February 11, 2022

Daily Market Commentary

Canadian Headlines
• Canadian protests that began by championing the rights of truckers have spread into sprawling, ad-hoc anti-establishment demonstrations across the country — shuttering crucial trade links, confounding police and giving hints that the efforts could spread. As of Thursday, the rolling blockades had closed three U.S.-Canada border crossings, including the crucial Ambassador Bridge between Detroit and Windsor, which is responsible for $13.5 million per hour in economic activity, according to the Windsor-Essex Regional Chamber of Commerce. That led to U.S. and Canadian auto plants curbing production and economists warning that the unrest could deliver a powerful one-two blow to Canada’s recovery if it continues — both further fanning inflation and sapping growth.
• Honda Motor Co. plans to suspend output from one production line on Friday at its vehicle assembly plant in Alliston, Ontario, which it said has been impacted by a blockade at the U.S.-Canada border. Japanese automaker says in statement late Thursday the temporary halt comes as it monitors “the disruption of transportation between Canada and the U.S.” Honda described the situation as “fluid” but that it has no plans to curtail output at any of its U.S. auto plants
World Headlines
• European stocks retreated after U.S. inflation came in hotter than expected, fueling fears of aggressive tightening from the Federal Reserve that could slow economic and profit growth. The Stoxx 600 Index fell 0.8% by 12:23 p.m. in London. Technology sector was among the worst performers as its earnings projections suffer from higher interest rates. Automakers outperformed as Mercedes-Benz AG surged after exceeding profitability target. Even with the latest declines, European equities are poised for their first weekly advance of this year, snapping the longest streak of weekly losses since March 2020.
• U.S. stock index futures pared declines after European equities started trading, but remained under pressure as investors weigh concerns that the Federal Reserve’s aggressive rate hikes may curb growth. March contracts for the Nasdaq 100 trimmed losses to 0.6% at 8:55 a.m. in London, after falling as much as 1.2%, while contracts on the S&P 500 declined as much as 1%. Global bond yields soared earlier as traders wagered that the U.S. central bank will raise policy rates 175 basis points by the end of the year, even as officials pushed back against expectations of a super-sized hike next month. Treasuries and Wall Street shares sank overnight after an unexpectedly large surge in U.S. inflation to a four-decade high. Federal Reserve Bank of St. Louis President James Bullard said he supports responding to the price jump with a full percentage point increase to interest rates by the start of July — including the first half-point hike since 2000.
• Asian equities fell after an unexpectedly large surge in U.S. inflation caused a spike in Treasury yields, hammering growth shares with rich valuations. The MSCI Asia Pacific ex-Japan Index declined as much as 1.2%, the most in two weeks, with technology names like Tencent, Meituan and Infosys the biggest drags on the gauge. Smaller, tech-heavy indexes were big losers in South Korea and Hong Kong. Markets in Japan were shut for a holiday. Friday’s losses spoil what has otherwise been a positive week for Asian stocks, helped by an advance in China following the market’s return from the Lunar New Year holidays. The CSI 300 Index rose and is on course for its best week in two months after Chinese state-backed funds were said to have bought local stocks earlier. The broader Asian equity gauge including Japan looks poised to beat the S&P 500 Index for a second straight week.
• Oil headed for its first weekly loss since mid-December as Iran moved closer to reviving a nuclear accord that would lift American sanctions on its petroleum exports. While futures in New York edged above $90 a barrel on Friday, they are still down about 2% this week. Officials from the U.S. to Europe have indicated that sides are closing in on a nuclear pact after talks resumed in Vienna on Tuesday. A bigger-than-expected jump in U.S. inflation that stirred hawkish Federal Reserve comments added to the bearish sentiment. Although oil’s scorching rally has taken a breather, global consumption continues to rebound, with OPEC suggesting Thursday that the recovery could surpass its forecasts this year. The IEA also said that prices may climb further because of the OPEC+ coalition’s “chronic” struggle to revive output, unless the group’s Middle Eastern heavyweights pump more.
• Gold held its biggest fall in two weeks as larger-than-expected U.S. inflation and hawkish comments from a Federal Reserve official fueled bets of a more aggressive approach in tightening monetary policy. Treasury yields soared Thursday after the consumer price index rose 7.5% year-on-year in January to a four-decade high. Gold ticked higher after the print, before coming under pressure when Fed Bank of St. Louis President James Bullard said he supports raising rates by a full percentage point by the start of July. Markets boosted bets on rate hikes over three meetings, which would require the first 50 basis-point increase in more than two decades. Overnight index swaps have started pricing a roughly 80% chance of the bigger hike at the Fed’s March meeting, as well as small rate rises in May and June.
• U.S. President Joe Biden said conditions in the region could “go crazy quickly” as he urged Americans to leave Ukraine. Washington repeated its intention to impose “swift, severe costs” on Russia if the Kremlin takes any aggressive acts. Russia and Belarus have started their largest joint military exercises in years, to last until Feb. 20. The maneuvers are happening near Ukraine’s border as well as those of NATO members Poland and Lithuania. The top U.S. military official spoke with his Belarusian counterpart to avoid a “miscalculation” around the drills. Moscow has repeatedly denied it plans an attack on Ukraine after the U.S. and NATO warned a buildup of almost 130,000 troops near the Ukrainian border may be preparation for an invasion as soon as this month.
• Hong Kong and Chinese authorities will hold a meeting this weekend to discuss ways to stem the city’s ballooning outbreak. Authorities reported a record 1,325 new cases today and extended a flight ban on eight countries. London’s Gatwick Airport will reopen its South Terminal after almost two years as European airlines gear up for an expected boom in summer flights. Meanwhile, Heathrow said it expects travel at just over half of pre-pandemic levels as strong summer holidays could offset a weaker start to the year. Spain eased restrictions for teenage holidaymakers from countries outside of the European Union such as the U.K., while Chancellor Olaf Scholz said Germany could loosen some pandemic restrictions next week.
• London’s most senior police officer, Cressida Dick, resigned after Mayor Sadiq Khan lost confidence in her leadership over a series of scandals that rocked the capital’s force. The Metropolitan Police Commissioner was under intense pressure after an official report last week found officers had joked about rape, killing Black children and beating their wives. It came with the Met already facing widespread condemnation, including over the murder of Sarah Everard by a serving police officer last year. Dick was hired in 2017 as the first woman to hold the top job in London’s police, which also takes responsibility for counter-terrorism nationwide. Her appointment came at a time when public confidence in the force was already declining. But the scrutiny intensified dramatically when Everard was murdered.
• Global bond yields soared as traders wagered that the Federal Reserve will raise policy rates by 175 basis points by the end of the year, even as officials pushed back against expectations of a super-sized hike next month. Overnight index swaps on Friday showed traders expect the Fed’s main rate to rise to 1.84% after the December meeting, from the effective rate of 0.08%. Goldman Sachs Group Inc’s economists are now calling for seven consecutive quarter-point hikes, up from the five they’d seen earlier. Two-year Treasury yields resumed gains as cash trading opened, shrinking the gap over 10-year yields to the flattest since April 2020.
• Centerbridge Partners has built a stake of more than 5% in Cedar Fair LP, the theme park operator facing takeover interest from rival SeaWorld Entertainment Inc., according to people familiar with the matter. The private equity firm believes Cedar Fair could draw interest from several other operators if it pursues a sale, the people said, asking not to be identified discussing confidential information. A stake of that size would make Centerbridge one of the amusement park company’s top three of four shareholders, according to data compiled by Bloomberg. SeaWorld has offered about $3.4 billion for the Sandusky, Ohio-based company, Bloomberg News reported on Feb. 1. Cedar Fair confirmed in a statement that it had received and was reviewing an “unsolicited, non-binding” proposal from SeaWorld. Perella Weinberg Partners LPand Weil Gotshal & Manges LLP are advising Cedar Fair.
• British American Tobacco Plc plans to buy back as much as 2 billion pounds ($2.7 billion) of shares after the Lucky Strike maker reduced its losses from making cigarette alternatives for the first time. Sales should grow 3% to 5% at constant currencies in 2022, the company forecast. Adjusted operating profit reached 11.15 billion pounds, just short of analysts’ estimates.
• To a growing faction of Wall Street bond veterans, investors are making a major miscalculation by betting the Federal Reserve’s coming cycle of interest-rate hikes will end with its key rate not too far from where it is now. As bearishness swept through the markets Thursday after inflation accelerated at a faster-than-expected pace, traders boosted their expectations for where the fed funds rate will wind up to around 2%, up by almost a full quarter-point hike. That still implies a relatively shallow series of increases to below the 2.5% peak in 2018, when the Fed was last tightening monetary policy. But the speed of the adjustment has some strategists betting that it’s just the beginning of a broader repricing as investors recognize that the Fed is finding itself in a much tougher spot than four years ago, with growth now surging twice as quickly, wages rising swiftly and consumer prices jumping by 7.5% in the year through January, the most in forty years. All of which may force policymakers to drive rates higher than markets expect, threating to pile more losses on stock and bond investors who’ve grown accustomed to seeing asset prices rally strongly through eras of easy money.
• The U.K. economy expanded at the fastest pace since World War II last year after suffering a milder hit than expected in December. The 7.5% expansion was the largest since 1941 and made Britain the fastest-growing advanced economy in 2021. The economy nonetheless remained smaller in the fourth quarter than at the end of 2019, before the pandemic struck. The figures will be welcomed by Prime Minister Boris Johnson, who is grappling with a brutal cost of living crisis and facing calls to resign over alleged rule-breaking parties when the country was in lockdown. They will also keep the Bank of England focused on efforts to curb surging inflation, with more interest-rate increases likely in coming months.
• Russian figure skater Kamila Valieva tested positive for a banned substance before the Beijing Winter Olympics, according to the International Testing Agency, a result that only came to light after she helped Russia win the team figure skating competition. In a sample taken Dec. 25 at the Russian Figure Skating Championships, Valieva tested positive for trimetazidine, the ITA said Friday. The drug is typically used to treat chest pain and vertigo, but can also boost endurance. The results were reported by a Swedish lab on Feb. 8, after the Russian team placed first but before medals were awarded.
• Mercedes-Benz AG said its 2021 earnings beat guidance after rising vehicle prices helped the luxury automaker claw its way back from an autumn lowpoint in the global chip crisis. The company said adjusted returns on sales at its cars and vans segment hit 12.7%, exceeding guidance for a result in a 10% to 12% range. Strong new and used vehicle pricing helped achieve the result, the company said.
• Apollo Global Management Inc. said fourth-quarter net inflows totaled $23.6 billion, the most in more than a year, bouncing back after client interest wavered over co-founder Leon Black’s business ties with convicted sex offender Jeffrey Epstein. Credit strategies accounted for 64% of inflows during the period, while private equity contributed just $1.9 billion, the alternative asset manager said Friday in a statement. It’s the biggest influx of capital since the second quarter of 2020, before the Epstein revelations became a full-blown crisis for Apollo. The credit inflows came from retirement-services clients, capital invested by direct-lending businesses and money raised by corporate-credit funds. Apollo has been building out its permanent capital base, which involves managing assets for fees rather than raising money from investors. In January, the firm merged with insurer Athene Holding Ltd., which generates steady fee income.
• Global oil prices could climb further because of the OPEC+ coalition’s “chronic” struggle to revive production, unless the group’s Middle Eastern heavyweights pump extra to compensate, the International Energy Agency warned. Crude has rallied to a seven-year high above $90 a barrel as demand bounces back from the pandemic while supplies around the world lag behind. Plagued by under-investment and disruptions, the 23-nation OPEC+ alliance has been unable to fully restore the output it halted — a problem the IEA expects to worsen. With oil inventories at the lowest in seven years, the agency sees markets facing further strain.
• For much of the past two years, money managers were handing out credit to just about anyone that asked for it: Tech startups with no profit. Cruise companies struggling to navigate a pandemic. Retailers that rely on fading malls. But in less than two months, the carefree days of ultra cheap credit have shown signs of coming to an end. Central banks around the world that pumped trillions of dollars into markets to keep economies afloat are now rushing to scale back the liquidity and fend off inflation. Those efforts could be hastened after U.S. Labor Department data on Thursday showed higher-than-expected price increases in January. Across debt markets, borrowing has gotten harder for the riskiest companies and more expensive for even the most creditworthy. Orders for new U.S. investment-grade notes are dropping. Rogers Communications Inc., a Canadian wireless company, last week scaled back its ambitions on a $750 million bond offering that was initially contemplated at $1 billion, and ended up paying more interest than it expected, according to a person with knowledge of the deal. Ion Analytics, a software and consulting firm, withdrew a junk debt sale in January. Asset-backed securities offerings are taking a few days longer to close.
• The airport luxury boutique became a staple of the pre-pandemic travel boom. Now it may be heading for the departure gate. In 2021, air passenger numbers globally totalled 4.6 billion, only half the 2019 level, according to data from the Airports Council International. Airlines aren’t the only ones feeling the pain. Switzerland-based Dufry, one of the world’s biggest duty-free businesses, said in its latest quarterly results that sales are still down 44% compared to the same period of 2019. Based on numbers for the first nine months, London’s Heathrow Airport in 2021 was on track to make just one-quarter of the revenue from retail concessions it did two years earlier. Before the pandemic, travel retail sales were growing around 8% a year, creating competition to rent space in airports. Luxury brands were particularly eager bidders and airport stores came to account for 6% of global luxury sales, according to Bain & Company data.
• Under Armour Inc.’s earnings beat was marred by concerns about supply-chain issues that the athletic-wear company said will have “material impacts” on the spring-summer season and potentially beyond. Revenue rose 9% to $1.53 billion in the fourth quarter, beating the $1.47 billion average of estimates compiled by Bloomberg. Adjusted earnings per share were 14 cents, while analysts were expecting 6.5 cents. For the current quarter, Under Armour now sees revenue growing at a mid-single-digit rate compared with its November forecast for low-single-digit growth. However, reductions in the spring-summer 2022 order book caused by supply constraints will reduce revenue by about 10 percentage points, the company said

*All sources from Bloomberg unless otherwise specified