December 13, 2022

Daily Market Commentary

Canadian Headlines

  • Bank of Montreal, which is working to close the largest acquisition in its history, is selling C$3.15 billion ($2.31 billion) in equity to make sure it can meet Canadian regulators’ recently-increased capital requirements. The bank is issuing C$1.4 billion in shares in a public offering at C$118.60 each, and another 14.8 million shares at the same price to a group of six Canadian pension plans and BNP Paribas, according to a statement Monday. Bank of Montreal fell to C$119 as of 4:58 p.m. in Toronto, down 5.7% from Friday’s close. The equity deal will dilute the bank’s earnings per share by about 4%, Bloomberg Intelligence analysts Paul Gulberg and Ethan Kaye said in a note. Bank of Montreal’s capital levels have been under closer scrutiny since Canada’s Office of the Superintendent of Financial Institutions last week raised the required common equity tier one ratio for the country’s largest banks by 50 basis points, to 11%, as of Feb. 1.
  • A court case over one of Canada’s biggest-ever takeovers is near its end, after weeks of testimony that came to focus on a single question: Is Shaw Communications Inc. a great company or a broken one?  The nation’s antitrust watchdog is fighting to block Shaw’s sale to Rogers Communications Inc., arguing that to consumers, Shaw is an irreplaceable force for good — a “disruptive” and “maverick” firm that has helped drive down prices in a country known for expensive cell-phone bills. Shaw executives, one after another, testified that their company was, in fact, about to hit a wall. It’s been cornered by larger competitors and its share price had flatlined for eight years before the Rogers family offered a way out. On the witness stand, Shaw’s chief financial officer said bluntly: “We just didn’t see a viable path forward as a standalone company.”
  • Gold Fields Ltd. said Chief Executive Officer Chris Griffith is stepping down after the South African company’s failed attempt to take over Canadian miner Yamana Gold Inc. Griffith, 57, who was appointed CEO in April last year, is leaving at the end of the month after the company’s bid to buy Yamana was scuppered by two rivals, denting a plan to expand in the Americas. Martin Preece, 54, who runs Gold Fields’ South Deep mine, becomes interim CEO at the bullion producer.  “The Yamana setback should not be allowed to impede the company’s strategy,” Griffith said in a statement. “So I felt that I should take responsibility and allow the company to move forward under new leadership unencumbered by the Yamana transaction.”

World Headlines

  • European stocks gained before a key US inflation print due later on Tuesday that investors will analyze for potential insight into the path of Federal Reserve monetary policy. The Stoxx Europe 600 advanced 0.6% by 10:43 a.m. in London. Tech and banks outperformed while utilities stocks were laggards. Deutsche Lufthansa AG rallied after raising its full-year earnings target for the second time in as many months. Among other individual movers, British American Tobacco Plc slipped after the US Supreme Court refused to halt California’s new ban on flavored tobacco products including menthol cigarettes, rejecting a bid by units of the company to keep the law from taking effect Dec. 21. Temenos AG rose after saying a US financial institution is extending its relationship with the Swiss software company.
  • US index futures rose and the dollar slid amid forecasts inflation in the world’s largest economy will post the lowest figure this year, warranting a less hawkish Federal Reserve. Contracts on the S&P 500 and Nasdaq 100 advanced at least 0.5% each after the underlying indexes climbed on Monday by the most in December. The greenback halted a two-day rally, while Treasuries gained. US stocks advanced Monday as traders took comfort from economists’ projection for a 7.3% expansion in the US consumer price index for November. If that expectation comes true, it would be the lowest reading in 11 months and the fifth consecutive drop. While that would still leave inflation much higher than the Fed’s target of 2%, it could justify a slowdown in the pace of monetary tightening, with a projected half-point move on Wednesday. However, it also leaves the bar low for disappointment and a selloff.
  • Asian stocks eked out a small gain as Hong Kong scrapped more of its Covid restrictions, supporting sentiment ahead of inflation data that could impact the trajectory of future US interest rates. The MSCI Asia Pacific Index rose as much as 0.5%, led by financial and industrial shares. Key gauges in Hong Kong advanced while Chinese stocks linked to reopening were mostly higher, after the city’s leader said restrictions on international arrivals going to bars or eating at restaurants will be removed. Most markets rose as some investors held onto hopes that US consumer price inflation — due later Tuesday —  could be soft enough to justify a slowdown in rate increases by the Federal Reserve, which sets policy later this week.
  • Oil rose for a second day on signs of further easing of China’s Covid-19 restrictions and as a key North American pipeline remained shut. West Texas Intermediate climbed near $74 a barrel after closing 3% higher on Monday, the first gain in seven sessions. China’s ambassador to the US said the nation will continue relaxing its pandemic curbs and will welcome more international travelers soon, lifting demand prospects in the world’s top oil importer. China’s rapid dismantling of its Covid Zero policy has led to a sharp recovery in the world’s biggest domestic air-travel market, although a surge in cases has raised some concerns about energy consumption. It is also delaying a closely-watched economic policy meeting after Covid infections jumped.
  • Gold was steady as the market waited for key US inflation data, along with rate decisions from the Federal Reserve and other central banks. The US consumer price index later on Tuesday is expected to show inflation cooling from the year-before for the sixth consecutive month. The Fed is widely seen announcing a 50 basis point rise on Wednesday, though a smaller-than-expected rise in prices is likely to diminish bets on future hikes. The US central bank’s round of aggressive tightening this year has helped push gold about 14% lower from a March peak. Still, bullion has trended upward since early November on signs inflation was diminishing, allowing policymakers to soften their hawkish stance.
  • FTX Co-Founder Sam Bankman-Fried was accused by US regulators of carrying out a multi-year scheme to defraud investors. The Securities and Exchange Commission said on Tuesday that Bankman-Fried, who was arrested on Monday in the Bahamas and is facing criminal charges in the US, raised more than $1.8 billion from investors. The SEC also said he concealed risks and FTX’s relationship with his trading firm Alameda Research, and used commingled customer funds. “We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” SEC Chair Gary Gensler said in a statement.
  • United Airlines Holdings Inc. agreed to buy 100 Boeing Co. 787 Dreamliners as part of a multibillion-dollar order for as many as 300 new aircraft, revamping the carrier’s fleet with one of the largest plane deals in recent years. The pact includes 100 firm orders for the widebody model along with options to add another 100, the companies said Tuesday in a release. The airline expects to take delivery of the Dreamliners beginning in 2024. Along with the widebody order, United agreed to purchase another 56 Boeing 737 Max planes and exercised options for 44 of the workhorse narrowbody jet. Deliveries are expected between 2024 and 2028, it said.
  • Tesla Inc. shares are trading at their cheapest-ever level, as the electric-car maker’s stock slumps more than 50% this year. Chief Executive Elon Musk’s focus on his recent acquisition of Twitter is among a few headwinds the stock faces, with some bears saying that the world’s most valuable automaker should see more declines. Tesla is now trading at 30 times projected earnings, its lowest ever, and well above the benchmark S&P 500 Index’s 17 times forecast earnings. Meanwhile, the company is grappling with a broad array of challenges, including the risks from its billionaire CEO’s association with Twitter to falling demand in China, the world’s largest car market.
  • Berkshire Hathaway Inc. further trimmed its stake in Chinese electric vehicle maker BYD Co., according to a filing Tuesday, offloading 1.3 million Hong Kong-listed shares to take its holding below 15%. That means the investment house has now sold more than one-quarter of its position in five months. Warren Buffett’s firm started publicly reducing its stake in Shenzhen-based BYD in August, when it cut its holding from 20.49% to 19.92%. The pace of sales accelerated in November. Berkshire only has to disclose sales of 1% or more, with any transactions to counterparties under that figure not publicized. Berkshire’s holding now stands at 14.95%. BYD’s stock has fallen around 31% since a Berkshire-sized stake was shown to have entered the Hong Kong exchange clearing system on Jul. 11, according to Webb-Site.com, eroding HK$248 billion ($31.9 billion) from its market value.
  • Federal Reserve officials are set to increase their 2023 unemployment projections for a third straight time amid warnings that their inflation-fighting campaign increasingly risks tipping the US economy into a recession. Economists polled by Bloomberg expect Fed officials to project unemployment rising to 4.6% by the end of 2023 in quarterly forecasts to be updated on Wednesday. That would compare with their median projection of 4.4% in September, and potentially mean 1.5 million more people out of work than now. Such an increase in the unemployment rate without a recession would be unprecedented. Most private-sector forecasters now see the US entering a downturn in 2023, and the Fed’s own staff economists warned last month that the odds of such an outcome were about 50-50.
  • While diplomats in Sharm El-Sheikh were hammering out a historic agreement last month to help developing nations cope with the crippling consequences of a warmer planet, one of the biggest US climate disasters in recent years was unfolding in a rural corner of Pennsylvania. A leak from a 1 5/8-inch (4.1 centimeter) vent on a natural gas storage well operated by Equitrans Midstream Corp. was discovered on Nov. 6 and lasted for 13 days, allowing more than 1 billion cubic feet to escape. Methane, the primary component of natural gas, has a devastating impact on the climate if released directly into the atmosphere, where it has more than 80 times the warming power of carbon dioxide in its first two decades. That single Equitrans release effectively erased emissions gains from about half of the 656,000 electric vehicles sold in the US last year. The incident is one of the biggest blows to the credibility of the US gas industry since the Aliso Canyon leak that began in late 2015 in California and lasted more than 100 days.
  • A government-backed bond program discontinued more than a decade ago is protecting a small group of canny British savers from today’s cost-of-living squeeze. So-called index-linked savings certificates, or ILSCs — which are tax-free and match the pace of price growth — paid out a record £1.2 billion ($1.5 billion) in the financial year ended April, according to a Freedom of Information requests submitted by Bloomberg to National Savings and Investments, the state-owned bank that issued them. Since then, UK inflation rates have soared further, reaching levels last seen in the early 1980s as both the consumer and retail price indexes hit double digits. For investors like Richard Young — one of about 350,000 people who hung onto the inflation-linked notes when rates were low and kept rolling them over at maturity after the program ended — the ILSCs have come into their own.
  • The Bank of England said 4 million households will feel a significant increase in mortgage payments next year and a further 2 million by 2025, adding to headwinds facing the housing market. The central bank said the average payment for those who remortgage will reach £1,000 a month next year — £250 pounds a month higher than the current level. That would cause severe financial difficulties for an extra 220,000 households, taking the total struggling to service their debt to 670,000. The findings in the BOE’s report on risks to the financial system underscore the weaker outlook many economists have for the housing market. Property prices have fallen for three months, the sharpest downturn since the global financial crisis more than a decade ago.
  • A cold week in Europe is sending short-term power prices soaring as grid operators balance supply and pay power stations to keep the region’s lights from flickering. After Monday marked the tightest day of the year so far for Britain’s electricity grid, strains appeared to recede Tuesday even as temperatures are forecast to stay below average for the rest of the week. Intraday prices for Tuesday’s early evening peak at 5 p.m.-6 p.m. eased to about a fifth of Monday’s level as a return of wind power added to supply.
  • Volkswagen AG said surging energy prices have hurt electric-car demand in Europe in recent months, though growth in the US is helping offset the slowdown. EV sales in Europe are still rising but have “gone off track,” Thomas Schmall, CEO of VW’s components division, said Tuesday during a call with reporters. The North American market is “speeding a little bit faster than we expected in the last months” as a result of incentives like the Inflation Reduction Act in the US, Schmall said. Demand in Europe is set to recover in the mid- to long-term. Schmall appeared alongside VW Chief Executive Officer Oliver Blume during a media call announcing a joint venture on charging infrastructure in Italy with a subsidiary of Enel Group. VW and Enel X Way will each invest €100 million ($105 million) in Ewiva, which aims to build a high-power charging network of 3,000 stations by 2025.
  • UK wages are rising at close to a record pace, maintaining pressure on the Bank of England to keep hiking interest rates despite a worsening economic outlook. Official figures Tuesday show average earnings excluding bonuses were 6.1% higher in the three months through October than a year earlier. That’s the most since records began in 2001, barring the height of the coronavirus pandemic. The jump reflects labor shortages that remain chronic despite a cost-of-living crisis that is set to tip the UK into long recession, if it has not already done so. Those shortages are being made worse by the loss of hundreds of thousands of workers over the last two years.
  • Japan needs to find another ¥6 trillion ($43.6 billion) to fund a promised expansion in defense spending over the five years starting in April, according to documents seen by Bloomberg. Prime Minister Fumio Kishida has pledged ¥43 trillion in defense outlays over the period to fiscal 2027, seeking to bolster Japan’s capabilities amid growing threats from North Korea, China and Russia. That’s an unprecedented hike compared with an initial plan for ¥25.9 trillion in military spending. About ¥11.1 trillion of the extra requirements will come from non-tax revenues. This includes the government’s foreign exchange funds account and its share in a large commercial building in central Tokyo, as well as spending cuts and surpluses. That leaves a shortfall of about ¥6 trillion, the documents show.
  • Binance Holdings Ltd., the dominant cryptocurrency exchange, has been hit by large outflows as traders move to take custody of their tokens amid revelations that rival FTX may have misused customer funds before its November implosion.  Net outflows of digital tokens from Binance amounted to about $3.7 billion in the past week, including almost $2 billion in the last 24 hours, according to data from research firm Nansen as of 9:20 a.m. in London. The one-day number was nearly 18 times higher than the next largest efflux, which was from Bitfinex. Binance founder Changpeng Zhao has taken to Twitter in past days to express confidence in the firm’s outlook. A spokesperson for Binance didn’t immediately respond to a request for comment on the outflows.

 

 

 

 

*All sources from Bloomberg unless otherwise specified