% and the dollar was steady. Investors will pore over Fed Chair Jerome Powell’s speech at Jackson Hole on Friday for a sense of how hawkish the US central bank will be in the face of mounting economic challenges. A global rebound in equities from a June low has stalled ahead of the widely-anticipated event.
• Asian stocks headed for a fifth day of declines, weighed down by losses in China, with investors trimming risky bets as they await clarity on the Federal Reserve’s policy path at the Jackson Hole meeting. The MSCI Asia Pacific Index dropped as much as 0.7%, set for its longest losing streak in two months. The consumer discretionary sector was the biggest drag. China’s CSI 300 Index slumped 1.9%, the most among regional benchmarks, with electric-vehicle linked shares leading the declines after CATL reported weaker battery margins.
• Oil rallied for a second day as an industry report signaled another drawdown in US crude inventories, adding to a tightening supply outlook after Saudi Arabia flagged possible cuts to production. Brent futures rose 1.4% to trade above $101 a barrel in London. The American Petroleum Institute reported crude stockpiles dropped by 5.63 million barrels last week, according to people familiar. That followed news that exports from Kazakhstan may be disrupted for months. The market’s rally has spurred a more positive technical picture in the oil market, with Brent trading above its 200-day moving average. Timespreads that gauge market strength also jumped in recent days.
• Gold held an advance as investors weighed the outlook for the Federal Reserve’s monetary policy tightening path after new data pointed to some weakness in the US economy. On Tuesday, bullion snapped six straight days of declines as the dollar took a leg down, with investors awaiting the annual gathering of central bankers at Jackson Hole later this week and Fed Chair Jerome Powell’s speech on Friday. Investors are assessing how aggressively the Fed can continue hiking rates in the face of mounting risks to growth. Economic activity weakened from the US to Europe and Asia, reinforcing concerns that soaring prices and the war in Ukraine will tip the world into a recession.
• Russia will resurrect local bond sales as soon as next month and it wants yuan-denominated debt to eventually play a role as it retools its sanctions-hit markets with a view to its ally, China. Sales of ruble bonds, known as OFZs, could resume with small offerings in the second half of September after a six-month hiatus, according to a person familiar with the matter. The government froze weekly auctions in early February, just two weeks before Russia’s invasion of Ukraine, fulfilling less than a fifth of its first-quarter borrowing plan. At the same time, a long-mulled plan to debut Chinese currency notes locally is being dusted off with fresh urgency as yuan trading volumes surge after sanctions shut Russia out of its traditional markets in the US and Europe, the person said. It won’t be a quick process and won’t start this year, said the person, who requested anonymity because they’re not authorized to speak publicly.
• The euro is languishing below parity with the dollar after its latest selloff, and there’s little hope that even a hefty hike in interest rates would rescue it. Rather than monetary policy, it’s the interlinked threats of a recession and a Russian energy cutoff that are weighing down the common currency, according to analysts. Despite traders now bracing for one percentage points of rate hikes by October, such dynamics are hard for the European Central Bank to counter — even if it deploys the kind of outsized moves in borrowing costs enacted recently by the Federal Reserve.  “Rates haven’t been in the driver’s seat in FX markets, particularly in the past month — it’s really about global growth dynamics,” said Sam Zief, head of global FX strategy at JPMorgan Private Bank. “Big rate hikes aren’t currency supportive when they’re being done to keep inflation expectations anchored and hurting the growth outlook at the same time.”
• Schneider Electric SE is considering a bid to buy out minority shareholders of industrial software developer Aveva Group Plc, people familiar with the matter said. The French industrial conglomerate, which already owns about 60% of Aveva, has been studying a potential deal to acquire its remaining shares and take the company private, the people said. Aveva had lost nearly half its value in the 12 months through Tuesday. While the decline in Aveva shares has made the long-considered move more attractive, there’s no certainty Schneider will decide to proceed with an offer, according to the people, who asked not to be identified because the information is private.
• A recent rally in Indian stocks has fueled a $2 billion flurry of secondary offerings this month, with private equity giants from Blackstone Inc.to KKR & Co. selling down their holdings or heading for the exit completely. KKR sold its entire stake in Indian hospital chain Max Healthcare Institute Ltd.last week for about 91.5 billion rupees ($1.1 billion), the biggest secondary offering in August in the South Asian nation. Fellow US private equity firm Blackstone raised 40.5 billion rupees from the sale of shares of auto parts maker Sona BLW Precision Forgings Ltd. a day later. Singapore state investment fund Temasek Holdings Pte was also selling, raising about $100 million in consumer electrical products maker Crompton Greaves Consumer Electricals Ltd. at the beginning of August.
• Lygend Resources & Technology Co., a Chinese nickel producer and trader, is planning to start taking investor orders for an initial public offering in Hong Kong as early as September, according to people with knowledge of the matter. The Ningbo-based company is working with advisers and is seeking to raise as much as $1 billion. After its first application for the listing in February lapsed, it is planning to refile in September and could make its trading debut as soon as the same month, one of the people said. Lygend is the latest producer of battery raw materials to ride on the electric vehicle boom to raise funds in Hong Kong. Tianqi Lithium Corp., which was already listed in mainland China, raised $1.7 billion in a Hong Kong offering in July.
• Cathie Wood bought Zoom Video Communications Inc’s shares as they tumbled to levels seen before the stock’s meteoric rise during the pandemic. Two Ark Investment Management LLC funds bought more than 800,000 shares on Tuesday, which were worth $68.25 million as of the day’s close, according to Ark’s daily trading data compiled by Bloomberg. The buying marked Ark’s first purchase of the video-conferencing company’s shares in three months. Zoom plunged 17% to a closing price last seen in January 2020 after the firm cut its annual revenue forecast. Once a key pandemic beneficiary, the firm has been struggling as workplaces reopen, and said it’s losing sales from consumers and small business faster than anticipated.
• Republican Florida Governor Ron DeSantis is heavily favored to cruise to a second term in the November general election, but anything less than a convincing win over Democrat Charlie Crist could spell doom for any 2024 presidential aspirations. DeSantis hasn’t said he plans to run in 2024, but he will be seeking a dominant performance to maintain his status in polls as GOP voters’ preferred standard-bearer should former President Donald Trump decide against making a third White House bid. The election is also an opportunity for DeSantis to ward off other potential challengers. A blowout in the Nov. 8 general election would give the governor the bounce he needs to launch a presidential campaign. He’s already persuaded billionaires including Citadel founder Ken Griffin to open their wallets, and a resounding victory would likely attract more deep-pocketed donors.
• US diesel prices at the pump rose overnight, snapping the longest losing streak in two years as farmers stocked up on the fuel used to harvest crops, competing with truckers for a shrinking pool of supplies. The country’s average retail diesel price rose to $4.977 a gallon for the first time since peaking at $5.816 a gallon in mid-June, according to auto club AAA. The increase ends 62 consecutive days of declines. Prices at the pump have risen along with diesel futures contracts, which have gained more than 20% in a little over two weeks. While high gasoline prices have been a major political challenge for President Joe Biden, diesel is the fuel that powers the US economy, and rising costs to transport goods often filter through to consumers in the form of higher prices.
• Russia’s push to consolidate control over its natural gas is beginning to curb supply to customers in Asia, the first tangible example Moscow’s move to nationalize Sakhalin is affecting shipments to the region. Sakhalin Energy LLC, the new operator set up by Moscow to tighten ownership over the liquefied natural gas facility in Russia’s Far East, scrapped a shipment to at least one North Asian customer due to payment issues as well as delays signing revised contracts, according to traders with knowledge of the matter. Moscow transferred the ownership of the plant to Russia-based Sakhalin Energy from a Bermuda-based entity on Aug. 19 and customers were asked to commit to new deals and send payments to banks in Moscow from that date. Few buyers have signed the revised contracts, which could threaten the flow of gas to markets including Japan and South Korea, the traders said.
• Qatar’s sovereign wealth fund plans to invest $3 billion in key sectors of Pakistan’s economy as the gas-rich Gulf state extends its support to the cash-strapped South Asian nation. The $445 billion Qatar Investment Authority is evaluating strategic investments in the country’s main airports in Islamabad and Karachi, as well as in the renewable energy, power and hospitality sectors, according to people familiar with the matter. The investments from the QIA may partly overlap with the $2 billion in bilateral support Qatar has already planned for Pakistan, one of the people said, asking not to be identified because the information is private. The fund may end up investing more or less than $3 billion depending on the asset valuations and opportunities, the people said, without sharing a time frame.
• Asia’s largest high-yield bond funds are steering clear of China’s real estate sector as a worsening liquidity crisis weighs on the debt, according to research firm Morningstar Inc. The average weighting of China property bonds in the Asian junk funds dropped to 16% in June from almost 28% at the end of last year, as a crackdown on borrowing and a plunge in housing sales continue to batter the industry. The funds, from global asset managers BlackRock Inc., Fidelity International Ltd., HSBC Holdings Plc, Pacific Investment Management Co. and UBS Group AG, registered double-digit losses through the end of July, the report says. BlackRock’s high-yield fund cut its property exposure by almost half in June from December to about 15% of the portfolio. PIMCO reduced it to 12% from 22%.
• Six months into President Vladimir Putin’s invasion of Ukraine, the war has upended fundamental assumptions about Russia’s military and economy. When the US warned of impending war earlier this year, officials and analysts in Washington and Europe alike assumed Russia’s much larger and better equipped military would quickly dominate Ukraine’s forces. They also believed Putin would find himself constrained by a weak domestic economy.  US Chairman of the Joint Chiefs of Staff Mark Milley even warned Congress that Kyiv could fall within 72 hours of an invasion being launched. President Joe Biden said he would turn the ruble to “rubble.” In the Kremlin, meanwhile, Putin and his closest advisers saw Ukraine as a nation divided with incompetent leaders that would lack the will to fight.
• A whistle-blower’s complaint alleging Twitter Inc. ignored a rash of spam and bot accounts could help Elon Musk in his effort to walk away from a $44 billion buyout of the social-media platform, legal experts say.  Peiter Zatko, Twitter’s ex-head of security, alerted US authorities to “egregious deficiencies” in the company’s defenses against hackers, according to his complaint. Zatko, fired from Twitter earlier this year, said he raised concerns about the bots in early 2021 and was told by the head of site integrity that Twitter didn’t know how many bots were on the platform. His Twitter colleagues showed no interest in delving into the issue, according to the complaint. Twitter sued Musk in July to force him to complete his proposed acquisition. Since then, dozens of people, banks, funds and other firms have been subpoenaed in the Delaware lawsuit, with a trial scheduled to begin Oct. 17. At the center of Musk’s defense are the company’s disclosures about the quality of its customer base as it is affected by spam and automated accounts.
• Schneider Electric SE said it’s considering a bid to buy out minority shareholders of industrial software developer Aveva Group Plc. The French industrial conglomerate believes a full combination with Aveva would help it execute its growth strategy faster, it said in a statementWednesday that confirmed an earlier Bloomberg News report. It already owns about 60% of London-listed Aveva.  Schneider said no proposal has been made to Aveva yet and there’s no certainty it will proceed with an offer. Under UK takeover rules, it has until 5 p.m. on Sept. 21 to make a bid.

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

*All sources from Bloomberg unless otherwise specified