The Daily – August 26, 2022

August 26, 2022

Daily Market Commentary

Canadian Headlines

• Canada’s Open Text Corp. struck a deal to buy UK software firm Micro Focus International Plc for about $6 billion including debt, building on a strategy of growth by acquisition. The Waterloo, Ontario-based company is offering 532 pence per Micro Focus share, a 99% premium to Thursday’s closing price. Open Text said it will fund the cash takeover bid with $4.6 billion in new debt, $600 million from an existing credit line and cash on its balance sheet. Shares of Micro Focus jumped 93% to 515.6 pence at 8:05 a.m. in London on Friday, the most on record. The stock had fallen 39% in the past year through Thursday’s close. The Newbury, UK-based company sells enterprise software to thousands of organizations including Airbus SE, Hewlett Packard Enterprise Co. and Kellogg Co., according to its website. Its products help companies with cybersecurity, IT operations management, communications and messaging. Micro Focus says it does business with a majority of the Fortune Global 500.

World Headlines

• European equities edged lower as traders braced for a key speech by Federal Reserve Chair Jerome Powell that’ll provide clues on the pace of monetary tightening. The Stoxx Europe 600 Index dropped 0.2% by 10:46 a.m. in London, giving up earlier gains of as much as 0.5%. Miners and banks outperformed, while media stocks were laggards. The summer rally in European shares has run into concerns that the Fed will continue raising rates to tame inflation despite fears of an economic slump. The main regional benchmark is set for a second week of losses. Powell is slated to speak at 10 a.m. Washington time, with market participants watching for his comments on the pace of interest rate increases ahead of the Fed’s Sept. 20-21 policy meeting.
• US equity futures slipped Friday and Treasuries retreated as a chorus of Federal Reserve hawks prepared the ground for a much-anticipated speech by Chair Jerome Powell that’s set to shape views on the pace of monetary tightening. S&P 500 and Nasdaq 100 contracts were in the red after Wall Street’s rally on Thursday. The 10-year Treasury yield climbed about five basis points to 3.08%. The dollar was steady. In addition to Powell’s speech later on Friday, traders have to keep an eye on a raft of US data, including personal spending and the Fed’s preferred measure of inflation, both of which are expected to show price pressures cooling. A rebound in stocks and bonds from June lows, fueled by speculation the Fed may turn more dovish as inflation peaks, has left financial conditions at easier levels than before the central bank began its aggressive tightening campaign. The question is whether Powell will try to reset market expectations to ensure that the brakes continue to be applied to economic activity.
• Asian stocks advanced for a second day, as technology shares gained ahead of Federal Reserve Chair Jerome Powell’s speech at Jackson Hole. The MSCI Asia Pacific Index climbed 0.4%, trimming gains later in the day as US futures slipped. TSMC and Samsung were among the biggest boosts as global chipmakers rallied, while Alibaba and peers climbed after reports of talks to avoid delistings of Chinese stocks in New York. Australian equities were among the biggest gainers, with the benchmark gauge up 0.8%. Investors will monitor Powell’s remarks later Friday for clues on the path of the Fed’s interest rate hikes ahead of its September meeting. Recent comments by Fed officials have indicated the US central bank may focus on taming high inflation, triggering a selloff in equities earlier this week.  .
• Oil was on track for a weekly gain amid a tightening supply outlook, with investor attention turning to a key speech on the US economy later Friday by Federal Reserve Chair Jerome Powell. West Texas Intermediate futures edged above $93 a barrel after closing 2.5% lower in the previous session as traders digested hawkish headlines from Fed officials. Powell is expected to reiterate the resolve of the central bank to keep raising interest rates to rein in rampant inflation. Crude rallied earlier this week after Saudi Arabia flagged potential cuts to OPEC+ output to stabilize a volatile market, a move supported by other cartel members including Iraq and Kuwait.
• Gold dropped slightly and copper gained before a key speech by Federal Reserve Chair Jerome Powell later Friday that will be eyed for clues on the future path of monetary policy. Bullion pared a small weekly gain as the dollar rose, having climbed in the past three sessions amid uncertainty over recession risks as the Fed tightens policy to fight inflation. The government’s main measures of US growth pointed in different directions in the first half, adding to debate on whether the central bank will slow down its aggressive rate hikes. The metal is down more than 4% this year as higher interest rates dull the allure of non-yielding assets. Powell — who is scheduled to deliver the keynote address at the annual Jackson Hole symposium at 10 a.m. Washington time — may restate his resolve to keep on tightening as US price pressures remain elevated.
• Corn futures headed for the biggest weekly gain in a month as a US crop tour indicated that many fields in the top-producing state of Iowa were in worse shape than last summer. Reports from the four-day Pro Farmer Midwest Crop Tour suggest that yields are expected to fall compared to 2021. Iowa is critical for corn output in the US, the world’s top producer and exporter. Scouts have expressed shock at just how badly conditions have deteriorated following months of poor weather across the country. As the tour wraps up, analysts will use the reports and their own outlooks to make corn and soybean supply projections for the entire country on Friday.
• Ardian SAS is shelving the planned sale of a majority stake in Italian health-care software provider Dedalus, people with knowledge of the matter said. The Paris-based buyout firm is putting the process on hold due to valuation and financing concerns, the people said, asking not to be identified because the information is private. Ardian was seeking to value the business at more than 3 billion euros ($3 billion), Bloomberg News has reported. The deal joins a number of transactions that have recently been put on ice as rocky credit markets make it more challenging for private equity firms to borrow money cheaply.
• Semiconductor Manufacturing International Corp. outlined plans to build a $7.5 billion chip plant near Beijing in conjunction with the local government, boosting capacity in more mature technology that’s relatively freer of US sanctions. The company has signed an agreement with two government agencies from the northern city of Tianjin to establish a plant with the capacity to produce 100,000 12-inch wafers a month. The facility will focus on more mature 28 nanometer to 180 nanometer chip processes, the company said in a filing on Friday. SMIC intends to bankroll the project from its own reserves, while relying on the twin agencies to provide support in land, infrastructure and talent. SMIC is at the vanguard of China’s long-term ambition to produce chips sophisticated enough to replace American silicon, which comprise the majority of the country’s annual $155 billion in semiconductor consumption. But it’s grappling with steadily tightening US export restrictions as Washington tries to contain Beijing’s technological rise. That’s on top of rapidly crumbling global electronics demand, as consumers leave a pandemic-era boom behind.
• Panasonic Holdings Corp., which supplies electric car batteries to Tesla Inc., is in talks to build another battery plant in the US worth around $4 billion, the Wall Street Journal reported Friday, citing people familiar with the matter that it didn’t identify. Oklahoma is a likely location for the new plant, although there are no guarantees an agreement will be reached, according to the report. Any new facility would be on top of another $4 billion EV battery factory that Panasonic said in July it plans to build in Kansas.
• Porsche has lined up investor interest for its initial public offering at a valuation of as much as $85 billion, signaling one of Europe’s biggest-ever listings is poised to go ahead despite market headwinds, according to people familiar with the matter. Volkswagen AG’s luxury brand has secured pre-orders that exceed the shares on offer at a valuation between 60 billion and 85 billion euros ($85 billion), said the people, who asked not to be identified because discussions are private. Porsche plans to announce its intention to float in Frankfurt in the first week of September after supervisory board sign-off, barring unexpected market shocks, they said. Big-name investors including T Rowe Price Group Inc. and Qatar Investment Authority have already indicated interest in subscribing to the IPO in that valuation range, the people said. Porsche has also been gauging interest from billionaires including the founder of energy drink maker Red Bull, Dietrich Mateschitz, as well as LVMH Chairman Bernard Arnault, the people said.
• UK households will pay almost triple the price to heat their homes this winter compared with a year ago, a jarring increase for millions of people already struggling to afford everyday essentials. Industry regulator Ofgem raised its cap on domestic energy bills to a record £3,549 ($4,189) beginning Oct. 1. That amount is expected to go even higher in January as the UK competes with other nations for limited gas supplies. “Come October, low-income households will simply not turn on their heating,” said Peter Smith, director of policy and advocacy for the National Energy Action charity. “An increase of this much cannot be budgeted for by households with no wiggle room.”
• Blackstone Inc. is planning to file as soon as next month for an initial public offering of its Indian shopping mall portfolio that could raise about $500 million, people familiar with the matter said. The private equity firm has been interviewing advisers for the Mumbai listing of a real estate investment trust, according to the people, who asked not to be identified because the information is private. Blackstone’s Indian retail portfolio, which is held through its Nexus Malls unit, could be valued at about $2.5 billion, the people said. The REIT could be listed as soon as 2023, they said. Preparations are at an early stage, and details of the listing could change, the people said. A representative for Blackstone declined to comment.
• China’s securities regulator has told Credit Suisse Group AG to fix the high turnover of senior executives at its securities venture before it is allowed to roll out its new business on the mainland. Nearly half the senior personnel at its China securities venture have left in recent months, prompting the regulator to postpone an on-site inspection, Bloomberg News reported last week. That would have been the final step Credit Suisse needed before it’s allowed to start building out its wealth management business and expand equities trading services beyond Shenzhen into other cities. Credit Suisse is being urged “to make preparations for on-site inspection of new businesses in accordance with relevant regulations,” the China Securities Regulatory Commission said in a response to Bloomberg News on Friday.
• The Federal Reserve Bank of Kansas City’s annual gathering in Jackson Hole, Wyoming is underway. Here’s what to expect from the two-day conference featuring central bankers from around the world: Returning to an in-person conference for the first time since the pandemic spread in 2020, the heavyweight lineup is headlined by Fed Chair Jerome Powell with a speech on Friday morning, at 10 a.m. Washington time. Investors will be listening closely for any clues about how the US central bank is thinking about the pace of interest rate increases ahead of its Sept. 20-21 policy meeting, after raising its benchmark rate by three-quarters of a percentage point at each of its last two meetings.
• French electricity for next year soared past 1,000 euros ($1,000) on Friday, the latest record in a rally that’s seen the power price gain more than 10 times in the last year. Futures are smashing records on an almost daily basis as Russia constricts the supply of natural gas ahead of the crucial winter heating period. The unprecedented surge in energy costs is fueling inflation and threatening the finances of households and businesses across Europe. European governments have started to take the drastic step of limiting energy use, such as banning outside lighting for buildings in Germany and lowering indoor heating temperatures. In the UK, energy bills are set to soar in October after the energy regulator raised its cap on costs. The rising prices may force many people in the country to curb energy use because they can’t afford it this winter.
• Merck & Co.’s talks to buy cancer-drug maker Seagen Inc. have stalled for now, threatening what would be the pharmaceutical giant’s biggest deal in more than a decade, according to people familiar with the matter. The companies have so far failed to agree on a price, said the people, who asked not to be identified because the information was private. The talks could still resume and possibly yield an agreement, the people said. Seagen shares slumped 11% in trading before US markets opened. A spokesperson for Seagen, previously known as Seattle Genetics, declined to comment. A representative for Merck didn’t immediately respond to a request for comment.
• LastPass, a password manager used by more than 33 million people around the world, said a hacker recently stole source code and proprietary information after breaking into its systems. The company doesn’t believe any passwords were taken as part of the breach and users shouldn’t have to take action to secure their accounts, according to a blog post on Thursday. An investigation determined that an “unauthorized party” cracked into its developer environment, which is the software that employees use to build and maintain LastPass’s product. The perpetrators were able to gain access through a single compromised developer’s account, the company said.
• T-Mobile US Inc. is partnering with Elon Musk’s SpaceX to offer wireless phone service in remote parts of the US where coverage is spotty. Musk and T-Mobile Chief Executive Officer Mike Sievert announced the partnership at an event Thursday evening at SpaceX’s Starbase in Boca Chica, Texas. The service will launch next year and work with existing phones for free on the company’s most popular plans, rolling out in stages, Sievert said. Customers on lower-priced plans may pay an extra fee. Musk said the service, which leverages SpaceX’s Starlink satellites, should be able to handle messages, images and possibly small video files, but warned that transmissions may take as long as half an hour early in the roll-out. Voice capabilities will come later.
• The end of cheap money. Soaring energy prices and crippling inflation. A recession on the horizon. For the UK housing market, that toxic mix is fueling concern that a sharp correction is on its way.  Cracks are already appearing amid the mounting pressures. Home values in London are flat or falling in almost half of the city’s boroughs, according to an analysis by Bloomberg News of preliminary Land Registry data. They’re also down in Yorkshire and the Humber on a monthly basis. Surveyors are becoming less optimistic about prices and say fewer people are starting to look for a home, according to the Royal Institution of Chartered Surveyors. Declines in each metric typically portend falling values.
• The estate of the late Microsoft Corp. co-founder Paul Allen is set to auction more than 150 artworks worth an estimated $1 billion at Christie’s New York this November. That would make it the most expensive public single-collection sale in history, besting a record set just a few months ago, when property from the divorced couple Harry and Linda Macklowe achieved a collective $922 million over the course of multiple auctions at Sotheby’s. Allen, the world’s 27th richest person when he died in 2018, was a prolific art collector who bought and sold at the top of the market. In 2016, he was the anonymous buyer of an $81.4 million painting by Claude Monet, an auction record at the time. That same year, he sold a Gerhard Richter for $25.6 million, doubling his money in just a decade.

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

*All sources from Bloomberg unless otherwise specified