December 7, 2022

Daily Market Commentary

Canadian Headlines

  • The S&P/TSX Composite fell 1.2%, with 11 of 11 sectors lower, led by health care stocks. As of market close, 198 of 236 stocks fell, while 37 rose. Canopy Growth Corp. led the declines, falling 16%, while Fortuna Silver Mines Inc. increased 2.2%.
  • The Bank of Canada is set to deliver a seventh consecutive increase to borrowing costs at a rate decision to be released at 10 a.m. Ottawa time. Economists are split on whether the central bank will increase the overnight lending rate by 25 basis points or 50. Either way, the rate would go to at least 4%, where it hasn’t been since early 2008. A new poll finds that Canadians are turning against trade with China.
  • The curse of Canadian mega-cap technology stocks hit Shopify Inc. this year, and analysts see little relief ahead for the e-commerce company’s shareholders. Shopify shares have tumbled 69% in 2022 and brokerages see a gain of only 2.2% for the Ottawa-based company’s shares in the next year. That’s the lowest expected return among this year’s 10 worst-performing Canadian and US tech companies with market values of $20 billion or more. A huge rally early in the pandemic made Shopify the third technology business since 2000 to become Canada’s most valuable company. Its rise and subsequent fall is an echo of its two predecessors: Nortel Networks Corp., a darling of the dot-com era, later went bankrupt. BlackBerry Ltd. lost its dominance in smartphones and the stock has collapsed 96% from its 2008 heyday.

World Headlines

  • European equities declined on Wednesday, with sentiment weakened by an uncertain economic outlook in China. Health-care shares surged after a US court ruling boosted the sector. The Stoxx Europe 600 index was down 0.5% by 9:51 a.m. in London as energy and mining stocks dragged the market lower. GSK Plc and Sanofi rallied to boost health stocks after a US federal judge rejected the scientific evidence behind lawsuits claiming heartburn drug Zantac can cause cancer. After gaining for seven weeks since a September low, the rebound for European stocks has faltered on concerns about the Federal Reserve’s push to hike rates following stronger-than-expected economic data, which reignited inflation worries. Meanwhile, data from China overnight further weighed on sentiment, with the country’s exports and imports both contracting at a steeper pace in November.
  • US equity futures dropped with stocks as weak Chinese trade data compounded concerns about the health of the global economy. Contracts on the S&P 500 futures slipped after the underlying gauge fell Tuesday for a fourth straight day and closed at the lowest level in nearly a month. Recession fears were palpable in the bond market, where demand for longer-dated bonds drove a yield inversion to a four-decade extreme, sending 10-year rates below those on 2-year notes by the most since the early 1980s. The Federal Reserve rate decision and inflation data due next week loom as pressure points for a market governed by central banks. The S&P 500’s worst selloff in a month has been sharp enough to reverse the rally that followed Fed Chair Jerome Powell’s comments on a possible downshift in the pace of tightening, leaving the benchmark where it was a week ago just before he spoke.
  • Asian stocks widened losses in the late afternoon as renewed concerns about China’s growth were revived by weak trade data, offsetting optimism as the nation moves away from its Covid-Zero policy. The MSCI Asia Pacific Index slumped as much as 1.4% on Wednesday, its biggest drop in more than a week, led lower by consumer discretionary and information technology shares. Benchmarks in Hong Kong plunged more than 3% in volatile trading as a selloff deepened following reports that mainland authorities are set to allow home quarantine and relax testing requirements. Weak trade data underscoring sluggish demand at home and abroad also hurt sentiment.
  • Oil stemmed a string of losses as a tough outlook for demand in 2023 was weighed against further signs of China’s economy reopening. West Texas Intermediate traded above $74 a barrel, reversing an earlier decline, after futures sank almost 9% over the previous three sessions. China eased a range of Covid restrictions on Wednesday, including allowing some home quarantine and scrapping certain test requirements. The world’s top crude importer was also said to be shifting focus to the economy, with a growth target of about 5% under consideration. Still, optimism surrounding China’s move to loosen its strict virus curbs was tempered by data showing shrinking exports. And among the gloomy predictions for the global economy, Goldman Sachs Group Inc. Chief Executive Officer David Solomon said that he saw “bumpy times ahead.”
  • China reported an increase in its gold reserves for the first time in more than three years, shedding some light on the identity of the mystery buyers in the bullion market. The People’s Bank of China raised its holdings by 32 tons in November from the month before, according to data on its website on Wednesday. That brought its total to 1,980 tons, the sixth-biggest central bank bullion hoard in the world. The gold industry has been rife with speculation over the central banks behind nearly 400 tons of sovereign purchases during the third quarter. Only about a quarter of the buying was publicly reported at the time, causing market watchers to tout both China and Russia as potential culprits.
  • Credit Suisse Group AG bankers are trying to entice rich clients with higher-yield notes and bonus deposit rates in a bid to quickly recoup as much as possible of the almost $90 billion recently pulled from the bank. The head of the Swiss lender’s wealth unit, Francesco de Ferrari, is mobilizing his 1,800 relationship managers in a mass calling campaign with offers including a lowered threshold on balances entitled to an interest rate of 5% to 6%, according to people familiar with the matter, who asked not to be identified as the plans are private. In addition, the bank is offering notes that pay a fixed rate of close to 7% to compensate investors for lending their cash for a number of months, the people said. Credit Suisse is fighting to regain stability in what is supposed to be one of its least volatile businesses and the centerpiece of the revamped institution — managing money for the wealthy. Yet amid swirling online rumors which erroneously questioned the bank’s solvency in October, clients began pulling out funds that within a few weeks amounted to about 10% of de Ferrari’s business.
  • US mortgage rates fell for a fourth week in a row, the longest such stretch of declines since May 2019. The contract rate on a 30-year fixed mortgage eased 8 basis points to 6.41% in the week ended Dec. 2, still the lowest since mid-September, according to Mortgage Bankers Association data released Wednesday. Rates have retreated for the past month as the Federal Reserve has signaled it will soon slow down the pace of interest-rate hikes, likely at next week’s policy meeting. Even so, MBA’s mortgage purchase index fell 3%, the first drop in five weeks, underscoring how demand remains fickle and driving a decline in the overall measure of mortgage applications. On the other hand, refinancing activity rose last week, but remains near the lowest level in two decades.
  • Thoma Bravo LLC raised $32.4 billion for three new tech-focused funds in one of the biggest hauls by a private-equity firm this year even as some rivals struggle to close out funding rounds. The Chicago-based company’s latest fundraising was 42% higher than its previous efforts, which closed with $22.8 billion in 2020, according to Jennifer James, the firm’s chief operating officer and head of investor relations. The massive fundraise comes amid one of the most challenging years for private-equity firms following several years of strong investor interest buoyed by market rallies and low interest rates. Apollo Global Management Inc. for instance has pushed back the timeline for its $25 billion fund and will continue collecting money into next year.
  • Southwest Airlines Co. said it would reinstate its dividend following a pause of more than two years, becoming the first major US carrier to resume the shareholder payouts after they were suspended during the pandemic as a condition of receiving government aid. Southwest’s board approved a quarterly dividend of 18 cents a share to be paid on Jan. 31, according to a statement Wednesday. The airline had notched a string of consecutive quarterly payouts for 43 years that ended in early 2020 as pandemic lockdowns began. The restriction on dividends tied to US financial aid ended in September of this year.
  • Uber Technologies Inc. is launching its first robotaxi service, reaffirming the company’s commitment for a self-driving taxi fleet even as the hype around autonomous vehicles fades. The San Francisco-based company is partnering with Motional, which is an autonomous driving joint venture between Hyundai Motor Co. and Aptiv Plc, to allow customers to hail self-driving rides in Las Vegas, the companies said in a statement Wednesday. The launch is part of a 10-year deal that will pair Motional’s all-electric IONIQ 5 robotaxis with Uber’s ride-hailing and delivery platform. The partnership began testing driverless food deliveries on Uber Eats in Santa Monica, California in May. People in Las Vegas can be paired with a Motional autonomous vehicle through the Uber app when they hail a ride. If an AV is available to complete the trip, Uber will match the rider to the vehicle and the person will have an opportunity to opt-in before the trip is confirmed and dispatched to pick them up. The robotaxi project will expand eventually to Los Angeles, the companies said.
  • Dish Network Corp. has started a trial of its anticipated Boost Infinite wireless plan with a $25-a-month lifetime price guarantee designed to lure customers away from the dominant mobile carriers. The company launched the beta version early Wednesday and plans a full nationwide rollout in the first three months of 2023. The unusually low price could be a “lightning rod” that jolts the industry toward lower rates, Stephen Stokols, Dish’s executive vice president of retail wireless, said in an interview. Boost Infinite is the Englewood, Colorado-based company’s first postpaid mobile offering and was built to take on larger rivals AT&T Inc., Verizon Communications Inc. and T-Mobile US Inc.
  • The European Union is urging the US to amend its climate law by the end of the year to allow European companies to benefit from tax credits in sectors including electric vehicles and batteries. “There are some openings, but it is important to bring those openings to concrete results and indeed we need to do it still this year” before the so-called Inflation Reduction Act enters into force in January, Valdis Dombrovskis, the European Commission’s vice-president for trade, told Bloomberg News in an interview. Brussels and Washington have set up a task force to address Europe’s serious concerns over US President Joe Biden’s $369 billion green package, with limited results so far. The climate law provides subsidies only to US manufacturers to develop some clean technologies including electric vehicles, allegedly breaching the rules of the World Trade Organization.
  • GSK Plc and Sanofi surged after a US judge rejected the scientific evidence behind claims heartburn drug Zantac can cause cancer, meaning the drugmakers don’t have to face more than 5,000 lawsuits. GSK shares rose 16% in London trading and Sanofi gained 8.8% in Paris. The UK drugmaker welcomed the dismissal, saying the ruling slapped down “unreliable and litigation-driven science.”  District Judge Robin Rosenberg in West Palm Beach, Florida, concluded that consumers used flawed science to back up lawsuits filed in federal court blaming Zantac for causing a variety of cancers. Rosenberg on Tuesday found plaintiffs’ experts couldn’t show legitimate links between the product and the diseases, which include lung, liver and kidney cancer.
  • Freezing temperatures and a blanket of snow are poised to hit the UK in the next few days, boosting energy demand just as output from the nation’s fleet of wind parks is slumping. The Met Office issued yellow severe weather warnings for ice and snow for parts of Scotland, Northern Ireland, Wales and the east coast of the UK for Wednesday and Thursday. Temperatures will drop as low as -10 Celsius (14 Fahrenheit) by the end of the week, the forecaster said. The frigid weather will severely test Britain’s power and gas infrastructure as the nation enters the coldest months with the smallest margin of back-up electricity supplies in seven years. The rest of northwest Europe is in a tight spot too, with prolonged nuclear outages in France and Sweden curbing stable output at a time when it is most needed.
  • Red-hot lithium prices are getting a little less expensive, just as China’s electric-car giant BYD Co. flags that the market could swing back into surplus next year. The battery material in China has continued to retreat from the all-time high hit last month as signs of demand weakness weigh on the market. Lithium carbonate fell 0.2% to 571,500 yuan ($82,000) a ton on Wednesday, although prices are still around double where they were at the start of the year. BYD’s Executive Vice President Stella Li told Bloomberg in an interview on Tuesday that she sees new mines coming on stream next year, calling lithium prices “unreasonable.”
  • After several years of deliberations, iron ore giant Vale SA is finally laying out a path for unlocking value from its nickel and copper business as demand for the so-called battery metals picks up. The Rio de Janeiro-based firm will separate the base metal assets from its iron ore operations and unveil a strategic partner in the first half of next year, Chief Executive Officer Eduardo Bartolomeo and Chief Financial Officer Gustavo Pimenta said in an interview. Copper and nickel mines will be placed into a new legal structure, with independent governance and a board that includes deep underground mining and electric-vehicle specialists. An initial public offering is off the table for now.  Separating the two sides of the business is key to accessing “competitive” capital needed for an estimated $20 billion of base metal investments, Bartolomeo said from New York. This, combined with the sale of as much as 10% of the new entity to a partner, will unlock value from a business that Vale sees worth as much as $40 billion.
  • China moved definitively away from its long-held Covid Zero approach Wednesday, easing a range of restrictions that it has persisted with way after the rest of the world moved on to living with the virus. By jettisoning key tenets of the virus elimination strategy, including forcing infected people into centralized quarantine camps, China is suddenly shifting gear faster than expected. The accelerated pace reflects pressure on President Xi Jinping to chart a path out of the crisis and quell public discontent. Less than a month after starting the reopening process by issuing 20 guidelines to local officials to minimize disruption from looser rules, the National Health Commission set out 10 new measures to assist the move away from Covid Zero. Markets appeared to be taken aback by how far-reaching the steps were, despite a buildup in expectations in recent weeks. An initial rally fizzled as some investors worried about a spike in infections and chaos that might ensue.
  • Venture capital investments are on track for the sharpest drop in more than two decades this year, surpassing the declines of the dot-com crash and the financial crisis amid rising interest rates, macroeconomic uncertainties and a public market downturn. The value of new VC deals globally is down 42% in the first 11 months of this year compared to last, to $286 billion, according to research firm Preqin. That’s the deepest slump the researchers have recorded yet, surpassing the nadirs of the early 2000s and the 34% collapse after the 2008 financial crisis. Venture capitalists, who ratcheted up spending over the last decade, are pulling back after rising interest rates put a premium on capital and challenged the tech industry’s growth-at-all-costs mindset. Deal activity dropped sharply in the two biggest venture markets, with declines in aggregate deal value of 50% in China and 45% in the US so far this year.
  • The head of the trade group representing the world’s airlines said it would be unwise to rely too heavily on a switch to hydrogen propulsion to deliver on the industry’s target of net zero carbon emissions by 2050. While planemaker Airbus SE may launch a hydrogen aircraft design before the end of this decade for service entry around 2035, International Air Transport Association Director General Willie Walsh said it’s unlikely the carbon-free fuel will make a meaningful contribution even 15 years after that point. “We’re not factoring in any significant amount of hydrogen,” Walsh said Wednesday in a media briefing in Geneva. “Airbus have talked about a hydrogen-powered aircraft from 2035. Personally I think there are still a lot of questions that need to be answered in relation to hydrogen and we don’t have the answers yet.”
  • European Union leaders are poised to urge stronger coordination among member states to prepare for the next winter as the bloc struggles to cope with a cut in natural gas supply from Russia that has triggered a jump in energy prices. At their next summit on Dec. 15, the heads of government are set to call for advancing work on joint gas purchases and pooling demand, filling of storages and early preparation of contingency plans for the 2023-2024 winter, according to a draft political statement seen by Bloomberg News.  While EU reserves are almost full at the start of this heating season, the concern is that member states will use up most of the gas in storage by April and refilling will be more difficult amid a continued supply crunch.

 

 

*All sources from Bloomberg unless otherwise specified