February 23, 2023
Daily Market Commentary
Canadian Headlines
- First Quantum Minerals Ltd. said it’s been forced to stop processing copper at its giant mine in Panama after the government blocked it from loading the metal at a port in the country. The move is a further escalation in an ongoing dispute between the miner and the government over its flagship operation in the country, which erupted after negotiators failed to reach a tax agreement late last year. First Quantum and Panama have been negotiating new tax terms for more than a year on the Cobre Panama mine. Talks failed to produce an accord by Panama’s Dec. 14 deadline, putting the two sides at an impasse as the threat of a global copper shortfall looms. Demand is expected to surge for copper, lithium and other raw materials crucial to the worldwide shift to cleaner energy. The mine is First Quantum’s biggest asset, an economic engine for Panama and the source of 1.5% of the world’s copper production. The dispute is playing out amid anti-government protests in Peru that have disrupted copper output and a series of operational setbacks at Chilean mines.
- Canada’s banks are expected to post the biggest profit decline in more than two years as they’re buffeted by rising taxes, higher regulatory capital requirements and the threat of a recession. Net income for the country’s six largest banks is expected to fall 15% in the fiscal first quarter, according to data compiled by Bloomberg. That would be the largest drop since the third quarter of 2020. Canadian Imperial Bank of Commerce kicks off the reports Friday. Driving the drop is a need to hold more capital — rather than deploy it into interest-earning loans — to absorb the defaults that may result from a downturn in Canada’s economy and meet their regulator’s 50-basis-point increase in required Common Equity Tier 1 capital ratios. On top of that, the banks will be paying higher taxes as measures Prime Minister Justin Trudeau campaigned on before his most recent election take effect.
- The fundamentals for commercial real estate have never been better at this stage of a downturn, according to Brookfield Asset Management Chief Executive Officer Bruce Flatt. Demand for the best space is strong and vacancy is low, leading to outsize rents for top office properties in New York, London and Dubai, Flatt said in an interview with Bloomberg Television. Insatiable demand for information storage is also supporting the company’s investments in digital infrastructure such as data centers and towers, he said. “There is a real tale of two cities,” Flatt said, dismissing recent loan defaults on Brookfield-owned properties in Los Angeles as insignificant. “High quality space is very sought after as companies want to bring people back and have engaging space.” Rising interest rates are washing through real estate markets globally, ending the cheap money era that saw asset values inflated to record levels. Still, relatively modest levels of borrowing by landlords and constrained supply make the current rates-driven correction distinct from previous downturns, when excess credit or construction have led to a crash.
- Newmont Corp. is expecting more of the same for gold output during the next year as the world’s top bullion producer pursues its biggest acquisition ever to secure future growth. The Denver-based company expects to produce 5.7 million to 6.3 million ounces of gold this year, Newmont said Thursday while reporting fourth-quarter earnings that beat analysts’ expectations. That compares to last year’s production of 6 million ounces, and comes as the company seeks to add mines through a proposed $17 billion takeover of Australian rival Newcrest Mining Ltd. The world’s biggest gold miners have struggled to maintain production while facing higher input costs and harder-to-mine deposits, even with prices for the precious metal up about 37% in the last five years. Newmont itself faced mining woes that undercut production and delayed projects, including a stalled expansion of its Yanacocha mine in Peru.
World Headlines
- European stocks were steady as investors considered the latest Federal Reserve policy minutes, alongside news that core inflation in the euro zone hit a record high in January. The Stoxx 600 was up less than 0.1% at 10:50 a.m. in London. Tech stocks outperformed after US-based Nvidia Corp. gave a bullish revenue outlook for the current quarter. Mining stocks trailed, with Anglo American Plc weighing on the subindex after the company announced a $1.7 billion writedown. European stocks rallied strongly at the start of the year, but more recently anxiety has gripped investors over concerns that inflation will remain elevated for longer, leading central banks to stay hawkish. The Federal Reserve minutes published Wednesday showed that officials are still eyeing more rate increases, though almost all agreed on ratcheting down the pace of hikes. Underlying inflation in the euro area hit a record in January, revised data showed, likely cementing the European Central Bank’s plan to raise interest rates by another half-point next month.
- US equity-index futures rose as investors grew confident the Federal Reserve’s peak interest rate would be within levels already priced in by markets. Contracts on the S&P 500 and Nasdaq 100 climbed at least 0.5% each after the underlying indexes avoided a selloff following the Fed’s minutes and remarks by officials. The dollar and Treasuries traded lower. After months of divergence over the perceived path of monetary tightening, the Fed and markets are increasingly getting aligned in their expectations, reducing the scope for hawkish shocks. While the minutes and comments by Fed officials including James Bullard reiterated a continuing preference for rate hikes, they didn’t say anything that wasn’t factored in by the market’s aggressive repricing of Fed bets in recent weeks.
- Asia stocks snapped a two-day decline as traders focused on US economic data due Thursday, while shares in Hong Kong entered correction territory. The MSCI Asia Pacific ex Japan Index rose as much as 0.9%, before paring gains to 0.3% in afternoon trading. South Korean shares were among the biggest advancers in the region as the Bank of Korea paused rate hikes for the first time in a year. Meanwhile, Hong Kong’s Hang Seng Index fell into correction amid growing geopolitical concerns and doubts over the strength of China’s economy. Japan was closed for a holiday.
- Oil held near $74 — after the longest run of losses this year — as prices swung with a fluctuating dollar and traders looked toward US inventory figures due later. West Texas Intermediate was little changed, paring earlier gains as the dollar trimmed losses. The greenback’s fortunes have driven crude in recent days, with gains tempered by Federal Reserve minutes released Wednesday that were more closely aligned with the market’s monetary tightening outlook. Crude has been under pressure this week as renewed expectations of rate hikes countered longer-term optimism about Chinese consumption rising later in the year. For much of this year, however, prices have lacked direction as traders await signs of meaningful demand increases.
- Gold held a three-day drop that pushed prices to their lowest close this year after minutes from a Federal Reserve meeting pointed to more rate hikes. Officials continued to anticipate further increases in borrowing costs would be necessary to bring inflation down when they met earlier this month, though almost all supported a step down in the pace of hikes. After the minutes, swaps traders kept steady their conviction that the Fed will keep pushing rates higher until summer. Bullion has all but erased this year’s gains following hot inflation data that dimmed the prospect of a quick return to looser monetary policy, triggering outflows from exchange-traded funds backed by the metal. Tighter Fed policy tends to diminish the appeal of non-interest bearing gold. Spot gold added 0.1% to trade at $1,827.43 an ounce at 8:54 a.m. in London after ending Wednesday at the lowest close since Dec. 30. The Bloomberg Dollar Spot Index weakened 0.2%. Silver and platinum edged higher, while palladium fell.
- Copper extended losses following hawkish signals from the US Federal Reserve and signs of weak near-term demand in China. Benchmark futures fell on Wednesday from the highest close in three weeks after minutes from the Fed’s last meeting underlined the scope for higher interest rates to bring down inflation. In China, traders are still waiting for more concrete evidence that domestic demand is rebounding. Copper remains about 8% higher this year, supported by optimism that demand in Asia’s top economy is set to accelerate after Beijing abandoned its Covid Zero policy, and on supply disruptions at mines in Asia and Latin America. At the same time, investors have been trying to price in the impact of tighter US monetary policy.
- Alibaba Group Holding Ltd.’s profit surged 69%, as China’s e-commerce leader kept a lid on costs and shoppers continued to spend online while the pandemic raged. Its shares climbed more than 6% in pre-market New York trading. The online retailer reported net income of 46.8 billion yuan ($6.8 billion), easily surpassing the roughly 35 billion yuan average estimate. Revenue rose 2.1% to 247.76 billion yuan in the December quarter, just ahead of projections. The bottom-line gains partly reflect deep cost cuts at a company that once spent aggressively to grow its international and online services businesses. The company is now focused on buoying profits while navigating increasingly tough competition from arch-rival JD.com Inc. as well as up-and-comers such as PDD Holdings Inc.
- Apollo Global Management Inc. is in talks to inject $750 million to support the leveraged-finance business of Credit Suisse Group AG’s investment-banking spinoff First Boston, potentially making it one of the biggest backers of the Swiss lender’s revamp. The New York-based alternative asset manager’s commitment may be matched by the Zurich-based bank, giving the unit roughly $1.5 billion in capital, said the people, who requested anonymity as the information is private. That could be leveraged to create about $7.5 billion in lending capacity for Single B-rated borrowers, one of the people said. The commitment would be parallel and separate to a possible investment in the First Boston unit that Apollo is also discussing. The firm has already agreed to acquire Credit Suisse’s securitized-products group in a deal that’s expected to provide the lender with much-needed liquidity during a restructuring period that has seen clients pull out funds and the share price slump to record lows.
- The global economy is in a better place today than many predicted months ago, US Treasury Secretary Janet Yellen said Thursday, while reiterating her calls for support to Ukraine on the eve of the one-year anniversary of Russia’s invasion. Yellen’s comments, delivered at a press conference in Bengaluru, India, where finance ministers and central bank governors from the Group of 20 countries are gathering Feb. 22-25, highlight a shift in tone on the global economic outlook from the last time the world’s top policymakers met in October.
- Nvidia Corp. jumped in early trading after giving a bullish revenue outlook for the current quarter, suggesting that a push into artificial intelligence processors is helping offset sluggish demand for personal computer chips. Sales in the three months ending in April will be about $6.5 billion, Nvidia said in a statement Wednesday. That compares with an average of analysts’ estimates of $6.35 billion, according to data complied by Bloomberg. Shares in the Santa Clara, California-based company rose as much as 8.9% in premarket trading Thursday, poised to add about $43 billion in market value and taking its year-to-date gains to nearly $200 billion.
- UK electricity generator Drax Group Plc almost doubled its profits last year as it locked in soaring power prices driven by Europe’s energy crisis. The company beat estimates, posting £731 million ($882 million) adjusted earnings before interest, taxes, depreciation and amortization, according to a statement Thursday. That’s above the average analyst expectations of £700 million compiled by Bloomberg. The company, like other power producers, has benefitted from a surge in energy prices, prompting public backlash and windfall taxes. That’s come despite rising costs of biomass — Drax’s main source of generation — that it needs to import to burn in its flagship power station in Yorkshire, northern England, where workers have been on strike over a pay dispute. Shares were down by 3.8% at 8:42 a.m. London time after management didn’t include formal guidance for the coming year. Drax did publish an analyst consensus showing estimates for record earnings of more than £1 billion this year, after it was able to lock in higher prices for its electricity sales for the coming years.
- Janus Henderson Group Plc’s new boss has a plan to revive the struggling money manager, whose clients have yanked about $130 billion since 2017. He’s leaning into active investing and pushing forcefully into alternative investments such as hedge funds and private credit. In his first interview since taking over as chief executive officer in June, Ali Dibadj, 47, acknowledged the difficulties the London-based firm has faced and laid out the core of his turnaround strategy — devised after months of internal review by senior staffers. Created in 2017 after the transatlantic merger of two storied asset managers, Janus Henderson aspired to build a large-scale fund manager able to fight the rapid shift to cheaper passive products. Instead, its assets under management shrank to $287 billion from $331 billion in 2017, and its clients have pulled money for the past 21 quarters.
- Moderna Inc. kept its forecast for at least $5 billion in sales of its Covid-19 vaccine this year, well short of analysts’ estimates, amid waning concern about the pandemic. The outlook for 2023 sales of the Spikevax shot, Moderna’s only product, is based on existing orders. Wall Street analysts are estimating annual Covid vaccine sales of about $8 billion. Additional sales in the US, Europe, Japan and other markets this year are possible, Moderna said Thursday in a statement. The Cambridge, Massachusetts-base drugmaker will lose its biggest Covid vaccine customer this year as the US government stops buying shots and that responsibility instead moves to private companies and insurers. It’s unclear how much demand there is for the company’s shots as the pandemic drags and Covid deaths and hospitalizations fall.
- Mexico’s inflation decelerated more than forecast in early February, suggesting that policymakers may have some room to maneuver after they surprised analysts with a bigger-than-expected interest rate hike at their last meeting. Consumer prices rose 7.76% in the first two weeks of the month from the same period a year earlier, down from 7.88% in late January, the national statistics institute reported Thursday. The reading was below the 7.81% median estimate of economists surveyed by Bloomberg. Core inflation, which excludes volatile items such as fuel, decelerated to 8.38%, below both the previous measure of 8.46% and economists’ forecast of 8.42%. Analysts have pointed to the elevated core readings as a particular concern, likely keeping Banxico on guard even after its half-point interest rate increase earlier this month.
- Goldman Sachs Group Inc. says the Chinese car industry’s demand for lithium has fallen by more than half in recent months, a dramatic reversal that will drive a further slump in prices for the key battery metal. The Wall Street bank stood out as a pessimistic voice in the later stages of lithium’s breakneck rally last year, with its forecasts of rising supply sparking a backlash from some of the industry’s most prominent experts. Now, with Chinese lithium prices down more than 30% from last year’s peak, Goldman reiterated its warning the slump has much further to run. Since December, Chinese lithium demand has plummeted as the removal of electric-vehicle subsidies, Covid-related disruptions and the New Year holidays curbed activity at all stages of the car industry’s supply chain, Goldman analysts led by Aditi Rai said in an emailed note. Yet production of battery-grade lithium has been holding firm, driving a growing mismatch between supply and demand that’s handing pricing power back to consumers after an intense race for material last year.
- As President Joe Biden’s administration prepares to accept requests for $39 billion in funding to jumpstart US production of microchips, his commerce chief emphasized the program’s focus is strengthening national security rather than boosting struggling chipmakers. The US next Tuesday will unveil applications for the manufacturing part of the funding under the Chips and Science Act passed last year and will be “crystal clear” in its selection criteria, Commerce Secretary Gina Raimondo said. “I expect there will be many disappointed companies who feel that they should have a certain amount of money. The reality is the return on our investment here is the achievement of our national-security goal,” Raimondo told reporters. She spoke ahead of a speech in Washington on Thursday where she’ll lay out the broad vision for the program through 2030. The plan is to try to return manufacturing to the US by building at least two new clusters of leading-edge logic-chip manufacturing, with a supplier ecosystem and research and development facilities, employing thousands of workers.
- After a 2022 to forget, Warner Bros Discovery Inc. shares have stormed out of the gate this year, leading gains among media and video-streaming companies. And according to analysts, the HBO parent’s rally has room to run. With a 63% advance in the year to date, the stock is the second-best performer among Nasdaq 100 Index components in 2023, just slightly behind Tesla Inc. and far ahead of media peers. That follows a more than 60% plunge through the end of 2022 following April’s merger between AT&T Inc.’s WarnerMedia business and Discovery. While concerns over high debt and the widespread weakness in the streaming sector haven’t entirely dissipated, the attention of analysts has been drawn to the stock’s cheap valuation, in addition to a heightened focus on expenses, which the company is looking to reduce by $3.5 billion. Results due after Thursday’s close could provide new clarity into its cost-cutting strategy and profitability goals.