August 8, 2023
- The Desmarais clan is back in dealmaking mode. Only this time, it’s not simply to expand their empire — it’s to fix it. Inside a narrow gray stone building just off Montreal’s main business district, the family and their key lieutenants are reshaping Power Corp. of Canada, the publicly traded holding company that’s the primary source of a fortune worth at least $4.5 billion. They’re jettisoning Putnam Investments — selling the Boston-based fund manager at a huge loss in a deal that stands to make them one of the largest outside shareholders in Franklin Templeton’s parent company. They’ve lured cash from Abu Dhabi’s sovereign wealth fund to juice growth in their private equity group, and bought a big stake in a New York wealth manager that sprung from the Rockefellers’ family office. And that’s just in the past five months. It’s all part of the most ambitious remaking of Power since the death of the patriarch, Paul Desmarais Sr., almost a decade ago. The sprawling entity, with businesses from mutual funds in China to life insurance in Ireland to 401(k) plans in the US, has seen its growth slow and its returns lag as it was surpassed by Brookfield Corp. as the standard-bearer in Canadian asset management. Two generations of Desmaraises, alongside an executive team led by Chief Executive Officer Jeffrey Orr, are now trying to modernize the firm, one transaction at a time.
- Glencore Plc underlined its continued interest in a deal with Teck Resources Ltd. by holding back $2 billion for a potential purchase of the Canadian miner’s coal business — cash it would otherwise have returned to shareholders. Glencore disclosed the new deals war chest in its first-half results Tuesday, as it joined rival miners in reporting a steep drop in profits after a retreat in commodity prices combined with a return to more normal trading conditions, following 2022’s wild swings. The Swiss company earlier this year made an unsolicited offer to buy all of Teck and then split their combined metals and coal businesses, which was repeatedly rejected. In June, it proposed buying Teck’s steelmaking coal business for about $8 billion as an alternative to its full takeover bid — still with the intention of spinning off the merged coal operations within a year or two.
- Across markets, there was a broad move into safety. The yield on the 10-year Treasury dropped 10 basis points and the equivalent rates in Germany fell 15 basis points. A gauge of the dollar climbed about 0.5%. Banks posted the steepest losses in Europe after Italy announced an unexpected tax on windfall profits, sending shares of UniCredit SpA and Intesa Sanpaolo SpA down more than 7%. Investors will also be closely watching US financials after Moody’s lowered credit ratings for 10 small and midsized lenders and warned about the risks tied to commercial real estate.
- Bond yields tumbled around the world and equities slumped as a raft of news on China, Italy and US banks fanned worries about the financial system and global economy. The Treasury auction later today and US inflation data on Thursday are the next pressure points for the market. A $103 billion deluge of 3-, 10- and 30-year auctions will hit before the week is out — up $7 billion from the May slate. Demand for the varying maturities may help shape the yield curve: recently longer-term yields have climbed relative to short-term ones as investors bet that the end of the Fed cycle would coincide with a recession. Fears about the health of the US economy — and its banks — have surfaced after 11 rate increases by the Federal Reserve. The warning by Moody’s is likely to renew focus on signs stress in the industry as rising interest rates force firms to pay more for deposits and bump up the cost of funding from alternative sources.
- Asian stocks slumped as disappointing trade data from China added to investor concerns, while a selloff in technology shares also weighed. The MSCI Asia Pacific Index fell as much as 0.9%, with tech shares leading losses ahead of key earnings reports and as US Treasury bond yields continued to rise. The Hang Seng Tech Index is down nearly 4% so far this month amid profit-taking after soaring 16% in July. Risk aversion has been dominant in August as a surprise downgrade of US debt coupled with China’s economic struggles nudge investors to take some profits off the table. Trade data released Tuesday were the latest cause for concern over Asia’s largest economy. China’s exports fell for a third-straight month in July amid a slump in global demand.
- Oil turned lower as bearish sentiment rippled through markets following a larger-than-expected drop in China’s trade data. West Texas Intermediate fell to near $81 a barrel. China’s trade plunged in July as slowing global demand clouded the outlook for exports, while its oil imports slipped to a six-month low. The dollar climbed and stocks fell as the trade figures fanned fresh concerns about the Chinese economy. Oil rallied to the highest level since April early in Monday’s trading, but pessimism around the global economy and higher interest rates have stalled that rally. Crude’s big three monthly reports — those from the International Energy Agency, OPEC, and the Energy Information Administration — will offer further updates on the health of the market over the rest of this week.
- Gold edged down for a second day as the dollar strengthened amid worries about China’s economic recovery. China’s central bank on Tuesday set the yuan fixing at the weakest level in almost a month and worsening trade figures also intensified concerns over a slowdown in the world’s second-largest economy. That helped support the greenback, which typically moves in the opposite direction to bullion. Spot gold lost 0.2% to $1,931.89 an ounce by 8:47 a.m. in London, after falling 0.3% on Monday. The Bloomberg Dollar Spot Index climbed 0.3%. Silver was little changed, while palladium and platinum declined.
- Consumer expectations for euro-area inflation fell in June but remained above the European Central Bank’s 2% target as officials ponder whether to continue their unprecedented bout of interest-rate hikes. Expectations for the next 12 months declined to 3.4% from 3.9% in May, the ECB said Tuesday in its monthly survey. For three years ahead, they dropped to 2.3% from 2.5%. The results come before a September meeting that President Christine Lagarde has said will decide between a 10th straight increase in the deposit rate and a pause.
- United Parcel Service Inc. lowered its full-year profit forecast as the courier contends with shifting consumer habits and rising costs after a tentative labor agreement. Revenue is expected to be $93 billion in 2023, down from its prior forecast of $97 billion, UPS said Tuesday in a statement. UPS now expects an adjusted operating margin this year of 11.8%, compared with an earlier forecast of 12.8%. UPS said the guidance change was “primarily to reflect the volume impact from labor negotiations and the costs associated with the tentative agreement” that was reached on July 25. The stock fell as much as 7.4% in premarket trading in New York.
- Bulging sales of US Treasuries are about to deliver a major test of investor demand and determine whether a selloff has room to run, as the market braces for the biggest round of refunding auctions since last year. Yields have surged since late July amid evidence of a resilient US economy, and after the Treasury shocked traders last week when it signaled greater borrowing needs. A rising US budget deficit and a poor fiscal outlook at a time of near full employment contributed to the move by Fitch Ratings to strip the US of its top rating last week. The bond market has to absorb a combined $103 billion of 3-, 10- and 30-year auctions before the week is out — up $7 billion from the May slate — as well as a key inflation reading Thursday. Yields on 10- and 30-year Treasuries are around 20 basis points or more higher than just a couple weeks ago and are within sight of multi-year peaks set in October.
- Taiwan Semiconductor Manufacturing Co. has agreed to build a €10 billion ($11 billion) plant in eastern Germany in partnership with Infineon Technologies AG, NXP Semiconductors NV and Robert Bosch GmbH. The planned fab will be 70% owned by TSMC, which will operate the facility in the city of Dresden, with Infineon, NXP and Bosch each holding a 10% equity stake, subject to regulatory approval, the companies said Tuesday in a joint statement. Slated to begin production by the end of 2027, it will provide chips for the automotive and industrial sectors and is a first step for TSMC in establishing a major European presence to counter risks from escalating US-Chinese tensions.
- Under Armour Inc. reported results that surpassed analysts’ expectations despite investor concern over a pileup in inventory. Inventories rose 38% to $1.3 billion for the quarter compared to the same period the year prior, above Wall Street’s estimate of $1.27 billion. Earlier this year, executives warned that a recovery would take longer than expected due to a prolonged inventory glut. Chief Executive Officer Stephanie Linnartz, who took the job in February, is in the early stages of a multiyear turnaround plan that’s looking to womenswear, footwear and sports to boost sales in the long-term. She has said that 2023 will be a “year of building” as management realigns around its new strategies.
- Mercedes-Benz Group AG’s first sterling deal in four years will cost the German automaker significantly more than when it last tapped the market. The German automaker is set to offer a yield of around 5.5% for Tuesday’s sale of three-year notes, subject to investor demand, according to Bloomberg calculations. That’s more than three times the 1.625% rate on its previous sterling deal in 2019 that carried a five-year maturity. Price guidance indicates the notes are being offered at a spread of around 95 basis points over UK gilts, with investor orders of over £590 million ($750 million), according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it. The deal size will be at least £250 million.
- Italian stocks dropped after a surprise new tax on bank profits sent the country’s lenders tumbling, erasing as much as €9.5 billion ($10.4 billion) from their combined market capitalization. Italy’s FTSE MIB fell 2.2%, with UniCredit SpA plunging 6.7% while Intesa Sanpaolo SpA sank 8%. The Stoxx Europe 600 index declined 0.4% as of 11:03 a.m. in London. Novo Nordisk shares soared 10% to an all-time high after reporting that Wegovy cut heart risk by 20% in a select trial. The Italian levy was slipped into a huge package of measures that ranged from taxi licenses to foreign investment. The tax could bring over €2 billion ($2.2 billion) into state coffers, according to Ansa newswire. Italy agreed on a “40% withdrawal from banks’ multi-billion euro extra profits” for 2023 which is set to finance tax cuts and support for mortgages for first-time owners.
- Moody’s Investors Service lowered credit ratings for 10 small and midsize US banks and said it may downgrade major lenders including U.S. Bancorp, Bank of New York Mellon Corp., State Street Corp., and Truist Financial Corp. as part of a sweeping look at mounting pressures on the industry. Higher funding costs, potential regulatory capital weaknesses and rising risks tied to commercial real estate loans amid weakening demand for office space are among strains prompting the review, Moody’s said in a spree of notes late Monday. “Collectively, these three developments have lowered the credit profile of a number of US banks, though not all banks equally,” it wrote in some of the assessments.
- Dish Network Corp. is proposing to merge with EchoStar Corp., the satellite network operator it once owned, in a stock-for-stock deal as billionaire Charlie Ergen works to shift his struggling legacy pay-TV business empire toward a future in wireless communications. Every share of EchoStar will be converted into 2.85 shares of Dish, according to a company statement issued Tuesday. Dish fell 5.2% in pre-market trading. EchoStar shares were halted. The merger reunites EchoStar with its former parent, which spun off the business in 2008. While EchoStar’s shares have risen more than 14% in the past 12 months, Dish shares have plunged 60% over the same period, amid investor concerns about its debt levels and its reliance on a shrinking base of satellite TV subscribers.
- Italy’s right-wing government shocked markets with an unexpected tax on banks’ windfall profits, wiping out around $10 billion from the market value of the country’s lenders. Deputy Prime Minister Matteo Salvini announced a 40% levy on the extra profits of lenders late Monday night, as part of a wide-ranging decree approved at a cabinet meeting. Analysts at Citi estimate it will wipe 19% from earnings. The levy targets higher interest incomes following rate hikes by the European Central Bank, according to a government statement Tuesday. The decree could cost banks about €2 billion ($2.2 billion), analysts said.