December 5, 2023

Daily Market Commentary

Canadian Headlines

  • Toronto home prices fell for a fourth straight month as buyers were squeezed by interest rates stuck at multi-decade highs. The benchmark price for a home in Canada’s largest city dropped 1.7% in November from the previous month to C$1.11 million ($820,000), according to seasonally adjusted data released Tuesday by the Toronto Regional Real Estate Board. That brings the total decline in Toronto home prices since July to 4.8%, the data show. The Bank of Canada has held its benchmark interest rate at 5%, the highest level since 2001, since July as it seeks to bring inflation back to its target level. That’s weighed on the country’s housing market, forcing out some buyers and limiting what others can afford. High borrowing costs have also put financial strain on mortgage holders coming up for renewal or individuals with floating-rate loans. While Bank of Canada Governor Tiff Macklem said last month that current rates may be high enough to tame inflation, most economists predict he won’t begin cutting them until the middle of next year. The central bank unveils its last rate decision of the year on Wednesday.

World Headlines

  • European stocks hovered near a four-month high on Tuesday as investors monitored the outlook for interest rates. London Stock Exchange Group Plc suffered a third outage within a few months as trading was halted in about 2,000 smaller shares. The Stoxx Europe 600 Index was little changed at 12:27 p.m. in London. Germany’s DAX Index gained 0.3%, and was within striking distance of its record closing high on July 28. Stocks including Infineon Technologies AG, Siemens AG and Allianz SE are among those that have led the DAX’s rebound from its late-October low. The benchmark European index has been subdued in the early days of December as technical indicators suggest the market overheated during last month’s rally. The Stoxx 600’s Relative Strength Index is now above 70 and in overbought territory — a level that is generally considered to be a precursor to a selloff. Also damping investor sentiment, Fed Chair Jerome Powell has pushed back on the odds of a rate cut in the first half of 2024.
  • US equity contracts slid as traders pushed back on optimistic scenarios that central bankers will cut interest rates in time to avert recession. Futures signaled another day of declines for the S&P 500, after the benchmark rose last week to its highest since March 2022 on bets the Federal Reserve would soon pivot to monetary easing. The 10-year benchmark Treasury yield dipped two basis points to 4.23%. A rally in November snowballed on hopes that global central bankers were ready to shift to easy policy now that inflation has cooled. Money markets have priced in a 70% chance the US central bank will cut rates in the first quarter, and have priced in as many as five, quarter-point reductions by the end of 2024.
  • Asian equities declined Tuesday and were on pace for their worst day since Nov. 20 as sharp selling in Chinese and Hong Kong shares hurt sentiment. The MSCI Asia Pacific Index slid as much as 1.1%, with Tencent, Samsung Electronics and AIA Group leading losses. Stocks in mainland China and Hong Kong dropped for a third straight day as investors remained concerned about the the health of world’s second-largest economy heading into next year. Sentiment was also dragged by a selloff in technology stocks across the region, tracking similar losses for US tech giants Monday. The MSCI Asia Information Technology Index fell the most since October. Asian equities have declined for three consecutive sessions, the longest streak since October, following a strong rally last month, as investors calibrate if they have overestimated by how much the Federal Reserve will cut interest rates next year amid a push back from Fed Chair Jerome Powell.
  • Oil snapped a run of declines after Saudi Arabia said recent cuts by OPEC+ would be honored in full and could be extended, pushing back against skepticism over the curbs’ effectiveness. Global benchmark Brent rose near $79 a barrel after dropping by more than 6% in the preceding three sessions. Saudi Energy Minister Prince Abdulaziz bin Salman told Bloomberg News the recently decided cuts would “overcome” an expected inventory build in the first quarter, and could be continued further into 2024 if needed. Crude had been under downward pressure since last week’s meeting of the Organization of Petroleum Exporting Countries and its allies, as traders remain unconvinced over how fully the package of voluntary cuts will be carried out. Nearby spreads once again dipped into a bearish contango structure that indicates oversupply this week, as the market grapples with still-elevated output from non-OPEC+ countries, including the US.
  • Gold edged higher in Asia after a dramatic session that saw it surge to a record on US rate-cut speculation before reversing those gains to close down more than 2%. The precious metal traded near $2,040 an ounce after being up as much as 3.1% early on Monday. The jump was triggered by comments from Federal Reserve Chair Jerome Powell on Friday that traders interpreted as signaling a pivot to rate cuts was nearing. However, those bets were subsequently seen as overdone, with gold falling as Treasury yields and the dollar rose.
  • Alaska Air Group Inc. Chief Executive Officer Ben Minicucci was all smiles as he made the media rounds Monday with his new partner, the CEO of Hawaiian Holdings Inc. — the two in coordinated aloha shirts. Alaska said Sunday it would buy Hawaiian for $1.9 billion. The deal, code named project Triggerfish for Hawaii’s state fish, was the culmination of six months of negotiations between the two men as Minicucci looks to grow Alaska Air. While the market hasn’t warmed to an acquisition that faces tough antitrust scrutiny — Alaska’s stock dropped 14% in Monday trading — Minicucci isn’t afraid of a fight. An Alaska Air spokesperson confirmed the project codename, but declined to comment further. The representative didn’t make Minicucci available for an interview. A representative for Hawaiian didn’t respond to a request for comment.
  • Workers in New York City, Long Island and Westchester County will soon be making at least $16 an hour, a dollar more than they do now, as the state joins 21 others in lifting the minimum wage. Increases are set to take effect Jan. 1 from Rhode Island to Nebraska to California, according to payroll processor ADP. Washington state will require employers to pay $16.28 an hour, the nation’s highest minimum wage at the state level. Wages are rising after a year in which labor unions have amped up pressure on employers to pay more, with US auto workers winning new gains after a strike and United Parcel Service Inc. significantly increasing pay to avoid a walkout. In many states, meanwhile, legislators have boosted minimum wage levels as inflation has fueled big increases in living expenses.
  • Johnson & Johnson expects operational sales growth between 5% to 6% in 2024 as its top-selling psoriasis drug starts to face generic competition outside the US. J&J’s sales growth rate appears to be slowing. For 2023, the drugmaker forecasts a 8.5% to 9% growth rate in operational sales. Operational earnings are expected to rise to $10.55 to $10.75 a share, J&J said before its investor day in New York Tuesday. The pharma and medical devices giant will soon lose its exclusivity with psoriasis treatment Stelara, which accounted for a fifth of its drug sales in the third quarter.
  • London Stock Exchange Group Plc suffered a third outage in a few months as trading was halted in about 2,000 smaller shares. Trading in the affected stocks was interrupted shortly after 9:15am local time and again in late morning after a brief resumption, according to the bourse operator. In October, trading in hundreds of smaller shares was halted in the final 80 minutes of a session. And last month, LSEG’s FTSE Russell indexes suffered a 40-minute outage, disrupting trades in the UK, Italy and South Africa. The recent outages serve as an embarrassment to LSEG as it seeks to transform itself from an exchange provider into a data services giant. Microsoft Corp. in 2022 agreed to buy a 4% stake in the company as part of a deal where LSEG agreed to spend billions of dollars on cloud services with the technology giant over the next 10 years.
  • Shares of Nokia Oyj. dropped as much as 10% on Tuesday after AT&T Inc. chose rival Ericsson AB to modernize its US wireless network, a project that could amount to almost $14 billion over five years. For Ericsson, already responsible for about two-thirds of AT&T’s US network, the deal represents a significant win over Nokia which accounted for the other third of AT&T’s business. It’s another blow to Espoo, Finland-based Nokia, which in October announced jobs cuts alongside broader struggles in its 5G infrastructure business. The deal will have Ericsson build AT&T’s network with open architecture, which will let vendors compete to supply components, according to a company statement Monday. Most networks today are locked into a relationship with a single manufacturer.
  • Germany can immediately fix its massive budget gap by eliminating more than €17 billion in tax breaks and benefits mainly for the auto sector, according to the nation’s environmental agency. “We’d hit two birds with one stone: ease the budget crunch and keep climate action on track,” agency President Dirk Messner told Bloomberg. Measures could include raising taxes on diesel fuel and eliminating tax breaks for wealthier motorists and company cars, he added. The steps are proposals at this point, and no decision has been taken. German officials are racing to fix the country’s budget crisis after its top court last month ruled that a top-up of a climate fund with around €60 billion ($65 billion) outside the regular budget was unconstitutional. The government has suspended constitutional borrowing limits for a fourth year in a row by passing a supplementary budget for this year. In addition, the finance ministry has frozen additional spending for new projects that aren’t yet finalized.
  • Spikes in a key short-term interest rate are raising eyebrows in the arcane-but-vital overnight funding market, drawing unsettling comparisons with turmoil that rocked the space more than four years ago. Strains started showing up late last week. The bond-buying frenzy that stoked November’s US debt rally led to a surge in demand for financing in the market for repurchase agreements, where participants engage in short-term lending or borrowing that’s collateralized by government securities. This led to a large jump in short-term rates on the final trading day of November, with yields on overnight general collateral repo soaring above 5.50%. Even more unusual, the elevated levels persisted as December began.
  • Israel would consider another short-term cease-fire if an agreement can be reached with Hamas to return more of its 137 hostages still in captivity. Securing the release of all those seized by Hamas and other armed groups on Oct. 7 remains an aim of the war alongside destroying the Islamist militant group, Eylon Levy, an Israeli government spokesman, said on Tuesday. During the seven-day cease-fire that ended Dec. 1, Hamas returned 110 of the more than 240 people taken when its militants swarmed out of Gaza and killed about 1,200 people. In exchange, about three times as many Palestinian prisoners were released by Israel.
  • Russian President Vladimir Putin on Wednesday will visit the United Arab Emirates and Saudi Arabia, where he plans to meet Crown Prince Mohammed bin Salman, as he seeks to bolster Moscow’s important partnerships with the strategic oil producers. The Kremlin said Tuesday that Putin would discuss trade and investments, with Interfax earlier reporting the oil market and Israeli-Palestinian conflict are also set to be on the agenda. On Thursday, Putin will also host Iranian President Ebrahim Raisi, who’ll lead a delegation to Moscow at the invitation of his Russian counterpart, according to the semi-official Tasnim news agency. Putin will be at negotiations in Abu Dhabi and won’t visit the COP28 summit, which is taking place this week in the neighboring emirate of Dubai, Peskov told Bloomberg News.
  • Moody’s Investors Service cut its outlook for Chinese sovereign bonds to negative, underscoring deepening global concerns about the level of debt in the world’s second-largest economy. Moody’s lowered its outlook to negative from stable while retaining a long-term rating of A1 on the nation’s sovereign bonds, according to a statement. China’s usage of fiscal stimulus to support local governments and its spiraling property downturn is posing risks to the nation’s economy, the grader said. The government pushed back soon after the outlook change was announced, saying it was “disappointed” with Moody’s decision and the nation’s economy “will be highly resilient and has large potential.” The impact of the property downturn is well under control, the finance ministry said in a statement.