February 22, 2022

Daily Market Commentary

Canadian Headlines

• The Bridging Finance sale process has ended and investors stand to lose an estimated C$1.3 billion, The Globe and Mail newspaper reported. Bridging’s court-appointed receiver, PricewaterhouseCoopers, engaged with more than 200 potential bidders; PwC narrowed the formal offers down to two. PwC to ask a judge to approve a liquidation of the loan portfolio that PwC estimates will ultimately return between 34%-42% of Bridging’s net asset value to its investors: the Globe
• Canadian Prime Minister Justin Trudeau said his government will retain emergency powers for at least a few more days because of ongoing threats, even after police cleared all blockades across the country. Speaking at a press conference in Ottawa, Trudeau said it’s still too early to lift measures banning public assembly in downtown Ottawa and at border crossings, because of concern demonstrators opposing vaccine mandates are prepared to continue protests. He said he is “reflecting” on timing of when to drop the powers, which include freezing financial accounts of demonstrators. “We don’t want to keep it in place a single day longer than is necessary,” Trudeau told reporters. “Even though the blockades are lifted across border openings right now, even though things seem to be resolving very well in Ottawa, this state of emergency is not over.”
• Brookfield Asset Management Inc. is in talks to buy the payments business of the UAE’s largest lender First Abu Dhabi Bank PJSC, according to people familiar with the matter. The Canadian investor is the frontrunner to acquire the Magnati unit, the people said, asking not to be identified as the matter is private. A deal will likely value Magnati at more than $1 billion, the people said.  Deliberations are ongoing and while Brookfield is in pole position, other parties could still emerge, according to the people. A representative for Brookfield declined to comment, while a spokesperson for First Abu Dhabi Bank didn’t immediately provide comment.
• Air Canada said it will launch seven new routes and restore 41 in North America as it plans to return to 90% of its pre-pandemic capacity by summer 2022. Launching four transborder and three domestic routes while restoring 41 North American routes.

World Headlines

• European equities erased declines to trade little changed as investors considered the extent of possible damage from tensions between Russia and the West over Ukraine. The Stoxx 600 Index was 0.2% higher by 12:21 p.m. in London, having earlier slumped as much as 2%. Automakers gained the most on upbeat corporate news, while energy outperformed as oil neared $100 a barrel. Banks, food and personal care shares underperformed. European equities, already under pressure this year from hawkish turns by the world’s most influential central banks, have been further hammered by the worsening standoff over Ukraine. The European benchmark is down about 8% from its Jan. 5 peak, and a drop of 10% would place it in a technical correction.
• Stocks erased losses as investors bet that markets can recover from the latest imbroglio between the West and Russia over Ukraine, and a flight to havens eased. Contracts on the S&P 500 steadied while those on the Nasdaq 100 pointed to a decline on Wall Street when trading resumes after a holiday. Benchmark Treasury yields pared their decline to trade at 1.92% and gold slipped.
• Chinese technology stocks dropped for a third straight session amid fresh worries over Beijing’s regulatory plans for the sector. The Hang Seng Tech Index fell 1.9% on Tuesday to the lowest close since its inception in 2020. Alibaba Group Holding Ltd. was among the biggest losers following a Bloomberg report that authorities have begun another round of checks on its fintech business arm.  The rout weighed on the broader Hong Kong market, with the Hang Seng Index slipping 2.7%, struggling to shake off the impact of China’s sweeping crackdown on private enterprise. The gauge was also dragged lower as HSBC Holdings Plc reported a charge relating to its Chinese commercial real estate exposure, while global equities face pressure from escalating Ukraine tensions.
• Energy prices surged after Russian President Vladimir Putin signed an order to send what he called “peacekeeping forces” to the two breakaway areas of Ukraine that he officially recognized on Monday. European natural gas led gains in commodities with as much as 13% rise, helped higher by Germany halting the approval process of the controversial Nord Stream 2 pipeline. Brent oil was closing in on $100 a barrel, and power and coal prices rose. Russia’s move is a dramatic escalation in its standoff with the West over Ukraine, with the U.S. and the U.K. saying they plan to announce new sanctions as soon as Tuesday.  There were no details on how many troops might go in, or when, but a conflict could threaten Russian energy supplies. The country is the biggest provider of gas to Europe, about a third of which typically travel through pipelines crossing Ukraine, and a major exporter of everything from crude oil to refined products.
• Gold fell below $1,900 an ounce as demand for the haven asset stalled ahead of the U.S. and Europe imposing fresh sanctions on Russia. Earlier, the metal surged to an eight-month high after Russian President Vladimir Putin announced he would recognize two self-proclaimed separatist republics in eastern Ukraine. It later pared those gains to trade 0.6% lower as investors took stock of this month’s advance. The metal had previously rallied despite expectations of a rate hike by the U.S. Federal Reserve next month. “Gold’s rally has paused ahead of a heavy layer of resistance in the $1,917/23 area with momentum not strong enough to take it through at this stage,” said Ole Hansen, head of commodities strategy at Saxo Bank A/S. “We probably have a fair amount of risk premium priced in which normally doesn’t tend to stick around for a prolonged period of time.”
• Iron ore futures fell as investors weighed China’s price-cooling measures against a possible ramp-up in steel production after the Winter Olympics and an improving outlook for the property market. The steel-making ingredient has been hammered in recent weeks by Beijing’s efforts to clamp down on speculation. Authorities in the world’s top buyer have checked port inventories, increased fees, and probed trading activity for signs of illegal hoarding. In its latest move, the government is considering conducting all overseas purchases of iron ore through a single state-backed platform, according to people familiar with the matter. “A centralized platform that consolidates China’s buying power does have a chance of successfully reducing iron ore prices in the medium to longer term,” said Vivek Dhar, commodities analyst at Commonwealth Bank of Australia.
• Hong Kong will test its entire population of 7.4 million people three times and maintain strict social distancing rules in a bid to slow an outbreak that’s now the worst on record for China. Health authorities announced over 6,000 confirmed cases on Tuesday, with 9,369 preliminary infections. The surge in numbers has also raised the specter of a citywide lockdown, a tactic used in the mainland but unprecedented for Hong Kong. Meanwhile, the omicron variant has gained a foothold in Wuhan, the central Chinese city where Covid-19 first emerged in December 2019. So far, 14 people have tested positive, marking the first resurgence in the city in more than six months.
• The western response to Russia’s latest escalation over Ukraine became clearer as Germany halted the certification process for the Nord Stream 2 pipeline following President Vladimir Putin’s decision to send troops to two self-proclaimed separatist republics. German Chancellor Olaf Scholz, who held a call with Putin late on Monday, said that the Russian leader’s recognition of the breakaway republics in eastern Ukraine had materially changed the situation so that “no certification of the pipeline can happen right now.” Without it, he told reporters in Berlin, the gas pipeline from Russia to Germany “cannot go into operation.” Nord Stream 2 is a priority project for Putin that he has personally pushed from its inception. The decision to put it into limbo demonstrates Germany’s determination to shoulder the economic cost of holding Putin to account for his actions, which effectively tear up years of diplomatic efforts spearheaded by Berlin to bring peace to eastern Ukraine. It was the first hint of a round of U.S. and European sanctions due to be announced as soon as Tuesday.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the eighth 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 $1.36 billion in the week ended Feb. 18, compared with gains of $1.37 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $8.13 billion.
• Bitcoin traded near a more than two-week low as fears of a possible Russian invasion of Ukraine prompted some analysts to predict the largest cryptocurrency could slide toward the key $30,000 level. Bitcoin was little changed after touching a low of $36,372 on Tuesday after Russian President Vladimir Putin said he’s recognizing two self-proclaimed separatist republics in eastern Ukraine and ordering troops there. Other cryptocurrencies also fluctuated amid the political uncertainty, with Ether off as much as 3% before edging higher and XRP down as much as 6.7%. Bitcoin dipped below $40,000 level over the weekend and kept weakening as the Ukraine crisis deepened, undermining the argument that cryptocurrencies are a haven in times of geopolitical turmoil. At the same time, gold has reached its highest level since June.
• Volkswagen AG is preparing an initial public offering of Porsche, seeking a listing of its most profitable asset to help boost the parent’s valuation and fund the push into electric vehicles. VW’s preferred shares surged as much as 10% after the announcement Tuesday on a possible IPO outline between the carmaker and and Porsche Automobil Holding SE, a company controlled by the billionaire Porsche and Piech owner family. The tentative plan, which is estimated to value the sportscar brand at as much as 85 billion euros ($96 billion), would reverse a tumultuous takeover of Porsche more than a decade ago and signals the extent of the upheaval sweeping the industry.  Europe’s biggest carmaker has been pushing for years to adopt a less centralized corporate structure to become more nimble and step up its challenge to Tesla Inc. Success has been modest. The IPO of Traton SE, VW’s truckmaking unit, fizzled amid internal ructions and a limited free float, while a plan to separate the Lamborghini supercar and Ducati motorcycle brands didn’t progress.
• HSBC Holdings Plc boosted its plans to return billions of dollars to investors, saying that business is picking up as global economies recover from the pandemic. The London-based bank will initiate a share buyback of as much as $1 billion, on top of an earlier $2 billion program, it said in an earnings statement on Tuesday. The lender posted a 79% increase in adjusted pretax profit to about $4 billion in the fourth quarter, compared with company-compiled estimates of $4.09 billion. “We have good momentum coming into 2022 and are confident that we can continue to execute against our strategy,” Chief Executive Officer Noel Quinn said in the statement. “We also remain cognisant of the potential impact that further Covid-19-related uncertainty and continued inflation might have on us and our clients.”
• The U.S. will give $35 million to MP Materials Corp. to process heavy rare earth elements at a facility in Southern California as part of a bigger push to challenge foreign dominance in a critical field. The U.S. has lagged far behind countries like China and Canada in extracting lithium, cobalt, and rare-earth elements that are crucial to the manufacture of modern electronics. Officials say that dependence on foreign trade has created national security and economic vulnerabilities. Tuesday’s announcement comes amid a drive by the White House to shore up supply chains and domestic manufacturing. Shortages and bottlenecks during the coronavirus pandemic have crippled manufacturing in key industries and driven inflation to its highest level since the early 1980s.
• When Elon Musk was asked last year whether the factory Tesla Inc. was constructing in Germany would deplete the area’s water supply, he broke out in bellowing laughter and called the notion “completely wrong.” Six months later, water is one of the primary reasons the plant still isn’t producing vehicles. While Musk in August flippantly pointed to water “everywhere” around Berlin, the region is suffering from falling groundwater levels and prolonged droughts due to climate change. That’s sparked a legal challenge that will go to court next week and an acknowledgment from local authorities that supply will be insufficient once Tesla ramps up the plant. The issue has the potential to further delay or even stop the 5 billion-euro ($5.7 billion) project in what could turn into a costly setback to the carmaker’s expansion.
• The cargo ship carrying about 4,000 Volkswagen AG vehicles that caught fire last week could cost the automaker at least $155 million, according to a risk-modeling company’s estimate. Of the roughly $438 million total value of goods aboard the Felicity Ace, which went up in flames off the coast of Portugal’s Azores Islands, Russell Group saidMonday it estimates there are $401 million worth of cars. VW group had Volkswagen, Porsche, Audi, Bentley and Lamborghini models on the vessel. A VW spokesperson declined to comment on the situation Monday. Two large tugs with firefighting equipment were expected to arrive Monday morning local time to start spraying water together with an initial salvage team that was on board already to cool down the ship, according to a unit of Mitsui OSK Lines Ltd. No oil leakage has been confirmed and the vessel remains stable, the transport company said on a website set up to provide updates on the incident.
• U.K. regulators have pushed banks to cut bonuses to employees whose units were burned by the collapse of Archegos Capital Management last year, according to people familiar with the matter. The Prudential Regulation Authority has challenged banks to justify compensation packages in detail and pushed back against some decisions to reward top earners seen to have taken on excessive risk, according to the people. The unraveling of Bill Hwang’s family office in March triggered losses of more than $10 billion across firms including Credit Suisse Group AG, Nomura Holdings Inc. and Morgan Stanley. That fueled concerns at U.K. regulators that lessons from the 2008 financial crisis haven’t been learned. The pressure comes with bonus pots largely soaring as competition for talent increases after the pandemic-fueled trading and mergers boom. But the fallout from Archegos has also been visible.
• Tegna agreed to be acquired by Standard General for $24.00 per share in cash, with an equity value of about $5.4 billion and an enterprise value of about $8.6 billion, including the assumption of debt. The consideration represents a premium of approximately 39% to Tegna’s unaffected closing share price on Sept. 14, 2021, the last full trading day prior to media speculation about a potential sale, release says.
• Veritas Capital has agreed to buy Houghton Mifflin Harcourt Co., the publisher of education materials and research, for $2.8 billion in cash. The $21 per-share price represents a 36% premium to the company’s unaffected share price as of Jan. 13, 2022, according to a statementTuesday that confirmed earlier reporting by Bloomberg News. Houghton Mifflin, whose roots as a publisher and bookseller date to 1832, is one of several companies that has benefited as it adjusted to the surge in remote learning during the Covid-19 pandemic. Its shares have almost tripled in the past year, giving it a market value of about $2.3 billion. Bloomberg reported in January that Houghton Mifflin was working with an adviser to consider a sale.
• U.S. Soccer has reached an agreement with the women’s national team to settle allegations that females were paid less than their male counterparts.  The settlement includes $24 million in payments to players, the New York Times reported. The U.S. women’s team sued in 2019 seeking equal and fair compensation for elite athletes, male and female. They said they are paid less than the men’s team.  “We are pleased to announce that, contingent on the negotiation of a new collective bargaining agreement, we will have resolved our longstanding dispute over equal pay and proudly stand together in a shared commitment to advancing equality in soccer,” U.S. Soccer and the women’s national team said in a statement posted online Tuesday.
• Home Depot Inc. projected a deceleration in profit growth in 2022 after a bumper end to last year, showing that pandemic-fueled spending on home improvement is starting to fade. Comparable-store sales, a key metric for retailers, increased 8.1% in the fourth quarter. The average estimateof analysts surveyed by Bloomberg was for 5.3% growth. Home Depot forecast low-single-digit percentage growth in diluted earnings per share this year after a 30% increase last year.

*All sources from Bloomberg unless otherwise specified