December 1, 2022
Daily Market Commentary
Canadian Headlines
- Toronto-Dominion BankĀ is making the most of rising interest rates, with widening lending margins lifting results. Net interest margin — the difference between what the bank earns on loans and what it pays for deposits — expanded to 1.81% in the fiscal fourth quarter, up 7 basis points from the previous three months, the Toronto-based companyĀ saidĀ Thursday. Overall profit topped analystsā estimates for the three months through October. Toronto-Dominionās large base of low-cost customer deposits is providing the bank with cheap funding at the same time that rising interest rates are letting it charge more for loans. The trend lifted net interest income 22% to C$7.63 billion ($5.68 billion) last quarter, with future rate increases poised to keep fueling earnings.
- Bank of MontrealĀ took a hit in the fiscal fourth quarter as a chill in capital markets weighed on investment-banking revenue.Ā Profit from BMO Capital Markets fell 33% to C$357 million ($266 million) in the three months through October, the Toronto-based company said Thursday. Overall profit trailed analystsā estimates.Ā Plunging equity markets have dried up demand for initial public offerings while debt capital markets also have been slow. That has hurt BMO Capital Markets, which saw its investment-banking revenue decline as the business was āimpacted by current market conditions,ā the bank said in aĀ statement.
- Canadian Imperial Bank of CommerceĀ posted earnings that missed analystsā estimates as the lender failed to benefit from rising interest rates. Net interest margin — the difference between what the bank earns on loans and what it pays for deposits — contracted 10 basis points to 1.33% in the fiscal fourth quarter, the Toronto-based company said Thursday. Overall profit trailed analystsā estimates for the three months through October. CIBCās lending margins had expanded more slowly than those of some peers, hurt by hedges in the bankās US business that were meant to protect against falling rates. In the fourth quarter, margins shrank at home as well. The net interest margin in Canadian personal and business banking contracted 10 basis points to 2.19%.
- Canadian Natural Resources Ltd., Canadaās largest oil and gas producer, is aiming to raise production as high as 1 million barrels a day in 2023 for the first time as the company ramps up drilling amid historically high prices.Ā Combined with natural gas, production is forecast to increase by 56,000 barrels of oil equivalent a day from this year to as much as 1.4 million barrels, the company said in an investor presentation Wednesday. Oil sands production, accounting for almost 75% of oil output, will increase about 5% as the company drills new well pads and reduces maintenance work at some facilities. Conventional production is expected to grow about 4% as heavy output rises from the Clearwater formation in Alberta and in the Bonnyville and Lloydminster areas.
World Headlines
- European stocks rose on Thursday, catching up with last nightās rally in US stocks on the back of Chair Jerome PowellāsĀ commentsĀ that the Federal Reserve will slow down the pace of its rate increases.Ā The Stoxx 600 addedĀ 0.8%Ā byĀ 11:19 a.m.Ā in London. Rates-sensitive sectors like technology and real estate outperformed, while energy and miners lagged.Ā The benchmark Stoxx 600 ended November with a second consecutive monthly gain for the first time since August 2021, while the French CAC 40 is up nearly 20% from its September low and on the cusp of entering a bull market. Optimism over the relaxation of Covid restrictions in China and the nationās move toward an economic reopening, along with robust earnings, have fueled the rally.
- The dollar plumbed a three-month low on Thursday, while US stock futures paused after hefty index gains fueled by Chinaās softer stance on Covid and confirmation of a slower US rate-hiking pace from Federal Reserve Chair Jerome Powell.Ā S&P 500 contracts were steady, a day after Powellās comments helped the underlying benchmark close out November with a second month of gains for the first time in more than a year. Those on the tech-heavy Nasdaq 100, which jumped 4.5% on Wednesday, slipped more, with notable declines in US-listed China stocks that had benefited from reports of Chinaās economic reopening. The buoyant mood knocked the dollar lower against its Group-of-10 counterparts for the third straight day, while Treasury 10-year yields stayed just off two-month lows hit in the wake of Powellās comments. The yen advanced more than 1% and the euro touched a five-month peak.
- Equities in Asia extended gains after their best monthly rally in 24 years, as concerns eased over Chinaās Covid measures and the Federal Reserveās tightening. After capping a 15% gain November, the MSCI Asia PacificĀ IndexĀ jumped as much as 2.5% Thursday, inching closer toward a bull market. Gauges in China, Japan and Taiwan ledĀ gainsĀ — although Hong Kongās measures pared — as a top Chinese official said efforts to combat the virus are entering a new phase with the omicron variant weakening and vaccination rates rising. Investors may look past Chinaās near-term economic slump āas long as there are positive signs of Chinaās reopening,āĀ David Chao, global market strategist for Asia Pacific ex-Japan at Invesco, wrote in a note. Traders will watch whether Chinaās central bank will ease further in December, he added.
- OilĀ swung between gains and losses amid firmer risk sentiment across markets as traders looked ahead to an OPEC+ meeting that will set supply levels for 2023. West Texas IntermediateĀ slipped below $81 a barrel after climbing more than 5% in the weekās first three sessions. Markets gained across the board Thursday as fresh signs emerged of a softening inĀ ChinaāsĀ Covid stance and as Federal Reserve Chair Jerome Powell confirmed the pace of interest rate hikes was set toĀ slow.Ā After hitting the lowest level since late 2021 on Monday, crude is now headed for a weekly gain as demand prospects brighten. The marketās latest shift will form the backdrop to a weekend meeting of theĀ Organization of Petroleum Exporting CountriesĀ and its allies, while traders are also awaiting news of the plan toĀ capĀ the price of Russian crude, which could now be set at $60.
- GoldĀ extended an advance after Federal Reserve Chair Jerome PowellĀ signaledĀ the pace of tightening would slow at the next meeting, ahead of economic data that could bear on the central bankās future rate hikes. Powell was optimistic inflation could be contained without the US economy tipping into recession, but said borrowing costs would still need to keep rising and remain restrictive for some time. Gold continued to rise on Thursday as the dollar kept dropping. Swap marketsĀ cementedĀ expectations of a smaller hike at the Fedās meeting this month, and now see rates peaking below 5%. Monetary tightening has weighed on non-interest bearing gold throughout the year by pushing up bond yields and the dollar, though bets on a slowdown and ChinaāsĀ Covid looseningĀ saw it rise 8% in November.
- Blackstone Inc. has agreed to sell its 49.9% stake in two Las Vegas hotels in a deal that values the properties at $5.5 billion, according to people familiar with the matter, marking one of the largest U.S. casino transactions this year. The New York investment firm is selling its stake in the MGM Grand Las Vegas and the Mandalay Bay to Vici Properties Inc., which owns the other 50.1% stake in the properties. Blackstone would receive $1.27 billion in cash, and Vici would assume Blackstone’s share of some $3 billion in debt, these people said. The sale, which is expected to close early in the first quarter, would bring a profit of more than $700 million for Blackstone in less than three years, including rent from the operator, according to the people familiar with the matter.
- Credit Suisse Group AGĀ slipped a 13th straight session, marking its longest run of losses ever, as the troubled Swiss bankās capital-raising compounds the fallout from years of scandals and mismanagement.Ā The shares fell as much as 5.5% Thursday to a record low of 2.67 francs. Theyāve dropped about 21% since Nov. 23, when the lender reportedĀ massive outflowsĀ at its key wealth-management business and warned it could post another big loss in the fourth-quarter, of as much as 1.5 billion Swiss francs ($1.6 billion). Credit SuisseāsĀ overhaul, including job cuts and the carve-out of the investment banking business, has met with skepticism from some analysts and investors concerned about the complexity of the restructuring. On top of that, the ongoing $4 billion capital increase will dilute existing investorsā holdings, adding further pain after a year of huge losses.
- Millennium ManagementĀ andĀ Brevan Howard Asset ManagementĀ want to penalize money managers who agree to join the firms but later change their minds, in an unusual step to protect themselves from the competition for talent in the hedge fund industry.Ā The two firms are asking new hires to agree to terms in their employment contract that can force them to pay damages if they do not start work as planned, according to people with knowledge of the matter. Conversely, the trader would get paid if the hedge funds decide to pull the job offer, the people said asking not to be identified because the information is private. The move, sparked by several traders backing out from jobs they had accepted for sweeter deals elsewhere, shows how far some hedge funds will go to secure a pipeline of top staff as money floods into certain corners of the industry.
- KKR & Co.ās buyout of a French insurance broker is offering a window into the diminishing power of Wall Streetās vaunted leveraged finance machine. The buyout firmĀ agreed to fundĀ on its own the totality of the ā¬2.3 billion ($2.4 billion) purchase price forĀ April Group, according to people familiar with the matter. Few banks are in much of a position to extend multibillion-dollar loans for acquisitions these days, given that theyāre still saddled withĀ more than $40 billionĀ of unwanted buyout debt on their balance sheets. This kind of all-cash buyout is almost unheard of in normal times, and yet itās suddenlyĀ becoming commonplaceĀ in todayās market. The April Group purchase marks at least the fifth such deal in the past few months.
- Elon MuskĀ risks giving a helping hand to Russian PresidentĀ Vladimir PutinĀ ifĀ Twitter Inc.ās recent staff cuts prevent the platform from rooting out propaganda about the war in Ukraine, one of theĀ European Unionās top officials warned. Failing to take on fake or misleading content online could ālead to the very quick abuseā of Twitter,Ā European CommissionĀ Vice PresidentĀ Vera Jourova, whoās spearheading efforts to tackle online disinformation, said in an interview withĀ Bloomberg. This includes making sure the platform doesnāt become a hub for Russian propaganda. āBy not acting actively against the propaganda, which means to remove the pieces of propaganda, the disinformation, then you are actively supporting the war,ā she said. āThis would be a very tricky and maybe dangerous endeavor or adventure for Mr. Muskā who āwants to be seen as somebody who is helping Ukraine.ā She cited MuskāsĀ StarlinkĀ satellite system, which has been providing internet communications for both Ukrainian citizens and its military.
- Europeās energy crisis and the allure of US incentives are complicatingĀ Germanyās effortsĀ to build up a leading electric-vehicle supply chain. Northvolt said this week itāsĀ considering postponingĀ plans to build aĀ battery factory in Europeās biggest economy because of high energy prices.Ā The Swedish company will decide next year between building the Heide facility in northern Germany in time for production to start in late 2025, or expand first in North America,Ā where US PresidentĀ Joe BidenĀ is wooing cell manufacturers with billions of dollars in incentives. āGiven what is happening in North America and what is happening in Europe,ā Northvolt willĀ ādecide what to prioritize,ā said Jesper Wigardt, a company spokesman. A decision in favor of North America might delay the German plant āa bit.ā
- UK house prices are falling more sharply than expected after a jump in borrowing costs quelled demand, Nationwide Building Society said. The mortgage lender said home prices fell 1.4% in November, the fastest drop since June 2020. Excluding the pandemic, prices havenāt fallen this sharply since the global financial crisis more than a decade ago. Economists had expected a 0.4% drop. The decline could be the start of a more protracted downturn, reflecting Britainās lurch into a recession and spiraling inflation thatās caused the tightest cost-of-living squeeze in memory. The Bank of England has boosted its benchmark lending rate to 3% from near zero a year ago, meaning those who remortgage in the next year may see their payments double.
- Mystery continues to shroud the missing billions at bankrupt crypto exchangeĀ FTXĀ after its disgraced founderĀ Sam Bankman-FriedĀ denied trying to perpetrate a fraud while admitting to grievous managerial errors. In his first major public appearance following the Nov. 11 implosion of FTX and sister trading houseĀ Alameda Research, Bankman-Fried said he āscrewed upā at the helm of the exchange and should have focused more on risk management, customer protection and links between FTX and Alameda. Bankman-Friedās participation was controversial given there are outstanding questions about how Bahamas-based FTX ended up with an $8 billion hole in its balance sheet and whether it mishandled customer funds.Ā ReportsĀ that FTX lent client money to Alameda for risky trades have stoked such concerns.
- Sharp declines await US stocks in the first half of 2023 against the backdrop of a mild recession and Federal Reserve rate hikes, say JPMorgan Chase & Co. strategists. The S&P 500 will likely re-test this yearās lows in the first half of 2023, they wrote in a note Thursday, implying a decline of about 12% from current levels. Their prediction adds to calls from strategists at Goldman Sachs Group Inc. and Deutsche Bank AG this week that US stocks are in for aĀ wild rideĀ next year. āWe do not expect this yearās constructive growth backdrop to persist in 2023,ā strategists led byĀ Dubravko Lakos-BujasĀ wrote in a note on Thursday. āFundamentals will likely deteriorate as financial conditions continue to tighten and monetary policy turns even more restrictive.ā
- European Union states are starting to coalesce around a plan to cap the price of Russian crude oil at $60 a barrel, their latest attempt to clinch an agreement before a Monday deadline, according to people familiar with the matter. The bloc is also looking at a mechanism that would allow for regular evaluations and potential revisions of the price every two months from mid-January 2023, the people added. Two of the people said that any agreement should also include a commitment to adjust the threshold to keep it at least 5% below average market rates. The people didnāt provide further details on what precisely those rates could refer to. EU talks on the level at which to cap Russian oil have been stuck since last week. Poland and the Baltic nations have demanded a price that puts more pressure on Moscowās revenues, arguing that earlier proposals — which had gone as low as $62 — were too generous. Greece and other shipping countries have angled for a higher price.
- Latin Americaās equity capital markets are expected to rebound in next yearās final two quarters because interest rates may start to fall in some countries, according toĀ Goldman Sachs Group Inc.ās head of that business for the region. āI think thereās going to be a lot of activity in the second half of 2023,āĀ Facundo VazquezĀ said in an interview in New York. āThe region is in a better position to take advantage of interest-rate cuts because it started to raise rates more than a year ago, before the US, and in certain countries inflation is peaking or even starting to come down.ā Latin American equity sales plunged 63% so far this year, to $11.6 billion, according toĀ dataĀ compiled by Bloomberg. After Brazilian companies raised more than $16 billion through initial public offerings in 2021, the figure dropped to zero this year. Mexican companies havenāt completed an IPO since January 2018, Facundo said.
*All sources from Bloomberg unless otherwise specified