December 8, 2022

Daily Market Commentary

Canadian Headlines

  • Canada is proposing to change its foreign investment law, creating new powers for a cabinet minister to impose conditions on deals to protect national security. The new legislation was promised in the government’s release of its Indo-Pacific strategy in November. It’s part of a broader government effort to guard Canada’s critical minerals industry and other sectors from Chinese state-owned firms. The changes create a new obligation for foreign investors to give the government more notice for proposed investments in certain sectors. The industry minister will be given the authority to place conditions before closing — such as limiting a foreign entity’s access to intellectual property or trade secrets.  The amendments also increase the penalties on companies for non-compliance with the law from C$10,000 to C$25,000 ($18,300) per day, per infraction, and allow for a discretionary penalty of C$500,000 or more for failure to make a so-called “pre-implementation filing.”
  • McEwen Mining Inc. is planning to take its copper unit public next year, seeking to capitalize on growing demand for the wiring metal. The company run by metals entrepreneur Rob McEwen is preparing an initial public offering for its McEwen Copper business in the first half of 2023, according to Michael Meding, who leads the unit. The company operates in Los Azules, one of the world’s biggest underdeveloped copper deposits. “These are exciting times to be in mining and in Argentina,” Meding, who was previously at Barrick Gold Corp., said in a phone interview. There’s been increased interest from prospective investors who previously were less active in mining, he said.

World Headlines

  • European equities slipped for a fifth day as investors assessed the economic outlook ahead of next week’s central-bank decisions. The Stoxx Europe 600 fell 0.3% at 10:47 a.m. in London. Energy shares outperformed as oil bounced after a four-day drop, while real estate and telecommunication stocks led the decliners. ASML Holding NV dropped on a report that Dutch officials are planning new controls on exports of chipmaking equipment to China. British American Tobacco Plc also declined after saying US consumers are increasingly switching to lower-priced cigarette brands. European stocks are set for the first weekly drop after rallying for the past seven, their longest winning streak since April 2021, on optimism over China’s reopening and hopes that inflation has peaked. But the latest stronger-than-expected US economic data are fueling concerns that the Federal Reserve will maintain its hawkish course to tame inflation. The Fed and the European Central Bank will announce their final decisions of this year next week.
  • US equity futures pointed to a recovery after a five-day rout sparked by concerns that the Federal Reserve will remain hawkish in the face of economic headwinds. Contracts on the S&P 500 ticked higher after the underlying benchmark posted the longest stretch of down days to begin a month since 2011. Futures on the Nasdaq 100 edged higher. European equities extended a four-day slide, with property and telecommunications firms pacing declines even as energy companies and miners gained. Treasuries halted a rally that had sent the 10-year yield to an almost three-month low as investors braced for an economic downturn. The benchmark added three basis points to yield 3.44%, while a gauge of the dollar was little changed.
  • Asian stocks rose, led by a jump in Chinese equities on increasing expectations for reopening, helping investors dispel worries about a possible global economic recession. The MSCI Asia Pacific Index rose as much as 0.6%, driven by gains in Chinese tech names including Tencent and Alibaba. The gauge erased an earlier drop of as much as 0.5% in another day of volatile trading amid thin volumes. Hong Kong’s Hang Seng Index surged more than 3%, rebounding from Wednesday’s selloff, after a report that the city is seeking to further ease Covid-related rules. Investors have been bullish on Chinese equities of late, with JPMorgan saying that earnings downgrades are “very close to the bottom”.
  • Oil snapped a four-day drop as investors weighed the impact of China’s moves to ease virus curbs against the risk of an economic slowdown in the US. West Texas Intermediate climbed toward $73 a barrel after plunging more than 11% over the previous four sessions. In recent days, a gloomy economic outlook — and apparent lack of disruption to supply after sanctions took effect on Russia — has pushed down prices. Yet positive signals from China, which is rolling back Covid restrictions, have brightened the prospects for demand. Oil has weakened this month, erasing all of the year’s once-substantial gains, as central banks tighten monetary policy and the macroeconomic outlook sours. The pace of the selloff in recent weeks means that the global Brent benchmark is now oversold, one sign that the market rout could be nearing an end.
  • Gold pared part of Wednesday’s gain as traders awaited two sets of inflation data to gauge the Federal Reserve’s rate hike trajectory. Bullion edged lower after climbing 0.9% yesterday as Treasury yields slid on softer unit labor costs and geopolitical tension. The precious metal, which has been pressured by relentless rate hikes this year, has picked up in recent weeks on a weaker dollar and signs the Fed is becoming less hawkish. Traders are waiting on Friday’s US producer price report and the US Consumer Price Index next week. Two softer prints last month triggered large gains in bullion as expectations of Fed tightening diminished.
  • The asset management unit of BNP Paribas SA has acquired a majority stake in a Danish firm managing $5.3 billion in sustainable timberland. The purchase of International Woodland Company, for an undisclosed sum, is part of BNP Paribas Asset Management’s effort to expand its sustainable product offerings and meet the demand of clients seeking private investment strategies, according to a statement on Thursday. The so-called natural capital market is small but “evolving rapidly” amid increasing focus by governments and international organizations like the United Nations, BNP said. Institutional timberland is estimated at less than $100 billion, it said.
  • Exxon Mobil Corp. expanded its share-buyback program to $50 billion through 2024 after higher oil and natural gas prices boosted the US energy giant’s earnings this year. The enhanced repurchase program, outlined Thursday in a statement ahead of an investor presentation, compares with a previous plan to spend $30 billion through 2023. The buyback will now include $15 billion of share repurchases this year, which would be the highest annual total since 2013, according to data compiled by Bloomberg. Exxon posted record profits this year as oil and gas prices soared following Russia’s invasion of Ukraine. Its second and third=quarter earnings were the highest in the company’s 152-year history.
  • Walmart Inc.-owned digital payments brand PhonePe is seeking to raise as much as $1 billion from General Atlantic and existing investors including Tiger Global Management, Qatar Investment Authority and Microsoft Corp., people familiar with the matter said, even as global funding dries up for startups. The all-equity round is expected to close in the next two weeks and may take PhonePe’s valuation close to $13 billion, including new capital invested, said the people, asking not to be named as the details of the deal are private. The valuation catapults PhonePe among India’s most valuable brands in a digital payments market forecast by Boston Consulting Group to triple in size to $10 trillion by 2026. The company is in talks with SoftBank Group Corp.’s Vision Fund, an investor in PhonePe’s parent entity Flipkart, although Walmart will remain top investor, the people said. Forced to go on the defensive due to its portfolio losses, SoftBank has cut its investments sharply this year.
  • Manhattan apartment rents climbed slightly in November after three months of declines. But the market isn’t returning to the hypercompetitive heights of the summer. The median rent rose 2.1% from October to $4,095, the third-highest level ever recorded by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. Yet there were also indications that demand wasn’t particularly strong, including a rising share of new leases signed with concessions and a higher vacancy rate. Landlords and renters across New York City are in a holding pattern, he said, waiting to see if the US dips into a recession and unemployment increases. In the meantime, leasing has slowed, with new signings down almost 39% from October, the largest month-over-month drop since April 2020.
  • Unilever Plc is weighing the sale of a portfolio of US ice cream brands that could be valued at as much as $3 billion, people familiar with the matter said. The UK consumer giant is working with advisers to review local brands such as Klondike and Breyers that may be considered for divestment, according to the people. International labels Magnum and Ben & Jerry’s are not part of the review, they said, asking not to be identified discussing confidential information. Deliberations are ongoing and Unilever may still decide against selling, the people said. A representative for Unilever declined to comment.
  • President Joe Biden will announce a $36 billion bailout for the Central States Pension Fund, helping to shore up one of the nation’s biggest multiemployer plans and delivering help to union allies after a contentious rail deal that frayed ties with organized labor. Biden will be joined by International Brotherhood of Teamsters President Sean O’Brien, AFL-CIO President Liz Shuler and Labor Secretary Marty Walsh at an event Thursday to promote the aid, according to a White House statement, which called the assistance “the largest ever award of federal financial support for worker and retiree pension security” and the largest from a program created by Biden’s pandemic relief law, the American Rescue Plan. The president angered some of his labor allies last week by signing legislation imposing a contract he personally helped to negotiate between freight railroads and their unions, averting a possible strike that threatened to cripple the economy. Rank-and-file union workers, however, opposed the deal. Four of the 12 unions involved in the negotiations — representing roughly 54,500 workers — rejected the contract.
  • While this week’s drone attacks on Russian airfields that the Kremlin blamed on Ukraine were of largely symbolic value, Kyiv’s apparent readiness to take the war to Vladimir Putin may be constrained by nervousness among its allies over his potential reaction. The strikes at three airfields, including ones used on bombing missions against Ukraine’s civilian infrastructure, boosted morale among Ukrainians enduring electricity and water outages in winter under repeated missile barrages. Kremlin threats of escalation in response have proven empty, at least so far. Yet US and European sympathy for Ukraine in wanting to hit back at attempts to freeze its population into submission is matched by anxiety over Putin’s red lines for resorting to his nuclear arsenal if attacks on Russian soil continue. That makes them reluctant to offer encouragement to Kyiv, still less weaponry with a range permitting far-reaching strikes into Russia, even as Putin’s invasion increasingly falters on the battlefield.
  • Banks handling Credit Suisse Group AG’s rights offer expect nearly all of those rights to be exercised, spelling success for a capital raise that looked shaky as recently as last week. Banks arranging the deal currently expect investors to take up well above 90% of the stock on offer, the people said, asking not to be identified because the information is private. Any remaining amount is expected to be small enough that it could be mostly absorbed by the sub-underwriters, who are major investors that have agreed to snap up unbought shares, the people said. The banks arranging the offering don’t currently anticipate needing to hold a sizeable amount of Credit Suisse stock on their books afterwards, according to the people. The offering closed at about 12pm Zurich time, the people said, cautioning that final take up numbers are still subject to change.
  • Airfares will increase around the world next year, by as much as 12% on Europe-Asia routes and 10% for North America-Asia flights, according to American Express Global Business Travel. Asia, which was slower to lift Covid travel curbs, is set for some of the biggest changes as demand swells, Amex GBT said in its Air Monitor 2023. The region’s relatively strong economic prospects could also push up prices, it said. Drivers of fare increases globally include inflation, rising fuel costs and capacity constraints. Higher fares between Europe and Asia also reflect the impact of rerouting to avoid Russian airspace, which is off-limits to many airlines following the invasion of Ukraine. The detour can add as much as three hours to journeys, pushing up fuel consumption and costs.
  • As Carvana Co. bondholders prepare to negotiate with the car seller to fix its debt load, they’re using a playbook that could become increasingly common when companies fall into distress. The group of debtholders, led by Apollo Global Management Inc. and Pacific Investment Management Co., has agreed to band together in preparation for a restructuring of Carvana’s obligations, and to resist any efforts by the company to pit creditors against creditors. They own about 70% of the corporation’s unsecured debt, or around $4 billion worth. They’re trying to short-circuit a tactic that companies have been increasingly using when they run into trouble: they get emergency financing from a hand-picked group of debtholders. Those investors get a big benefit from offering that funding, jumping to the front of the line to get repaid if the company goes broke. The other creditors end up further back, hurt by the those that collaborated with the corporation.
  • Elon Musk’s bankers are considering providing the billionaire with new margin loans backed by Tesla Inc. stock to replace some of the high-interest debt he layered on Twitter Inc., according to people with knowledge of the matter. The margin loans are one of several options the Morgan Stanley-led bank group and Musk’s advisers have discussed to soften the burden of the $13 billion of debt Twitter took on as part of Musk’s $44 billion acquisition, said the people, who asked not to be identified because the discussions are confidential. Banks have been forced to fund the entire debt package with their own cash after a deterioration in credit markets and a tumultuous start to Musk’s reign at Twitter made the debt difficult to syndicate to institutional investors. The company is estimated to face annual interest costs of about $1.2 billion if the current debt structure remains in place, more than a measure of Twitter’s earnings for the whole of 2021.
  • As winter approaches, governments across Europe have been frantically drafting aid programs to protect their citizens from the surge in energy costs triggered by Vladimir Putin’s invasion of Ukraine. There are electricity price caps in France, gasoline discounts in Italy and heating-bill subsidies in Germany. These measures are costing a lot of money, notching up a tab in the hundreds of billions of euros, and swelling the region’s financing needs well above historical norms for a fourth straight year. The problem with it all is that unlike the past eight years, when the European Central Bank was happy to print money and buy as many bonds as needed, governments will have to find new financiers. So rapid, in fact, will the ECB’s policy pivot be that analysts estimate it will force the region’s governments to sell more new debt in the bond market next year — upwards of €500 billion on a net basis — than anytime this century. And bond investors, scarred by the same inflation surge that the ECB is trying to squelch, aren’t in the mood to tolerate fiscal largesse right now. As Liz Truss found out, they will exact a price.




*All sources from Bloomberg unless otherwise specified