The Daily – December 16, 2022

December 16, 2022

Daily Market Commentary

Canadian Headlines

• The S&P/TSX Composite fell 1.5%, with 11 of 11 sectors lower, led by materials stocks. As of market close, 154 of 237 stocks fell, while 78 rose. TransAlta Renewables Inc. led the declines, falling 17%, while NFI Group Inc. increased 3.7%.
• Advent International Corp. agreed to buy satellite owner and weather forecaster Maxar Technologies Inc. in a deal that values the company at about $4 billion. Private equity firm Advent will pay $53 per share for Maxar, the companies said Friday. Maxar shares more than doubled in pre-market trading to $49.75 after closing at $23.10 on Thursday. Maxar’s share price sagged this year as the company missed earnings targets and revised its 2022 projections lower. Advent said it would prioritize Maxar’s work with the U.S. defense and intelligence agencies.  Maxar, which is based in Westminster, Colorado, operates satellites that can collect detailed images from space. Its technology is used for geospatial intelligence and defense and also powers Google Maps, according to The Wall Street Journal, which reported on the deal earlier.
• A top Ritchie Bros. Auctioneers Inc. shareholder is opposing a takeover of auto salvage and parts auction company IAA Inc., a business it calls “distinctly inferior.” Luxor Capital Group, which owns about 3.6% of Ritchie Bros. shares, said an 18% drop in the company’s share price since the deal was announced Nov. 7 indicates investors’ “clear distaste” for the transaction.” “The IAA Merger will permanently subject RBA investors to the vagaries of operating a weaker and declining second place player with far less appealing business dynamics than those currently enjoyed by RBA, as a dominant leader with a long runway of growth ahead,” Luxor said in a letter dated Friday to the company, a copy of which was reviewed by Bloomberg.

World Headlines

• European stocks extended losses on Friday, with the region’s benchmark hitting its lowest level in more than a month, as the European Central Bank followed the Federal Reserve in sticking to a hawkish tone to fight rampant inflation. The Stoxx Europe 600 fell 1.4% at 11:04 a.m. in London after posting the biggest daily drop since May yesterday. The index is on track for a second weekly loss for the first time since September. Among sectors, rates-sensitive real estate and technology stocks underperformed. After gaining as much as 18% from a September low, the rally in the Stoxx 600 has stumbled in December as better-than-expected US economic data and this week’s comments from policy makers spooked investors, who had been betting on a dovish pivot from the central banks.
• U.S. equity-index futures dropped with European stocks amid concern the resolve of central banks to continue their fight against inflation will tip the economy into a recession. Contracts on the S&P 500 and Nasdaq 100 fell at least 0.8% each after the underlying indexes posted their biggest declines since Nov. 2 on Thursday. Europe’s Stoxx 600 slid to a five-week low. The dollar fluctuated and Treasuries dropped across the curve. Oil trimmed a weekly gain. Adobe Inc. rose in premarket New York trading after reporting better-than-estimated earnings. An index of global stocks headed for a weekly slide as the Federal Reserve and the European Central Bank reaffirmed rates will go higher for longer until inflation fell back to their targets. While that belied market expectations for a lower peak rate and potential rate cuts in 2023, it also clouded the growth outlook. Economists now see a 60% probability of recession in the US and an 80% chance in Europe. Equity analysts have cut 12-month earnings estimates for the regions to the lowest levels since March and July, respectively.
• Asian equities fell Friday, extending the week’s decline, as hawkish views from global central banks offset the boost from easing delisting risk for Chinese stocks in the US. The MSCI Asia Pacific Index dropped as much as 0.9%, led by technology stocks. Shares in Japan and Taiwan were among the worst performers in the region. Chinese shares eked out small gains after US officials said they got sufficient access to audit documents on companies in China and Hong Kong, removing the acute threat of delisting faced by those firms. Still, caution remained as the US government added dozens of Chinese tech companies to its blacklist. A risk-off mood extended into Friday’s trading after the Fed’s hawkish tone from its latest rate decision was echoed by the European Central Bank, squashing hopes for a pivot in monetary policies next year.
• Oil declined Friday as markets were pressured by the outlook for interest-rate hikes. While West Texas Intermediate fell below $75 a barrel on Friday, futures are up almost 5% for the week. Contracts across equity markets were lower amid concern the resolve of central banks to continue their fight against inflation will tip economies into recession. There are signs that Russian flows to Asia are dipping because of the price cap, while the International Energy Agency said this week that oil prices could rally next year as sanctions squeeze the nation’s supply.
• Gold is on track for a weekly decline after the Federal Reserve indicated it won’t soon abandon an aggressive monetary-tightening policy, triggering a retreat from the non interest-bearing metal. Bullion has had a volatile week, surging past the $1,800 an ounce mark on Tuesday after data showed US inflation slowing. However, the Fed’s hawkish comments on Wednesday helped drive gold back below that threshold.
• The Federal Reserve’s updated economic projections this week appeared to incorporate an assumption that raised eyebrows: inflation would prove resurgent at the end of this year. The quarterly projections showed Fed officials now expect so-called core inflation — which excludes food and energy — to end this year around 4.8%, up from the 4.5% figure they forecast in September. Yet that number looks much too high to Wall Street economists following a surprisingly-soft Labor Department release on consumer prices Tuesday, even though Chair Jerome Powell said it was reflected in the projections. It’s an important question because Powell specifically cited the higher “jump-off” point for inflation this year as one reason for the surprising upgrade to where Fed officials see prices at the end of 2023. That outlook, in turn, led to a hefty upward revision to their projected path for interest rates.
• Twitter Inc.’s live audio service, Twitter Spaces, is down after a number of journalists that had just been suspended from the social network found they could still participate on it. Twitter owner Elon Musk said late Thursday night that the company was fixing an old bug and the audio service “should be working tomorrow.” Earlier in the evening, Musk’s network threw reporters from CNN, the Washington Post and the New York Times, among others, into a seven-day suspension for allegedly disclosing the location of his private jet.
• Boeing Co. is closing in on an order for as many as 200 of its 737 Max jets from Air India Ltd.’s new owner Tata Group as the two sides race to wrap up talks before the year-end holidays, according to people familiar with the matter. The final deal is expected to include 40 to 50 Max aircraft that were built for Chinese carriers but never delivered due to an extended grounding of the US jet and heightened trade tensions, some of the people said, asking not to be identified because the discussions are confidential. A Boeing spokeswoman declined to comment. Air India and Tata representatives didn’t immediately respond to requests for comment outside of normal business hours.
• For Verizon Communications Inc. investors, 2022 can’t end fast enough. By the time the books close, the largest US wireless carrier will have logged a third-straight year of below-industry growth, going from first to last in mobile-subscriber gains. “Verizon bungled 5G and lost its network leadership position,” said Roger Entner of Recon Analytics, a boutique advisory group. Some investors worry Verizon will ignite a costly price war to win back market share, hurting all of the players as they continue to spend billions of dollars on network expansion and upgrades. The last few years have been marked by more stable industry pricing, record high margins and low customer churn.
• Starbucks Corp. baristas at 50 locations throughout the US are starting a three-day strike on Friday, saying the company isn’t bargaining fairly with recently unionized stores. Organizers say the planned strike will involve more than 1,000 workers, making it the biggest multiday work stoppage ever by Starbucks Workers United, the labor group that’s prevailed in elections at about 270 of the chain’s cafés this year. Workers at 50 locations that aren’t stopping work for three days plan to support the effort by striking for a day or two, according to the union.  The walkout underlines the rising tension between the coffee giant and its union employees, who have tried to secure a collective-bargaining agreement for more than a year without success.
• Goldman Sachs Group Inc. may eliminate as many as 4,000 employees, according to a person familiar with the matter. Top managers have been asked to identify potential cost-reduction targets, and no final job-cut number has been determined, the person said, asking not to be identified discussing internal deliberations. Headcount at the Wall Street giant has surged in recent years as Chief Executive Officer David Solomon completed acquisitions to build a more diversified company. A costly expansion into consumer banking left the unit with its deepest losses yet amid a slowdown in the business environment for dealmaking and slumping asset prices.
• A salvo of more at least 76 Russian missiles knocked out power and water across Ukraine as President Vladimir Putin’s forces continued their campaign of attacking infrastructure. Rockets slammed into residential areas across the country on Friday. The capital, Kyiv, was targeted by 40 alone, although air defense forces shot down 37. Overall, Ukrainian forces downed 60 of the missiles, Commander-in-Chief of the Ukrainian Armed Forces Valeriy Zaluzhnyi said on Telegram. The attack underscores Moscow’s focus on pounding Ukraine’s energy infrastructure in an attempt to weaken the nation’s resolve to resist Putin’s invasion.
• Major central banks this week signaled their willingness to countenance a global recession in 2023 as they promised to raise borrowing costs further in their ongoing battle against sky-high inflation. After each increased rates by a half percentage point, the heads of the Federal Reserve, the European Central Bank and the Bank of England all said more increases are likely next year even as they acknowledged that their economies were weakening. The mounting risk is that an even greater tightening of monetary policy on top of the biggest squeeze in four decades will undermine demand and hiring so much that it forces the world economy to slump next year, so soon after the pandemic-driven contraction.
• The European Union faces a potential blow to its fragile unity after Slovakia’s government collapsed, plunging the nation into political turmoil and raising the prospect of a snap vote.  As the EU member state of 5.4 million lurches toward an early election, opinion polls show political forces in the lead who have shown skepticism for backing Ukraine — including one former premier who has openly opposed sanctions against Russia and linked himself with Hungarian Prime Minister Viktor Orban and his democratic backsliding.  Slovakia’s president, Zuzana Caputova, dismissed the government on Friday, a day after a no-confidence motion initiated by a former coalition partner was approved in parliament. Interim options include appointing a new cabinet, but consensus is moving in favor of holding a snap ballot as early as spring.
• Norwegian oil and gas producer Aker BP ASA is moving ahead with multibillion-dollar plans to develop a string of fields in the North and Norwegian seas. The decision comes just weeks before Norway reins in tax breaks it introduced during the pandemic. The country has become the biggest supplier of natural gas to Europe in the aftermath of Moscow’s invasion of Ukraine, and will likely continue to see strong demand as buyers turn their back on Russian energy. A total of 10 development plans were submitted to Norway’s Energy Ministry on Friday, including for Yggdrasil, formerly known as the NOAKA area, Aker BP said in a statement. The company and its partners expect to invest more than 200 billion kroner ($20 billion) to develop the package of fields.
• China pledged stronger monetary and fiscal stimulus for the economy and support for private businesses, as Beijing shifts toward boosting growth after dropping its Covid Zero policy. Top leaders including President Xi Jinping agreed to pursue “more forceful” fiscal policy as well as a “forceful” monetary policy stance to ensure “ample” liquidity in the banking sector after concluding a meeting setting economic policy priorities for the coming year, according to state broadcaster CCTV Friday. They also pledged to aid private businesses. The meeting took a stronger pro-growth stance than in recent years, stating that the “amount” of economic growth is important, and that boosting domestic consumption and investment is the top priority for 2023. The officials also vowed financial support for the property sector, which is in its longest-ever slump, but said they want to avoid financial speculation on housing.
• Federal Reserve Bank of New York President John Williams said that while inflation has showed some signs of slowing, a tight labor market and other factors are likely to keep price pressures elevated and warrant high interest rates for some time. “We have clear signs that demand exceeds supply in our labor market” and broader economy, Williams said Friday during an interview on Bloomberg Television with Kathleen Hays. He expects inflation to slow to the 3% to 3.5% range next year, but “the real issue is how do we get it all the way” to 2%, Williams said. “We’re going to have to do what’s necessary,” Williams said. He added that rates could go higher than what officials wrote down in their most recent projections, if necessary.

 

 

 

 

 

*All sources from Bloomberg unless otherwise specified