February 7, 2022

Daily Market Commentary

Canadian Headlines

• Canada’s capital city declared a state of emergency Sunday as police struggled to rein in protests against vaccine mandates and Covid-19 restrictions. Ottawa Mayor Jim Watson, who declared the emergency, said that increasingly rowdy demonstrations posed a “serious danger and threat to the safety and security of residents.” Hundreds of trucks continue to occupy the downtown area near Canada’s parliament with no sign that the protesters plan to leave. Truckers and their supporters have been stockpiling jerry cans of diesel and other necessities. They built a wood shed as a kitchen and set up logistics centers in a downtown park and the parking lot of a baseball stadium.
• A staunch supporter of the trucker protest that has taken over the downtown of Canada’s capital city is seeking to lead the country’s Conservative Party. Pierre Poilievre, a 42-year-old finance critic from the Ottawa area, said in a Twitter post on Saturday he is running for prime minister to replace Justin Trudeau and “restore freedom.” Poilievre is deeply popular with the Conservatives’ base and announced his candidacy days after the Tories ousted their leader, Erin O’Toole, after he failed to stem internal dissent that had been building since last year’s election defeat.

World Headlines

• European stocks were steady Monday as investors monitored the global bond rout amid an increasingly hawkish outlook from central banks. The Stoxx Europe 600 was down less than 0.1% at 11:21 a.m. in London with losses in energy stocks offsetting gains in basic resources shares. The benchmark had earlier advanced as much as 0.7%. European stocks have declined the first five weeks of this year as investors fret over the impact hawkish central banks will have on the recovery. Lower valuations may tempt dip-buyers as the results season reassures, with Morgan Stanley strategists saying fourth-quarter earnings per share are on track to deliver another beat.
• U.S. index futures dipped and equities in Europe erased gains as investors took stock of the outlook for monetary policy ahead of key inflation data later this week. Treasuries were steady, though a rout in European sovereign bonds deepened. S&P 500 and Nasdaq 100 contracts fluctuated following Friday’s bounce on Wall Street. Peloton Interactive Inc. soared in premarket trading after reports that it’s exploring takeover options. Investors are grappling with the prospect of the steepest monetary tightening cycle since the 1990s, with markets pricing in more than five quarter-point Federal Reserve interest-rate hikes in 2022 following a strong U.S. jobs report. The U.S. inflation report this week could lead to more market volatility. A reading north of 7%, the highest since the early 1980s, is expected.
• Chinese shares climbed on their return from a weeklong holiday, with sentiment boosted by Friday’s jump in Hong-Kong listed names and easing concerns about regulatory headwinds for the nation’s battered tech sector. The CSI 300 Index ended up 1.5% on Monday after rising as much as 2.4%. While that marked the benchmark’s best post-Lunar New Year holiday performance since 2019, its gains trailed the rally seen in Hong Kong markets when they reopened on Friday.  Even as global equities rose when China was shut, stocks on the mainland are seen struggling to keep up with any initial upward momentum given a weakening correlation with offshore markets, unless policy makers take more steps to restore investor confidence. The CSI 300 plunged into a bear marketjust before the holidays as worries about a weak economy and the property sector’s debt woes outweighed Beijing’s monetary easing.
• Brent oil eased following a run of seven weekly gains that’s pushed crude to the highest level since 2014. Futures in London lost 0.8% after earlier touching $94 a barrel. Marathon Petroleum Corp.’s 593,000 barrel-a-day Galveston Bay refinery in Texas was shut after cold weather. Oil product markets surged after the news, with heating oil margins climbing to their strongest since April 2020, while crude’s structure cooled. Traders also continue to watch the Iran nuclear deal negotiations, with diplomats set to return to Vienna Tuesday. On Friday, the U.S. signed several sanctions waivers related to Iran’s civilian nuclear activities, though Tehran said it still needs guarantees from Washington in order to revive the deal.
• Gold edged higher as investors weighed the ongoing Russia-Ukraine tensions — which have supported demand for the haven asset — against the Federal Reserve’s imminent monetary policy tightening. U.S. President Joe Biden and his French counterpart Emmanuel Macron have spoken about responding to Russia’s military buildup on the Ukrainian border, according to the White House. Moscow has repeatedly denied that it plans to attack its neighbor.  Meanwhile, traders increased bets that the Fed will kick off a series of interest-rate hikes with the steepest increase in two decades after an unexpectedly strong jobs report boosted speculation the U.S. economy is at risk of overheating.
• Hong Kong is set to report another record number of infections, ramping up pressure on the government to contain the worsening outbreak. Australia will allow double-vaccinated visa holders to enter the country from Feb. 21, ending about two years of strict international border controls. China locked down a city of 3.6 million people, and a top epidemiologist said the country has no plans to adjust its zero-Covid policy. Beijing reported a pickup in new Covid infections among arrivals for the Winter Olympics. Canada’s capital Ottawa declared a state of emergency as police struggled to rein in protests largely among truckers against vaccine mandates. A group of anti-vaccination demonstrators and conspiracy theorists have also blockedroads and targeted businesses in the Australian capital of Canberra.
• French President Emmanuel Macron meets Russian President Vladimir Putin on Monday as Western leaders continue their push to deter any moves against Ukraine. Kremlin spokesman Dmitry Peskov said the talks will be “substantive and quite prolonged,” but he doesn’t expect a breakthrough. Even as those diplomatic efforts continue, European leaders are preparing for other contingencies. Top European Union officials are in Washington to discuss alternative energy sources should Russia reduce natural gas flows to the bloc. And Andrzej Duda, the president of Poland, which shares a long border with Ukraine, is in Brussels for meetings with EU and NATO leaders.  Moscow has repeatedly denied that it plans to attack Ukraine, while the U.K. and U.S. say Russia has massed almost 130,000 troops close to the border. Ukraine’s defense minister said the probability of an escalation by Russia looks low, while an official close to President Volodymyr Zelenskiy said the West should specify potential sanctions.
• President Joe Biden’s top advisers are repackaging his economic message to the American public as his approval ratings sink and his legislative agenda stalls in Congress, just months before crucial midterm elections. Within the last week, Biden has taken pains to put more emphasis on growth in wages, union jobs and domestic manufacturing, according to a senior administration official. At the same time, he’s given less weight to areas that remain sore points with voters, like inflation and the legislative machinations of his stalled Build Back Better plan, as well as the partisan strife over Covid-19 vaccinations, masks and testing. In the wake of surging consumer prices, continuing supply-chain bottlenecks and a renewed jump in Covid-19 cases, Biden’s economic advisers decided over the U.S. winter holidays his approach could use a reset, according to a senior administration official.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the sixth 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 $328.6 million in the week ended Feb. 4, compared with gains of $416.1 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $5.38 billion.
• Frontier Group Holdings Inc. agreed to buy Spirit Airlines Inc. for $2.9 billion in cash and stock, in a deal to unite two growing U.S. low-cost carriers. Spirit owners will receive 1.9126 Frontier shares and $2.13 in cash for each share they own, according to a statement Monday. The deal values Spirit at $25.83 a share based on closing stock prices Feb. 4. The combination will bring Spirit into a constellation of low-cost airlines led by William A. Franke, the managing partner of Indigo Partners. The private equity firm owns a majority stake in Frontier, and is the largest shareholder in Hungary’s Wizz Air Holdings Plc. and other discount airlines.
• Alphabet Inc.’s Google is being sued by Nordic price comparison provider PriceRunner AB for about 22 billion kronor ($2.4 billion) at Stockholm’s patent and market court. The lawsuit follows the conclusion of a legal ruling in the European Union that established Google has breached antitrust laws by manipulating search results in favor of its own comparison-shopping services, PriceRunner said in an emailed statement Monday. “This is also a matter of survival for many European entrepreneurial companies and job opportunities within tech,” said Mikael Lindahl, chief executive officer of PriceRunner.
• Peloton Interactive Inc. soared in premarket trading after reports that it’s exploring takeover options, a move that could test investors holding short positions in the fitness company. The New York-based company is working with an adviser after an earlier plunge in Peloton’s shares made it a takeover target, according to people familiar with the matter, who asked not to be identified because discussions are private. The takeover interest is exploratory and may not lead to a transaction, they said. The stock rose 27% in early premarket trading in New York and could see more gains at the New York open due to high short interest. A 12% short position on its free float could mean short sellers would scramble to cover their positions, fueling shares further higher.
• After a bumpy start to the year, the risks facing global stocks are now priced in, according to JPMorgan Chase & Co.’s Mislav Matejka. Neither the Federal Reserve nor the European Central Bank will move further into hawkish territory, “at least relative to what is priced in currently,” strategists led by Matejka wrote in a note on Monday. Meanwhile, headline inflation is peaking and earnings are likely to surprise positively. “We believe that equities still offer upside, and that the cycle is far from over,” they said. U.S. and European stocks started the year on the wrong foot amid fears that more aggressive monetary tightening to tame inflation will lead to a sharp slowdown in economic growth. While a solid earnings seasons is helping to alleviate some concerns over a less forgiving macroeconomic backdrop, equity markets have remained volatile, and strategists are divided about the outlook for the rest of the year.
• Olaf Scholz succeeded Angela Merkel as German chancellor nearly two months ago, but the West is still waiting for him to put his stamp on Europe’s biggest economy. Scholz is under increasing pressure to take a stand on Russia over its military buildup near Ukraine, as well as face up to domestic difficulties including a rampant coronavirus outbreak and criticism of its spending plans. He has an opportunity to respond to critics when he embarks on his first trip to Washington as chancellor on Sunday. His meeting with President Joe Biden at the White House on Monday kicks off a period of more intense international activity.
• Mitsubishi Corp. and UBS Asset Management, part of UBS Group AG, is considering the sale of a jointly owned real estate management company for about 200 billion yen ($1.7 billion), people with knowledge of the matter said. Mitsubishi UFJ Trust & Banking Corp. has emerged among possible buyers of the joint venture, called Mitsubishi Corp. UBS Realty, said the people, who asked not to be identified because the sales process isn’t public.  The trading company, part of the Mitsubishi group of companies, owns 51% of the real estate venture, with UBS Asset Management owning the rest. Mitsubishi Corp. UBS Realty manages assets for Japan real estate investment trusts, including Japan Metropolitan Fund Investment Corp. and Industrial & Infrastructure Fund Investment Corp.
• U.K. house prices rose at the slowest pace in more than six months in January after a bumper end to 2021 left the average value of a home at a record high. Prices rose just 0.3% following four months of gains above 1%, mortgage lender Halifax said Monday. In a sign of a more normal market, the number of transactions fell toward pre-Covid levels, it said. House prices enjoyed a stellar run in the aftermath of the U.K.’s first covid lockdown, fueled by a tax cut and a demand for more space, but analysts expect far more modest gains in 2022.
• The global bond rout extended Monday, stoked by expectations for aggressive interest-rate hikes around the globe. Greek debt led a selloff in Europe after hawkish comments from a European Central Bank policy maker on the potential for a first rate increase this year, and as money markets price the end of negative deposit rates by December. Australian short-end yields jumped toward the highest in almost three years after Friday’s surge in Treasury equivalents, while there’s speculation the Bank of Japan may act to slow the advance in benchmark 10-year yields to a six-year high. Government bonds worldwide are extending declines after the worst six months since 2016, a Bloomberg index showed. Meanwhile, the pool of negative-yielding debt shrank to a six-year low, after nearly $3 trillion was wiped out in just two days last week.
• Alibaba Group Holding Ltd. shares slipped 3.6% in U.S. premarket trading after Citigroup Inc. analysts saw its additional American depositary share registration in the U.S. as a sign that SoftBank Group Corp. may intend to sell part of its stake. A stake sale by Softbank, a pre-initial public offering investor, would likely weaken sentiment toward Alibaba’s shares, battered last year along with other Chinese technology peers by Beijing’s regulatory crackdowns. The stock was 61% below its October 2020 highs as of Friday’s close, having slid as much as 65%.
• Two things usually happen in earnings seasons: First, estimates prove too conservative and companies’ results surpass them and second, the beats lift stock prices.  Despite the heightened volatility of the past couple of weeks, U.S. markets have yet to stray from this ritual. On average, S&P 500 returns during reporting seasons over the past 22 years have been double those of non-reporting weeks, according to Bloomberg Intelligence. The effect of quarterly results in soothing any broader macro concerns has been even more pronounced during the pandemic, with the U.S. benchmark returning 90 basis points on average during the reporting weeks since July 2020 versus 37 basis points during the other 64 weeks.
• Tesla Inc. received another subpoena from the U.S. Securities and Exchange Commission about a subject that keeps coming up: Elon Musk’s tweeting in 2018 that he was considering taking the carmaker private. The SEC issued the subpoena on Nov. 16, seeking information about Tesla’s governance processes and compliance with the settlement reached with the agency in September 2018, the company said in a regulatory filing. Tesla agreed to put in place controls to oversee Musk’s communications — including his tweets — after the SEC alleged the chief executive officer committed securities fraud by saying he had secured funding for the company to go private. The SEC sought to have a judge find Musk in contempt of the settlement early the following year when he tweeted about Tesla’s production outlook without getting approval beforehand. The two sides agreed in April 2019 to amend their agreement by adding specific topics Musk can’t tweet about or otherwise communicate in writing without running it by a company lawyer.
• A whopping $600 billion of cash stashed at Wall Street’s megacap technology companies could drive a wave of deal-making in the sector after the valuations of once high-flying names such as Peloton Interactive Inc. and Netflix Inc. slumped. Amazon.com Inc. has been speaking to advisers about a potential deal for Peloton, the Wall Street Journal reported Friday. The e-commerce giant had $96 billion in cash and marketable securities as of Dec. 31 — 12 times Peloton’s market value.  While the risk of of regulatory scrutiny may deter some buyers, plenty of other companies are loaded with cash too. Apple Inc. tops the list with $202.6 billion, more than the capitalizations of Netflix, Qualcomm Inc. or Intel Corp.
• Day after day, the scene has replayed: Roger Ng, a former Goldman Sachs Group Inc. banker, left his Manhattan apartment and, with an electronic monitor strapped to his ankle, headed downtown to build the case that might save him from prison. It’s been nearly three years since Ng landed in the U.S. from Southeast Asia to face federal charges over his role in a scheme to loot billions from the Malaysian fund known as 1MDB. In that time Malaysia’s former prime minister has been convicted of crimes while Goldman has paid $5 billion in fines and apologized for breaking the law, one of the biggest black marks in its 153-year history. Now, at long last, Ng is about to get his day in court – as the only person in all of Goldman Sachs to stand trial in the U.S. for a scandal that stretched from Singapore to Hollywood to Wall Street and beyond. He has pleaded not guilty.
• Spotify Technology SA’s Chief Executive Officer Daniel Ek apologized to staff for the impact the controversy over Joe Rogan’s podcast has had on them, but said he didn’t agree with calls to drop the broadcaster from the service.  “There are no words I can say to adequately convey how deeply sorry I am for the way ‘The Joe Rogan Experience’ controversy continues to impact each of you,” Ek said in a letter to staff, which was seen by Bloomberg News and verified by a spokesperson for Spotify. “Not only are some of Joe Rogan’s comments incredibly hurtful — I want to make clear that they do not represent the values of this company,” Ek said. “I know this situation leaves many of you feeling drained, frustrated and unheard.”
• Hasbro Inc. reported fourth-quarter profit that beat analysts’ estimates as revenue from TV shows and films offset supply-chain challenges. Fourth-quarter profit came to $1.21 a share, excluding some items. Analysts were looking for 90 cents, on average. Revenue rose to $2.01 billion, topping the $1.87 billion average estimate of analysts surveyed by Bloomberg. Hasbro sees revenue and operating profit growth at a low-single-digit rate for 2022, and operating cash flow in the range of $700 to $800 million, helped by feature films for “Transformers: Rise of the Beasts” and “Dungeons & Dragons.

*All sources from Bloomberg unless otherwise specified