January 12, 2023

Daily Market Commentary

Canadian Headlines
• Mexico and Canada won a trade dispute with the US over cars shipped across regional borders, providing automakers more incentive to make vehicles in those nations. The decision was included in a final report released Wednesday by a five-member dispute-resolution panel set up under the 2020 US-Mexico-Canada Agreement. The panel made its preliminary ruling in November, but it wasn’t released until this week, after the leaders of the three countries met in Mexico City. The decision will encourage companies to invest more in Mexico and Canada to get the benefit of exporting duty-free to the US and create more jobs overall in North America, said Luz Maria de la Mora, who as Mexico’s undersecretary of economy for trade helped bring the complaint challenging the US interpretation of the trade pact. Auto parts often cross the borders between the countries many times before a vehicle is completed.
• Ahead on Thursday, Cogeco Communications will report earnings. Prime Minister Justin Trudeau is to meet with Japanese Prime Minister Fumio Kishida in Ottawa. Executives from Air Canada, two other airlines and three airport authorities are scheduled to testify at a House committee hearing on the widespread travel disruptions that took place over the Christmas holidays.
• Aritzia Inc. a vertically integrated, innovative design house offering Everyday Luxury online and in its boutiques, today announced its financial results for third quarter fiscal 2023 ended November 27, 2022 – Q3 net revenue increased by 37.8% to $624.6 millionQ3 net income increased by 8.9% to $70.7 millionQ3 Adjusted EBITDA increased by 9.5% to $119.6 million. “The outstanding momentum in our business continued through the record-breaking third quarter of fiscal 2023, resulting in net revenue of $625 million, the highest of any quarter in Aritzia’s history. All geographies and all channels contributed to our better than anticipated results, fueled by a tremendous client response to our collection of beautiful products and our Everyday Luxury experience,” said Jennifer Wong, Chief Executive Officer.
World Headlines
• European stocks gained as traders prepared for the US inflation print to gain insight into the path of Federal Reserve policy and economic growth. The Stoxx Europe 600 rose 0.5% by 10:43 a.m. in London. Real estate, auto and retail shares outperformed while chemicals and technology were laggards. European equities started this year on a strong note, taking the Stoxx 600’s gains to about 17% from its September lows, while the Euro Stoxx 50 is already in a bull market. Signs of easing inflation, dollar weakness and China’s reopening have fueled the rally, with Europe extending its outperformance against US shares. The optimism hasn’t spread to all corners of the markets, as bond traders don’t seem to be as convinced as equity peers that central banks will stop tightening policy anytime soon.
• S&P 500 contracts were 0.1% higher. Those on the Nasdaq 100 were little changed after the technology sector, one of the most-beaten down groups during the Fed’s tightening campaign, led gains among US shares on Wednesday. American Airlines Group Inc. rose in premarket trading after its profit beat expectations. Every aspect of Thursday’s CPI report will be scrutinized, with extra attention on core inflation, which excludes food and energy and is seen as a better indicator than the headline measure. The projected 5.7% increase would be well above the Fed’s goal, helping explain its intention of keeping rates higher for longer. But the year-over-year price growth would also show moderation.
• Asian stocks advanced, as miners in Australia climbed on demand optimism ahead of highly-awaited US inflation data. The MSCI Asia Pacific Index rose as much as 0.8% to the highest since August before paring. Japan’s MUFJ, AIA in Hong Kong and Australia’s BHP boosted the index the most while the Chinese tech rally took a pause. Equities in Japan posted moderate gains helped by financials after a report said the Bank of Japan is reviewing the side effects of its ultra-easy monetary policy. Benchmarks in Hong Kong and mainland China fluctuated between gains and losses as traders digested Chinese inflation data. Trading volume was 14% lighter than average ahead of key consumer price data from the US due later Thursday.
• Oil rose for a sixth day on hopes that US inflation is cooling and amid a spate of Chinese crude purchases. West Texas Intermediate rose above $78 a barrel and was heading for the longest run of daily gains since February. Equities were also stronger as investors wagered that American inflation eased ahead of data due later Thursday, reducing pressure on the Federal Reserve to hike interest rates. The dollar fell, boosting the appeal of commodities priced in the currency. China’s crude buying after Beijing issued a bumper batch of import quota this week is adding bullish sentiment about demand. The country has stepped up purchases of US and West African crudes in recent days.
• Gold gained ahead of key US inflation data due later Thursday that could determine whether its two-month uptrend continues. The Federal Reserve’s monetary tightening weighed on non-interest bearing gold last year, causing it to drop for seven months through October. It’s rallied around 15% since then as the dollar and US bond yields fell on signs the tightening cycle was nearing an end. Cooler US inflation and labor-market numbers have raised expectations the Fed will dial back its hawkishness this year, even as officials caution more rate hikes are needed. That optimism could be boosted by the consumer-price index data, which is expected to show a month-on-month decline.
• Copper edged lower as traders weighed the outlook for the metal metal following a sharp gain to the highest in almost seven months on hopes for a demand surge in China. The metal burst through $9,000 a ton on Wednesday on its way to the strongest five-day gain since early 2021. Optimism for China’s economic rebound this year is mixing with speculation that the Federal Reserve will slow the pace of rate hikes. US inflation data due later will be closely watched. Copper fell 0.5% to $9,083 a ton by 11:06 a.m. on the London Metal Exchange, after touching $9,185 on Wednesday, the highest since June. Most other metals declined on Thursday, led by lead which slipped 2.8%.
• A prolonged rally in Bitcoin is giving crypto enthusiasts a smidgen of something to be happy about during a dark period for the industry. The world’s largest token has advanced for nine straight days, the longest such streak since 2020, according to data compiled by Bloomberg. Bitcoin has added almost 10% this month and second-largest token Ether about 17%. They both fell more than 60% last year. Bitcoin was up 3.6% to about $18,194 as of 6:53 a.m. in New York. Ether and Avalanche both gained about 4%. Bets that inflation is cooling and that the Federal Reserve will slow the pace of interest-rate hikes have helped all manner of assets at the start of 2023. For Bitcoin, the recent gains are a stark contrast to last year’s slump of 64% amid a series of crypto blowups, including the fall of the FTX exchange.
• American Airlines Group Inc. said fourth-quarter profit and revenue exceeded expectations, helped by robust holiday travel demand. Earnings per share, excluding some items, were in the range of $1.12 to $1.17 for the quarter, almost double the average analyst estimate of 60 cents. Revenue rose 16% to 17% over the same period of 2019, surpassing the carrier’s October forecast for a jump of as much as 13%, according to preliminary results disclosed in a regulatory filing Thursday. American’s results support large US airlines’ claims that the industry will continue its recovery from the pandemic in 2023 as appetite for travel so far appears resistant to inflation and the risk of recession. The carrier has said demand from small and mid-sized companies and trips mixing leisure and business have recovered faster than larger corporate travel accounts.
• Saudi National Bank, which holds about a 10% stake in Credit Suisse AG, said it will raise its paid-up capital by $4.1 billion to strengthen its financial position. The lender, which is 37% owned by the kingdom’s sovereign wealth fund, will boost its capital by about a third to 60 billion Saudi riyals ($16 billion) through a bonus share offering from its retained earnings, it said in a statement on Thursday. The board recommended one share for every three shares held. Because the bonus shares will be transferred from the bank’s retained earnings “there is no impact on capital ratio,” said senior Bloomberg Intelligence analyst Edmond Christou. “However, this means the new paid-up capital now stands at 60 billion riyals compared with 31 billion riyals for statutory reserves. As per regulation, this implies an acceleration of statutory reserve build up from future earnings to bring it up to the new paid-up capital.”
• Pakistan has said the United Arab Emirates has agreed to increase its financial assistance to Pakistan to $3 billion, a move key to bolster foreign exchange reserves for the South Asian nation reeling under an economic crisis. UAE’s President Sheikh Mohamed bin Zayed Al Nahyan has agreed to provide $1 billion in a fresh loan and rollover an existing loan of $2 billion after a meeting with Prime Minister Shehbaz Sharif, Pakistan Prime Minister’s Office said in a statement Thursday. UAE’s support comes two days after Saudi Arabia’s Crown Prince Mohammed bin Salman announced that it was considering to increase deposit in Pakistan’s central bank to $5 billion. Earlier this week, Pakistan also received commitments of more than $10 billion in assistance after floods that inundated a third of the nation and cut its growth by half.
• Goldman Sachs Asset Management LP has raised more than $15 billion for a fund that is hunting for higher-yielding private debt opportunities amid a broader crack-up in credit markets, according a statement seen by Bloomberg News. West Street Mezzanine Partners VIII, as the new vehicle is known, closed with $11.7 billion of capital commitments, topped up with $3.5 billion of leverage, the wealth manager said in an emailed statement. It’s already deployed about $4 billion across 13 companies as part of its focus on lending to private-equity backed businesses. Private debt investors such as Goldman Sachs AM are taking advantage of dislocations in credit markets sparked by a surge in inflation and concern about the blow to economic growth dealt by higher borrowing costs. The firm has raised more than $53 billion over the past quarter-century to invest in so-called mezzanine financing, which typically comes as lower-ranking debt instruments that sit between equity and more senior debt financing.
• An expansion of Tesla Inc.’s plant in Shanghai has been delayed, according to people familiar with the matter, over data concerns that risk putting a roadblock in the way of the US electric-car maker’s ambition to keep growing in China. The so-called phase-three expansion originally slated to start mid-year would have seen the plant’s capacity double to around 2 million cars a year, said the people, who asked not to be identified because they’re not authorized to speak publicly. Some central government officials expressed concern about a US company with connections to Elon Musk’s internet-from-space initiative Starlink having such a large presence in Asia’s biggest economy, one of the people said. While Tesla cars aren’t equipped with Starlink equipment, which would allow users to bypass China’s Great Firewall, Beijing has become increasingly concerned about data security and social stability.
• Deutsche Lufthansa AG is discussing some conditions with Italy in order to proceed with its plan to acquire a 40% stake in the country’s ITA Airways, according to people familiar with the matter. The German carrier is seeking to gain the option to back out of a full takeover should the venture fail to work out, as well as legal waivers to protect against unforeseen issues arising from the integration of the successor to bankrupt carrier Alitalia, said the people, asking not to be identified discussing confidential deliberations. Lufthansa is still deliberating the contours of its preliminary bid, which could come in the latter part of this month, said the people. Plans under discussion would see the German carrier paying as much as 350 million euros ($376 million) to take an initial 40% stake in ITA Airways via a capital increase, and could eventually seek a majority stake at a later date, while also leaving room for a second investor to join the group, the people said.
• Spain plans net debt issuance of €70 billion ($75.4 billion) this year, the same amount as 2022, as surging tax revenues help the government keep a lid on its funding needs. The total announced in a Spanish Treasury presentation Thursday is the same as the amount flagged in November when the government unveiled its 2023 budget. Spain will also reopen green bond sales to raise €3.2 billion this year. A jump in tax revenue due in part to surging inflation is helping to keep the government’s coffers topped up even as it deploys resources to offset the impact on Spaniards of surging living costs.
• The European Union and the UK are preparing to enter an intense phase of negotiations starting next week aimed at overcoming the dispute over the post-Brexit trading relationship well ahead of the anniversary of Northern Ireland’s peace agreement in April, according to people familiar with the matter. The aim is to move into a negotiating “tunnel” after UK foreign minister James Cleverly and European Commission Vice-President Maros Sefcovic take stock of talks on Jan. 16, said the people, who spoke on condition of anonymity to discuss private talks. Cleverly and Sefcovic announced earlier this week that the EU had agreed to use the UK’s live database tracking goods moving from Great Britain to Northern Ireland. This was a first sign of progress in a long-running dispute on post-Brexit trading rules and a step that paves the way for negotiations on other more complex issues, such as checks on agri-food goods, state aid and VAT.
• Volkswagen AG sales declined for a third year in a row during 2022 after shortages of semiconductors again hampered production to push deliveries to an 11-year low. Group sales fell 7% to 8.3 million vehicles after supply constraints saw factories grind to a halt, Europe’s biggest carmaker said Thursday. The company, expecting bottlenecks to ease this year, said it has a high order bank of 1.8 million vehicles in Western Europe alone. After protracted bottlenecks on chips, shipping and raw materials, carmakers are now saddled with a weakening outlook particularly in Europe where high energy prices are fanning record inflation. Full order books should help bolster profit well into the middle of the year, while China removing most of its Covid restrictions should see customers return to showrooms.
• Sales of second-hand luxury watches will overtake new models within a decade as buyers seek out scarce Rolex, Patek Philippe and Audemars Piguet timepieces, according to a new industry report. The market for vintage and pre-owned watches will surge to 79 billion euros ($85 billion) in 2033, more than triple the 25 billion euros sold last year, LuxeConsult, a Swiss-based industry analyst and consulting firm, forecast. Online sales will drive the jump amid a renaissance in interest in luxury timepieces fomented during the pandemic. As demand has boomed, consumers wanting to buy the most popular models from Rolex, Patek and Audemars Piguet have been frustrated by a lack of product and waitlists due to the limited production constraints at the top brands. Some buyers have turned to the secondary market where sellers and dealers charge a premium above retail prices for the most in-demand models.
• HSBC Holdings Plc lost its bid to topple the decision that it illegally rigged the Euribor benchmark, in a setback following an earlier victory when its €33.6 million ($36 million) EU fine was overturned. The EU Court of Justice in a ruling on Thursday rejected HSBC’s challenge of the European Commission’s finding that it had illegally participated in a cartel. While a lower EU court in 2019 toppled the antitrust fine on procedural grounds, judges at the time agreed with the bloc’s antitrust regulators that HSBC had taken part in a single and continuous infringement. Such a finding leaves banks exposed to lawsuits for damages.
• Workers at Twitter Inc.’s Singapore office were told to empty out their desks and vacate the premises, said people familiar with the situation, as Elon Musk continues to pare expenses around the globe. Twitter staff were informed via email Wednesday that they had until 5 p.m. to leave the CapitaGreen building and resume their duties remotely from Thursday, one of the people said, asking not to be named discussing private information. Singapore-based staffers have now been reassigned as remote workers in Twitter’s internal system until further notice, the person added. Singapore serves as Twitter’s Asia-Pacific headquarters, a region that was hit hard by deep and abrupt job cuts when new owner Musk took over the San Francisco-based firm. The company this month also let go of Nur Azhar Bin Ayob, who had been the head of site integrity for the region and a relatively recent hire.
• One of the world’s most important short-term lending benchmarks has climbed back to a level last seen before the onset of the global financial crisis in 2008. The three-month London interbank offered rate for dollars on Thursday climbed to 4.82971%, above the peak of 4.81875% it reached in October of that year when credit markets were in disarray following the shock collapse of Lehman Brothers Holdings Inc. The last time it was higher was in 2007. The benchmark rate for lending between banks was up 1.5 basis points on Thursday. The spread of Libor over overnight index swaps — a barometer of funding pressure — was at 16.3 basis points on Thursday versus 17 basis points the prior session.





*All sources from Bloomberg unless otherwise specified