August 29, 2022

Daily Market Commentary

Canadian Headlines

  • A slump in capital-markets activity and expectations that the economy may take a turn for the worse are casting a pall over a Canadian bank earnings season that showed the lenders’ core businesses in otherwise solid shape. Five of Canada’s six largest banks posted fiscal third-quarter results last week, with many showing strong loan growth and widening lending margins — especially at Toronto-Dominion Bank — as interest rates rise. But those same rate increases have darkened the economic outlook, prompting the banks to stockpile more capital in case borrowers start to default. Volatile equity and debt markets, meanwhile, put the brakes on transactions that fuel the companies’ investment-banking franchises, cutting into one of their top sources of fee revenue. That trend took a heavy toll on Royal Bank of Canada, which reported earnings that missed analysts’ estimates. The S&P/TSX Commercial Banks Index is down 2.3% since Bank of Nova Scotia kicked off the reports, more than the 0.5% drop for the broader S&P/TSX Composite Index.
  • Prime Minister Justin Trudeau faces growing pressure to help Canadian households offset surging inflation as he meets with his cabinet in Vancouver next week to set his government’s fall agenda. Unlike many of his global peers, Trudeau has avoided taking new measures recently to ease the burden of rising prices, even with inflation at its highest level since the early 1980s. That may reflect a growing political sensitivity to criticism his government overspent during the pandemic, leaving the country with less fiscal room to tackle big future challenges like climate change. But there is also a wariness that doling out money to ease price pain may only wind up stoking more inflation.

World Headlines

  • European equities dropped on Monday, adding to last week’s selloff amid concerns about the economic impact from further central bank tightening, which officials embraced in Jackson Hole. The Stoxx Europe 600 slid 1.2% by 1:04 p.m. in Paris. Technology stocks underperformed as bond yields rose. Utilities also fell after comments from French Prime Minister Elisabeth Borne over the weekend heightened unease that a windfall tax could be imposed on “super profits.” UK markets were shut for a holiday. The benchmark has slumped to the lowest since July 21, breaking below its 50-day moving average, as worries about a downturn intensified after central bank officials said they are ready to follow through with higher interest rates, even if it does some damage. The region already faces a flurry of other headwinds, such as the prospects of gas rationing and political turmoil in Italy and the UK.
  • Contracts on the S&P 500 and Nasdaq 100 retreated more than 1%, with the latter underperforming after the tech-heavy gauge slumped the most in more than two months on Friday. A global share index fell to a one-month low and European stocks extended last week’s drop, with the rates-sensitive technology sector leading a broad-based decline. The Bloomberg Dollar Spot Index pushed toward the record hit last month as investors sought a haven from spiking volatility. The US two-year yield, sensitive to expectations around Fed policy, hit 3.47% in Asian trading, the highest since the global financial crisis. The 10-year yield climbed to about 3.10%. Powell in his address at the Fed’s Jackson Hole symposium flagged the likely need for restrictive monetary policy for some time to curb high inflation and cautioned against loosening monetary conditions prematurely. He also warned of the potential for economic pain for households and businesses.
  • Asian stocks tumbled, with the regional benchmark approaching a two-year low reached mid-July, as investors fled risk assets after the Federal Reserve signaled it will keep raising interest rates to rein in inflation. The MSCI Asia Pacific Index slumped as much as 2.3%, the most since June 13, with technology, financials and industrials the worst-performing sectors. Key equity gauges in Japan and Taiwan led regional losses, sliding more than 2% each. Most of the world’s top central bankers, including Chair Jerome Powell, delivered a stern message on the need to curb inflation as they gathered at the Jackson Hole symposium last week. Rates are heading higher and will stay there “for some time,” Powell said in a speech Friday, dashing hopes for investors betting the Fed will shift to rate cuts next year as growth slows.
  • Oil climbed as traders weighed risks to the supply outlook against pledges from leading central banks to raise interest rates further. West Texas Intermediate rose toward $94 a barrel, reversing an earlier decline, after gaining 2.5% last week. In Libya, clashes between militias in the capital left at least 23 dead, sparking fears of further upheaval in the OPEC nation. While Libya’s output so far remains stable, investors are watching for signs that the violence may again put oil shipments at risk just as Europe reels from an energy crisis. Iran, meanwhile, said exchanges with the US over a European Union proposal to revive a nuclear deal will drag on into next month, undercutting speculation that an agreement paving the way for increased oil flows is imminent.
  • Gold dropped for a second day after Federal Reserve Chair Jerome Powell pushed back against hopes the US central bank would start easing monetary policy soon, signaling instead that interest rates would keep rising and remain elevated to stamp out inflation. Bullion has tumbled to the lowest level in a month and is heading for a fifth monthly decline, the longest such stretch in four years, after the Fed raised rates, dulling the allure of the non-interest bearing metal. A stronger dollar has also weighed on gold priced in the US currency. The two-year Treasury yield reached the highest since 2007.
  • European natural gas prices plunged the most since March after Germany said its gas stores are filling up faster than planned and some traders took profits after the rally of recent weeks. Benchmark Dutch front-month futures fell more than 20%, partly reversing last week’s jump of almost 40%. German power prices also plunged, after earlier climbing to a record. In Germany, gas stores are filling up fast and are expected to meet an October target of 85% full already next month, Economy Minister Robert Habeck said in a statement on Sunday. Monday’s plunge in prices is some relief after a furious rally with futures still trading almost six times higher than a year ago. The region is on the brink of a recession, with inflation at the highest in decades in some countries. Governments are also putting in place measures to ease the burden, setting aside some 280 billion euros ($278 billion) in relief packages.
  • Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week, ending two weeks of inflow that reached $556.3 million. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $640.9 million in the week ended Aug. 26, compared with gains of $207.8 million in the previous week, according to data compiled by Bloomberg. This was the biggest weekly outflow since Nov. 26. So far this year, inflows have totalled $22.7 billion.
  • Honda Motor Co. and South Korean battery maker LG Energy Solution Ltd. will spend $4.4 billion to build a new battery plant in the US as the Japanese carmaker seeks to phase out fossil-fuel vehicles completely by 2040. The facility will have an annual capacity of about 40 gigawatt-hours with mass production slated to start at the end of 2025, Honda said Monday in a company filing. The duo will set up a joint venture this year in which Honda will hold 49% stake by investing $1.7 billion. Construction is expected to start by early 2023. Carmakers around the world are scrambling to build electric car or EV battery plants in North America by partnering with Asian battery makers. Panasonic Holdings Corp., which supplies electric car batteries to Tesla Inc., is in talks to invest $4 billion in a battery plant in the US, the Wall Street Journal reported last week. Korean battery makers also have a slew of plans for battery plants in the US, constructing four for General Motors Co., two for Stellantis NV and three for Ford Motor Co.
  • The closely watched mission to send a rocket around the moon is at risk of delays as NASA grapples with multiple issues that have arisen in the hours before the launch. The space agency is investigating a potential crack in material in the main body of the rocket as well as a possible temperature issue with one of the main engines, officials said early Monday. Those came after engineers examined and resolved a suspected leak affecting the hydrogen tanking process. The problems raise the likelihood that the Artemis I launch from the Kennedy Space Center won’t take place at the scheduled time of 8:33 a.m. local time in Florida. If the rocket doesn’t lift off by 10:33 a.m., it could be rescheduled for next week or potentially October.
  • Bitcoin is seeing sustained trading below $20,000 for the first time since mid-July, as risk appetite wavers after Federal Reserve Chair Jerome Powell stressed that interest rates may have to stay elevated to stamp out inflation. The largest token fell as much as 2.3% on Monday to $19,527, the fifth day of declines. While Bitcoin had briefly dipped below $20,000 during the days following Powell’s speech Friday at the Jackson Hole conference, it had quickly rebounded to trade at around that key level. Equities also slumped across Asia and Europe, along with US futures. The $20,000 level acted as support for Bitcoin when it hit lows in recent months, but the cryptocurrency had worked its way higher in recent weeks. Before Saturday, it hadn’t been below $20,000 since July 14, and had even crossed above $25,000 earlier in August. That mini-rally was cut short as rate-hike concerns intensified, and Bitcoin has fallen around 20% since Aug. 15.
  • Progress toward an Iranian nuclear deal has thrown the spotlight onto a sizeable cache of crude held by Tehran that could be swiftly dispatched to buyers in the event an agreement gets hammered out. About 93 million barrels of Iranian crude and condensate are currently stored on vessels in the Persian Gulf, off Singapore and near China, according to ship-tracking firm Kpler, while Vortexa Ltd. estimates the holdings at 60 to 70 million barrels. In addition, there are smaller volumes in onshore tanks. The possible full readmittance of Iran to the global crude market, with the potential lifting of US sanctions, comes at a complex moment for oil traders. Investors are juggling the countdown toward far tighter European Union curbs on Russian crude flows from December as part of the the bloc’s pushback against the war in Ukraine. In addition, the Biden administration’s mammoth sale from the Strategic Petroleum Reserve will end in October.
  • US Navy warships transited through the Taiwan Strait for the first time since House Speaker Nancy Pelosi’s visit to the self-ruled island tested ties between Washington and Beijing. The Ticonderoga-class guided-missile cruisers USS Antietam and USS Chancellorsville conducted a routine transit through a corridor of the strait Sunday, the Seventh Fleet said in a statement. “The ship’s transit through the Taiwan Strait demonstrates the United States’ commitment to a free and open Indo-Pacific,” the fleet said, noting the waters were “beyond the territorial sea of any coastal state.” The decision to send two missile-laden cruisers through the strait may have been a calibrated signal by the Biden administration to demonstrate its resolve to maintain a naval presence in the waterway without prompting an additional response from China. While at least a quarter of the transits publicly announced by the US Navy over the past five years have involved two vessels, none have involved two cruisers, according to data compiled by Bloomberg.
  • The world’s major economies ratcheted up their spending on fossil fuels last year, with threats to energy security and poorly designed subsidies hurting efforts to reach climate goals, according to a fresh study by the OECD and the International Energy Agency. Government support for oil, gas and coal almost doubled to $697 billion in 2021, the joint study published on Monday showed. And consumption subsidies will probably rise even further in 2022 due to higher energy use and fuel prices, the OECD and IEA wrote. The OECD said it is now urging governments to adopt measures that “protect consumers from the extreme impacts of shifting market and geopolitical forces in a way that helps keep us on track to carbon neutrality as well as energy security and affordability.”
  • Corn futures extended a surge to a two-month high as the US is on track to harvest its smallest crop in three years. Growers in the world’s biggest producer will collect 13.759 billion bushels this season, according to estimates from Farm Journal Inc.’s agricultural marketing arm, Pro Farmer. If realized, that would be the smallest bounty since 2019. All of this points to an American harvest that will disappoint those who had been hoping for some relief, after Russia’s invasion of Ukraine disrupted grain supplies and stoked concern about food shortages. Unfavorable weather in some of the largest growing regions, including the US and also Europe and China, is adding pressure to the outlook for global supply.
  • One of Wall Street’s biggest bears said weaker earnings, not higher interest rates, pose the largest threat to US stock prices after Federal Reserve Chair Jerome Powell signaled the central bank will keep tightening policy even if it hampers growth. “The path for stocks from here will be determined by earnings, where we still see material downside,” Morgan Stanley strategists led by Michael J. Wilson said in a research note Monday. “As a result, equity investors should be laser focused on this risk, not the Fed.” The Morgan Stanley strategists are watching a couple of gauges that indicate pressure on profit margins and risk to earnings growth — the spread between forward sales growth and the rate of change on the producer price index, as well as the spread between nominal gross domestic product growth and wage growth. Their leading earnings model, which projects a steep fall in earnings per share growth over the next several months, also confirms that view, they said.
  • The European Union could offer Ukraine’s armed forces sniper, de-mining or officer training as part of a new mission the bloc’s foreign policy chief plans to propose to member states this week. Josep Borrell is due to suggest an EU training mission for Ukraine, with the aim of clinching political backing from defense ministers when they gather in Prague starting Monday evening. While Ukraine’s needs are evolving, Kyiv has identified some specific training needs, including for medical, de-mining and sniper missions, as well as various kinds of officer training, according to a document obtained by Bloomberg. The non-paper sent to member states by the EU’s foreign policy arm broadly lays out the scope of the mission that Borrell will formally propose.

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

*All sources from Bloomberg unless otherwise specified