December 13, 2021

Daily Market Commentary

Canadian Headlines

• Heavy winds over the weekend in the Canadian province of Ontario felled trees, broke utility poles and cut power to more than 450,000 Hydro One Ltd. customers, the company said. The utility had restored power to all but 115,000 customers as of Saturday as workers repaired more than 200 broken poles as well as 53 damaged transformers, downed power lines and fallen trees caused after winds of more than 100 kilometers (62 miles) an hour blew through parts of the province on Saturday, the company said in a release on its website. As the damage is fully assessed, the company said it anticipates some customers could be without power beyond Monday. The province contains a number of critical oil refineries, chemical plants and pipelines. Emails to Ontario refinery operators including Imperial Oil Ltd., Royal Dutch Shell Plc as well as pipeline operator Enbridge Inc. weren’t immediately returned. Suncor Energy Inc.operator of a refinery in Sarnia, Ontario, declined to comment on the status of its plant when contacted by email.
• Wyloo Metals Pty Ltd., owned by billionaire mining magnate Andrew Forrest, has boosted its offer to buy out Canadian nickel explorer Noront Resources Ltd., reigniting a battle with rival suitor BHP Group after talks broke down on a compromise deal. Wyloo’s proposal at C$1.10 per share trumps BHP’s bid of C$0.75, which currently has the support of the Noront board. Earlier, BHP said it had been unable to win backing from Wyloo — already a major shareholder in the Canadian company — for its offer. Wyloo’s latest offer is nearly 60% above the C$0.70 per share proposal it made back in August.

World Headlines

• European stocks climbed as risk appetite returned, with traders preparing for a wave of central bank decisions this week amid lingering concerns about the omicron variant. The Stoxx Europe 600 Index added 0.6% by 11:21 a.m. in London. Miners surged as iron ore jumped amid demand optimism on expectations that China will move to increase stimulus next year. Technology and automakers were also among the top gainers, while travel and leisure underperformed. European stocks have been rebounding from a slump fueled by Covid-related fears and last week had their biggest gain since mid-March. Prime Minister Boris Johnson warned the U.K. is facing a “tidal wave” of omicron infections and set an end-of-year deadline for the country’s booster vaccination program. Preliminary data showed that Covid vaccine boosters improve protection to as much as 75% against the omicron.
• U.S. futures rose with European stocks on Monday as traders prepared for a wave of central bank decisions this week amid concerns about inflation and economic risks from the omicron virus variant. U.S. contracts climbed after shares closed at a record on Friday. Apple Inc.rose 1% in premarket trading, leaving the stock close to hitting $3 trillion market capitalization if the move holds. Miners led an advance in Europe’s Stoxx 600 Index as the price of iron ore jumped on expectations that China will move to increase stimulus next year. The Federal Reserve on Wednesday is expected to speed up stimulus withdrawal and perhaps open the door to earlier interest-rate hikes in 2022 if price pressures stay near a four-decade peak. The 10-year U.S. Treasury yield slipped to 1.47% and the dollar pushed higher.
• Asian stocks erased an early advance as deepening losses in shares of Chinese property developers and persistent concerns over the omicron coronavirus variant soured sentiment. The MSCI Asia Pacific Index was down 0.2% after having climbed as much as 0.8%. Equity benchmarks in India and South Korea led regional declines. While stocks in China and Hong Kong rallied in morning trade on signals policies may become more pro-growth next year, the Hang Seng Index erased a gain of as much as 1.6%. That was owing to a selloff in real estate names after a plunge in the bonds and shares of Shimao Group sparked renewed concern over the health of the sector. Monday’s trading in Asia also highlighted investor caution as markets confront potential economic risks from omicron’s spread and a series of central bank meetings this week, including the Federal Reserve. The Fed on Wednesday is expected to speed up stimulus withdrawal and perhaps open the door to earlier interest-rate hikes in 2022 if price pressures stay near a four-decade peak.
• Oil steadied in New York after its biggest weekly jump in three months as traders weighed the risks from the omicron variant, while expectations of Chinese fiscal stimulus buoyed sentiment. West Texas Intermediate futures traded near $72 a barrel, paring earlier gains as confidence that fuel consumption will withstand the new virus strain — which propelled crude 8.2% higher last week — fluctuated.  The U.K. said on Sunday it faces an emergency from omicron, and warned of possible new measures to contain it. Meanwhile, there have been some indications that high prices have sapped consumption in Asia.
• Gold held Friday’s advance as investors weighed concerns over elevated inflation and the omicron variant ahead of a Federal Reserve meeting this week. U.S. consumer prices climbed last month at the fastest annual pace in almost 40 years, underscoring how rapid and persistent inflation is increasing pressure on the Fed to tighten monetary policy. Chair Jerome Powell has already signaled being open to faster tapering, while retiring the description of price pressures as “transitory.” The Fed is expected to speed up the withdrawal of stimulus at its Dec. 14-15 meeting, and perhaps open the door to earlier interest-rate hikes in 2022. JPMorgan Chase & Co. moved up its forecast for the first rate hike to June from September, with the initial move expected to be “followed by a quarterly pace of hikes thereafter.” Higher rates would weigh on non-interest bearing gold.
• Hong Kong is poised to add the U.K. to its highest-risk Covid travel list, meaning returning residents will face a week of mandatory quarantine. The U.K. is facing an accelerating wave of omicron infections, prompting Health Secretary Sajid Javid to refuse to rule out closing schools in a bid to slow infections. Australia recorded its first hospitalization from the omicron variant. New Zealand’s largest city, Auckland, will ease Covid restrictions at the end of the month, reflecting a declining trend in case numbers and rising vaccination levels.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the second straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $930.4 million in the week ended Dec. 10, compared with gains of $285.7 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $41.1 billion.
• Morgan Stanley strategists led by Michael Wilson say they’re now more confident about their base-case scenario for the months ahead, which sees the S&P 500 dropping to 4,400 index points, down from 4,712 on Friday’s close. Bear case of sharper correction has 30% probability, while goldilocks scenario in which S&P 500 climbs to 5,000 points has just 10% probability, down from 20% previously. Stock picking will be difficult, but a necessary condition to generate meaningful returns in 2022, as the market separates the winners and losers and index basically goes nowhere over the next 12 months, strategists write in note.
• Negative real rates coupled with high equity risk premia suggest that, in the absence of a growth shock, equity markets are likely to make progress over the next year, albeit at a slower pace, Goldman Sachs strategists led by Peter Oppenheimer write in a note. Strategists see lower index returns ahead and risk that equities see a correction in the event of a sharp re-pricing of term premia and interest rates.
• More Retail Pvt., an Indian grocery chain backed by Amazon.com Inc., is considering an initial public offering that could value the company at as much as $5 billion, according to people with knowledge of the matter. The company is weighing a first-time share sale in Mumbai as early as June, the people said, asking not to be identified as the information isn’t public. More Retail could raise as much as $500 million in a listing, which would consist largely of new shares, one of the people said. Deliberations are at an early stage and details such as the timing and size could change, the people said. A representative for Samara Capital declined to comment, while a representative for More Retail did not immediately respond to requests for comment.
• Senate Majority Leader Chuck Schumer insists the Senate will pass President Joe Biden’s nearly $2 trillion tax-and-spending package before Christmas, but there’s still much work to do and time is running short. A delay into the new year risks slowing momentum for Democrats who need this legislative victory behind them as they fight to maintain narrow majorities in the House and Senate in the 2022 midterm elections. The signature bill includes spending on Democratic priorities such as child care and climate change and drastically changes the tax cuts Republicans won under President Donald Trump.  “There is no way they’re going to be ready to vote on their big bill,” Senator John Thune of South Dakota, the No. 2 GOP leader, said on Thursday. Democrats “probably need to nip that fairly soon because it’s just not practically going to happen,” he added.
• It’s been almost three weeks since the U.S. unveiled an internationally coordinated release of oil from national reserves, but so far there’s been little follow through from the other five nations. President Joe Biden said on Nov. 23 that the U.S. would release 50 million barrels of crude from its Strategic Petroleum Reserve in “the next several months.” The unprecedented move would be done in parallel with China, Japan, South Korea, India and the U.K., he said. While the U.S. has granted its first release of SPR oil to Exxon Mobil Corp., and intends to issue another sale notice for 18 million barrels this week, there’s been radio silence from the other participants. That’s starting to prompt some skepticism in the market about whether they’ll go ahead at all, particularly after the omicron virus variant led to a sharp drop in global prices.
• Lone Star Funds agreed to buy industrial pump and valve maker SPX Flow Inc. for $3.8 billion, including assumed debt, the latest deal in the manufacturing industry. SPX Flow investors will get $86.50 a share in cash, the companies said Monday. That’s 1% higher than Friday’s closing price. Bloomberg reported last month that Lone Star was considering a bid for SPX Flow, citing people with knowledge of the matter. The company has been running a strategic review, working with Morgan Stanley, after rejecting a $3.59 billion takeover bid by Ingersoll Rand Inc. in July.
• Intel Corp. is spending $7 billion to build a new chip packaging facility in Malaysia, a major Asian investment intended to address endemic global semiconductor shortages at a time Washington is advocating domestic production. The U.S. chipmaker intends to invest 30 billion ringgit on shoring up its advanced chip packaging capabilities in the island state of Penang, Malaysia’s main investment promotion agency said in a press invitation distributed Monday. It will elaborate on its plans for the Asian country during a press briefing Wednesday in conjunction with Trade Minister Azmin Ali and Malaysian Investment Development Authority Chief Executive Officer Arham Abdul Rahman, according to the invite. The event coincides with Secretary of State Antony Blinken’s first visit to Southeast Asia. CEO Pat Gelsinger took the helm of the largest American chipmaker in February with a mandate to take back leadership of the industry from Asian giants such as Taiwan Semiconductor Manufacturing Co. Investors want Gelsinger to staunch market share losses and customer defections stemming in part from stumbles in upgrading technology.
• Two doses of the Pfizer Inc. and AstraZeneca Plc.vaccines induced lower levels of antibodies against the omicron variant, increasing the risk of Covid infection, according to researchers from the University of Oxford. Blood samples collected from people vaccinated with a combination of the two different shots and tested against the new strain showed a substantial drop in neutralizing antibodies, a proxy for protection, the scientists said Monday in a paper. The results echo other findings released by the U.K. government last week emphasizing the need for booster shots, especially amid evidence of omicron’s ability to drive a tidal wave of infections. The country’s Health Security Agency said Friday the basic course of shots from Astra and Pfizer provided much lower defenses against symptomatic infection with omicron compared with the delta strain, while a booster lifted protection to 70% to 75%.
• A wave of selling swept through Chinese developers’ bonds and shares after the sudden plunge in a major property firm’s notes renewed concern over the health of the sector. Shimao Group Holdings Ltd.’s dollar notes dropped as much as 12 cents on the dollar, with the selloff spreading to other company bonds including Sunac China Holdings Ltd. and KWG Group Holdings Ltd. Trading was halted in six of Shimao’s yuan bonds after they plunged, with one falling more than 50%. A Bloomberg Intelligence stock index of real estate firms slumped 2.8%, led by an 12% drop by Shimao. The company said it’s looking into market rumors which it blamed for causing the selloff, according to an emailed statement. The declines shattered the buoyant mood that dominated trading last week, when Beijing’s shift toward pro-growth policies helped drive yields on Chinese junk dollar bonds down the most in seven years. Optimism over further easing steps had helped counter the long-anticipated defaults by China Evergrande Group and Kaisa Group Holdings Ltd.
• Apple Inc. is edging closer to a $3 trillion stock-market value for the first time ever. The shares rose 1% to $181.30 in premarket trading Monday, which would put the company at $2.98 trillion if that price holds up in the regular session. Since the stock touched a low in early October, Apple’s value has increased by about $700 billion. The iPhone maker’s share price has surged throughout 2021, leaving it up more than 200% since Covid first sent the world into lockdown early last year and underlined the centrality of technology for work, education, entertainment and keeping connected. These are all markets that Apple touches on deeply through its hardware, software and media services, and that has contributed to it becoming the first company in history to hit $3 trillion, just 16 months after it first crossed the $2 trillion mark.
• Pfizer Inc. agreed to buy Arena Pharmaceuticals Inc. in a deal valued at about $6.7 billion, gaining potential therapies targeting immuno-inflammatory diseases. The U.S. drugmaker will pay $100 a share in an all-cash transaction for San Diego-based Arena, bringing assets in gastroenterology, dermatology and cardiology, according to a statement Monday. That’s about double Arena’s Friday closing price. Pfizer, collaborator with BioNTech SE on the widely used Comirnaty Covid-19 vaccine, said the deal complements its capabilities in inflammation and immunology and will contribute to growth through 2025 and beyond.
• Ares Management Corp. has raised $8 billion dollars for a fund making direct loans to small and midsize U.S. companies, escalating a fight between alternative-asset managers for market share in the burgeoning private-credit market. Asset-management firms including Apollo Global Management Inc., Ares and Blackstone Inc. are increasingly turning to credit funds to boost assets under management, a key driver of their stock valuations. The new Ares fund raised almost twice its initial target of $4.5 billion and nearly three times the amount the firm got for the direct-lending fund it launched in 2018. Blackstone raised $9.4 billion earlier this year through a business-development company that makes direct loans. HPS Investment Partners, a private company, closed a nearly $12 billion direct-lending fund in September.
• Citigroup Inc. and Macy’s Inc. renewed their longtime credit-card partnership after the two spent months renegotiating the terms of the agreement. As part of the deal, Citigroup will continue to provide payment offerings for the retailer’s Macy’s and Bloomingdale’s brands through March 2030, the companies said Monday in a statement. “We’re so pleased to announce a multiyear extension of our 16+-year credit-card program with Macy’s,” David Chubak, head of Citi’s retail-services business, said in the statement. “Together, we’re very excited to continue providing innovative payment offerings for Macy’s and Bloomingdale’s shoppers.”
• European natural gas futures surged to the highest level since early October on increasing concern that Russia’s Nord Stream 2 pipeline won’t operate this winter and forecasts for cooler weather. German power surged to a fresh record.  The west is hardening its stance against Russia because of increasing tension over the Ukraine. New German chancellor Olaf Scholz said his government will “do everything” to ensure that natural gas continues to flow through Ukraine and prevent Russia from using its new Nord Stream 2 gas pipeline to Germany to cripple the former Soviet republic’s economy. Additionally, uncertainty remains over one of the main existing channels for Russian gas to Europe. Belarus reiterated its threat to halt transit through a pipeline across its territory to Poland and Germany if the west presses on with sanctions in a dispute over a migrant crisis at its border with the European Union.

Traders are paring back bets on Bank of England rate hikes over the next year as concerns over fresh Covid restrictions outweigh inflation fears.  Money markets are wagering the central bank’s key rate will rise to 1% by 2023 after Prime Minister Boris Johnson warned the U.K. is facing a “tidal wave” of omicron infections. Just over three weeks ago, traders saw borrowing costs hitting almost 1.25% by the end of next year. Even before the omicron wave, some central bank officials and many economists indicated the 2022 rate-hike bets were too aggressive. In November, BOE Governor Andrew Bailey said such moves would leave inflation below the central bank’s 2% target at the end of the forecast period. He said he would “caution against” such views.

“The Fed is the greatest hedge fund in history.” — Charlie Munger

*All sources from Bloomberg unless otherwise specified