August 25, 2022

Daily Market Commentary

Canadian Headlines

  • Toronto-Dominion Bank, which has struck deals this year for two major acquisitions to expand in the US, reaped the benefit of higher interest rates and continued strong loan growth last quarter. Net interest income rose 17% to C$7.04 billion ($5.45 billion) in the fiscal third quarter, the Toronto-based company said in a statement Thursday. Analysts estimated C$6.62 billion, on average. Overall profit also beat projections. Toronto-Dominion is seeking to bolster its already-formidable US retail banking operation with the $13.4 billion takeover of First Horizon Corp., and earlier this month struck a $1.3 billion deal to buy Cowen & Co. to bulk up its presence in American capital markets. Even with the First Horizon deal yet to be completed, Toronto-Dominion has an outsize presence in personal banking and is Canada’s most rate-sensitive lender, which benefited the company as central banks hiked rates last quarter.
  • Canadian Imperial Bank of Commerce posted fiscal third-quarter profit that topped analysts’ estimates as rising interest rates and the country’s housing market boosted lending income. Net interest income rose 12% to C$3.24 billion ($2.51 billion) in the three months through July, the Toronto-based company said in a statement Thursday. CIBC has been investing in technology and front-line, revenue-generating employees in a bid to spur faster growth than at its Canadian banking peers. While Canadian housing prices and sales have started to cool, mortgage balances still rose 11%, and the domestic personal banking unit’s net interest margin expanded 10 basis points to 2.29%.
  • Gold Fields Ltd. Chief Executive Officer Chris Griffith said he’s getting positive investor feedback on the miner’s $7 billion acquisition of Canadian Yamana Gold Inc. after initial concerns it was paying too much. The Johannesburg-based miner’s investors are gaining more understanding of the deal’s rationale before a vote, probably at the end of October or in early November, Griffith said. Some investors initially balked at the 34% premium Gold Fields offered to Yamana investors, and the subsequent share dilution. Gold Fields on Thursday raised its interim dividend by 43% and has promised a more generous payout policy as it seeks investor backing for the deal. Gold Fields, which has BlackRock Inc. and South Africa’s Public Investment Corp. among its biggest shareholders, needs investor backing for its takeover of Yamana, which has assets in Canada, Argentina, Chile and Brazil. The acquisition will enable Gold Fields to continue expanding in the Americas, after shifting focus from its home country, where producers are struggling with the geological challenges of operating some of the world’s deepest mines.

World Headlines

  • European stocks erased gains to trade little changed as uncertainty around the Federal Reserve’s outlook on rate hikes overshadowed an early boost from more stimulus from China. The Stoxx 600 Index was up less than 0.1% by 10:51 a.m. in London after earlier rising as much as 0.8%. Energy and mining led the advance among sectors, while retail underperformed. Shell Plc and Glencore Plc outperformed. A rally in European stocks since early July has sputtered recently as investors grew more cautious around the pace at which the Fed could slow rate hikes in response to peaking inflation. A rise in bond yields has also pressured rate-sensitive growth stocks, and strategists expect markets to remain volatile in the build up to Fed Chair Jerome Powell’s speech at Jackson Hole on Friday.
  • US futures rose Thursday as China’s massive stimulus steadied some nerves in the anxious wait for a key speech by Federal Reserve Chair Jerome Powell. Treasury yields and a dollar gauge dipped. Contracts on the S&P 500 and Nasdaq 100 pushed higher in the wake of positive closes for both gauges. Sentiment was boosted after China stepped up stimuluswith a further 1 trillion yuan ($146 billion) of measures. Traders expect markets to remain volatile as they look to Powell’s comments due Friday at the Jackson Hole meeting for clues on the pace of US monetary tightening. Fed officials in the run-up to Jackson Hole have been clear they see more monetary tightening ahead, a message that’s eroded a bounce in stocks and bonds from mid-June troughs. The tension in markets is whether those assets will continue to head back toward the lows of the year.
  • Asian stocks rebounded strongly after a five-day loss to head for their biggest advance since the end of May, boosted by a late surge in Hong Kong shares. The MSCI Asia Pacific Index climbed as much as 1.6% late in the Asian day, with Hong Kong-listed Chinese tech stocks like Alibaba and Tencent being the biggest contributors to its gain. The gauge’s increase earlier in the session was driven by export-heavy markets like Korea and Taiwan as the dollar weakened. The Hang Seng Index surged 3.6%, the most since April 29, leading the late regional rebound that some traders attributed to short-covering ahead of a key speech by Federal Reserve Chair Jerome Powell at the Jackson Hole conference. The morning trading session in Hong Kong was suspended due to a tropical storm warning.
  • Oil held gains as falling US stockpiles and the possibility of OPEC+ cutting output heighten the prospects of an increasingly tight market. Brent futures traded near $102 a barrel. There have been a deluge of bullish headlines recently, with Saudi Arabia suggesting that OPEC+ could intervene if prices drop too far. US inventories fell last week as the country exported its highest-ever volume of crude and refined products with consumers across the globe rushing for supplies. OPEC+ members Iraq and Kuwait have expressed support for the Saudi suggestion for market intervention, while export problems in Kazakhstan have kept supply concerns at the forefront. These have bolstered trading activity with Brent futures volumes topping 1 million contracts for the first time since the middle of July. Key timespreads that gauge market strength have also firmed markedly.
  • Gold climbed for a third day on a weaker dollar, with traders waiting for more US economic data ahead of a key speech by Federal Reserve Chair Jerome Powell. Bullion rose as much as 0.7% as the greenback slipped back amid better sentiment in equity markets. Earlier in the week it slid to a three-week low as the dollar rallied on expectations the US economy will outperform Europe’s while the continent is gripped by an energy crisis. Gold has been rangebound with a mild bullish bias ahead of the symposium as any dovish forward-looking statements from Powell could undermine the dollar’s strength and boost bullion, said Gnanasekar Thiagarajan, director at Commtrendz Risk Management Services. “With manufacturing activity going down, the central bank is expected to tone down its monetary tightening stance.”
  • The euro area has already entered a “shallow” recession that’s been triggered by surging energy prices and will last through year-end, according to economists at UBS Group AG. The 19-nation economy will shrink by 0.1% in the third quarter and 0.2% in the fourth, the analysts predicted Thursday in a report to clients. Despite that, they upgraded their full-year outlook after a strong performance in the three months through June. The growth forecast for 2023 was cut to 0.8% from 1.2%. A crucial assumption is that natural gas prices will climb further, but there’ll be no severe shortages. Should rationing become necessary, “the economic damage would likely be much worse,” UBS said.
  • Russian coal exports were effectively halted by a European Union ban on entities within the 27-nation bloc servicing shipments of the fuel to anywhere in the world. Suek JSC, Russia’s largest thermal coal miner, was unable to ship the fuel since mid-August, according to people familiar with the situation who asked not to be named because the matter is private. The insurance and reinsurance markets are dominated by EU, UK and Swiss companies, making it hard for shipowners to find cover, the people said. An EU ban on imports of Russian coal and other goods into the bloc started on Aug. 10, following a wind-down period of four months. In a clarification earlier this month, the European Commission said the sanctions also prohibit EU operators from providing services — such as financing and insurance — to all shipments of such products originating in Russia.
  • General Electric Co. is selling new generator technology to startup Hyliion Holdings Corp. and will take a roughly 3% stake in the electric trucking startup in a cash-and-stock transaction. The system, cooked up by engineers at GE’s 3-D printing unit, can use as many as 20 different types of fuel and will be integrated into Hyliion’s next-generation electric truck powertrain platform. Hyliion rose as much as 12% in premarket trading Thursday. Cedar Park, Texas-based Hyliion is also paying $15 million in cash for the GE assets as well as related intellectual property and some 3D-printing machines needed to manufacture the generators. The deal monetizes an invention by GE Additive, the conglomerate’s 3-D printing unit built via acquisitions prior to Chief Executive Officer Larry Culp’s tenure. The unit is housed within GE’s aviation division. Electric vehicle startups across the industry are looking for partners to bolster their chances at survival in the currently sluggish market — with Canoo Inc. recently striking a deal to sell EVs to Walmart Inc. in exchange for potentially around 25% of its shares, and Nikola Corp. acquiring battery startup Romeo Power Inc.
  • Snowflake Inc. surged in premarket trading after its forecast for quarterly sales topped analysts’ estimates, reassuring Wall Street that companies are still investing in their technology systems to boost efficiency. Product revenue at the maker of software to organize and analyze data in the cloud will be as much as $505 million in the period ending in October, the company said Wednesday in a statement. Analysts, on average, estimated $501.1 million, according to data compiled by Bloomberg. Product sales make up the majority of Snowflake’s total revenue and are watched closely by investors and analysts. Snowflake rose to prominence in September 2020 with one of the biggest U.S. initial public offerings for a software company. Since reaching a record share price of $401.89 in November, the stock has tumbled 60%, as growth has slowed and valuations across the industry have been dented by a weaker overall economic outlook. The shares jumped 18% in premarket trading on Thursday before exchanges opened in New York, having closed earlier at $159.49.
  • Salesforce Inc. gave a forecast for quarterly revenue that fell short of analysts’ estimates, suggesting that a choppy economy may be causing some customers to slow spending on business software. The shares declined in premarket trading. Sales will be as much as $7.83 billion in the period ending in October, the San Francisco-based company said Wednesday in a statement. Analysts, on average, projected $8.05 billion, according to data compiled by Bloomberg. For the full year, the company cut its revenue forecast slightly to as much as $31 billion from $31.8 billion. The reduced guidance reflects a shift in the tone of customers as the quarter progressed, which particularly hit in July, said Mike Spencer, recently appointed head of investor relations, in an interview.
  • More than half of UK households risk being pushed into energy poverty this winter by soaring bills that threaten suppliers with rising amounts of debt that simply can’t be repaid. The crisis could have a bigger impact on households than the 2008 financial crisis, according to consultancy Baringa Partners. The bleak warning comes as bills are set to surge roughly 80% from October, just as the arrival of colder weather boosts energy demand. Winter energy bills are expected to be more than triple what they were a year ago. That will further stretch consumer budgets being hit by a wider cost-of-living crisis that’s stoking fears of a recession and prompting calls for the government to offer more help.
  • The US and the European Union condemned Russia after a deadly attack on a railway station in the Dnipropetrovsk region of Ukraine that directly hit a passenger train. Russia said it hit a military target. Pressure piled onto European consumers and industry as German and French power prices hit fresh records, driven by tighter gas supplies from Russia.  International concern remained high over Zaporizhzhia nuclear power plant, Europe’s biggest atomic energy station, which has been hit by shelling in recent weeks.
  • Peloton Interactive Inc. gave a bleak forecast for the current quarter, with losses piling up and sales falling more steeply than Wall Street expected, renewing concerns about the fitness company’s comeback plan. Revenue will be $625 million to $650 million in the fiscal first quarter, the company said Thursday, far short of the $772 million analysts were predicting. Its loss on an adjusted basis will be $90 million to $115 million, compared with an average estimate of about $93 million. The outlook follows a similarly dire fourth quarter, when sales plunged 28% to $678.7 million and the adjusted loss was $288.7 million. On a net basis, the loss was $1.2 billion — about four times the size of the company’s loss a year earlier.
  • China stepped up its economic stimulus with a further 1 trillion yuan ($146 billion) of funding largely focused on infrastructure spending, support that likely won’t go far enough to counter the damage from repeated Covid lockdowns and a property market slump. The State Council, China’s Cabinet, outlined a 19-point policy package on Wednesday, including another 300 billion yuan that state policy banks can invest in infrastructure projects, on top of 300 billion yuan already announced at the end of June. Local governments will be allocated 500 billion yuan of special bonds from previously unused quotas.
  • Citigroup Inc. will wind down its Russian consumer bank after attempts to sell the unit were stymied by Russia’s invasion of Ukraine and subsequent sanctions on the nation’s financial system, people familiar with the matter said. The bank is expected to announce the decision later on Thursday, the people said. The New York bank had said it would exit Russian consumer banking in April 2021, part of a broad pullback from international consumer operations. The bank had been in discussions to sell operations there to Russia’s VTB. U.S. and European authorities have since sanctioned VTB to weaken Russia financially and undermine Moscow’s war in Ukraine.
  • US agencies that lend hundreds of millions of dollars a year to individuals and small businesses must develop plans for how they will disregard medical debt in assessing loan eligibility, under a Thursday directive from the White House’s budget office. The directive, signed by Budget Director Shalanda Young, is part of the Biden administration’s push to help Americans saddled with medical debt receive more favorable terms on loans, including those to buy a home. Half of insured Americans owe medical debt, a February survey of 1,250 US adults found.
  • The Federal Reserve hasn’t yet raised interest rates to levels that are weighing on the economy and may have to take them above 4% for a time, Kansas City Fed President Esther George said. “It’s very important that we are clear in our communication about the destination we are headed,” she told Michael McKee and Kathleen Hays in an interview with Bloomberg Television in Jackson Hole, Wyoming, where she hosts the Fed’s annual policy retreat.
  • After a $280 billion rally since late May, Tesla Inc. is using a trusted method for fueling further gains. It may not pan out like that. The electric vehicle maker’s second stock split in as many years takes effect when US markets open on Thursday, a move aimed at bolstering an already strong retail investor base. The previous one in 2020 was among a number of factors that drove the stock up more than eightfold that year. The latest split comes close on the heels of similar moves by Amazon.com Inc.and Alphabet Inc., whose subsequent stock performances have suggested this once dependable tactic to boost valuation is losing its potency amid the ravages of a bear market. Amazon shares fell more than 10% from when it announced the split to the day it became effective, while Alphabet lost 21% between those events.
  • Pfizer Inc.’s experimental vaccine for a potentially dangerous lung infection called respiratory syncytial virus hit its main goal of preventing symptoms in a large trial of 37,000 older adults.  Based on the results, the company plans to apply this fall for US approval, according to a statement, making the product a potential early entry in what could be a large, new respiratory disease vaccine market.  Pfizer anticipates it could get a priority review of the vaccine, which could shorten its path to the market, William Gruber, who heads the company’s clinical vaccine research and development, said in an interview.

Cnooc Ltd. more than doubled its first half profits from a year ago as China’s biggest offshore driller benefited from sky-high oil and gas prices.  The firm posted 71.9 billion yuan ($10.5 billion) in profits in the first half of the year, more than doubling the 33.3 billion yuan earnings it made in the same period last year, according to an exchange filing. Last month it flagged that net income would be 70.5 billion to 72.5 billion yuan in a preliminary filing. Among China’s three state-owned oil giants, Cnooc has the most direct exposure to global energy prices because it lacks the massive fuel refining and marketing business of its peers Sinopec and PetroChina Co. Global oil prices were about 60% higher over the first half than the same period on 2021 as Russia’s invasion of Ukraine raised fears of resource scarcity.

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

*All sources from Bloomberg unless otherwise specified