February 27, 2023

Daily Market Commentary

Canadian Headlines

  • LKQ Corp. agreed to buy  Canadian automotive-parts wholesaler Uni-Select Inc. for about C$2.8 billion ($2.1 billion). The sum represents the total enterprise value, which includes the assumption of debt. The equity value is C$2.1 Billion. LKQ will pay C$48 per share for Uni-Select, a 19% premium on the Feb. 24 closing price, the companies said Monday. LKQ will fund the transaction, which is expected to close in the second half of the year, through cash and new debt. The transaction will generate about $55 million of annual run-rate cost savings by the third year following closing, the companies said. LKQ expects the acquisition to add to its adjusted earnings per share in the first year.
  • Intact Financial will make a contribution of about £500 million to facilitate the £6.5 billion UK pension buy-in agreement between RSA UK Pension Trustees and Pension Insurance Corporation. Eliminates Intact’s annual £75 million funding contribution and releases about £150 million of capital. Deal removes pension exposure on Intact’s balance sheet by fully insuring its UK defined benefit pension liabilities with PIC

World Headlines

  • European stocks gained on Monday after sliding the most in five weeks, as investors picked up cheaper equities following a selloff fueled by fears that sticky inflation will force central banks to stay hawkish for longer. The Stoxx 600 Index rose 1.1% by 11:01 a.m. in London. Technology and consumer products sectors outperformed, while media and health care lagged. A rally in European stocks has lost its momentum this month as worries about rising interest rates overshadowed optimism about a better-than-expected earnings season. The yield on Germany’s 10-year bond rose Monday to the highest level since 2011 as traders bet that the European Central Bank will sustain a higher level of interest rates for longer. Fears of a hawkish Federal Reserve also gathered steam on Friday after the central bank’s preferred inflation gauge unexpectedly accelerated in January.
  • US equity futures markets pushed higher, bouncing back from Wall Street’s worst week since December, even as evidence mounted that central bank policy could remain restrictive for longer than thought on both sides of the Atlantic. Futures on the tech-heavy Nasdaq 100 outperformed as Treasury yields steadied and the dollar turned lower, gaining 0.6%. In the US premarket, Seagen Inc. rose 14% on a report that Pfizer Inc. is in early-stage talks to acquire the cancer therapy developer. A more optimistic outlook for earnings estimates is helping ease fears that inflation will remain entrenched even as growth slows, drawing investors back to stocks. Those treading into this market risk falling into a “bull trap” according to Michael Wilson, chief US equity strategist at Morgan Stanley. That view was echoed by Torsten Slok, chief economist at Apollo Global Management.
  • Asian stocks declined as traders worry about the prospect of further interest rate increases by the Federal Reserve after an unexpected acceleration of US inflation. Investors were also cautious ahead of a key political meeting in China. The MSCI Asia Pacific Index dropped as much as 0.8%, led by technology and materials shares. Australia and South Korea were among the worst-performing markets, while Japan bucked the region’s trend following a pledge from the Bank of Japan governor nominee to maintain ultra-loose monetary policy. Chinese and Hong Kong benchmarks edged lower as investors eyed the National People’s Congress meeting starting this weekend. They are showing a preference for onshore stocks over Hong Kong peers amid expectations that more pro-growth policies will be announced.
  • Oil steadied as traders weighed the prospects for tighter US monetary policy against optimism for a demand recovery in China and supply disruption in Europe. West Texas Intermediate held near $76 a barrel, after earlier dropping as much as 1%. Poland’s largest oil company, PKN Orlen SA, unexpectedly stopped receiving crude via the Druzhba pipeline from Russia. At the same time, traders remain anxious that strong US inflation will compel the Federal Reserve to keep raising rates, bolstering the dollar and impeding commodity demand. Crude has traded within a tight $10 range so far this year as investors weigh a welter of conflicting forces, including the outlook for supplies from Russia, China’s reopening, and the trajectory of monetary policy.
  • Gold declined to the lowest in two months after an acceleration in the Federal Reserve’s preferred inflation gauge dashed hopes for an imminent pause in monetary-tightening. The personal consumption expenditures price index unexpectedly accelerated in January and consumer spending surged after a year-end slump. That’s likely to add pressure on policymakers to keep ratcheting up interest rates, which would be negative for non-interest bearing gold. Spot gold fell as low as $1,806.79 an ounce, the lowest since Dec. 29, before trading little changed at $1,809.85 as of 10:34 a.m. in London. Bullion declined 1.7% last week. The Bloomberg Dollar Spot Index was flat. Silver also declined, while platinum rose and palladium was steady.
  • China’s lithium industry is reeling as its top production hub — responsible for around a 10th of the world’s supply — faces sweeping closures amid a government probe of environmental infringements. The crackdown in Yichun, Jiangxi province, follows a local lithium frenzy over the past year as miners raced to feed rampant demand for the battery material — and to benefit from record global prices. Now, they’re grappling with a close-up inspection by environment officials sent from Beijing. Ore-processing operations in Yichun have been ordered to stop as investigators probe alleged violations at lithium mines, Yicai newspaper reported. That threatens somewhere between 8% and 13% of global supply, according to various analyst estimates, although it’s unclear for how long the immediate shutdowns will last.
  • Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week. This was the third straight week of outflows. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $443.5 million in the week ended Feb. 24, compared with losses of $573.5 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $11.2 billion.
  • A dizzying rally in China’s technology stocks is fading fast as growth concerns take center stage despite a string of earnings beats. The Nasdaq Golden Dragon China Index has fallen 16% from a January high to approach a bear market, with its 63 members losing a combined $190 billion in market value during the period. Alibaba Group Holding Ltd. led the decline, even after the firm reported better-than-expected quarterly profits. The losses reflect the broader caution surrounding Chinese assets as long-standing concerns return to the fore after a rally fueled by the reversal of strict Covid curbs. Regulatory risks have resurfaced following the disappearance of a high-profile tech dealmaker while the shooting down of an alleged spy balloon has worsened US-China tensions.
  • Goldman Sachs Group Inc.’s leaders take the stage this week hoping to turn the page on a forgettable 2022, lay out new reasons for investors to rally around the stock and quell dissatisfaction within the firm’s ranks. After a year in which profits slumped by half and a consumer-banking strategy unraveled, executives plan to offer a more forceful case for shareholders to appreciate its $2.5 trillion asset and wealth management business. The top brass sees the unit, dubbed AWM, as critical to unlocking a higher valuation. The Wall Street firm’s second-ever investor day comes at a critical juncture – weeks after Goldman’s leaders acknowledged a foray into consumer banking lost almost $6 billion since inception, setting off disapproving howls in the ranks and denting Chief Executive Officer David Solomon’s standing with the troops.
  • The headwinds for US equities are set to increase even further in March, with stocks coming under pressure from faltering earnings and high valuations, according to Morgan Stanley strategists. “Given our view that the earnings recession is far from over, we think March is a high risk month for the next leg lower in stocks,” strategists led by Michael Wilson, ranked No. 1 in last year’s Institutional Investor survey after correctly predicting the selloff in stocks, wrote in a note Monday. Analysts pausing earnings estimates cuts over the next 12 months has stoked some investor optimism, Wilson said. However, bear markets typically feature a flattening out in outlook between quarterly earnings seasons before the downward trend resumes, he wrote. “Stocks tend to figure it out a month early and trade lower and this cycle has illustrated that pattern perfectly.”
  • The U.S. subsidiary of Li-Cycle Holdings Corp. is getting a $375 million loan offer from the Biden administration for the expansion of a New York lithium-ion battery recycling plant. The conditional loan would help finance the expansion of a first-of-its-kind facility in Rochester that recycles old lithium-ion batteries into chemicals that can he used for the batteries of more than 200,000 electric vehicles a year, according to the Energy Department. The funding from the department’s Advanced Technology Vehicles Manufacturing Loan Program comes amid a broader White House goal of having half of all vehicles sales in 2030 be zero-emission. It also follows a $2 billion commitment announced earlier this month to EV battery component maker and lithium-ion battery recycler Redwood Materials Inc.
  • Pentagon contract spending could reach another record total in fiscal 2024 if a decade’s worth of defense budget and contract spend patterns hold, according to Bloomberg Government analysis based on preliminary defense budget estimates. Contract obligations out of the Defense Department have averaged 55% of the Pentagon’s discretionary budget authority since fiscal 2013. Projecting out from that ratio against the enacted defense appropriations figure for fiscal 2023 and the estimated budget request for fiscal 2024 points to continued robust DOD procurement spending. Bloomberg reported earlier this month that the White House’s fiscal 2024 budget request for DOD will exceed $816 billion. At that funding level, there would be $452 billion in Pentagon contracts in fiscal 2024, up 3.4% from fiscal 2022 and 2.3% percent from the current fiscal year which ends Sept. 30.
  • Traders are betting for the first time that the European Central Bank will extend its rate-hiking cycle into 2024, leading to a selloff in German debt that took yields to the highest in more than 11 years. Swap-market pricing shows they briefly wagered the ECB will raise its deposit rate to as much as 3.9% in February 2024. Just weeks ago, money-market traders were betting on a peak rate of around 3.5% in July this year.  The readjustment in expectations has been triggered by a slew of strong US inflation and growth figures. Further compounding the move has been the vow by a number of ECB policymakers to continue raising borrowing costs to slow inflation that remains far above their 2% target.
  • Malaysia reached a $1.8 billion settlement with International Petroleum Investment Co. and Aabar Investments PJS to end a legal dispute linked to the multi-billion scandal involving the southeast Asian nation’s 1Malaysia Development Bhd. The two sides have been locked in proceedings at a London’s court, with Malaysia claiming that the Abu Dhabi entities — which have since been rolled into Mubadala Investment Co. — were aware of fraud allegations against former Prime Minister Najib Razak at the time the deal was struck. 1Malaysia Development Bhd., or 1MDB, was an investment fund intended to develop the nation’s economy. Instead, it became the focus of a scandal that spawned probes in Asia, the US and Europe. Much of the money was allegedly embezzled by people connected to Najib and diverted for bribes.
  • Pfizer Inc. is in talks to acquire biotech Seagen Inc., according to people familiar with the matter, the latest potential deal for a big drug company aimed at adding a promising class of targeted cancer therapies. The talks are at an early stage and there is no guarantee there will be a deal, the people said. A number of hurdles would need to be overcome, including the potential for a stringent antitrust review of any proposal. If there is a deal, it would be big: Seagen has a market value of some $30 billion and would be expected to command a premium over that. Seagen was in advanced talks last year to be acquired by Merck & Co., in a deal that would have been worth $40 billion or more, The Wall Street Journal reported at the time, but the two sides failed to reach agreement. Pfizer at the time was also looking at Seagen, people familiar with the matter have said.
  • Focus Financial Partners agreed to be acquired by affiliates of CD&R for $53 per share, in an all-cash transaction valued at an enterprise value of over $7 billion. The proposed transaction represents an approximately 36% premium to Focus’ 60-day volume weighted average price as of the close on Feb. 1, Focus said. Funds managed by Stone Point have agreed to retain a portion of their investment in Focus and provide new equity financing. Deal is expected to close in the third quarter of 2023; will cease to be a publicly traded company upon consummation of the proposed transaction
  • SpaceX and NASA scrubbed a rocket launch shortly before liftoff early Monday, postponing a mission to send US astronauts and a Russian cosmonaut to the International Space Station. NASA and SpaceX said they postponed the scheduled 1:45 a.m. launch of a Falcon 9 rocket with a Dragon capsule from the Kennedy Space Center in Florida because of a ground system issue. “Mission teams decided to stand down to investigate an issue preventing data from confirming a full load of the ignition source for the Falcon 9 first stage Merlin engines, triethyl aluminum triethylboron (or TEA-TEB),” the National Aeronautics and Space Administration said in a statement.
  • President Joe Biden instructed federal agents responding to the train derailment in East Palestine, Ohio, to go door-to-door to conduct health surveys with impacted families, a White House official said Monday. Representatives from the Environmental Protection Agency, Federal Emergency Management Agency, and Centers for Disease Control and Prevention visited approximately 350 household over the weekend, according to the official, who described the effort on the condition of anonymity. The government has been distributing fliers detailing available federal resource and hopes to reach an additional 50 families on Monday. Biden has so far opted against visiting the site of the fiery crash and chemical explosion, instead dispatching Cabinet members and emergency response workers. That decision has come under criticism from leading Republicans, with former President Donald Trump – who has announced his 2024 presidential campaign – visiting the town last week and distributing fast food and water.
  • A floating-rate euro bond from AT&T Inc. has pulled in €2 billion ($2.1 billion) of orders, showing investor appetite for less volatile short-term debt as renewed inflation fears hurt credit markets. The Dallas, Texas-based communications group is set to raise €1.25 billion from the sale of a two-year floating-rate note, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it. The strong demand enabled the coupon to be set at 40 basis points above three-month Euribor, down from around 45 basis points initially. It also led the company to increase the size of the sale from initial expectations for at least €750 million. The offering comes at a time when portfolio managers are turning defensive as central banks’ fight against inflation looks set to last longer. That’s leading a number of investors to target short-dated notes to limit the fallout.