December 4, 2023

Daily Market Commentary

Canadian Headlines

  • Origin Energy Ltd. rejected a A$19.1 billion ($12.8 billion) Brookfield Asset Management Ltd.-led takeover, after the fund’s yearlong pursuit of a utility that’s vital to Australia’s energy transition. About 69% of ballots cast by investors were in support of the deal, below the required threshold of three-quarters of the votes, Origin said Monday in a statement, following a shareholder meeting. The utility will “focus on delivering on our strategic priorities, accelerating investment in cleaner energy and storage and pursuing our ambition to lead the energy transition,” Origin Chairman Scott Perkins said in the statement. Origin’s largest investor AustralianSuper, which holds about 17% of the company, had opposed the offer as too low, effectively blocking the prospects for an acquisition. The intervention by Australia’s largest pension fund showcased an increasingly assertive approach from managers of the country’s A$3.5 trillion retirement savings pool.

World Headlines

  • European stocks edged lower on Monday after a strong end to the week, as investors await industrial production data on Tuesday. The Stoxx Europe 600 fell 0.1% as of 8:15 a.m. in London, after closing in overbought territory on Friday. Declines on Monday were led by miners, which fell with iron ore prices, and energy stocks. A slump for Flutter Entertainment Plc weighed on the travel and leisure sector after news that the gambling company will be deleted from the Euro Stoxx 50 Index. European stocks started the month with a healthy gain, extending a rally in November that marked the best month for the benchmark since January on optimism around easing inflation and a peak in interest rates. The Stoxx 600 now has the highest percentage of overbought members since February.
  • Stocks and bonds retreated as traders pause after November’s blockbuster rally and debate the case for interest rate cuts. The 10-year Treasury yield added five basis points to 4.25% while US futures posted modest losses. Bitcoin surged past $41,000, while gold briefly touched an all time high. A slew of economic reports this week are expected to shed light on the state of the US labor market and whether markets are prematurely excited that softer economic conditions can open the door to Federal Reserve rate cuts. Soft-landing hopes built on an economy at “stall speed” look fragile, leaving the market open to risks of a deeper contraction, JPMorgan Chase & Co. strategists led by Mislav Matejka warned in a note. Optimism around a peak in interest rates pushed the benchmark 10-year Treasury yield down 60 basis points in November from a 16-year high of 5% the previous month, and brought a gauge of the securities into positive territory for the year. The S&P 500 advanced about 9%, one of its best November rallies in a century.
  • Asia’s equity benchmark dropped, led by losses in Chinese and Hong Kong stocks as investors looked for fresh catalysts after a strong rally in November. Indian equities headed for a fresh record after Prime Minister Narendra Modi’s victories in three key state elections boosted expectations of policy continuity. The MSCI Asia Pacific Index declined 0.2%, after rising as much as 0.7% earlier. Stocks in Japan slid as the yen strengthened while Chinese shares extended declines. China Evergrande rallied 9% in Hong Kong after the distressed developer won breathing room to strike a restructuring agreement with creditors. Asian stocks headed into December on the back of a 7.7% rally last month, their best monthly gain since January, as investors pile into bets that the Federal Reserve may cut interest rates by mid next year. Optimism also remains that China will continue its policy support for its struggling economy. Historically, regional equities tend to have a quiet December with average rise in the past 10 years seen at around 0.9%, according to data compiled by Bloomberg.
  • Oil held a run of declines — after failing to sustain an early gain — amid continuing skepticism that the latest OPEC+ supply cuts will turn the market tide. Global benchmark Brent slipped near $78 a barrel after a six-week losing run, while West Texas Intermediate was below $74. Oil just posted back-to-back monthly declines as supplies from non-OPEC countries ballooned, while the outlook for demand growth softened. A meeting of the Organization of Petroleum Exporting Countries and its allies last week saw delay and internal wrangling, causing some to doubt the group’s pledged supply cuts. Prices have softened even as wider markets wager that the US Federal Reserve is done hiking interest rates.
  • Gold hit a record high Monday as growing optimism that the Federal Reserve will cut US interest rates in the new year has dented the dollar in recent weeks. The precious metal, seen as a haven investment, reached an all-time pinnacle at $2,135.39 an ounce. Profit-taking later set in, leaving it to trade at $2,069.01. The dollar was also firmer Monday.
  • Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the fourth 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 $1.08 billion in the week ended Dec. 1, compared with gains of $766.5 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $11.2 billion.
  • UBS Group AG will redeem a so-called additional tier 1 bond worth $2.5 billion at the first possible date. The bank issued the note on the Swiss SIX stock exchange on Jan. 31, 2019 and will redeem it on Jan. 31, 2024, UBS said in a statement on Monday. The last trading day will be Jan. 29 2024, it said. The Swiss bank’s decision to redeem the bond by the end of January may be followed by more AT1 issuance in 2024, given its current shortfall in the amount set aside for this type of security, according to Bloomberg Intelligence senior credit analyst Jeroen Julius. “The call was expected, with the bond approaching par value and following the issuance of the two dollar 9.25% AT1s in November which raised a combined $3.5 billion,” he said. Last month, UBS’s stormed the AT1 market with the first sale of its bond since Credit Suisse roiled the market with a historic writedown, when roughly $17 billion of the bank’s AT1s were wiped out as part of a UBS takeover brokered by the Swiss government.
  • Alaska Air Group Inc. agreed to buy rival Hawaiian Holdings Inc. for $1.9 billion in cash and debt, challenging the Biden administration’s aggressive stance on mergers that has already derailed one partnership between carriers. Alaska will pay $18 per share in cash in a deal that includes about $900 million of Hawaiian’s debt, according to a statement Sunday. The offer — a significant premium to Hawaiian Holdings’ $4.86 closing price on Friday — sent its stock surging 174% on Monday. The deal could provide a valuable lifeline to Hawaiian, whose stock has tumbled more than 52% this year. The company has been hurt by the slow return of tourism between Asia and Hawaii following the pandemic and a ramp up in growth in the Hawaii-to-mainland US market by Southwest Airlines Co. Alaska Air Group will be the parent holding company, with Alaska Airlines and Hawaiian Airlines continuing to operate under their separate brands.
  • Spotify Technology SA is cutting 17% of its workforce, marking at least the third time that the streaming service has carried out mass layoffs this year in an effort to shrink costs and drive profitability. Employees affected by the layoffs will be notified on Monday, the music streaming company said in a statement. Roughly 1,500 jobs are being eliminated, a spokesperson said. The streaming audio giant is on pace to add more than 100 million users this year — its biggest year yet — and reported a rare profit last quarter. But Chief Executive Officer Daniel Ek said in a note to employees on Monday that Spotify is still spending too much, citing an economic slowdown and the rising cost of capital.
  • Democratic dreams of imposing a wealth tax on the richest Americans risk being snuffed out by the US Supreme Court in a dispute over a $14,729 bill. Calls to tax assets in addition to income have grown since Senator Elizabeth Warren ran for the White House on the issue in 2020, with President Joe Biden’s 2024 budget requesting a “billionaire minimum tax” to ease the federal deficit. But in a case set for argument Tuesday, the justices will consider whether the Constitution effectively precludes Congress from putting a levy on stock holdings, real estate and other wealth. “The case literally could involve trillions of dollars and directly affect the way our economic and tax systems work because it calls on the court to decide whether a wealth tax might be constitutional,” said John Yoo, a University of California at Berkeley law professor who helped draft a brief in the case for the anti-tax group FreedomWorks.
  • Iranian-backed Houthi rebels claimed they targeted “two Israeli ships” in the Red Sea, part of a series of attacks against commercial vessels in international waters on Sunday during which the US said one of its destroyers shot down three drones. The USS Carney responded to distress calls from three ships over the course of the day while patrolling in the Red Sea, two of which matched the names of carriers the Yemen-based Houthis said they targeted, US Central Command said in a statement. No casualties were reported and while each drone was headed toward the Carney, it wasn’t clear that the warship was the target, according to Centcom. The US military blamed the Houthis, “fully enabled by Iran,” for the attacks, saying they “represent a direct threat to international commerce and maritime security.”
  • US stocks are headed for a rocky end to the year after rallying in November as bond yields fluctuate, according to Morgan Stanley’s Michael Wilson. The strategist — who remained broadly bearish this year even as the S&P 500 gained nearly 20% — said in a note that December could bring “near term volatility in both rates and equities” before more constructive seasonal trends as well as the so-called “January effect” support stocks next month. The benchmark S&P 500 advanced about 9% last month — one of its best November rallies in a century — on optimism around a peak in interest rates. That has left the index in overbought territory — a technical level that is generally considered to be precursor to a selloff.
  • Bitcoin topped $42,000 as frenzied speculation in cryptocurrencies gathers pace, extending the largest digital token’s rally to more than 150% this year. The biggest cryptocurrency rose as much as 6.1% to reach $42,144 as of 11 a.m. on Monday in London. Bitcoin was last at these levels in April 2022, before the TerraUSD stablecoin collapse that accelerated a $2 trillion rout in digital assets. It’s on track for the biggest annual gain since 2020. Smaller tokens such as Ether and meme-crowd favorite Dogecoin also pushed higher. Bitcoin Cash jumped 11% and a gauge of the largest 100 crypto coins added more than 5%. The broad cryptocurrency advance came even as stock markets were mixed, with benchmarks in China and Hong Kong sliding.
  • Israel is expanding military operations into southern Gaza, putting at risk hundreds of thousands of Palestinians escaping the north as US officials grow increasingly uneasy about the war’s toll on civilians. Southern Gaza was hit by airstrikes overnight, when the Israeli military struck around 200 targets, including weapons depots used by militant group Hamas, designated a terrorist organization by the US and European Union. The attacks came hours after Israel Defense Forces urged those who fled south to evacuate again. The fatalities in Gaza — standing at around 15,500 according to the Hamas-run health ministry — have spurred increasingly vocal and public warnings from top American officials that Israel should do more to keep Palestinians safe. Over the weekend, American officials from Secretary of Defense Lloyd Austin to Vice President Kamala Harris said the civilian cost of the war was getting too high.
  • Orsted A/S is set to get a €1.2 billion ($1.3 billion) loan from the European Investment Bank that will help the offshore wind developer bolster its balance sheet after one of its worst years ever. The company is poised to receive an initial €400 million to help finance the Borkum Riffgrund 3 offshore wind farm in the German North Sea, according to people familiar with the matter. The deal could be announced as early as Monday and it coincides with the COP28 meeting in Dubai, said the people who asked not to be identified because the matter is private. The loan may help steer the Danish firm back on track after a year marred by a $4 billion impairment related to abandoned wind projects in the US and its worst quarterly loss since at least 2015. The wider offshore industry has been hit by soaring raw-material prices, higher borrowing costs and long-running supply-chain issues.
  • Investors in private credit are currently getting better returns than they would from private equity, new data shows, piling even more pressure on a buyout industry that’s reeling from the evaporation of M&A this year. The State Street Private Equity Index, which collects data from about 3,900 funds with $4.8 trillion in capital commitments, calculated that private debt funds returned 2.61% to their investors in the second quarter of 2023, the latest data available, while buyout funds returned 2.29%. Since the start of 2022, private credit has been ahead in all but one quarter, according to State Street’s numbers. “It reflects the direction of the market,” said Ian Milton, founder of Mercia Capital Partners, a specialist private credit placement agent. Fundraising in both the private debt and equity markets has suffered this year, but the former is doing slightly better. “So many factors are pushing private credit allocations upward,” he added.
  • Roche Holding AG agreed to pay as much as $3.1 billion for Carmot Therapeutics Inc., a developer of the new type of weight-loss treatments that’s sparked a pharma industry gold rush. The deal for three experimental medicines in obesity and diabetes could push the Swiss drugmaker into competition with European rival Novo Nordisk A/S, whose drug Wegovy has fueled the Danish pharma player’s growth into the most valuable company in Europe. Roche, which has come under pressure to improve its pipeline with new medicines, agreed to pay $2.7 billion at first for closely held Carmot and up to $400 million in milestones, it said in a statement on Monday.
  • Emerging-market traders were taking a pause after the biggest monthly rally in a year as they awaited data-driven clues on the health of the Chinese economy and the Federal Reserve’s policy path. Benchmark indexes for developing-nation stocks and currencies rose about 0.1% Monday amid a stronger dollar, higher US yields and a selloff in commodities. A rally in Asian bonds failed to carry over to the emerging Europe, Middle East and Africa region where geopolitical concerns dominated. Investors are looking for fresh drivers after stocks added $1.5 trillion last month and yields on sovereign dollar bonds dropped by 87 basis points, both the best performances since November 2022. They’re seeking stronger evidence the Fed will turn more dovish next year and that the recovery in the world’s second-biggest economy is intact.