December 1, 2022

Daily Market Commentary

Canadian Headlines

  • Toronto-Dominion Bank 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 company said Thursday. Overall profit topped analysts’ estimates for the three months through October. Toronto-Dominion’s 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 Montreal took a hit in the fiscal fourth quarter as a chill in capital markets weighed on investment-banking revenue. 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 analysts’ estimates. 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 “impacted by current market conditions,” the bank said in a statement.
  • Canadian Imperial Bank of Commerce posted earnings that missed analysts’ 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 analysts’ estimates for the three months through October. CIBC’s lending margins had expanded more slowly than those of some peers, hurt by hedges in the bank’s 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., Canada’s 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. 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 night’s rally in US stocks on the back of Chair Jerome Powell’s comments that the Federal Reserve will slow down the pace of its rate increases. The Stoxx 600 added 0.8% by 11:19 a.m. in London. Rates-sensitive sectors like technology and real estate outperformed, while energy and miners lagged. 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 nation’s 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 China’s softer stance on Covid and confirmation of a slower US rate-hiking pace from Federal Reserve Chair Jerome Powell. S&P 500 contracts were steady, a day after Powell’s 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 China’s 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 Powell’s 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 China’s Covid measures and the Federal Reserve’s tightening. After capping a 15% gain November, the MSCI Asia Pacific Index jumped as much as 2.5% Thursday, inching closer toward a bull market. Gauges in China, Japan and Taiwan led gains — although Hong Kong’s 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 China’s near-term economic slump “as long as there are positive signs of China’s reopening,” David Chao, global market strategist for Asia Pacific ex-Japan at Invesco, wrote in a note. Traders will watch whether China’s central bank will ease further in December, he added.
  • Oil 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 Intermediate slipped below $81 a barrel after climbing more than 5% in the week’s first three sessions. Markets gained across the board Thursday as fresh signs emerged of a softening in China’s Covid stance and as Federal Reserve Chair Jerome Powell confirmed the pace of interest rate hikes was set to slow. After hitting the lowest level since late 2021 on Monday, crude is now headed for a weekly gain as demand prospects brighten. The market’s latest shift will form the backdrop to a weekend meeting of the Organization of Petroleum Exporting Countries and its allies, while traders are also awaiting news of the plan to cap the price of Russian crude, which could now be set at $60.
  • Gold extended an advance after Federal Reserve Chair Jerome Powell signaled the pace of tightening would slow at the next meeting, ahead of economic data that could bear on the central bank’s 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 markets cemented expectations of a smaller hike at the Fed’s 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 China’s Covid loosening 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 AG slipped a 13th straight session, marking its longest run of losses ever, as the troubled Swiss bank’s capital-raising compounds the fallout from years of scandals and mismanagement. The shares fell as much as 5.5% Thursday to a record low of 2.67 francs. They’ve dropped about 21% since Nov. 23, when the lender reported massive outflows 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 Suisse’s 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 investors’ holdings, adding further pain after a year of huge losses.
  • Millennium Management and Brevan Howard Asset Management 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. 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.’s buyout of a French insurance broker is offering a window into the diminishing power of Wall Street’s vaunted leveraged finance machine. The buyout firm agreed to fund on its own the totality of the €2.3 billion ($2.4 billion) purchase price for 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 they’re still saddled with more than $40 billion of unwanted buyout debt on their balance sheets. This kind of all-cash buyout is almost unheard of in normal times, and yet it’s suddenly becoming commonplace in today’s market. The April Group purchase marks at least the fifth such deal in the past few months.
  • Elon Musk risks giving a helping hand to Russian President Vladimir Putin if Twitter Inc.’s recent staff cuts prevent the platform from rooting out propaganda about the war in Ukraine, one of the European Union’s top officials warned. Failing to take on fake or misleading content online could “lead to the very quick abuse” of Twitter, European Commission Vice President Vera Jourova, who’s spearheading efforts to tackle online disinformation, said in an interview with Bloomberg. This includes making sure the platform doesn’t become a hub for Russian propaganda. “By not acting actively against the propaganda, which means to remove the pieces of propaganda, the disinformation, then you are actively supporting the war,” she said. “This would be a very tricky and maybe dangerous endeavor or adventure for Mr. Musk” who “wants to be seen as somebody who is helping Ukraine.” She cited Musk’s Starlink satellite system, which has been providing internet communications for both Ukrainian citizens and its military.
  • Europe’s energy crisis and the allure of US incentives are complicating Germany’s efforts to build up a leading electric-vehicle supply chain. Northvolt said this week it’s considering postponing plans to build a battery factory in Europe’s biggest economy because of high energy prices. 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, where US President Joe Biden is wooing cell manufacturers with billions of dollars in incentives. “Given what is happening in North America and what is happening in Europe,” Northvolt will “decide what to prioritize,” said Jesper Wigardt, a company spokesman. A decision in favor of North America might delay the German plant “a bit.”
  • 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 haven’t 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 Britain’s lurch into a recession and spiraling inflation that’s 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 exchange FTX after its disgraced founder Sam Bankman-Fried 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 house Alameda Research, Bankman-Fried said he “screwed up” at the helm of the exchange and should have focused more on risk management, customer protection and links between FTX and Alameda. Bankman-Fried’s 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. Reports 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 year’s 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 a wild ride next year. “We do not expect this year’s constructive growth backdrop to persist in 2023,” strategists led by Dubravko Lakos-Bujas wrote in a note on Thursday. “Fundamentals will likely deteriorate as financial conditions continue to tighten and monetary policy turns even more restrictive.”
  • 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 didn’t 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 Moscow’s 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 America’s equity capital markets are expected to rebound in next year’s final two quarters because interest rates may start to fall in some countries, according to Goldman Sachs Group Inc.’s head of that business for the region. “I think there’s going to be a lot of activity in the second half of 2023,” Facundo Vazquez said in an interview in New York. “The 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.” Latin American equity sales plunged 63% so far this year, to $11.6 billion, according to data 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 haven’t completed an IPO since January 2018, Facundo said.

*All sources from Bloomberg unless otherwise specified