February 28, 2023
Daily Market Commentary
- Bank of Nova Scotia missed earnings estimates as the company failed to capture the benefit of rising interest rates. Net interest margin — the difference between what the bank earns from loans and what it pays depositors —contracted to 2.11% in the three months through January, down from 2.18% in previous quarter. Overall profit in the fiscal first quarter trailed analysts’ estimates. Scotiabank’s international division — centered on Chile, Colombia, Mexico and Peru — is unique among Canada’s North America-focused banks, and its presence has weighed on the lender’s shares in recent years. Chief Executive Officer Scott Thomson, who took over on Feb. 1, has said that the returns on the capital Scotiabank deployed into international markets in the past decade “have not been commensurate with the risk,” leading to speculation that he may consider alternatives for parts of the business.
- Bank of Montreal’s capital-markets division helped profit beat estimates as the company’s equities and fixed-income traders benefited from volatile markets. Revenue from BMO Capital Markets came in at C$1.72 billion ($1.27 billion), the Toronto-based bank said Tuesday. While that’s down from a year earlier, it topped analysts’ average estimate of C$1.48 billion. Overall fiscal first-quarter earnings also exceeded expectations. Markets have been volatile in recent months amid central bank rate hikes and concerns that the tightening campaigns may provoke a recession. Bank of Montreal’s fiscal first-quarter trading revenue from fixed income, foreign exchange and equities all rose from the previous three months. Bank of Montreal completed its $16.3 billion purchase of Bank of the West from BNP Paribas SA on Feb. 1, expanding its US footprint to 32 states and adding 1.8 million new customers.
- European stocks were subdued on Tuesday as investors fretted over the outlook for central bank rate hikes following French and Spanish inflation data that came in hotter than expected. The Stoxx 600 was little changed by 11:17 a.m. in London, with the gains in February set for a 2.1% advance. Banking shares outperformed as Banco Santander SA gained after pledging to return a bigger share of earnings to investors. Healthcare and consumer staples were among laggards. Euro-area bond yields surged, putting further pressure on stocks. European equities have had a very strong start to the year, but fears of sticky inflation and staunchly hawkish central banks have curbed the rally in February. Data today showed that French inflation accelerated to a record in this month, while Spanish inflation unexpectedly quickened on higher electricity and food cost, increasing pressure on the European Central Bank to deliver more interest-rate hikes.
- US equity futures and European stocks shrugged off a renewed surge in bond yields Tuesday as evidence mounted that still-elevated inflation has yet to succumb to aggressive central bank policy. Contracts on the S&P 500 and Nasdaq 100 turned higher, reversing earlier losses, after a solid advance on Wall Street Monday. Treasury yields advanced, with the 10-year benchmark climbing two basis points but still below a key 4% threshold. The yield on two-year German government bonds — among the most sensitive to changes in policy — jumped to 3.17%, the highest since 2008, in the wake of reports that showed accelerating inflation in France and Spain. Traders are now pricing US rates to peak at 5.4% this year, compared with about 5% just a month ago. Federal Reserve Governor Philip Jefferson firmly stood by the central bank’s 2% inflation goal on Monday. A series of hawkish Fed speak this month has trimmed January’s gains across markets.
- Asian stocks were headed for their worst month since September as a repricing of the Federal Reserve’s policy and an evaporating China rally weighed on the region. The MSCI Asia Pacific Index fell as much as 0.5% on Tuesday, driven by consumer discretionary and communication shares. Hong Kong stocks declined the most even as the city said it will end its mask mandate. A late afternoon surge helped Chinese shares close in the green. The regional stock measure has fallen more than 6% in February, erasing a bulk of January’s advance. Catalysts appear stretched amid concerns over global monetary policy, while China investors await a key meeting of the nation’s political leaders starting this weekend for further clues.
- Oil headed for a fourth consecutive monthly decline as concerns over tighter monetary policy and swelling stockpiles in the US eclipsed optimism about rising demand in China. West Texas Intermediate ticked above $76 a barrel, but is still down about 3% this month. Crude has been under pressure in February as persistent inflation in the US spurs expectations that the Federal Reserve will keep raising interest rates. That’s aided the dollar, hurting commodities priced in the currency. Oil prices have also been weighed down by rising US stockpiles, which are at the highest level since May 2021. As part of that increase, there have been builds in crude holdings at the key storage hub in Cushing, Oklahoma.
- Gold headed for its worst month since the middle of 2021, after a slew of data saw traders pricing a higher peak for US interest rates this year. The metal is down about 6% in February, after rallying for the previous three months on signs the Federal Reserve would be able to dial back on its hawkishness. Instead strong inflation, home sales and jobs data have increased expectations for monetary tightening. The dollar and Treasury yields have risen this month, dimming the allure of non-interest bearing gold. That’s triggered outflows from bullion-backed exchange-traded funds. There were net withdrawals in all but three days in February, and holdings are near the lowest since April 2020.
- Investors boosted bets on the peak for European Central Bank interest rates to 4% for the first time after inflation in France and Spain came in unexpectedly hot. Consumer prices in France jumped by a euro-era record 7.2% from a year ago in February as food and services costs increased. Spain saw a 6.1% advance. Analysts had estimated price gains would remain unchanged at 7% in France and slow in Spain. The stronger readings from the euro zone’s second- and fourth-biggest economies will cement the half-point rate move the ECB is planning for March and bolster those officials who say more big moves are needed beyond that to get inflation under control.
- The Biden administration warned companies lining up for funding from the US Chips and Science Act that the money will come with major strings attached, including restrictions on investing in other countries and a limit on much-prized stock buybacks. The Commerce Department released the rules Tuesday ahead of doling out $39 billion in incentives, which are aimed at helping pay for semiconductor factories in the US. Some of the biggest chip producers such as Intel Corp. had lobbied for the funding package, which passed last year, but now they’re learning the consequences and risks of taking the cash. That includes having to return the money if projects don’t meet certain milestones or don’t get completed as planned. Companies also have to limit funding production in “countries of concern” — implicitly, China — for a decade.
- The UK government is set to make £1.2 billion ($1.4 billion) from a short position it took in power and natural gas markets after seizing control of collapsed supplier Bulb Energy Ltd. last year. When Bulb was in the Special Administration process, Treasury rules prevented the buying of energy in advance to match the amount already sold to the failed utility’s 1.5 million customers. That set up a short position, and when energy prices fell, the government’s position became profitable, according to documents prepared for a Tuesday court hearing in London. Bulb was acquired by Octopus Energy Ltd. in December through a profit-sharing agreement underpinned by government support for the cost of buying energy in short-term markets. When prices were at their peak in the summer, the government was criticized by a Parliament committee for its lack of forward purchasing.
- Hong Kong telecommunications provider HKBN Ltd. has received a takeover offer from HGC Global Communications Ltd. that could value the company at more than $1 billion, according to people familiar with the matter. HGC, owned by private equity firm I Squared Capital, has lodged an offer for the Hong Kong-listed company, said the people, who asked not to be identified as the information is private. Shares of HKBN were up about 12% when trading was halted on Tuesday, without giving a reason for the suspension. They had jumped as much as 13%, their biggest advance in seven weeks, after the Bloomberg News report. The stock is still down 44% in the past 12 months, giving the company a market value of about HK$7.2 billion ($922 million).
- Prime Minister Rishi Sunak and European Commission President Ursula von der Leyen both hailed their post-Brexit deal as a chance to reset frayed relations between the two sides. For investors in British assets, the repair work is only just beginning. BlackRock Inc. and Abrdn Plc are among asset managers overseeing more than $9 trillion combined that expect the deal to remove only some of the uncertainty that has dogged the UK since Britain voted to leave the bloc in 2016. Others, including Invesco Asset Management, said the agreement won’t meaningfully help the UK economy. UK assets have long been out of favor with investors because of Britain’s lackluster economy and, more recently, the chaos of former Prime Minister Liz Truss’s unfunded tax cuts. Monday’s Brexit deal may have removed some of the lingering uncertainty but it wasn’t enough to trigger an immediate rally, and UK stocks lagged the broader gains across Europe. The country’s problems, from runaway inflation to disagreement between parts of the union and looming general elections, remain too great for many investors to rush back in.
- US homebuyers are increasingly paying in cash. The share of all-cash deals rose to the highest since 2013 last year, while institutional investors, who usually account for many cash sales, retreated, according to data from real estate data analytics firm Attom. That suggests more regular buyers turned to self funding to dodge punishing mortgage rates. It’s particular true in the Southeast, home of most of the 13 cities with a cash share above 50% last year in the Attom data. Augusta, Georgia, known for hosting the US Masters golf tournament, topped them all with 72%. Realtors in the region say many individuals who would have been priced out by Wall Street money a year ago are now able to step in, in particular buyers who made a profit selling property in more expensive parts of the US.
- Apple Inc.’s Chinese suppliers are likely to move capacity out of the country far faster than many observers anticipate to pre-empt fallout from escalating Beijing-Washington tensions, according to one of the US company’s most important partners. AirPods maker GoerTek Inc. is one of the many manufacturers exploring locations beyond its native China, which today cranks out the bulk of the world’s gadgets from iPhones to PlayStations. It’s investing an initial $280 million in a new Vietnam plant while considering an India expansion, Deputy Chairman Kazuyoshi Yoshinaga said in an interview. US tech companies in particular have been pushing hard for manufacturers like GoerTek to explore alternative locations, said the executive, who oversees GoerTek’s Vietnamese operations from northern Bac Ninh province. The expanding conflict between the US and China, which began with a trade war but has since expanded to encompass sweeping bans on the exchange of chips and capital, is spurring a rethink of the electronics industry’s decades-old supply chain. The world’s reliance on the Asian nation became starkly clear during the Covid Zero years, when Beijing’s restrictions choked off the supply of everything from phones to cars.
- Equities are overvalued and at risk of further losses as a divergence with bonds is yet to close, say JPMorgan Chase & Co. strategists. The modest decline in stocks in recent weeks doesn’t capture the sharp increase in rates since the Federal Reserve’s last meeting, according to a team led by Marko Kolanovic. For the current level of real rates, history implies the S&P 500 Index is 2.5 times too expensive, he wrote. “Risk markets are misaligned with policy and cycle,” Kolanovic wrote in a note on Monday, saying higher-for-longer rates lead to effects including demand destruction, lower margins and asset writedowns.
- Chevron Corp. increased its annual rate of share buybacks in a show of confidence in its cash-generation goals, even after crude prices declined by more than 30% since June. Chevron will repurchase stock at a rate of $17.5 billion annually beginning in the second quarter, up from a previously planned $15 billion, the San Ramon, California-based company said in a statement Tuesday. Chief Executive Officer Mike Wirth is keen to show that the cash returns promised to shareholders last year when oil soared to more than $100 a barrel are sustainable despite much lower crude prices today. Analysts have questioned whether the second-largest US oil company has enough production growth in its existing portfolio to keep generating the money needed for shareholder payouts.
- Germany’s government is accelerating efforts to merge four high-voltage grid operators because it believes that’s the quickest way to modernize power lines for a coming influx of renewable energy, according to people familiar with the matter. Chancellor Olaf Scholz’s cabinet is in talks with the Dutch government to pay more than €20 billion ($21 billion) for the local unit of Dutch operator TenneT Holding BV. Negotiations for stakes in rivals 50Hertz Transmission GmbH, TransnetBW GmbH and Amprion GmbH also are underway, with the eventual goal of forming a single unit, the people said, asking not to be identified because the discussions aren’t public. The administration views former Chancellor Angela Merkel’s decision to privatize and split the grid as the reason for splintered management responsibilities, slow expansion and sluggish modernization, according to the people. Germany is pushing to secure affordable power and curb its dependency on Russian gas amid the worst energy crisis in decades. It also hopes to wean itself off fossil fuels and reach climate neutrality by 2045.
- Target Corp. turned in a strong fourth-quarter performance but offered a cautious financial forecast for this year as the retailer contends with shaky demand for discretionary goods. Adjusted earnings will rise to no more than $8.75 a share in the current fiscal year, the company said in a statement Tuesday as it reported financial results. That’s 50 cents lower than the average of analyst estimates compiled by Bloomberg. Target turned a profit of $1.89 a share in the fourth quarter, handily exceeding the $1.48 predicted by Wall Street, and resolved an inventory surge that marred results earlier in the year. The muted outlook combined with strong recent results echoed the message from Walmart Inc.’s earnings report last week, as US retailers contend with a cloudy sales picture and an uncertain economic backdrop. While Target continues to attract customer traffic, the company faces a long road ahead in its push to rebuild profits after a bonanza early on in the pandemic, when homebound shoppers snapped up household furnishings, appliances and electronics.
- Credit Suisse Group AG “seriously breached” its risk management obligations in the Greensill Capital supply-chain financing affair, Switzerland’s banking regulator has concluded as it closed its probe against the bank. The Swiss bank was ordered to take remedial measures by Finma, which include a periodic executive board level-review of the most important business relationships for counterparty risks, the regulator said in a statement on Tuesday. The bank must also record the responsibilities of its 600 highest-ranking employees in a “responsibility document,” Finma said. Credit Suisse Chief Executive Officer Ulrich Koerner said in a statement he welcomed the conclusion of the probe. “Finma’s review has reinforced many of the findings of the board-initiated independent review and underlines the importance of the actions we have taken in recent years to strengthen our risk and compliance culture,” he said.
- As Xi Jinping prepares to begin his second decade as China’s president, he’s facing a new phenomenon: A much more skeptical public. The abrupt end to some of the world’s strictest Covid controls following rare protests against Xi and the Communist Party in late November led to a wave of sickness and death across the world’s second-biggest economy, overwhelming hospitals and crematoriums. Although Chinese officials declared a “decisive victory” over the virus last month for the second time, the long-term political consequences for Xi remain unclear. The credibility deficit for Xi is particularly evident in Shanghai, a financial and trade hub that has long served as China’s window on the world. Interviews with more than a dozen people there in recent weeks showed a deep lack of trust about the path forward under Xi and his new right-hand man Li Qiang, who was rewarded with a promotion to premier after effectively locking people in their homes for two months last year.
- German prosecutors raided homes of 16 HSBC Holdings Plc employees as part of their vast probe into the Cum-Ex tax dividend scandal. The searches started Tuesday morning, people familiar with the matter said. Cologne prosecutors confirmed they are conducting searches in the Dusseldorf area over Cum-Ex but declined to disclose any names, citing office policy. A spokesman for HSBC said the bank wasn’t raided and declined to comment further. Cum-Ex was a trading strategy across Europe that siphoned off billions of euros in government revenue, by taking advantage of tax laws that seemed to allow multiple investors to claim refunds of a tax on dividends that was paid only once. Germany moved to abolish the practice in 2012.
- The $15 billion buyout of Toshiba Corp. is increasingly looking like a purely Japanese affair as most international buyout firms are poised to drop from the deal, according to people familiar with the matter. Talks to bring Blackstone Inc., BPEA EQT and CVC Capital Partners on as equity investors have stalled, the people said, asking not to be identified because the matter is private. The bidding group led by homegrown fund Japan Industrial Partners Inc. presently includes domestic firms, the people said. The private equity investors are concerned about the valuation, complexity and political nature of the deal, some of the people said. The Japanese bidding consortium also wants to avoid triggering Chinese antitrust scrutiny by bringing in foreign investors, they said.
- The chatbot battle is heating up, and Mark Zuckerberg is making it clear that Meta Platforms Inc. is focusing on artificial intelligence-powered tools, too. “We’re creating a new top-level product group at Meta focused on generative AI to turbocharge our work in this area,” Meta Chief Executive Officer Zuckerberg said Monday in a post on Instagram. “We have a lot of foundational work to do before getting to the really futuristic experiences, but I’m excited about all the new things we’ll build along the way.” For now, he said, the company is trying to use the technology with text-like chats in Meta’s messaging apps WhatsApp and Messenger, and on visual filters for photos and videos on platforms like Instagram. “We’ll focus on developing AI personas that can help people in a variety of ways,” he added.