December 3, 2021

Daily Market Commentary

Canadian Headlines

• Canadian equities surged as investors bought the dip after a two-day plunge. S&P/TSX Composite rose 1.5 percent to 20,762.03 in Toronto. The move was the biggest gain since April 1 and follows the previous session’s decrease of 0.9 percent. Today, financial stocks led the market higher, as 10 of 11 sectors gained; 177 of 233 shares rose, while 55 fell. Toronto-Dominion Bank contributed the most to the index gain, increasing 4.9 percent. Bombardier Inc. had the largest increase, rising 8.4 percent.
• Bank of Montreal’s heavy focus on commercial lending is paying off as businesses in the U.S. and Canada ramp up borrowing.  Profit in the U.S. personal and commercial banking business rose 66% to $408 million in the fiscal fourth quarter, the Toronto-based bank said in a statement Friday. In Canada, net income in the business rose 42% to C$921 million ($718 million). Overall profit topped analysts’ estimates. Bank of Montreal generates a larger portion of its earnings from commercial lending than its peers, and that proved to be an advantage last quarter as business loans advanced 2.2% in Canada from the previous three months, while in the U.S. they climbed 1.8%. The bank also saw continued gains in Canadian mortgages as well as a 5.1% increase in Canadian credit-card balances. The bank also raised its dividend 25% to C$1.33 a share and announced a plan to buy back as many as 22.5 million shares. The repurchase would cost about C$3 billion at the company’s current share price. Canada’s banking regulator last month removed a temporary ban on dividend increases and share buybacks, a measure put in place early in the pandemic to protect the financial system.
• Toronto home prices rose to a record as a sharp decline in the number of properties coming up for sale stoked competition among buyers, leaving little prospect the market will cool soon. The average price of a home sold in the Toronto region in November was C$1.16 million (about $904,000), up 22% from last year. The number of new listings fell 13%, according to data released Friday by the Toronto Regional Real Estate board. Ultra-low mortgage rates, an open immigration policy and demand for larger living spaces in the pandemic have combined to created a homebuying frenzy that has made Canada one of the hottest housing markets in the world. Now, with the central bank signaling that interest rates could rise as early as April, buyers are finding incentives to try to get in the market now.

World Headlines

• European equities were little changed Friday as investors awaited more clarity on the risks to growth posed by the omicron variant of the coronavirus, as well as a key U.S. jobs report. The Stoxx Europe 600 Index advanced less than 0.1% as of 9:55 a.m in London, paring a gain of as much as 0.8%. Travel and leisure and energy stocks rose the most, while miners underperformed. Stocks have whipsawed since last week’s dramatic selloff spurred by the emergence of the omicron variant. While that has added to short-term worries, strategists are more concerned about hawkish central banks in the longer run. The U.S. jobs data later today will be keenly watched for clues about the withdrawal of monetary policy support, one of the main pillars of the equity bull run.
• S&P 500 and Nasdaq 100 contracts fluctuated before turning lower, after dip-buyers Thursday fueled the S&P 500’s best climb since mid-October, a sign that some of the worst fears about the omicron virus strain are dissipating. Treasury yields ticked lower, erasing some of Tuesday jump after Fed officials laid out the case for a faster removal of policy support amid high inflation. The dollar was steady. Crude advanced after OPEC+ proceeded with an output hike but left room for quick adjustments due to a cloudy outlook. In the latest U.S. data, jobless claims remained low, suggesting additional progress in the labor market. Traders are awaiting payrolls numbers Friday, which could shape expectations for the pace of Fed policy tightening. Bloomberg Economics expects a strong report, while the median estimate in a Bloomberg survey of economists predicts an increase of 550,000.
• Asian stocks held gains from the past two days as travel and consumer shares rallied after their U.S. peers rebounded and a report said Merck & Co. is seeking to obtain approval of its Covid-19 pill in Japan. The MSCI Asia Pacific Index was little changed after climbing as much as 0.3%, with Japan among the region’s best performers. South Korea’s benchmark had its biggest three-day advance since February, boosted by financial shares. Still, Asian stocks headed for a weekly loss as U.S. regulators moved a step closer to boot Chinese firms off American stock exchanges. The Hang Seng Tech Index slid as much as 2.7% as Tencent Holdings and Alibaba Group Holding fell after Didi Global Inc. began preparations to withdraw its U.S. listing.
• Oil jumped after the OPEC+ alliance left the door open to reversing its decision to boost output at any moment, with the impact of the omicron variant on demand remaining highly uncertain. West Texas Intermediate climbed above $68 a barrel after closing higher on Thursday following the producer group’s decision. OPEC+ agreed to add 400,000 barrels a day of crude to global markets in January, but it essentially put a floor under prices by giving itself the option to change the plan on short notice. That’s an unusual step that underscores the difficulty in assessing the supply-demand balance over the short term due to the omicron virus variant and the U.S.-led release of national reserves.
• Gold held near the lowest in a month as investors continued to assess the impact of the omicron virus strain on the global reopening, ahead of a key U.S. jobs report. The risk of reinfection from omicron is three times higher than for any previous variant, according to a South African study of infections since the start of the pandemic. But scientists also said hospitalizations in the country remain muted, a sign that may be attributable in part to vaccinations. Traders were also weighing comments from Federal Reserve officials, which helped boost Treasury yields Thursday and weighed on non-interest bearing bullion. Fed Governor Randal Quarles, Atlanta Fed President Raphael Bostic and his San Francisco counterpart Mary Daly explained the rationale for tapering bond purchases more rapidly. That reinforced a similar message from Chair Jerome Powell this week.
• At least five U.S. states have reported omicron cases, with Hawaii joining New York late Thursday in saying the variant had been detected. It also has been found in California, Colorado and Minnesota, which said that a resident who had traveled to an anime convention at Manhattan’s Javits Center tested positive. Germany has a long battle ahead against the pandemic, a top health official warned, with pressure set to increase on intensive-care units even as infections show signs of peaking.  The reproductive number, a measure of how fast the virus spreads, has surged to a record in Gauteng, the center of South Africa’s omicron variant outbreak. The reproductive number rose to 2.33 in the province, meaning each infected person on average infects another 2.33.
• The United Arab Emirates agreed to buy 80 Rafale fighter jets from France as part of a 17 billion-euro ($19 billion) deal signed during President Emmanuel Macron’s visit to the Gulf nation Friday. The long-delayed accord was announced in a statement from the French presidency following a meeting between Macron and the UAE’s de facto ruler, Crown Prince Sheikh Mohammed Bin Zayed Al Nahyan, known as MBZ, on the sidelines of the Dubai Expo. As well as the fighters produced by Dassault Aviation SA, the UAE is also buying 12 Caracal military helicopters from Airbus. The UAE’s Mubadala wealth fund also signed separate deals totaling another 10 billion euros during the trip.
• AstraZeneca Plc effectively blocked a $7.6 billion takeover of Swedish Orphan Biovitrum AB by withholding its 8% stake in the drugmaker from a buyout offer by Advent International and Singapore wealth fund GIC, according to people familiar with the situation. The U.K. drugmaker’s opposition meant the offer fell short of the 90% threshold needed for approval, torpedoing what would have been the largest take-private deal in European healthcare sector this year. Sobi lost a quarter of its value. Astra objected to the deal because it was seeking to buy certain assets from the Swedish company, said the people, who requested not to be identified because the information was private.
• Elon Musk’s offloading of Tesla Inc. shares surpassed the $10 billion mark as he sold stock in the electric-car maker for the fourth consecutive week. In the latest transactions, the world’s richest person got rid of more than 934,000 shares worth about $1.01 billion, according to regulatory filings dated Thursday. The purpose of the sales were to help Musk offset taxes on the exercise of about 2.1 million options. The latest disposals bring the total shares sold to 10.1 million — worth about $10.9 billion — since Musk asked Twitter users on Nov. 6 whether he should offload 10% of his Tesla stake. It’s unclear whether the poll had any actual bearing on Musk’s plans. The chief executive officer said months earlier he was likely to exercise a big block of stock options toward the end of the year, and he set up a trading plan to sell shares before his tweet.
• The U.S. government is inching further on efforts to boot Chinese companies off American stock exchanges for not complying with Washington’s disclosure requirements. The Securities and Exchange Commission on Thursday announced its final plan for putting in place a new law that mandates foreign companies open their books to U.S. scrutiny or risk being kicked off the New York Stock Exchange and Nasdaq within three years. China and Hong Kong are the only two jurisdictions that refuse to allow the inspections despite Washington requiring them since 2002.  The SEC’s new rule, which lays out how the regulator will identify companies subject to delisting and the procedure for kicking non-compliant firms off exchanges, is the latest development in a tussle between financial officials in the world’s two biggest economies. While much of the recent tension has been around the shell companies that Chinese firms use to list in the U.S., Thursday’s regulation dates back decades.
• Apple Inc. just offered a new reason to be worried about the state of the consumer. The company is telling suppliers of waning demand for its iPhone 13. The warning suggests shoppers have either satiated their appetite for new stuff or are uneasy about extravagant purchases in a world of soaring prices and a pandemic that refuses to go away. Throw in the new omicron mutation, and it’s a heady mix for shoppers. Whatever the reason, consumer caution leaves economies facing the new virus threat with less support from goods spending — a reversal from earlier in the pandemic. In the U.S., a key measure of prices for consumers skyrocketed to 6.2%, the highest since 1990. Across the OECD group of major economies, prices are rising at the fastest pace in almost a quarter century. For U.K. consumers, there’s an additional squeeze from tax hikes.
• The Turkish central bank intervened on the currency market for the second time this week to slow a depreciation that’s wiped out almost half the lira’s value this year. The central bank said it stepped in because of “unhealthy” price formations. The lira jumped as much as 2.1% to 13.4026 per U.S. dollar after the statement, before giving up those gains to trade 0.4% weaker as of 2:07 p.m. in Istanbul, edging toward a record low. The move comes after data earlier on Friday showed inflation accelerated for a sixth month in November, reaching the fastest pace in three years — more than four times the official target. That added to concerns President Recep Tayyip Erdogan’s determination to drive down borrowing costs will undermine the currency.
• China will cut the amount of cash banks have to keep in reserve to aid smaller firms, the Premier Li Keqiang said Friday, although he didn’t say when the reduction would happen. China will continue to implement a prudent monetary policy, keep liquidity reasonably ample, make policies based on the needs of market entities, and will cut the reserve requirement ratio at an appropriate time, Li said in a Friday meeting with International Monetary Fund head Kristalina Georgieva. The authorities will increase support for the real economy, especially for small and medium-sized companies, to ensure it operates in a stable and healthy manner, he said, according to Chinese state television. Li also said that China will continue to coordinate pandemic controls with economic and social development, keep implementing a stable macroeconomic policy while making it more targeted and effective.
• American Express Global Business Travel is close to a merger with a blank-check company backed by Apollo Global Management Inc. to go public with a roughly $5.3 billion valuation, people familiar with the matter said. A travel-booking services provider for corporate customers, AmEx Global Business Travel is 50% owned by American Express Co. It is nearing a deal to combine with the special-purpose acquisition company Apollo Strategic Growth Capital, the people said. The merger could be announced as soon as Friday. The deal would represent a vote of investor confidence in business travel despite a bumpy 2021 recovery in the industry. Although business travel is bouncing back as more people are vaccinated, new Covid-19 variants and travel restrictions continue to emerge and keep activity well below pre-pandemic levels. Paul Abbott, chief executive officer of American Express Global Business Travel, responded to plunging sales at the start of the pandemic by cutting costs.
• Credit Suisse Group AG is reviewing banker pay to better align compensation with shareholder interests, after a tumultuous year in which the firm was buffeted by the Archegos Capital Management and Greensill Capital crises. The Swiss lender should give senior-ranking employees more of their remuneration in shares, with long deferral periods and the ability to take back compensation that’s already been paid out, Chairman Antonio Horta-Osorio said at a virtual Financial Times conference late Thursday. The Zurich-based bank plans to submit the proposed changes at its shareholder meeting in April. Compensation should include more deferred pay to “make sure the consequences of decisions today” are fully evaluated, he said. Organizations also need the ability “to claw back that remuneration, not as a matter necessarily of guilt but as a matter of accountability.”
• Didi Global Inc. began preparations to withdraw from U.S. stock exchanges, a stunning reversal following demands from Chinese regulators that had opposed its American listing.  The ride-hailing giant’s board has authorized the company to file for a delisting of its American depositary shares from the New York Stock Exchange, it said in a statement Thursday. It will pursue a listing in Hong Kong and ensure that the U.S. stock will be convertible into freely tradable shares on another internationally recognized stock exchange.  Didi is aiming to file for the Hong Kong listing around March, people with knowledge of the matter said, asking not to be identified as the plans haven’t been made public. Based on the normal process in Hong Kong, it could aim for a summer listing if everything goes smoothly.
• The Bank of England’s leading inflation hawk said there could be advantages from waiting for more data on how the omicron variant of the coronavirus will impact the economy before raising interest rates, prompting investors to slash bets on a December hike. Michael Saunders, who voted to lift borrowing costs last month, said the new strain will be the key issue at the BOE’s next decision, adding to speculation the central bank may delay a move this month. It’s possible the variant could impact both demand and supply even if the U.K. avoids deeper restrictions, he said. Markets reacted to Saunders’ unexpected signal by paring bets on a 15-basis-point hike on Dec. 16. Investors are see a 36% chance of such a move, down from 56% on Thursday and a near certainty last month.
• Brazilian firm Patria Investments Ltd. completed the acquisition of Chile-based Moneda Asset Management, creating an alternative asset manager in Latin America overseeing almost $25 billion in private equity, infrastructure and credit funds, among others. The companies’ partners — 23 from Patria and 10 from Moneda — now have 65% of the total capital from the Nasdaq-traded firm based in Grand Cayman, and more than 90% of the voting power, Patria Chief Executive Officer Alexandre Saigh said in an interview. “The plans are to keep focusing in Latin America,” he said. Saigh said he sees buying opportunities. The region’s economy is slowing, with gross domestic product expected to grow 2.2% next year, below this year’s 6.9%, according to data compiled by Bloomberg. Brazil’s stock exchange is down more than 19% this year in dollar terms, and the $166 billion Chilean pension-funds industry as of October posted outflows of about $47 billion since July 2020. Chile this year, and Brazil next year, are both facing polarized presidential elections, which are further depreciating asset prices

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

*All sources from Bloomberg unless otherwise specified