August 4, 2022

Daily Market Commentary

Canadian Headlines

• Sun Life Financial Inc.’s second-quarter earnings were boosted by the growth of its Canadian business. Underlying net income in Canada rose 19% to C$344 million ($268 million), driven by higher new-business gains, favorable credit, investments and lower claims volume, according to a statement Wednesday. The Toronto-based company’s asset-management unit reported a 13% decline in underlying net income, reflecting the drop in global equity markets. The SLC Management alternative-asset unit generated C$7.3 billion in net flows, while more retail-focused MFS Investment Management unit posted C$7 billion of outflows.
• Toronto benchmark home prices fell for a fourth-straight month, a record-breaking streak of declines that some economists warn could become an historic downturn in Canada’s real estate market.  The home-price index in Canada’s largest city declined 3.9% in July from the month earlier, bringing the total drop since April to 13.3%, according to data released Thursday by the Toronto Regional Real Estate Board. That’s the worst four-month performance since the measure started being tracked in 2005. After an unprecedented run-up through the course of the pandemic, Canadian home prices have seen an abrupt reversal since the country’s central bank began aggressively raising interest rates in March to get the highest inflation in four decades under control. That has more forecasters starting to say the pain in real estate is only getting started.

World Headlines

• European stocks gained on Thursday as investors continued to weigh the path of corporate earnings, while attention turned to the Bank of England’s policy decision later in the day. The Stoxx Europe 600 Index was up 0.8% as of 11:35 a.m. in London. Autos, retailers and travel and leisure stocks led gains, while the media and personal care sectors underperformed. The region’s equities have struggled to maintain their momentum this week after posting their biggest monthly gain since November 2020 in July, with concerns about slowing economic growth keeping risk sentiment subdued. And while weaker data have raised bets of a dovish pivot in the Federal Reserve’s policy, strategists have warned it may be too soon to dismiss the risks of a potential recession.
• US futures rose with stocks Thursday as investors shrugged off growth warnings from the bond market. Oil bounced back from the lowest level in almost six months. Contracts on both the S&P 500 and the Nasdaq 100 pushed higher, suggesting the tech-heavy Nasdaq will extend an advance of 19% from its June 16 low. Equities are proving resilient to heightened bond market anxiety and an inverted Treasury yield curve flashing warnings on economic risks, as the S&P 500 climbs back toward the highest level in two months. But a global wave of monetary tightening risks upending those gains. The Bank of England unleashed its first half-point hike since 1995 in an effort to control inflation, joining some 70 other institutions around the world moving rates up in outsized steps.
• Asian stocks rebounded as easing tensions over Taiwan and overnight gains on the Nasdaq fueled a rally in Chinese tech shares ahead of key earnings reports. The MSCI Asia Pacific Index climbed 0.5%, set for its first gain in three sessions. Alibaba, which is scheduled to release earnings later Thursday, and e-commerce peers Meituan and JD.com helped boost the Hang Seng Tech Indexas much as 3.4%, most in more than a month. Asia’s key stock benchmark has rebounded from its July low, but its recent recovery has been lagging behind US peers amid a property crisis in China and heightened geopolitical risks.
• Oil steadied after plunging to the lowest close in almost six months as investors weighed weaker US gasoline demand and rising inventories against a token supply increase from OPEC+. West Texas Intermediate was little changed near $91 a barrel, after sinking 4% on Wednesday. In the US, government data showed Americans are driving less than they did in the summer of 2020, when pandemic travel curbs all but halted movement. Nationwide crude stockpiles also expanded last week. Ahead of the US data release, the Organization of Petroleum Exporting Countries and its allies including Russia agreed on Wednesday to boost supply by a meager 100,000 barrels a day in September. The group also issued a stark warning on “severely limited” spare capacity.
• Gold extended gains as geopolitical tensions between the US and China persisted, boosting haven demand. Bullion is hovering near a four-week high as the fallout from US House Speaker Nancy Pelosi’s visit to Taiwan keeps markets on edge. While anxiety eased somewhat after the trip ended, China has now started military drills in areas surrounding the island. Gold rose even after Federal Reserve officials pledged the central bank would continue an aggressive fight to cool soaring inflation. The Bloomberg Dollar Spot Index slipped on Thursday.
• Plant-based meat maker Beyond Meat Inc. eliminated about 40 positions as part of a broader cost-cutting plan, Chief Executive Officer Ethan Brown told employees in an internal memo. “While difficult, this decision is one piece of our larger strategy to reduce operating expenses and support sustainable growth,” Brown said in the memo viewed by Bloomberg. Workers from the operations team in multiple locations were affected, according to people familiar with the matter. The company, which reported having about 1,100 employees at the end of last year, is scheduled to report earnings on Thursday afternoon.
• Restaurant Brands International Inc.’s sales topped estimates after results at Tim Hortons and Burger King bolstered the business. The company reported adjusted earnings per share of 82 cents, compared with analysts’ 73-cent estimate. Revenue rose 14% to $1.64 billion, beating the $1.57 billion estimate. Tim Hortons comparable sales jumped 12.2%. The chain has focused on improving its food and drinks while adding digital menu boards to its drive-thru lanes. The chain also has also gotten a boost from fewer dining-room virus restrictions. Restaurant Brands gets more than half of its revenue from Tim Hortons. Burger King comparable sales jumped 10%, more than double estimates. The fast-food chain has had to raise prices even as it struggles in the US recently to attract diners. Burger King has slimmed down its menu to make its kitchens easier to operate and is trying to remodel older restaurants.
• A group of Chinese companies are investigating why a commodities storage site in northern China is holding only one third of the copper concentrate they were financing, according to people familiar with the situation. Traders from more than a dozen mostly state-owned firms gathered in Qinhuangdao city this week after becoming aware of the missing material following concerns into the borrower’s finances, said the people, who asked not to be identified as they aren’t authorized to speak publicly. The group has a total claim on 300,000 tons of concentrate worth about 5 billion yuan ($740 million), but there’s only 100,000 tons at the depot, the people said. That puts the dollar value of the missing material at about $490 million.
• Goldman Sachs Group Inc. is facing a probe into its nascent credit-card business, adding another headache for the Wall Street giant’s pursuit of the masses.  The Consumer Financial Protection Bureau is looking into the company’s credit-card practices, including how it resolves incorrect bills and processes refunds, Goldman said in a regulatory filing Thursday. The probe is also examining advertisements and how Goldman credits “nonconforming payments” and reports information to credit bureaus. Goldman made a splashy entrance into the business in 2019 with the launch of the Apple Card, a tie-up with technology giant Apple Inc. It also announced a new credit card with General Motors Co. earlier this year, adding another Main Street brand to its consumer business.
• Credit Suisse Group AG executives are discussing reducing thousands of roles globally as the struggling European lender seeks to slash its overall cost base by an additional $1 billion. The bank, which began trimming front line roles in Asia last month, is mulling an aggressive plan to reduce its headcount, which stood at 51,410 at the end of June, said people familiar with the matter, who asked not to be identified discussing personnel matters. Credit Suisse is expected to finalize its plans over the next couple of months and is examining inefficiencies in the bank’s middle and back office in addition to the efforts to reshape its investment bank, the people said. Estimates being discussed include cutting several thousand roles over a number of years, the people said, adding that the plans are preliminary and no final decision has been taken.
• The Bank of England unleashed its biggest interest-rate hike in 27 years as it warned the UK is heading for more than a year of recession under the weight of soaring inflation. The half-point increase to 1.75% was backed by eight of the bank’s nine policy makers, who also kept up a pledge to act forcefully again in the future if needed, potentially putting similar hikes on the table for coming meetings. The pound pared gains and 10-year gilt yields dipped after the move, which was accompanied by warning that a UK recession will begin in the fourth quarter and last all the way through next year.
• Alibaba Group Holding Ltd. logged better-than-projected quarterly revenue, after the e-commerce giant fought to course-correct while navigating both US and Chinese regulatory scrutiny. Revenue came to 205.6 billion yuan ($30.4 billion) in the June quarter, barely changed from a year earlier but enough to beat an average projection for 204 billion yuan. Net income fell 50% to 22.7 billion yuan. Its US shares surged more than 5% in pre-market trading in New York. Alibaba is still grappling with the economic fallout from nationwide Covid-related lockdowns and a near-economic contraction in China. Smaller rival JD.com Inc., which escaped the worst of the crackdown, is overtaking Alibaba in sales growth, while up-and-coming competitors such as ByteDance Ltd. to Pinduoduo Inc. are drawing more users away.
• A warning for investment bankers who enjoyed lavish bonuses for 2021, when banks opened their wallets to reward busy dealmakers amid a war for talent: don’t expect a repeat this year. Incentive pay for those underwriting debt and equity could plummet more than 45% this year, while their counterparts advising on mergers and acquisitions could see their bonuses slump 25%, according to a closely watched report Thursday from compensation consultant Johnson Associates Inc. Investment-banking revenue fell 43% in the first six months of 2022 from a year earlier at the five biggest Wall Street firms. Persistent inflation, recession fears and global turmoil including Russia’s invasion of Ukraine brought on wild market swings, keeping clients on the sidelines. And the battle for banking talent has cooled, with the biggest companies more mindful of their expenses.
• Microsoft Corp.’s purchase of Activision Blizzard Inc. is bogged down, yet some traders are betting the deal ultimately will go through. If they’re right, there’s serious money to be made, given that the videogame company’s shares are still almost 20% below the offer price. Stricter US antitrust regulators, the series of international approvals needed, a broad slump in technology stocks and the size of the $69 billion deal have all contributed to keep the gap between Activision’s price and Microsoft’s $95-a-share bid stubbornly wide. That’s made it one of the most potentially lucrative opportunities for arbitrageurs who speculate on acquisitions. The heightened attention that US regulators are paying to big companies, especially in technology, has resulted in a longer period between when a deal is announced and when it finally goes through, raising the risk of a transaction falling apart.
• WeWork Inc. said offices were 72% full at the end of the second quarter, matching the occupancy rate from before the Covid-19 pandemic in late 2019 for the first time. WeWork’s occupancy rate — the percentage of its total desks that were rented out — dropped dramatically during the first year of the pandemic, when many tenants canceled their rental contracts and decided to work from home. That metric hit its low point of 46% a year later. The company pitched a turnaround story when it went public last year in a blank-check merger. WeWork’s buildings have slowly filled back up. WeWork management has maintained that more customers are drawn to its flexible office space offering as they attempt to figure out long-term real estate strategies in a new world of hybrid and remote work. It now has 62,000 subscriptions to its All-Access pass, a product that allows customers to book space for shorter increments of time.
• Shippers rerouted vessels as China began its most provocative military drills in decades around Taiwan, with at least one owner barring ships from transiting the strait. Taiwan said China fired 11 missiles in waters around the island as of 4 p.m. local time Thursday. The maneuvers, in response to US House Speaker Nancy Pelosi’s visit to the island this week, are taking place in six areas surrounding Taiwan, and China advised ships and aircraft not to go near the regions. A statement by the Eastern Theater Command of the People’s Liberation Army said it had completed live-fire training and lifted relevant air and sea controls. It didn’t clarify whether that meant all exercises had ended, but the state-run People’s Daily later said controls off the eastern coast of Taiwan have been lifted. The drills began at noon on Thursday and were set to last until Sunday.
• Duke Energy Corp. announced a strategic review of its commercial renewables business, which consists of over five gigawatts of wind and solar farms across the US. “We see significant investment opportunities in our regulated operations and believe now is the time to review the strategic fit of our commercial portfolio,” the company said in its second-quarter earnings release on Thursday. The unit is among the top ten solar and wind businesses in the US, but represents less than 5% of the company’s consolidated earnings, according to the company’s earnings presentation. If sold, the majority of proceeds would be used for debt repayment and avoidance, the company said.
• Glencore Plc will return an additional $4.45 billion to shareholders in dividends and share buybacks after first-half profit more than doubled to a record thanks to surging coal prices. Glencore, the world’s top coal shipper, has been one of the biggest winners from the global energy crunch as demand for the fossil fuel surges. The company’s sprawling trading business is also benefiting from the volatility and market dislocations across commodities following Russia’s invasion of Ukraine.  Glencore reported first-half core profit of $18.9 billion, with coal earnings of $9.5 billion exceeding the entire company’s profit a year earlier. Prices for coal have soared to records this year as a global energy crisis boosts demand.
• Ukrainian President Volodymyr Zelenskiy urged Chinese leader Xi Jinping to hold direct talks, noting Beijing hasn’t replied to such requests since Russia invaded his country some five months ago. The last time the pair spoke was one year ago, Zelenskiy told the South China Morning Post in an interview published Thursday. Since Russia’s invasion on Feb. 24, he said the Ukrainian side had “asked officially for a conversation” with Xi but hadn’t received a response. Such a dialog, he added, “would be helpful.” The leader of the world’s second largest economy has refused to condemn Russia’s war in Ukraine and declared a “no limits” friendship with Putin weeks before the invasion, making any call with Zelenskiy potentially awkward. Xi and Putin spoke within days of the war’s beginning, and the Russian leader called Xi on the latter’s birthday in June.

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

*All sources from Bloomberg unless otherwise specified