The Daily – December 21, 2022

December 21, 2022

Daily Market Commentary

Canadian Headlines

• TC Energy pushed back the restart of its Keystone oil pipeline by a week after a 14,000-barrel oil spill shut the conduit, according to people familiar with the matter. The company had expected to begin a full restart Dec. 20 but is now targeting Dec. 28 or 29, said the people, who asked not to be named discussing confidential matters. Although the people didn’t specify the reasons for the delay, TC Energy previously said that cold weather could hamper clean-up of the spill. The company has already submitted a restart plan with the federal government, which must give approval before operations can resume. The shutdown of the pipeline that carries heavy crude from Western Canada to the US Midwest has roiled oil markets, limiting supplies to the storage hub at Cushing, Oklahoma, which is the delivery point for the US benchmark.

World Headlines

• European stocks rose from a six-week low on Wednesday as investors returned to risk assets following losses fueled by fears of the hawkish stance shown by major central banks. The Stoxx Europe 600 Index climbed 0.8% by 9:24 a.m. in London. Gains were driven by a rebound for some of the underperforming rates-sensitive sectors of 2022, like retail and real estate. Telecoms, banks and miners posted more modest gains. The Stoxx 600 closed at its lowest level since Nov. 9 on Tuesday as investors were spooked by the Bank of Japan doubling a cap on 10-year yields, sparking a jump in global bond yields. That was the latest in a slew of hawkish decisions and commentary by central banks, which last week included the Federal Reserve and the European Central Bank, as they persist with their fight against high inflation.
• US equity futures ticked higher, pointing to a second day of gains on Wall Street, while global bonds steadied from the previous day’s selloff as some of the furore following the Bank of Japan’s unexpected increase in its yield trading band ebbed. Futures on the S&P 500 rose 0.6% after the underlying index closed higher on Tuesday for the first time in four sessions, providing a moment of respite in one of the worst years for stocks and bonds in more than a decade. Rampant inflation this year unhinged basic portfolio balancing investment that relies on a mix of 60% to equities and 40% to bonds. The strategy has plunged 17% in 2022, the worst performance since 2008.
• Asian stocks headed for a fifth session of declines, as traders assessed adjustments to monetary policy in Japan and a jump in Covid cases in China. The MSCI Asia Pacific Index was little changed after moving between a gain of 0.4% and a loss of 0.3%. While industrial and tech shares weighed on the gauge, Australian miners provided support on higher gold prices. Japanese banks gained after the Bank of Japan doubled its yield cap on Tuesday, although benchmarks fell. Moves across the region were driven by thin trading into year-end, with benchmarks in China and Hong Kong inching back from a two-day fall. In addition, a surge in Covid infections in China has affected trading desks. India stocks led losses in the region.
• Oil rose for a third day after a report showed a drop in US crude inventories as market liquidity ebbs before year end. West Texas Intermediate for February delivery traded near $77 a barrel after rising more than 2% in the week’s first two sessions. Trading volumes have generally been below average this week ahead of the upcoming holiday period. The American Petroleum Institute said US crude inventories shrank by 3.1 million barrels last week, according to people familiar with the data. Crude remains on track for the first back-to-back quarterly decline since 2019 as further tightening by leading central banks risks tipping the US and European Union into recession. Traders are also tracking the impact of China’s easing of harsh virus restrictions, and a warning from Saudi Arabia that the Organization of Petroleum Exporting Countries and its allies would remain proactive and pre-emptive in managing the global oil market.
• Gold steadied, after rallying on Tuesday as the Bank of Japan’s unexpected yield-curve-control policy rattled markets and weighed on the dollar. Bullion jumped 1.7% on Tuesday after the BOJ’s move, and is trading near the highest since June. The precious metal often moves in the opposite direction to the greenback as it’s priced in the US currency. Traders will look to a slew of US economic data due this week, including the Federal Reserve’s favored gauge of inflation, that may shed more light on the rate-hike trajectory. Market moves may be exacerbated by lower liquidity as the holiday season approaches.
• Iron ore rose for a second day as China’s abrupt Covid Zero reversal and a steady stream of supportive policies improved the likelihood of a recovery in the housing sector. The steel-making ingredient gained as much as 3.8% in Singapore, touching the highest level in over four months, as the outlook for the property market brightened on China’s re-opening prospects. Morgan Stanley upgraded its view of the sector to attractive after recent pro-growth government measures. With officials pledging stronger policy support next year, “greater economic certainty should embolden more homebuyers to enter the market, even if worries about purchasing pre-sold homes from financially troubled developers will remain for a while longer,” Rosealea Yao, an analyst at Gavekal Dragonomics, said in a note. Sales and construction starts may exceed Gavekal’s earlier forecasts of around 5% and 10% growth in 2023, she added.
• US President Joe Biden will unveil nearly $2 billion in assistance and announce moves to deliver a Patriot missile battery to help Ukraine bolster its defenses this winter as its leader, Volodymyr Zelenskiy, arrives in Washington on Wednesday to deliver an in-person address to Congress. Zelenskiy will be leaving Ukraine for the first time since Russia invaded in February and at a critical stage in the war. His country has faced a barrage of Russian missile and drone attacks targeting Ukraine’s civilians and critical energy infrastructure in recent weeks, leading to power and water cuts. The speech to Congress gives Zelenskiy the opportunity to personally appeal to US lawmakers to continue assistance for Ukraine even after Republicans, who have been more skeptical of Biden’s support for the country, take control of the House in January. Zelenskiy has pleaded for more advanced weapons systems to blunt Russian attacks and for additional energy and economic support as civilians brace for a brutal winter ahead.
• Investors ready to turn the page on the worst year for equities since the global financial crisis should brace for more pain heading into 2023. That’s the blunt message from top strategists at Morgan Stanley, Goldman Sachs Group Inc. and others, who are warning that stocks face fresh declines in the first half as corporate earnings succumb to weaker economic growth and still sky-high inflation, and central banks remain staunchly hawkish. The second half will mark a recovery once the Federal Reserve stops hiking rates, they say — but it’s likely to be a muted rebound that will still leave stocks only moderately higher than at the end of 2022. “The risks that stock markets grappled with this year aren’t over and that makes me nervous about the outlook, particularly in the first half,” Mislav Matejka, global equity strategist at JPMorgan Chase & Co., said in an interview.
• Elon Musk confirmed he will step down as chief executive officer of Twitter Inc. after finding a successor, though he plans to retain control over the company’s engineering teams. Since taking over in October, Musk has overseen the firings or departures of roughly 5,000 of Twitter’s 7,500 employees. He’s said he plans to emphasize Twitter’s engineering as owner, and it’s hard to tell what’s left of other operations, such as legal and finance after the departures. The billionaire executive embarked on a search for a new CEO, according to a person familiar with the search, after losing a straw poll he posted on the social media site that asked whether he should relinquish his role as head of the company.
• Saudi Arabia is buying stakes in three flagship DP World developments in the United Arab Emirates for $2.4 billion, in the latest sign that increasing competition between the two largest Gulf economies isn’t impacting deal flow. Hassana Investment Co. will take a 10.2% stake in assets including the Jebel Ali Port, which helped transform Dubai into a global trading hub. It will also take holdings in Jebel Ali Free Zone and the National Industries Park, according to a statement on Wednesday. The deal is part of DP World’s quest to pare down debt and comes six months after Caisse de Depot et Placement du Quebec said it would invest $5 billion in the Middle East’s biggest port and two industrial zones.
• A House committee voted to release Donald Trump’s tax information to the public, capping a three-year legal saga initiated by Democrats to obtain and release the former president’s closely held financial documents. House Ways and Means Chairman Richard Neal released a report about the Internal Revenue Service’s audits of Trump’s taxes late Tuesday, but the actual tax returns will be made public in a few days after the redaction of personal information, such as Social Security numbers. The documents released include a report summarizing Trump’s personal and business income and tax payments from 2015 through 2020, showing that he and his companies lost millions of dollars during some of the years he was running for president and in the White House.
• Cathie Wood ramped up purchases of Tesla Inc. shares in the fourth quarter even as concerns over Chief Executive Officer Elon Musk’s ability to manage businesses rise, potentially signifying her faith in the billionaire and electric vehicles. Tesla shares rose as much as 2.4% in US premarket trading on Wednesday following Wood’s purchases. The stock was also boosted after Musk confirmed that he would resign as chief of Twitter Inc. once a replacement was found, alleviating investor worries that the CEO is spending too much time on the social media company. Exchange traded funds backed by Ark Investment Management LLC purchased slightly more than 445,000 shares of the electric vehicle maker since Oct. 3, when they started their latest buying streak, according to Ark trading data compiled by Bloomberg. This is the first quarter in seven that Ark has net acquired Tesla shares.
• UK government borrowing surged in November as the public finances came under mounting pressure from rising debt-interest payments and the huge cost of subsidizing energy bills for consumers and businesses. The budget deficit stood at £22 billion ($26.8 billion) –- the highest monthly total in records stretching back to 1993 and almost triple the £8.1 billion reading a year ago, the Office for National Statistics said Wednesday. Economists had forecast a shortfall of £14.8 billion. The figures leave Prime Minister Rishi Sunak’s government little room for maneuver in settling strikes that have upended transport and the National Health Service in the lead-up to the Christmas holiday. Railway workers, ambulance drivers and nurses are among those that set to walk off the job to press their case for higher pay, something ministers maintain would fan inflation.
• In a span of 18 hours last week, years of rigid intransigence from the European Union’s two most rebellious nations started to break. First Hungary and then Poland agreed to fix their democracies’ shortcomings in exchange for gaining access to billions of euros of the bloc’s funds. If they make good on those promises, it will also be a testament to the new-found powers of the bond market. In an era of soaring inflation and rapidly rising borrowing costs, bondholders have the ability — for the first time in years — to exert pressure on governments whose policies concern them. Exhibit A of this is famous by now: Liz Truss’s rapid downfall in the UK. In the EU, Hungary and Poland — both ruled by leaders accused of democratic backsliding — cause particular angst.
• US mortgage rates declined last week to a three-month low, though a slight easing in home-purchase applications underscores a still-challenged housing market. The contract rate on a 30-year fixed mortgage decreased to 6.34% in the week ended Dec. 16 from 6.42%, according to Mortgage Bankers Association data released Wednesday. Rates are down 82 basis points since reaching a more than two-decade high of 7.16% in late October. The group’s index of mortgage applications for home purchases slipped 0.1% from an almost three-month high the prior week. Housing demand has collapsed since the start of the year as rapid inflation prompted aggressive interest-rate increases by the Federal Reserve, though home prices have been slow to settle back. Nonetheless, the worst of the spike in mortgage rates may be over as central bankers dial back the pace of interest rate increases and ultimately move toward a pause in their hiking cycle.
• Brexit has left the UK economy is 5.5% smaller than it would have been and added to the squeeze on public services that’s behind strikes cripling the railways and National Health Service, a prominent research group concluded.  The Center for Economic Reform said that slower growth is also weighing on the Treasury’s revenue and that the tax increases announced in the autumn fiscal statement wouldn’t be necessary if the UK were still in the European Union’s common market. The findings are the latest to highlight the costs of Brexit, which is limiting Prime Minister Rishi Sunak’s effort to pull the UK economy out of a recession that may last until the next election. Sunak is holding firm in his determination to limit pay increases for nurses, ambulance drivers and railway staff, who are walking off the job in protest.
• Stubbornly high inflation, soaring borrowing costs and geopolitical uncertainty hindered dealmaking in 2022, sending global mergers and acquisitions activity down by almost a third compared with last year’s record haul. Companies announced $3.5 trillion of deals in 2022, according to data compiled by Bloomberg, striking transactions to bulk up existing businesses, push into new sectors or reorganize operations against a volatile backdrop of slumping equity markets and forceful antitrust actions. Megadeals announced early in the year were soon replaced by jitters about getting M&A over the finish line, with monthly deal activity plummeting by almost half from May to June. The volumes have yet to recover.  The year started off on a high note when Microsoft Corp. agreed in January to buy video game publisher Activision Blizzard Inc. for $69 billion, in the biggest deal since 2019. For a moment, 2021’s gangbuster performance — which saw a record $5 trillion of deals announced – looked set to continue.
• Federal authorities are set to whisk Sam Bankman-Fried to the US on Wednesday to face a range of criminal charges related to the collapse of the FTX crypto exchange. Bankman-Fried signed his surrender documents on Tuesday, according to Bahamas Acting Commissioner of Corrections Doan Cleare. He’ll sign a separate set of papers finalizing his waiver of rights to fight extradition at the Magistrate’s Court in Nassau on Wednesday. After that the FTX co-founder will be accompanied by FBI agents on a non-commercial aircraft back to the US, according to a person familiar with the matter. The plane will leave from a private airport in the island nation, said another person, who also asked not to be identified due to the sensitivity of the plans.
• HSBC Holdings Plc won a battle at the UK’s top court in a case over allegations it turned a “blind eye” to suspicious payments made by convicted billionaire swindler Allen Stanford. In a split decision, the country’s top judges dismissed an appeal by Stanford International Bank, which effectively ends the long-running dispute. HSBC fought a claim from the administrators of SIB, who’d previously alleged that the lender should have known of the fraud, when it made some £116 million ($140 million) of payments. SIB, which was controlled by Stanford, sold billions of dollars in bogus certificates of deposit to more than 17,000 investors worldwide before it imploded in 2009. At the time, the plot was the second-largest Ponzi scheme prosecuted in the US, behind the Madoff investor fraud, which came to light a few months earlier.

 

 

 

 

 

 

 

*All sources from Bloomberg unless otherwise specified